Offshore funds—What is an offshore fund?
Produced in partnership with Michael Alliston of Herbert Smith Freehills LLP
Offshore funds—What is an offshore fund?

The following Tax guidance note Produced in partnership with Michael Alliston of Herbert Smith Freehills LLP provides comprehensive and up to date legal information covering:

  • Offshore funds—What is an offshore fund?
  • Background to the offshore funds rules
  • What is an offshore fund?
  • Non-UK resident body corporates
  • Non-UK resident trusts
  • Non-UK co-ownership arrangements
  • What is a mutual fund?
  • Condition A—participation
  • Condition B—no day-to-day control
  • Condition C—expectation of realising net asset value (NAV)
  • more

Background to the offshore funds rules

Specific tax legislation for offshore funds was initially introduced in 1984. Before that time, UK investors in non-UK investment vehicles had been able to roll up income offshore and when their investments were realised, for example on a sale, tax was paid at the capital gains rate as opposed to income tax rates.

The regime introduced in 1984 combatted this by taxing as income any gains realised on disposals of material interests in ‘offshore funds’, with ‘offshore funds’ being defined for tax purposes using a regulatory definition. Certain conditions provided an exemption for funds which distributed at least 85% of their income and UK equivalent profits to investors each period. Where this was the case, disposals of interests in such funds retained capital gains treatment. The purpose of the 1984 legislation was to ensure consistent tax treatment of interests held by UK investors in offshore and UK funds.

The tax regime for offshore funds was amended further in 2009. It maintained broadly the same aim, of ensuring consistent treatment of investments in offshore and UK funds, but departed from the previous system of requiring funds to distribute a specified minimum amount in order for disposals to retain capital treatment. Instead, following the 2009 changes, capital gains treatment on disposals is now retained in respect of