Offshore funds

Produced by Tolley
Offshore funds

The following Personal Tax guidance note Produced 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
  • The information states that the fund is reporting / distributing
  • The information is silent or unclear
  • Question one - is the investment in a mutual fund?
  • Applying these definitions
  • Question two - is the investment an offshore fund?
  • Question three - is the fund reporting or non-reporting?
  • More...

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:

  1. the interaction between offshore funds and the remittance basis. For this, see Tolley’s Income Tax 2015/16 Chapter 50.8. For the remittance basis generally, see the Remittance basis - overview guidance note

  2. 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.

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.

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. The offshore funds legislation aims to prevents this conversion of income into capital.

It achieves this by dividing offshore funds into those where:

  1. 1)

    the investor is taxed on the income as it arises. Investors in these funds are within the scope of capital gains tax (CGT) when they dispose of their interest

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