Offshore funds

By Tolley

The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

Offshore funds
The purpose of the offshore funds rules
The new and old rules
Identifying the type of fund
Question one - is the investment in a mutual fund?
Question two - is the investment an offshore fund?
Question three - is the fund reporting or non-reporting?
Question four - is the fund opaque or transparent?
Question five - has the fund changed its status during the period?
Commencement

Offshore funds are investments such as foreign unit trusts and open ended investment companies (OEICs).

This note introduces this topic, and aims to help you understand whether the taxpayer’s investment is within the special offshore funds tax regime and, if so, how it will be taxed. In particular, it explains the difference between ‘reporting’ and ‘non-reporting’ funds. It considers the tax position of the UK resident individual investor.

The taxation of offshore funds is very complex. This guidance note, and the linked notes on opaque funds, transparent funds, and changes in fund status, are only an outline of the topic, and you may need specialist advice. In particular, this suite of guidance notes does not cover:

•the interaction between offshore funds and the remittance basis. For this, see Tolley’s Income Tax 2015/16 Chapter 50.8 (subscription sensitive). For the remittance basis generally, see the Remittance basis - overview guidance note
•the complexities where one offshore fund invests in another, has an ‘umbrella’ structure involving sub-funds, or where trusts are involved

For further reading, see Simon’s Taxes Division B5.7 (subscription sensitive).

The purpose of the offshore funds rules

Many investment funds, such as unit trusts, are based in the UK. These UK resident investment funds pay corporation tax on the income arising in the fund at the rate equivalent to the basic rate of income tax, on an annual basis.

CTA 2010, ss 612–618 (subscription sensitive)

Offshore funds are, by definition, not subject to UK tax. Absent specific legislation, it would be possible to roll-up undistributed income in an offshore fund, so that no tax was paid until the investor sold his interest in the fund. At that point he would realise a chargeable gain, taxed at a lower rate.