Offshore funds — opaque funds

Produced by Tolley

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

  • Offshore funds - opaque funds
  • Reporting and non-reporting funds
  • Distributions
  • Undistributed income
  • Tax treatment on disposal
  • Reporting funds
  • Non-reporting funds
  • Offshore income gains
  • Who is chargeable?
  • Calculating the OIG
  • More...

Offshore funds - opaque funds

An outline of the regime applying to offshore funds, including a description of the various types of fund, is discussed in the Offshore funds guidance note. You are advised to read that guidance note first. That guidance note also explains what is meant by a ‘reporting’ and a ‘non-reporting’ fund.

Reporting funds can be divided into ‘opaque’ funds (also known as non-transparent funds), where investors are regarded as owning units in the fund rather than as owning precise fractions of the underlying assets, and ‘transparent’ funds, where the investor has a share of the underlying fund assets. The fund manager should be able to tell the taxpayer whether his fund is opaque or transparent for tax purposes.

This guidance note considers the tax treatment of opaque funds, both reporting and non-reporting. For the tax treatment of transparent funds, see the Offshore funds - transparent funds guidance note.

A list of whether an entity is regarded as transparent or opaque for UK tax can be found in INTM180030.

This list may not be up to date in each case, and it is possible that HMRC’s view may now be different. If in doubt, clarification can be sought.

The taxation of offshore funds is very complex. This note is only an outline of the topic, and you may need specialist advice. In particular, there are further 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.

Reporting and non-reporting funds

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 investment, and at that point he would realise a chargeable gain, taxed at a lower rate. The offshore funds legislation aims to prevent the tax-free conversion of rolled-up income into capital gains.

This is achieved by dividing offshore funds into:

  1. 1)

    funds where the investor is taxed on

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