Offshore Funds Mantyual

Offshore Funds Manual
Offshore Funds Manual Introduction to the Offshore Funds Manual This manual explains how UK resident investors in offshore funds are treated for tax purposes. It sets out the background to the offshore funds tax regime that applied to UK investors in offshore funds from 1984 onwards, and provides detailed guidance explaining how UK investors are treated under the replacement regime introduced by Finance Act 2008 and the Offshore Funds (Tax) Regulations 2009 (S.I.2009/3001). The manual also provides guidance relevant to the treatment of investments held by offshore funds in other offshore funds, for the purposes of the Regulations. Contents Introduction OFM00500 Background to the treatment of UK investors in offshore funds OFM01000 Overview of the 1984 regime for offshore funds OFM01500 Overview of the 2009 regime for offshore funds Definition of an offshore fund Contents OFM02000 OFM02200 OFM02500 OFM03000 OFM03500 OFM04000 OFM04500 OFM05000
Overview Meaning of offshore fund Meaning of mutual fund Exceptions to the meaning of mutual fund Transparent entities Umbrella funds and protected cell companies Classes of interest Particular arrangements
The 2009 offshore funds regime OFM06000 Introduction Investors in non-reporting funds OFM07000 Introduction OFM08000 Distributions: the charge to tax OFM08500 Disposals of interests OFM09000 The charge to tax on disposals of interests OFM10000 Exceptions to the charge to tax OFM10500 Computation of offshore income gains OFM11000 Deduction of offshore income gains in computing capital gains OFM11500 Conversion of a non-reporting fund to a reporting fund Reporting funds OFM12000 Introduction OFM12500 Applications for reporting fund status OFM13000 Duties of reporting funds OFM13500 Preparation of accounts OFM14000 Computation of reportable income

OFM14500 OFM15000 OFM15500 OFM16000 OFM16500 OFM17000 Computation of reportable income: transactions not treated as trading Reports to participants Tax treatment of participants in offshore funds Provision of information to HMRC Breaches of reporting fund conditions Leaving the reporting fund regime
Transitional rules OFM17500 Transitional rules

OFM00500 Introduction: background to the treatment of UK investors in offshore funds A tax regime for UK investors in offshore funds was first introduced in 1984. Broadly, its purpose was to counter arrangements that, before its introduction, enabled investors within the charge to UK tax (UK investors) to accumulate income in an offshore fund free of tax and, when the investment was realised, to be subject only to tax on capital gains rather than having to pay tax on income. In contrast, a combination of regulatory and tax rules meant that UK investors had to pay tax annually on income from UK funds. The relevant legislation was in Chapter 5 of Part 17 ICTA 1988 (repealed by Schedule 2 of the Offshore Funds (Tax) Regulations 2009 (S.I. 2009/3001)). The rules relating to the treatment of UK investors in offshore funds were amended on several occasions in the years since 1984, and replaced by a modern regime introduced by legislation contained within Finance Act 2008 (by provisions inserted into Finance Act 2009), supplemented by regulations contained within the Offshore Funds (Tax) Regulations 2009. The legislation covering the 1984 regime in Income and Corporation Taxes Act (ICTA) 1988 is repealed at the time the new legislation takes effect. The new regime has effect for the purposes of income tax for the tax year 2009-10 and subsequent tax years, and for distributions made on or after 1st December 2009, and for the purposes of capital gains tax in relation to disposals made on or after 1 December 2009; for the purposes of corporation tax on income, for accounting periods ending on or after 1st December 2009, and for the purposes of corporation tax on chargeable gains in relation to disposals made on or after 1 December 2009.
This is subject to certain transitional arrangements see OFM17500 onwards. The purpose of both the original and the replacement offshore funds tax regimes remains the same, and they work by charging gains on realisations of interests in offshore fund investments to tax as income rather than as capital gains, unless certain conditions are met. Further details regarding the operation of the previous regime can be found at OFM01000. The remainder of this manual is concerned with the replacement 2009 regime, and references made to offshore funds are made in that context.

OFM01000 Introduction: overview of the 1984 regime for offshore funds
The previous regime, introduced in 1984, was based on the definition of an offshore fund in Chapter 5 of Part 17 ICTA 1988. Where a UK investor held a material interest in an offshore fund, as defined in that Chapter, then any sums realised on disposals of such an interest were charged to tax as income, unless certain conditions were met. Broadly, the conditions were that the fund had distributed at least 85% of the higher of its income or UK equivalent profits (UKEP) to its investors. The fund had to apply for and obtain approved status from HMRC, in arrears, for each period of account in order for its investors to be able to be taxed on realisations under the more favourable capital gains rules. Fund managers, or persons acting on their behalf, who require more detailed information regarding the operation of the 1984 regime should refer to the Offshore Funds Guide which is available on the HMRC website (at http://www.hmrc.gov.uk/manuals/osfgmanual/index.htm ), or contact the Collective Investment Schemes Centre at HMRC Collective Investment Schemes Centre (CISC) 1st Floor South Concept House 5 Young Street Sheffield S1 4LB Liz Foster: Tel 0114 2969 377 Sandra Whyman: Tel 0114 2969 688 Graham Naylor: Tel 0114 2969 769 Investors who require more detailed information regarding how distributions and gains on realisations are taxed under the 1984 regime should refer to the guidance in the Savings & Investment Manual (SAIM) available on the HMRC website at http://www.hmrc.gov.uk/manuals/saimmanual/Index.htm .

Introduction OFM01500 Contents OFM01550 OFM01600 OFM01700 OFM01800 OFM01900 Overview of the 2009 offshore funds regime
Introduction Overview of the regime for funds Overview of the treatment of investors Commencement Overview of transitional arrangements

OFM01550 Introduction: overview of the 2009 offshore funds regime: general
The previous tax regime for UK investors in offshore funds, introduced in 1984, was established on the basis that if an offshore fund did not distribute at least 85% of its income then, on disposal of interests in the fund, UK investors would be charged to tax on income rather than on capital gains. This was to prevent the possibility of rolling up income in an offshore fund with any subsequent disposal being subject only to tax on capital gains, rather than being charged to tax as income. The purpose of the legislation was to align the tax treatment of interests held by UK investors in offshore funds with that of interests in investments in UK funds, from which income is chargeable to tax as income on an arising basis. The 2009 regime has a similar purpose but moves away from the requirement that income is distributed in order for UK investors to enjoy the more favourable capital gains treatment on disposals of interests. Instead, that treatment will apply if an offshore funds income is reported to UK investors in such a way that UK investors are charged to tax on their share of the reported income of the fund, regardless of whether that income is distributed to them or accumulated in the fund. Funds will either be reporting funds or non-reporting funds. The previous tax definition of an offshore fund was based upon the regulatory definition of collective investment schemes as set out in the Financial Services and Markets Act 2000 (FSMA), with modifications for tax purposes. The legislation giving the definition and the detailed rules of the 1984 regime was contained within ICTA 1988. The definition applying to the 2009 regime is contained within section 40A FA 2008, inserted by FA 2009. It detaches the tax definition of an offshore fund from the regulatory definition and instead bases the tax definition on characteristics. The detailed operational rules relating to the treatment of UK investors are contained within regulations (the Offshore Funds (Tax) Regulations 2009). The key features of the new regime for offshore funds rules include: a new tax definition of an offshore fund (section 40A Finance Act 2008); a facility for an advance application to be a reporting fund; a requirement (for reporting funds) to report fund income to UK investors rather than the requirement to distribute income; the consideration of only one layer of funds for reporting funds; there are no longer either percentage investment restrictions nor a limit to the number of layers of funds into which a reporting fund can invest; revised rules to deal with breaches of conditions, in particular to deal with occasions of minor or inadvertent breaches; and treating investments in non-reporting funds in the same way as under the 1984 regime for investments in non-distributing funds.
So whilst the 2009 regime for offshore funds treats investors within the charge to UK tax in a similar manner to the 1984 regime it aims to provide greater certainty to funds and to their investors as well as more flexibility to deal with breaches of the rules. This manual provides guidance on the definition of an offshore fund (see OFM02000 onwards), and the detailed rules relating to the operation of the regime contained within the Regulations (see OFM06000 onwards).

OFM01600 Introduction: overview of the 2009 offshore funds regime: overview of the regime for funds
Reporting funds An offshore entity that meets the definition of an offshore fund (under section 40A(2) Finance Act 2008 see OFM02000 onwards) can, on meeting certain conditions, apply to be a reporting fund. The relevance of reporting fund status for UK investors is that gains realised on disposals of investments in reporting funds will in most circumstances be subject to tax on chargeable gains (see the detailed guidance on reporting funds at OFM12000 onwards for exceptions), whereas gains realised on disposals of investments in non-reporting funds will be subject to less favourable treatment as they will be charged to tax on income. Reporting funds must prepare accounts in accordance with an acceptable accounting policy, and provide reports of their reportable income, which is the accounts figure for the total return of the fund adjusted in accordance with certain rules set out in the Offshore Funds (Tax) Regulations 2009. They must provide reports to both HMRC, to include a computation showing their reportable income, and to participants (investors) that show their proportionate share of that income. In addition, reporting funds must make certain information available to HMRC when requested to do so. Funds may apply for reporting fund status in advance or in arrears, subject to certain time limits see OFM12700 for details. A fund, once granted reporting fund status, may rely on that status going forward subject to continued compliance with the reporting funds rules, which include making reports as described above for each period of account. A fund may exit the reporting funds regime on giving notice and there are rules that permit HMRC to exclude a fund from the regime for serious breaches or a number of minor breaches, subject to an appeals process. Full details can be found at OFM17000 onwards. See OFM01700 for an overview of the treatment of UK investors in reporting funds. There is a list of funds that come within the definition of an offshore fund and have successfully applied for reporting fund status on HMRCs website. The list is updated on a monthly basis and can be found at http://www.hmrc.gov.uk/collective/reportingfundlist.pdf. Non-reporting funds A non-reporting fund is any offshore entity that falls within the definition of an offshore fund but has not obtained reporting fund status (or has left or been excluded from the reporting fund regime) that is to say, an offshore fund to which Part 3 of the Offshore Fund (Tax) Regulations 2009, which deals with reporting funds, does not apply. Non-reporting funds are under no obligations to provide information to HMRC but it is likely that such a fund will be obliged by local law or by its constitution to provide information to investors in respect of income arising to the fund. Although it is expected that they would provide details of distributions as a matter of routine to UK investors, it is the responsibility of investors to otherwise obtain and record such information.

See OFM01700 for an overview of the treatment of UK investors in non-reporting funds.

OFM01700 Introduction: overview of the 2009 offshore funds regime: treatment of UK investors Investors in reporting funds UK investors in a reporting fund will be provided with a report (by one of several permitted methods) for each period of account showing sums actually distributed per unit of interest held, as well as any excess forming the balance of its reportable income per unit of interest held in the fund at the end of the reporting period (see the guidance at OFM15000 onwards for further details). UK investors must make a return of their income to include both the actual distributions received, as well as the reported income (i.e. their proportionate share of the funds reportable income in excess of the sums distributed). They will be liable to income or corporation tax as appropriate on the total of those sums. In most cases, providing the fund in question has been a reporting fund for the entire period that an investor has held their interest, then, on any subsequent disposal of that interest, the investor will be subject to tax on any capital gain (or loss) arising. There are some exceptions see, for example, OFM01900 for an overview of transitional arrangements where a reporting fund was a non-qualifying fund under the previous offshore funds regime. There is a list of funds that come within the definition of an offshore fund and have successfully applied for reporting fund status on HMRCs website. The list is updated on a monthly basis and can be found at http://www.hmrc.gov.uk/collective/reportingfundlist.pdf.
Investors in non-reporting funds UK investors in non-reporting funds remain chargeable to income or corporation tax on any distributions the fund actually makes to them. Alternatively, if the fund is transparent for income purposes then the investor will be chargeable to tax on income arising on the underlying investments. There are also rules relating to transparent funds with interests in reporting funds, to ensure that investors in the top layer fund are chargeable to tax on their proportionate share of the underlying funds reportable income see OFM08000 for further details. On disposal of an interest in a non-reporting fund, UK investors will be subject to tax on any gains arising as if those gains were income that is, on the offshore income gain (OIG). There are detailed rules relating to the calculation of OIGs and to their effect on capital gains computations see OFM10500 and OFM11000 onwards for details.

OFM01800 Introduction: overview of the 2009 offshore funds regime: commencement The 2009 regime has effect for the purposes of income tax for the tax year 2009-10 and subsequent tax years, and for distributions made on or after 1st December 2009; and for the purposes of corporation tax on income, for accounting periods ending on or after 1st December 2009,
There are some transitional rules for offshore funds relating to periods of account straddling 1 December 2009 and immediately thereafter see OFM01900. UK investors in existing funds will be subject to the legislation contained within Chapter 5 of Part 17 ICTA 1988 (for guidance see the Savings & Investment Manual (SAIM - on the HMRC website at http://www.hmrc.gov.uk/manuals/saimmanual/Index.htm ) until the 2009 rules within FA 2008 and the Offshore Funds (Tax) Regulations 2009 take effect (see OFM00500). Once a fund that existed prior to the operative date of the 2009 regime becomes a reporting (or non-reporting) fund, then the new rules will apply as explained in the overview at OFM01700 and in the detailed guidance set out later in this manual. Again, there are transitional rules that may apply see OFM01900.
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OFM01900 Introduction: overview of the 2009 offshore funds regime: transitional arrangements - overview Offshore funds Offshore funds may apply for reporting fund status only for periods of account commencing on or after 1 December 2009. A fund can apply for distributing fund status under the rules of the previous regime for offshore funds, for any period of account that straddles the 1 December date (the overlap period paragraph 3 Schedule 1 of the regulations). Note that this is not an alternative to an application for reporting fund (RF) status a fund will not be able to apply for RF status for a period of account commencing before 1 December 2009, so if it does not apply to be a distributing fund then it will simply be a non-distributing fund (or a non-qualifying fund in the language of section 760 ICTA). In other words, the transitional provisions within paragraph 3 of Schedule 1 simply provide a mechanism to apply for distributing fund status for the overlap period, as it is not possible to apply for reporting fund status. If a fund is successful in obtaining distributing status for the overlap period, it can obtain distributing status for the succeeding period as well, if desired (para (3) of Schedule 1). However, no application for distributing fund status can be made for periods of account ending after 31 May 2012 - see OFM17650. After the overlap period (or the succeeding period where relevant) neither the fund nor any investor on its behalf can make further requests for distributing fund status the funds only options from that time will be to be a reporting or a non-reporting fund. See OFM17600 for full details. UK investors UK investors who held a material interest in a qualifying fund (i.e. one that has held distributing fund status for all previous periods of account) and who continue to hold an interest in the fund if it becomes a reporting fund immediately following its last period as a qualifying fund
will not be subject to a charge to tax on an offshore income gain (OIG) on disposal of their interest. This is likely to be a common situation, but there are other possibilities and the transitional rules set out what happens when an investor held a material interest in a qualifying (i.e. distributing) fund that is also within the new definition of an offshore fund but that does not become a reporting fund (para (4) of Schedule 1); an investor held an interest in a fund that did not come within the previous definition of an offshore fund but does subsequently come within the new definition of an offshore fund applying for interests obtained on or after 1 December 2009 (para (7) of Schedule 1).
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The rules applying in each of these cases are set out at OFM17500 onwards. In addition, an investor may have held a non-material interest in a non-qualifying (i.e. non-distributing) fund that is also subsequently within the new definition of an offshore fund applying for interests acquired on or after 1 December 2009. This is not strictly a transitional issue as it may have relevance for many years to come. Accordingly, the matter is dealt with by regulation 30 of the Offshore Funds (Tax) Regulations 2009: rights in certain existing holdings (as at 1 December 2009, i.e. grandfathering provisions) see OFM10220 for full details. There are other matters that may arise on an ongoing basis and that are therefore also addressed in the main body of the regulations Regulation 43: special rules for certain existing holdings (identification rules on disposal where investor has some rights in an offshore fund that are grandfathered and some that are not) see OFM10800; Regulation 48: conversion of non-reporting fund to reporting fund (deemed disposal election by investors) see OFM11500; Regulation 100: deemed disposals of interests (election by investors where a reporting fund becomes a non-reporting fund) see OFM15800.
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Definition of an offshore fund
Contents OFM02000 OFM02200 OFM02500 OFM03000 OFM03500 OFM04000 OFM04500 OFM05000
Overview Meaning of offshore fund Meaning of mutual fund Exceptions to the meaning of mutual fund Transparent entities Umbrella funds and protected cell companies Classes of interest Particular arrangements
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Definition of an offshore fund OFM02000 Overview Contents OFM02050 OFM02100 OFM02110 OFM02150
Introduction Arrangements within the definition of an offshore fund Arrangements not within the definition of an offshore fund Transitional arrangements
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OFM02050 Introduction
Characteristics based definition The definition of an offshore fund is based on characteristics. The relevant legislation is at FA2008/Ss40A 40G. Section 40A makes it clear that an offshore fund, whatever its legal form, must be a mutual fund. That term is defined at section 40B. Sections 40C and 40D state that in the case of umbrella arrangements and arrangements with more than one class of interest respectively it is the sub-fund or class of interest that is to be considered rather than the main arrangements, so that for example umbrella arrangements could consist of sub-funds some of which come within the definition of an offshore fund and some that do not (this might typically be the case where one or more of the exclusions from the definition apply to a particular sub-fund(s) see below). Meaning of mutual fund In considering whether any particular arrangements are a mutual fund it is necessary to consider all agreements and understandings which might form part of the basis for any contract or entity, that is, arrangements has a wide meaning and is not limited to, for example, the legal documents establishing a fund. In another sense however arrangements has a narrow meaning in that it is used here to describe the documents undertakings and agreements constituting a particular entity and not the wider economic arrangements that may be constituted by a group of entities. It follows, therefore, that in a fund of funds situation, including those headed by fully transparent entities such as limited partnerships, it is necessary to consider each set of arrangements independently of the others in the structure so, for example, a limited partnership cannot be viewed as being part of any other arrangements and thus forming part of an offshore fund. However, if the terms on which investment in the underlying entities are communicated to investors or potential investors in documentation or marketing material relating to a top level entity (for example, a partnership agreement that makes it clear that underlying companies will be wound up by a certain date) then, in a case where the top level entity is in a position to control any underlying entity, those terms are relevant to determining whether the underlying entity itself is an offshore fund. The characteristics based approach also means that all UK investors in the same offshore fund face the same set of tax rules (subject to certain preserved treatment for investments held before 1 December 2009 (see OFM17500 onwards)). This is subject to the situation where rights of investors change during the holding of their investment (see OFM09100). Exceptions to the meaning of mutual fund The intention of the offshore fund rules generally is to prevent the roll-up of income in pooled investment arrangements, with a subsequent realisation at (or nearly at) net asset value, (or by reference to an indexed value) in capital form. Section 40E therefore provides exceptions to the meaning of mutual fund for certain closed-ended funds where income roll-up would not be possible, as well as for those closed ended funds with unlimited life so that the investor does not have an expectation of redemption at net asset value (or sale at net asset value).
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If the arrangements are not a mutual fund then they cannot be an offshore fund, and so the operational rules will not apply (the operational rules relating to the treatment of UK resident investors in offshore funds are contained within the Offshore Funds (Tax) Regulations 2009 (S.I.2009/3001) - those rules apply when a UK resident holds an interest in an offshore fund as defined at Sections 40A to 40G Finance Act 2008 (FA 2008), inserted by FA 2009). The exceptions in Section 40E only apply to closed-ended arrangements; that is arrangements where an investor does not have a right to redeem their interest on a basis calculated entirely or nearly entirely by reference to the net asset value of their proportionate share of the scheme property. In particular, the exceptions apply in circumstances where it is only possible for an investor to realise their investment on that basis in the event of a winding up and the arrangements do not have a limited life, or where the arrangements do have a limited life but other conditions apply so that income cannot be rolled up (see OFM03000 onwards for details). Requests for advice HMRC is not able to provide an up-front clearance service confirming whether or not a particular set of arrangements comes within the definition of an offshore fund in every case. It will often be clear that a particular set of arrangements either does or does not come within the definition, but HMRC recognise that will not always be the case. If, after having considered the guidance in this manual in relation to all of the facts, there is material uncertainty as to whether particular arrangements are within the definition then HMRC will provide an opinion unless it is considered that the request does not come within published guidelines. Although this is not a formal clearance service, enquirers should consider the guidance concerning clearance requests available on the HMRC website at http://www.hmrc.gov.uk/cap/links-dec07.htm#annexb , including the circumstances in which HMRC will and will not provide an opinion. Queries should be sent at least 28 days in advance if the matter is material to whether or not to proceed with marketing to UK investors, and should be addressed to HMRC Collective Investment Schemes Centre (CISC) 1st Floor South Concept House 5 Young Street Sheffield S1 4LB (Please see OFM01000 for a list of contacts at CISC if you need to speak to someone prior to writing to HMRC.)
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OFM02100 Arrangements within the definition of an offshore fund
As the operational rules are intended to apply to interests held in certain types of arrangements that have particular characteristics, and those arrangements may be based anywhere in the world, it is not possible to provide a list of all entity types that come within the definition of an offshore fund. The paragraphs below provide a broad overview of the types of arrangements that HMRC consider would come within the definition and should not be considered to be exhaustive: Open-ended investment companies (OEICs) Arrangements that take corporate form and that permit investors to redeem their interests on request or at intervals, entirely or nearly entirely by reference to the net asset value (NAV) of their proportionate share of the scheme property or an index. An example of such a fund would be Belgian SICAVs. Open-ended contractual arrangements Arrangements that take contractual form and that permit investors to redeem their interests on request or at intervals, entirely or nearly entirely by reference to the net asset value (NAV) of their proportionate share of the scheme property or an index. An example of such a fund would be a Luxembourg Fonds Commun de Placement (FCPs) but note that limited partnerships are specifically excluded from this category by FA2008/S40A(3). These sorts of arrangements are usually transparent for income purposes there is further guidance on income transparent arrangements, including details of when an offshore income gain will not arise for UK investors, at OFM03500 onwards. Foreign unit trusts Arrangements that take trust form where the trustees of the property are not resident in the UK and that permit investors to redeem their interests on request or at intervals, entirely or nearly entirely by reference to the net asset value (NAV) of their proportionate share of the scheme property or an index. An example of such a fund would be a Jersey property unit trust (JPUT). Some foreign unit trusts are transparent for income purposes there is further guidance on income transparent arrangements, including details of when an offshore income gain will not arise for UK investors, at OFM03500 onwards. Arrangements with limited life Arrangements that take corporate form (irrespective of whether they have fixed share capital) or contractual form that come within the definition of a mutual fund at FA2008/S40B and that have a fixed or determinable life at the end of which investors would be able to redeem their interest in the arrangements entirely or nearly entirely by reference to the NAV of their proportionate share of the scheme property or an index, unless any of the exceptions at FA2008/S40E apply. An example of such a fund would be a Cayman registered company with a limited life that, although it did not permit redemptions on request, could be reasonably expected to provide redemption by reference to NAV (etc.) at the end of its life.
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Further guidance Further guidance on particular entity types (such as limited life companies) is provided in this manual at see OFM05000 onwards. The legislation at FA2008/Ss40A - 40G must still be considered where there is any doubt as to whether a particular set of arrangements come within the definition. See OFM02110 for the types of arrangements that, in general, HMRC consider would not come within the definition.
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OFM02110 Arrangements not within the definition of an offshore fund
As the operational rules are intended to apply to interests held in certain types of arrangements that have particular characteristics, and those arrangements may be based anywhere in the world, it is not possible to provide a list of all entity types that do not come within the definition of an offshore fund. The paragraphs below provide a broad overview of the types of arrangements that do not come within the definition: Partnerships Partnerships are specifically excluded from the meaning of an offshore fund at FA2008/S40A(2)(c) by FA2008/S40A(3). Limited liability partnerships Limited liability partnerships (LLPs) incorporated under the Limited Liability Partnerships Act 2000 but that are tax resident outside the UK are excluded from the definition even if they are treated as not being a body corporate (FA2008/S40A(6)). This exclusion does not apply to LLPs formed under the law of any other territory if such an LLP is a body corporate (and opaque for capital gains purposes) and a mutual fund then it will come within the definition of an offshore fund at FA2008/S40A(2)(a). Arrangements that are not mutual funds Any corporate or contractual entity not coming within the definition of a mutual fund at FA2008/S40B will not be an offshore fund. This would include, for example, foreign equivalents of UK investment trusts or UK Real Estate Investment Trusts (UK-REITs) as those types of arrangements do not offer investors a facility to redeem their interests on request or at intervals, entirely or nearly entirely by reference to the net asset value (NAV) of their proportionate share of the scheme property or an index, and nor are they limited life. Closed-ended arrangements within the exceptions at FA2008/S40E Arrangements with fixed share capital or similar, that otherwise would come within the definition of a mutual fund, may still be excluded from the definition of a mutual fund (and therefore an offshore fund) if they come within any of the exceptions at FA2008/S40E. Examples would include arrangements taking corporate form without being limited life or that have limited life but either do not generate income or all income is paid or credited to investors so that it would be chargeable to tax as income. See OFM03000 onwards for further guidance. Further guidance Further guidance on particular entity types (such as limited life companies) is provided in this manual at OFM05000 onwards. The legislation at FA2008/ss40A-40G must still be considered where there is any doubt as to whether a particular set of arrangements comes within the definition. See OFM02100 for the types of arrangements that, in general, HMRC consider would come within the definition.
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OFM02150 Transitional arrangements Regulation 30
Holdings acquired before 1 December 2009 in arrangements that fall within the new definition of an offshore fund but which, on the date that the investor acquired them, were not an offshore fund within the previous meaning at Chapter 5 of Part 17 Income and Corporation Taxes Act (ICTA) 1988, or were within the definition but did not constitute a material interest (s759 ICTA 1988 before 1/12/2009) are subject to preserved treatment, that is they are not treated as relevant holdings in an offshore fund. The same treatment may apply to holdings acquired after 1 December 2009 but only where they were acquired under a written, legally binding agreement entered into by the investor prior to 30 April 2009 and the terms of the agreement are not varied on or after that date. If such an agreement was conditional, then all of the conditions must have been satisfied before 30 April 2009 in order for this provision to apply. See OFM17500 onwards for full details of the transitional provisions contained within the offshore funds regulations.
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Definition of an offshore fund OFM02200 Meaning of offshore fund Contents OFM02250 OFM02300 OFM02350 OFM02400
Introduction Corporate entities Property held on trust Other arrangements that create rights in the nature of co-ownership
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OFM02250 2008 Meaning of offshore fund: introduction Section 40A Finance Act
The definition of an offshore fund is limited to mutual funds which take one of three forms and which are resident in, or based in, a territory outside the United Kingdom. The meaning of the term mutual fund is given by section 40B FA 2008, and is explained in more detail at OFM02500 onwards. Those pages discuss each type of mutual fund in more detail, but broadly the definition is applied to a company, trust or any other vehicle or arrangement that meets the following characteristics it is not UK tax resident; it exists to enable participants to take part in the benefits arising from acquisition, holding, managing, or disposing of assets of any description; the participants do not have day-to-day control of the management of the property whether or not they have the right to be consulted or give directions; and a reasonable investor would expect to be able to realise any investment based entirely or almost entirely by reference to the net asset value of the assets under management or, alternatively, by reference to an index of any description. The three forms of mutual funds that fall within the definition of an offshore fund are a mutual fund constituted by a body corporate resident outside the United Kingdom (section 40A(2)(a) - see OFM02300) a mutual fund under which property is held on trust for the participants by trustees resident outside the United Kingdom (section 40A(2)(b) - see OFM02350); and a mutual fund constituted by other arrangements that create rights in the nature of co-ownership where the arrangements take effect by virtue of the law of a territory outside the United Kingdom (section 40A(2)(c) - see OFM02400). Foreign partnerships within the scope of section 40A(2)(c) are specifically excluded from the meaning of an offshore fund given by section 40A(3) FA 2008. See OFM02100 for examples of the types of arrangements that are within the definition of an offshore fund, and OFM02110 for examples of the types of arrangements that are not within the definition of an offshore fund.
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OFM02300 Meaning of offshore fund: corporate entities Section 40A(2)(a) Finance Act 2008 All mutual funds constituted as incorporated bodies resident outside the United Kingdom fall within the definition of an offshore fund, except for a non-resident limited liability partnership (LLP) incorporated under UK law (The Limited Liability Partnerships Act 2000), which is excluded by section 40A(6) FA 2008. This exclusion does not apply to LLPs formed under the law of any other territory if such an LLP is a body corporate (and opaque for capital gains purposes) and a mutual fund then it will come within the definition of an offshore fund at FA2008/S40A(2)(a). Open-ended investment companies and other companies with similar characteristics would fall within section 40A(2)(a). It is expected that relatively few fixed share capital companies will fall within the new definition. So, for example, an investment in a trading or investment company or group with fixed share capital and that was not limited life (even if local law provides for continuation votes) would not come within the definition. But under the characteristics based approach, entities that have fixed share capital and that are structured in such a way that they share characteristics of open-ended share capital arrangements will be within the definition. So, fixed share capital companies that are predicated on the basis that investors will get a net asset value return or a return which is very close to net asset value may fall within the new definition. That will also be the case where there are no redemption rights but the arrangements have a limited life and a reasonable investor could expect to get a net asset value return on winding up (unless one of the exceptions in FA2008/S40E applies). See OFM05200 onwards for further guidance on fixed share capital companies, and OFM02500 onwards for guidance regarding the meaning of the term mutual fund.
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OFM02350 Meaning of offshore fund: property held on trust Section 40A(2)(b) Finance Act 2008 Most mutual funds where the property of the fund is held on trust for the investors by trustees who are resident outside of the United Kingdom will fall within the definition of offshore fund. It will usually be the case that offshore trust arrangements will not come within the definition of a mutual fund, but those that do come within the meaning of a mutual fund at FA2008/S40B will be offshore funds, unless exceptionally the trust is closed-ended that is, it cannot issue or redeem units on request and it falls within any of the exceptions within FA2008/S40E. See OFM02500 onwards for guidance regarding the meaning of the term mutual fund.
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OFM02400 Meaning of offshore fund: other arrangements that create rights in the nature of co-ownership Section 40A(2)(c) Finance Act 2008 All mutual funds constituted by other arrangements (i.e. those not constituted by bodies corporate or where property is held on trust) creating rights in the nature of coownership, which take effect by virtue of the law of a territory outside the UK, are brought within the definition of an offshore fund. This is subject to the important exception that mutual funds constituted by two or more persons carrying on a trade or business in partnership and that would otherwise come within the meaning of an offshore fund under FA2008/S40A(2)(c) are specifically excluded from doing so by FA2008/S40A(3). Co-ownership is not restricted to the meaning of that term in the law of any part of the United Kingdom, so would take its meaning from the law of the territory in which the arrangements take effect. Types of mutual funds that come within the definition of an offshore fund at FA2008/S40A(2)(c) would include, for example, contractual arrangements such as Luxembourg Fonds Commun de Placement (FCPs), but see OFM03500 onwards for further information concerning these and other types of contractual arrangements that are transparent for income purposes. See OFM02500 for guidance regarding the meaning of the term mutual fund.
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Definition of an offshore fund OFM02500 Meaning of mutual fund Contents OFM02600 OFM02700
Introduction Conditions
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OFM02600 Meaning of mutual fund: introduction Section 40B Finance Act 2008
The meaning of the term mutual fund is drawn widely and encompasses any arrangements with respect to property of any description, including money - in other words, it does not matter what the underlying investments are. Whether arrangements amount to a mutual fund depends on three conditions (Conditions A to C), all of which must apply to the participants of the arrangements being considered. The conditions bring within the meaning of mutual fund those arrangements that, broadly, have the characteristics of pooled investments. Participants are those persons who take part in the arrangements that is, the investors - and it makes no difference whether they directly own the underlying property of the arrangements or not. So, for example, there is no difference between a participant who has a share in a mutual fund constituted by a company (in which case under most forms of company law the participant would not have an ownership interest in the underlying property) and on the other hand, an interest in a trust or other contractual arrangement which may well give the participant a direct ownership right (FA2008/S40A(5)). If arrangements relate to a number of separate pools of assets then each asset pool is considered separately. Similarly if an asset pool has different classes of interest then each class of interest is considered separately. For more details see FA2008/Ss 40C and 40D, which relate to umbrella arrangements and arrangements comprising more than one class of interest (see OFM04000 and OFM04500). There are exceptions to the definition of a mutual fund given by FA2008/S40E (see OFM03000 onwards). Conditions A to C are considered in more detail in the following pages.
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Definition of an offshore fund Meaning of mutual fund OFM02700 Contents OFM 02705 OFM 02710 OFM 02715 OFM 02720 OFM 02725 OFM 02730 Conditions
Condition A Condition B Condition C Condition C: Meaning of 'reasonable investor' Condition C: Realisation of investment by reference to NAV or an index Condition C: Realisation of investment by reference to NAV or an index: Disposals of underlying fund assets
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OFM02705 Meaning of mutual fund: conditions: condition A Section 40B(2) Finance Act 2008 Condition A requires it to be the purpose or effect of the arrangements to enable the participants to participate in the acquisition, holding, management or disposal of the property, or to receive profits or income from those transactions or sums paid out of such profits or income. The condition is deliberately drawn widely so that it applies to a broad range of arrangements that are designed to facilitate pooled investment. Property in this context therefore applies to all asset classes, including securities, equities, and real property and also includes contracts and derivatives. Some arrangements that come within the meaning of an offshore fund will nevertheless not give rise to an offshore income gain when an investor disposes of an interest in the arrangements if tax is chargeable under other provisions of the Taxes Acts. This would include, for example, sums charged to tax under the loan relationships rules. Chapter 3 of The Offshore Funds (Tax) Regulations 2009 (S.I. 2009/3001) contains regulations setting out exceptions from the charge to an offshore income gain (see OFM10000 onwards).
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OFM02710 Meaning of mutual fund: conditions: condition B Section 40B(3) Finance Act 2008 Condition B is that the participants do not have day-to-day control of the management of the property. In this context, participants means persons acting in the capacity of investors in a particular scheme and control would therefore mean having control by way of rights as an investor. So, if the scheme manager held units or shares in the fund managed then that would not prevent condition B from being satisfied. In the case of a fund with an advisory committee, which would typically comprise either a few key investors or independent investment experts, again nothing prevents Condition B from being satisfied (particularly so in this case as it would not be expected that the role of the investment manager would be usurped by such a committee). Merely having a right to be consulted or to give directions does not result in a participant having day-to-day control. So, for example, the right to a vote at annual general meetings would not be considered to amount to day-to-day control. In order for the arrangements to satisfy condition B, not all of the individual participants must have day-to-day control, regardless of the extent of their interest in the fund. So, even if only one participant does not have day-to-day control the arrangements would satisfy condition B.
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OFM02715 Meaning of mutual fund: conditions: condition C Section 40B(5) Finance Act 2008 Condition C requires that a reasonable investor would, as participant in the arrangements, expect to be able to realise all or part of an investment in the arrangements on a basis calculated entirely or almost entirely by reference to either the net asset value (NAV) of the scheme property, or an index of any description. To expect, in this context, does not necessarily mean that an enforceable right exists, but it does mean that an investor could reasonably expect to rely on realisation as described. Realisation of an investment has a wide meaning, and so may be by redemption, sale to a third party, or by distribution of assets on the termination of a fund for example. So, if a fund has a limited life, it would not matter that an investor may not be able to sell his or her shares or units on the open market for a sum representing NAV or close to NAV as there would be an expectation that the investment could be realised at or close to NAV when the fund terminated. See OFM02720 for guidance on the meaning of a reasonable investor, and OFM02725 regarding realising an investment on a basis calculated entirely, or almost entirely, by reference to NAV or an index of any description. The exceptions to the meaning of the term mutual fund relate directly to Condition C, and so Condition C must be read in conjunction with section 40E FA 2008 (which provides the exceptions) for the purposes of determining whether or not arrangements come within the meaning of a mutual fund, and hence an offshore fund see OFM03100 onwards.
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OFM02720 Meaning of mutual fund: conditions: condition 'C': meaning of 'reasonable investor' Section 40B(6) Finance Act 2008 A reasonable investor is not defined in the legislation. It is assumed that such an investor (whether an individual, corporate investor, or otherwise) would have read the documentation and taken account of all additional material and communications of any nature whatsoever provided by the fund prior to investing. Where the scheme documentation is not written in a language that the investor can understand then it is assumed that the investor will have obtained a translation of the prospectus and any other relevant scheme documents or material.
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OFM02725 Meaning of mutual fund: conditions: condition 'C': realisation of investment by reference to NAV or an index Section 40B(5) Finance Act 2008 There is no definition within the legislation of almost entirely as any sort of percentage limit of variation from NAV could be susceptible to arrangements seeking to avoid the intention of the offshore funds rules. It depends on what the arrangements are intended to provide. For example, buy-back arrangements normally take effect when there is a large discount to NAV, but may also be used in very exceptional circumstances to buy back at a very small discount or at NAV which, on its own, may not mean that the arrangements constitute a mutual fund. OFM05250 provides further guidance on share buy-backs and share issuance. Open-ended and closed-ended arrangements Condition C, when read in conjunction with section 40E(1), provides a clear distinction between a mutual fund and a company organised in the way that, for example, an investment trust company in the UK is organised. Such a company is a closed-ended company, in the sense that it does not allow investors to redeem their shares on request, nor does it issue new shares on request (but see OFM05300 onwards where such closed-ended companies have a limited life). This contrasts with an open-ended investment company which is designed to enable investors to realise NAV and does so through its ability to issue or redeem shares. A reasonable investor in what may generally be regarded as a closed-ended company that meets Conditions A or B would normally only expect to be able to realise NAV on the liquidation of the company. So section 40E(1)(a) excludes from section 40B (meaning of mutual fund etc) any case where a reasonable investor would only be able to realise the investment in the arrangements in the event of a winding-up, dissolution or termination of the arrangements, and where certain other conditions (condition X or Y) apply (section 40E(1)(b) - see OFM03100 onwards). Realisation of investment on a basis calculated at or close to NAV It is not necessary that the investor obtains NAV directly from the fund. Where a reasonable investor could expect to receive NAV on selling their interest on a secondary market the fund will be an offshore fund if all other conditions are satisfied. For example, Exchange Traded Funds (ETFs) are usually operated in such a way that the quoted prices are at NAV or very close to NAV because market makers are able to create or redeem units (and in that sense such funds are open-ended), and so ETFs would be expected to qualify as mutual funds. On the other hand, arrangements where a fund offered to buy back shares to keep a discount on the share price within a reasonable limit would not make the fund a mutual fund unless it was clear to a reasonable investor at the time that they invested (or on alteration of the terms of an investment) that there were such arrangements and that they were intended to ensure that such purchases were at NAV or almost or very close to NAV. Shares trading close to NAV The mere fact that shares in a closed-ended arrangement sometimes trade at or close to NAV does not mean that Condition C is satisfied unless that is as a result of
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arrangements being in place such that a reasonable investor could expect to receive NAV or close to NAV on selling their interest. Warrants and options Warrants or options that give an investor the right to sell shares back to an issuer for a particular price will not cause Condition C to be satisfied unless the price is determined by reference to NAV so that the investment can be realised at or close to NAV. Similarly, rights that carry the option to convert to other classes of interest would only satisfy Condition C if the new rights themselves permitted an investor to realise their investment at or close to NAV. Realisation of investment by reference to an index In some cases an investor may have a right to redeem an investment at an amount not representing the assets directly invested in, but which is expressed in terms of an index. The fund manager may then invest the assets so as to produce a return as nearly as possible matching the index which is offered. In such a case Condition C will also be met. Again, this is subject to exceptions where conditions X or Y apply. In many cases investments designed to produce an indexed return are likely to be nonincome producing (that is, they reflect capital growth only) in which case the exception provided by FA2008/S40E(4) condition Y1 will apply (see OFM03100 onwards). Where an investment is by reference to an index that reflects both capital growth and income returns then condition Y1 would not apply, but condition Y3 might see OFM03130. Where an investment is designed to produce a return for investors that equates in substance to a return on capital invested at interest none of the possible exceptions will apply (FA2008/S40E(7) see OFM03115).
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OFM02730 Meaning of mutual fund: conditions: condition 'C': realisation of investment by reference to NAV or an index: disposals of underlying fund assets Section 40B(5) Finance Act 2008 Disposals of underlying fund assets Alternatively, a reasonable investor could expect to realise their investment at or close to NAV as a result of the intention of a fund to dispose of its assets in tranches followed by a final distribution of any remaining assets, as opposed to a liquidation of all of the funds assets on a winding-up. For example, a fund may be set up in order to acquire distressed debt assets with an intention to realise those assets as they mature and to distribute the proceeds to investors in the following way Step 1: debt assets are acquired with 1, 2 and 3 year lives; Step 2: the assets are realised, without reinvesting the proceeds, at the various maturity dates; Step 3: the sums realised on the occasion of each disposal are distributed to investors and, finally; Step 4: the fund is formally wound up and any remaining assets distributed. There would be an expectation of realising an investment in such an arrangement at or close to NAV (at NAV on the final distribution, or perhaps close to NAV if remaining negligible assets are not in fact distributed). In those circumstances condition C would be satisfied and the fund would be a mutual fund, so long as conditions A and B were also satisfied and none of the exceptions at FA2008/S40E applied, and would also therefore be an offshore fund as defined at FA2008/S40A. Where this or a similar fact pattern is present, it is still possible in those circumstances for a fund that otherwise comes within the meaning of a mutual fund at FA2008/S40B to satisfy condition X (not limited life - but that would not be the case for the example above, as the nature of the funds assets and intention not to reinvest mean that there is a determinable latest termination date see OFM03110) or condition Y (either no income arising in the fund, no entitlement to income arising in the fund or income of the fund is distributed see OFM03115 onwards). This is because it is the final distribution on termination of the fund that gives rise to the expectation of realising an investment at or close to NAV. Note that in the example above, a UK investor would be treated as making a partdisposal of his or her interest (see TCGA92/S42), and if the fund was within the definition of an offshore fund then the treatment of that part-disposal would depend on whether regulation 17 of The Offshore Funds (Tax) Regulations 2009 applied. If regulation 17 did apply then an offshore income gain would arise on any gain, or if it did not apply then any gain would be subject to capital gains tax or corporation tax.
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Definition of an offshore fund Exceptions to meaning of mutual fund OFM03100 Contents OFM 03105 OFM 03110 OFM 03115 OFM 03120 OFM 03125 OFM03130 Conditions
Introduction Condition X Condition Y: General Condition Y1: Not relevant income-producing assets Condition Y2: no entitlement to income or any benefit arising from income Condition Y3
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OFM03105 Exceptions to meaning of mutual fund: introduction Section 40E(3) Finance Act 2008 In order to meet the definition of an offshore fund, arrangements must be a mutual fund. Section 40B provides three conditions, A to C, which must be met for arrangements to be a mutual fund - see OFM02700. Even if all three conditions are met, section 40E provides exceptions to certain types of arrangements that would otherwise be mutual funds. The exceptions are dependent on whether the arrangements are such that the only occasion on which a reasonable investor would expect to be able to realise an investment based entirely or almost entirely by reference to the net asset value (NAV) of the property or an index of any description is on a windingup, dissolution or termination of the arrangements, such as in a case where there is a final redemption of a class of interest, (FA 2008/S40E(1)(a)), and one of two conditions, X or Y, are met (FA 2008/40E(1)(b)).
Section 40E(1)(a) has the effect that open-ended arrangements (i.e. those that enable investors to realise NAV by disposing of their interest to the fund manager) cannot come within the exceptions provided by section 40E. The conditions X or Y do, however, except certain types of closed-ended arrangements from the meaning of a mutual fund. The exceptions can also apply to arrangements where a reasonable investor could expect to realise their investment at or close to NAV as a result of the intention of a fund to dispose of its assets in tranches followed by a final distribution of any remaining assets, as opposed to a liquidation of all of the funds assets on a winding-up (see OFM02730). Further guidance on conditions X and Y can be found at OFM03110 and OFM03115 to 03130 respectively. See OFM05340 for guidance on limited life companies that are subject to a continuation vote.
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OFM03110 Exceptions to meaning of mutual fund: condition X Section 40E(2) Finance Act 2008 The most important exception, provided by condition X (section 40E(2), is that a reasonable investor cannot expect the arrangements to terminate on or by a date fixed in advance. This condition means, for example, that ordinary shares in any company with defined share capital (that is, not an open-ended company with variable share capital) and which does not have a limited life, will not be an offshore fund. Condition X requires that the arrangements are not such that they are designed to terminate on a date that is stated or determinable under the arrangements. As elsewhere arrangements has a wide meaning and is not limited to the documents establishing the fund, so can include all agreements and understandings. Similarly, determinable has a wide meaning. So for example, if a fund prospectus stated that the fund was intended to wind-up after it had realised all of its assets, but those assets consisted of debt instruments none of which was longer dated than 5 years then the termination date would be determinable (unless, of course, it was clear that the fund would reinvest the proceeds of asset realisations and was not limited life in any other regard). Asset realisations It will not be sufficient to satisfy condition X for a fund to state that an intention to dispose of its assets on or by a certain date is subject to market conditions or some similar caveat where it is clear that a long-stop date exists, or there is no specific and realistic possibility that would lead a reasonable investor to conclude that the fund would not necessarily be able to dispose of its assets by the date stated. For example, if a funds assets consist of short-dated debt instruments, or commercial leases with a life of 20 years then, unless the fund was reasonably likely to re-invest funds from disposals, condition X could not be satisfied. Where there is no such long-stop date implicit from the nature of the assets themselves then condition X may still not be satisfied if a fund stated an intention to dispose of its assets in, say, four years time subject to market conditions or some other broad statement. HMRC will consider particular cases where a fund manager or its advisers believe that there are tangible and specific reasons why such a statement should lead to condition X being satisfied but this is expected to apply in exceptional circumstances only. An example of the circumstances when a broad statement relating to whether assets could be realised on or by a given date may be sufficient to satisfy condition X would be if a fund held significant assets in a country about which there were real and significant concerns regarding any future governments policy in respect of the assets in question (such as public declarations of an intention to nationalise particular industries or companies in which the fund holds significant investments). Continuation votes Where arrangements provide for a continuation vote or similar action to determine whether they will persist beyond a given date that will not, in itself, mean that condition X is not met. So, if a reasonable investor, considering all of the facts, could not have any
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expectation that a continuation vote would fail then, provided the continuation vote was not for a determinable period and absent any other factors, the arrangements could not be said to have a determinable life and condition X could then be satisfied. HMRC accept that it could usually be expected that condition X would be satisfied where continuation votes are provided for because continuation resolutions may well be passed if a fund is performing well, and a reasonable investor would be expected to invest on the basis that a fund would be successful. However, if arrangements or understandings are in place so that it could be expected that a continuation vote would not be passed then there would be a determinable date. Even if a date of termination is stated or determinable, so that condition X could not be satisfied, it is still necessary to consider Conditions Y1 to Y3 to determine if the arrangements amount to a mutual fund see OFM03115 to OFM03130.
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OFM03115 Exceptions to meaning of mutual fund: condition Y: general Section 40E(3) Finance Act 2008 As explained in OFM03110 even where Condition X is not met the arrangements being considered may still be excepted from the meaning of mutual fund where the basic condition at section 40E(1)(a) and condition Y is met. This is because the purpose of the offshore fund rules is to ensure that income cannot be converted into capital by using offshore arrangements. To avoid unnecessary administrative burdens for arrangements that neither give rise to income at the fund level nor would give the investor an income flow if they invested in the underlying assets directly, closedended capital only arrangements are excluded from the definition of a mutual fund in certain circumstances by the exceptions provided by FA2008/S40E. Condition Y is expressed in terms of three alternative sub-conditions, Y1 to Y3. These sub-conditions are explained at OFM03120 to OFM03130. None of the sub-conditions Y1 to Y3 can be met where the arrangements are designed to produce a return for investors that equates, in substance, to the return on an investment of money at interest (section 40E(7)). The question of whether or not arrangements are designed to produce such a return is determined by reference to the facts, and is not limited to arrangements that provide similar returns to those provided by placing money on deposit (so, for example, it does not matter if the expected return would be greater than would be expected from money placed on deposit). If arrangements provide for a return by reference to a fixed return on capital invested, for example 100 invested provides for a return of 150 in 3 years time, then Condition Y could not be satisfied. Such arrangements would include, for example, zero dividend preference shares (ZDPs).
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OFM03120 Exceptions to meaning of mutual fund: condition Y1: not relevant income-producing assets Section 40E(4) Finance Act 2008 Even if a date of termination is stated or determinable under the arrangements, the arrangements are not a mutual fund if none of the assets of the arrangement are relevant income-producing assets (see below). The exception provided by condition Y1 is designed to exclude arrangements which invest in assets intended to give a purely capital growth based return. The term relevant income producing assets is defined at FA2008/S40F and means assets which produce income on which, if they were held directly by an individual resident in the United Kingdom, the individual would be charged to income tax (section 40F(1)). That would include, for example, sums that would be treated as offshore income gains generated by the sale of investments in underlying non-reporting funds. This is subject to limited exceptions, as follows There may be cases where underlying assets are acquired (and on which income would arise) but which are hedged using derivatives (such as a total return swap). Section 40F(2) ensures that such assets that are hedged are not regarded as income producing assets if no income arises or is expected to arise from the asset (after allowing for the effect of the hedging arrangements) or from the hedging arrangements themselves. A further exception applies where incidental income arises from cash awaiting investment being placed on deposit, provided that the sums in question and all income produced are subsequently invested in assets that are not themselves relevant income-producing assets as soon as reasonably practicable (section 40F(3). HMRC accept that cash awaiting investment, and interest earned whilst it is on deposit, has been invested in assets that are not themselves relevant income-producing assets as soon as reasonably practicable where it can be demonstrated that sums have been invested in line with the stated intentions in the fund prospectus without any unreasonable delay. For example, if the fund is intended to provide a capital-only return by reference to an index then provided sums subscribed by investors were used to purchase the assets required to achieve that aim without undue delay then the exception would be satisfied. There may also be exceptional circumstances applying, such as extreme volatility in the markets, so that a delay in investing sums subscribed would be reasonable provided the delay was not contrived. However, condition Y1 will not be met where the arrangements are designed to produce a return for investors that is equivalent, in substance, to interest and such arrangements will therefore meet the definition of a mutual fund and will be an offshore fund (section 40E(7) see OFM03115).
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OFM03125 Exceptions to meaning of mutual fund: condition Y2: no entitlement to income or any benefit arising from income Section 40E(5) Finance Act 2008 Even if a date of termination is stated or determinable under the arrangements, the arrangements are not a mutual fund if the participants have no entitlement to any income arising under the arrangements, or to any benefit arising from such income. An example of an arrangement satisfying this condition might be the capital shares or units in an arrangement which splits the rights to capital and income between the holders of different classes of interest, where the holders of capital shares or units are not entitled to any of the income or any benefit arising from the income. However, condition Y2 will not be met where the arrangements are designed to produce a return for investors that is equivalent, in substance, to interest and such arrangements will therefore meet the definition of a mutual fund and will be an offshore fund (section 40E(7) see OFM03115).
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OFM03130 Exceptions to meaning of mutual fund: condition Y3 Section 40E(6) Finance Act 2008 When conditions Y1 and Y2 are not satisfied then the arrangements being considered may still be excluded from the meaning of a mutual fund if condition Y3 is satisfied. Condition Y3 is satisfied if all of the income produced by the assets that are the subject of the arrangements (after the deduction of reasonable expenses) is required to be paid or credited to participants in such a way that any participant who is a UK resident individual would be charged to income tax on the amounts so paid or credited. That would include, for example, sums that would be treated as offshore income gains generated by the sale of investments in underlying non-reporting funds. Reasonable expenses is not defined, but HMRC will accept that expenses are reasonably deducted where they would, broadly, be deductible for a reporting fund in calculating its reportable income under Chapter 5 of The Offshore Funds (Tax) Regulations 2009. This would prevent, for example, capital items from being deducted. Condition Y3 is framed in terms of individuals resident in the United Kingdom (FA2008/S40E(6)(b)). So, provided that a fund distributes all of the income of the fund that would be chargeable to income tax in the hands of an individual UK resident and domiciled investor (if the asset producing the income was directly held by them) then the fund can satisfy condition Y3. There would, of course, also be a requirement to distribute to corporate investors but it is the liability to tax (on the underlying income) of individuals that is the measure of the amounts to be distributed to participants in general. If a fund would face difficulty in determining the measure of income to be distributed on the above basis, for example because it is itself invested in another fund(s) and either the detail of the reporting by that fund(s) is insufficient for this purpose or the information is received late, then the fund may choose to distribute a measure of income determined in some other manner (for example, in accordance with that required for a reporting fund) provided it can be demonstrated that the sum distributed is at least that which would be required in order to satisfy condition Y3. Condition Y3 could in theory be satisfied if the arrangements being considered are transparent for income purposes. However, it would be expected that most income transparent entities / capital gains opaque entities that were capable of coming within the definition of an offshore fund, such as so-called Baker unit trusts and Fonds Commun de placement (FCPs), would be open-ended (that is, the fund can issue or redeem units on request or at particular intervals) and as such none of the exceptions in section 40E could apply as section 40E(1)(a) has the effect that the exceptions can only apply to closed-ended arrangements. Regulation 29 of The Offshore Funds (Tax) Regulations 2009 does, however, permit such funds to remain non-reporting funds without an offshore income gain arising to investors disposing of their interests in them subject to certain conditions see OFM10200 for details. Condition Y3 will not be met where the arrangements are designed to produce a return for investors that is equivalent, in substance, to interest and such arrangements will therefore meet the definition of a mutual fund and will be an offshore fund (section 40E(7) see OFM03115). Definition of an offshore fund
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OFM03500 Contents OFM 03550 OFM 03600
Transparent entities
Application of S103A TCGA 92 to interests in arrangements that create rights in the nature of co-ownership Arrangements that are tax transparent for income purposes
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OFM03550 Application of Taxation of Chargeable Gains Act (TCGA) 1992 to interests in arrangements that create rights in the nature of co-ownership Section 103A TCGA 1992 Certain contractual arrangements have historically been treated as transparent for both income and capital gains purposes (for example, Luxembourg Fonds Commun de placement (FCPs)). But whilst such funds came within the previous definition of an offshore fund, the offshore funds regime for taxing offshore income gains was not applicable as investors were treated as holding, for capital gains purposes, interests in the underlying assets rather than in the fund itself. This led to considerable difficulties for investors when they disposed of their interests, or when new investors were admitted to the fund, as capital gains computations could become very complex. This is not the case for interests in offshore unit trusts which were and are subject to section 99 TCGA 1992, so that for the purposes of tax on chargeable gains a unit trust is treated as if the fund was a company, and the rights of the participants in the fund were shares in that company. Section 103A TCGA 1992 was introduced by Part 2 of Schedule 22 Finance Act 2009 to align the treatment of interests in arrangements that create rights in the nature of co-ownership with that of interests in unit trusts. That is, those arrangements are treated as opaque for capital gains purposes from the operative date (see below), so that Section 103A shifts the taxation of gains arising to UK residents to the time when they dispose of their interest in a fund. Section 103A does not change the tax treatment of such arrangements for income purposes they remain fiscally transparent. Therefore, investors are entitled to income as it arises (from whatever source or country) and UK investors are taxable on such income as it arises, regardless of whether income is actually distributed. Income arising retains its character where arrangements are fiscally transparent, so for example if a fund receives income from property situated in the UK then UK investors would be chargeable to tax as if they had received that income directly. Section 103A will automatically apply with effect from 1 December 2009 for all interests in such funds held by capital gains tax payers, and for corporation tax payers from 1 April 2010. Contractual arrangements that come within the meaning of mutual fund at FA2008/S40B are offshore funds as defined at FA2008/S40A and the charge to tax under regulation 17 of SI2009/3001 will apply on disposals of interests in such arrangements from the time that rights in the arrangements are treated as opaque for chargeable gains purposes, unless the arrangements are a reporting fund or the exception in regulation 29(1) applies (see OFM03600 and OFM10200). Acquisition costs for the rights in a relevant fund will be the acquisition costs that applied immediately before the effective date (paragraph 18 Schedule 22 Finance Act 2009) that is, the operative dates referred to above, or the date from which an election for earlier tax years or accounting periods applies (see below). Transitional arrangements: Elections for earlier tax years and accounting periods There is a facility to allow investors with existing interests to elect to treat their holdings in a relevant fund as opaque for capital gains purposes for previous years from the 2003/04 tax year for capital gains tax payers and from accounting periods beginning on or after 1 April 2003 for corporation tax payers. An election for a
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particular year or accounting period is irrevocable, and will mean that investments in the relevant fund(s) that is (are) the subject of an election will in all subsequent years or accounting periods be treated as opaque for capital gains purposes (paragraph 15 Schedule 22 Finance Act 2009). Elections are to be made by being included in a relevant self-assessment return or corporation tax return. A return will be a relevant return if it is for the tax year, or accounting period, in respect of which the election is being made, or for a subsequent year where it is too late to make a return or an amended return for the first year (or period) in respect of which the election is to apply from (paragraph 16 Schedule 22 Finance Act 2009). Where an election for opaque treatment is made, the investor is treated as if they had held an interest in a qualifying offshore fund (that is, one that had distributing fund status) for all years covered by the election.
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OFM03600 Arrangements that are tax transparent for income purposes
Mutual funds that are tax transparent for income purposes but opaque for capital gains purposes are within the definition of an offshore fund (unless closed ended and within the exceptions described at OFM03000 onwards) because, although it is not possible to roll-up income in the fund itself, it would be possible to do so in a lowertier investment of that fund. Regulation 29 of The Offshore Funds (Tax) Regulations 2009 provides that, subject to conditions, disposals of interests in arrangements within the definition of an offshore fund that are tax transparent for income purposes but opaque for capital gains purposes (for example, Fonds Commun de placement (FCPs) and so-called Baker foreign unit trusts) will be excluded from offshore income gains treatment even if the fund is a non-reporting fund, provided broadly that the fund does not itself invest more than 5% of its total value in other non-reporting funds (see OFM10200 for full details). Even where regulation 29 is capable of applying, income transparent funds can still choose to apply for reporting fund status if they wish to because, for example, they wish to exceed the percentage limit, do not wish to monitor it or they consider that being approved as a reporting fund will be beneficial in attracting UK investors.
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OFM04000 Act 2008 Umbrella funds & protected cell companies Section 40C Finance
Umbrella arrangements means arrangements which provide for separate pooling of the contributions of investors and the profits or income out of which payments are made to them. References to part of an umbrella arrangement are to the arrangements relating to a separate pool (or sub-fund). Umbrella arrangements will not themselves be treated as an offshore fund. Instead
Each sub-fund and each class of interest is treated as an offshore fund in its
own right,
The umbrella fund is not treated as an offshore fund, The overall arrangements are disregarded.
The same approach applies to an individual cell of a protected cell company. For umbrella arrangements and protected cell companies, it would usually follow that each sub-fund has the same residence status as the overall arrangement. In the case of a non-resident company it would be expected that each sub-fund would also be non-resident if it was under the central management and control of the directors of the company which constitutes the overall arrangement. In the case of a unit trust scheme, the trustees of the overall trust arrangements will usually also be the trustees of each separate arrangement, and so their residence status determines the residence of the fund, but where there are different trustees for each sub-fund then each must be considered separately. The central management and control test is also applicable to unit trusts.
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OFM04500 Classes of interest Section 40D Finance Act 2008
Section 40D deals with a case where there is more than one class of interest in any arrangements. This includes the case where there is more than one class of interest in a part of an umbrella arrangement (sub-fund). Where there is more than one class of interest in a sub-fund, each class of interest is treated as a separate arrangement and looked at separately for the purpose of determining whether that class of interest constitutes a mutual fund and an offshore fund, while the main arrangements are disregarded. Class of interest is not limited to share classes. There may be other forms of interest which entitle an investor to realise their investment on a basis calculated entirely or almost entirely by reference to the net asset value of the scheme property or an index. For example, certain types of loan may give a return which tracks NAV or is based on an index. A class of interest may also be created as a result of new issues or conversions of existing rights. It is possible for an entity, particularly a company, to have a class of interest such as ordinary shares which does not constitute a mutual fund and another class of interest which does constitute such a mutual fund. However, a particular class of shares can only constitute a single class of interest even if different types of holders of those shares enjoy different rights. For example, in the case of an exchange traded fund, the creation unit holders who act as market makers might have the right to redeem or issue shares directly but if that same class of shares were acquired by another investor on the secondary market then they would still form part of the same class of interest and satisfy Condition C because, as a consequence of the market makers ability to redeem or create units, all other investors would expect to be able dispose of their interest at or close to NAV. (See also OFM05100 regarding exchange traded funds).
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OFM05000 Contents OFM 05050 OFM 05100 OFM 05150 OFM 05200 OFM 05250 OFM 05300
Particular arrangements
General Exchange traded funds Property investment vehicles Fixed share capital companies Share buy backs and share issuance Limited life companies: general
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OFM05050 Particular arrangements: general
The following pages discuss particular issues with regard to the definition only; for guidance on the operation of the offshore funds regulations please refer to the manual contents pages.
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OFM05100 Particular arrangements: exchange traded funds
Exchange traded funds are usually operated in such a way that the quoted prices are at net asset value (NAV) or very close to NAV, and so would be expected to meet the characteristics set out in the legislation and to come within the meaning of a mutual fund, and therefore within the definition of an offshore fund. As with other classes of interest, it is important to note that fungible shares can only constitute a single class of interest even if different types of holders of those shares enjoy different rights (see OFM04500 - Classes of interest).
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OFM05150 Particular arrangements: property investment vehicles
The same considerations apply in determining whether a property investment vehicle comes within the definition of an offshore fund as apply to any other sort of arrangements. So, closed-ended arrangements that do not have a limited life will not come within the definition as they would not satisfy condition C at FA2008/S40B(5). This would be the case for overseas arrangements that are equivalent to a UK Real Estate Investment Trust (UK-REIT), for example, but not to arrangements that are equivalent to a UK Property Authorised Investment Fund (PAIF) which, like other UK authorised investment funds, are open-ended. As is the case for other fund types, HMRC cannot provide a comprehensive list of different types of overseas property funds that come within the definition of an offshore fund. The reference to UK-REITs and PAIFs above is solely for the purpose of illustrating the distinction between types of funds that would or would not come within the definition of an offshore fund for tax purposes. The particular terms relating to any arrangements have to be considered in each case. So, for example, any overseas property fund that is listed and only tradable on a secondary market but whose price closely tracks NAV because market makers are able to create and redeem units would, like any ETF, satisfy Condition C.
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OFM05200 Particular arrangements: fixed share capital companies
It is expected that very few fixed share capital companies will fall within the new definition. So, for example, an investment in a trading or investment company or group with fixed share capital which does not have limited life (even if local law provides for continuation votes) would not come within the definition. But under the characteristics based approach, entities that have fixed share capital and that are structured in such a way that they share characteristics of open-ended share capital arrangements (that is, the share capital expands and contracts in response to demand) will be within the definition. So, fixed share capital companies that are predicated on the basis that investors are able to redeem their interest to get a net asset value (or indexed) return or a return which is very close to net asset value may fall within the new definition (if conditions A and B at FA2008/S40B are satisfied and none of the exceptions at FA2008/S40E apply). That will also be the case where there are no redemption rights but the arrangements have a limited life and a reasonable investor could expect to get a net asset value return on winding up. The following pages consider specific examples of fixed share capital arrangements and their interaction with the offshore funds tax definition in more detail.
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OFM05250 Particular arrangements: share buy-backs and share issuance
The price or value of shares in fixed share capital companies may reflect either a discount or a premium to the net asset value of the underlying assets. It may also be the case in some circumstances that there is either directors or investors discretion to allow or require the buy-back of shares if there is a discount of a certain level between the net asset value of the arrangements and the share price. Provided the share buy-back arrangements are made to prevent the discount becoming too large by reference to net asset value, and provided a reasonable investor cannot expect to realise their investment either entirely or almost entirely by reference to net asset value (or by reference to an index), and there is no determinable termination date, then such arrangements will be outside the definition of an offshore fund for UK tax purposes (as Condition C at FA2008/S40B(5) will not be satisfied). Similar considerations apply where the shares trade at a premium. For example, if a foreign equivalent of an investment trust was trading at a discount of 15% to NAV and bought its own shares on the open market to reduce the discount then, absent any factors that could lead to an investor being able to expect to redeem their investment at or close to NAV, this would not cause Condition C at FA2008/S40B(5) to be satisfied: it is clear that before the company commenced to buy its own shares that some investors would not have been able to redeem their interest at NAV and that any subsequent reduction in the discount would be due to normal operation of the market. Without any factors indicating that the company would act to reduce the discount either having been in place prior to this market activity or at some point in the future, a reasonable investor could not expect to realise their investment at or close to NAV. However, share buy-back arrangements that are specifically designed to provide tracking to net asset value will cause the company or share class to come within the definition of offshore fund. This would include any arrangements introduced as a result of changes to the constitution of a scheme. If a change in the terms of a scheme result in it coming within the definition of an offshore fund then UK investors are treated as if they had always held an interest in an offshore fund. If the fund becomes a reporting fund then investors may be able to make an election under regulation 48(2) to crystallise any offshore income gain at that point, with any subsequent gain being subject to chargeable gains treatment (provided the fund remains a reporting fund). See OFM 09100 and OFM11500 for further guidance. When considering an investors rights, account should be taken of all scheme documents, promotional documentation or communications to determine what guarantees or undertakings may have been given to the investor. An undertaking or guarantee, etc, to buy back or redeem only a part of an investors holding entirely or almost entirely by reference to the net asset value of the property or an index of any description can still constitute an expectation, so for example if the fund manager undertook to redeem or buy back an investors shares in tranches the arrangements could still be within the definition. Warrants or options that give an investor the right to sell shares back to an issuer for a particular price will not cause Condition C to be satisfied unless the price is determined by reference to NAV so that the investment can be realised at or close to NAV. Similarly, rights that carry the option to convert to other classes of interest would only satisfy Condition C if the new rights themselves permitted an investor to realise their investment at or close to NAV.
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Where no guarantees or undertakings are given when the arrangements are set up or the scheme terms are amended, a subsequent buy-back or issue of shares would not, by itself, give rise to an expectation that a reasonable investor could realise their investment either entirely or almost entirely by reference to net asset value (or by reference to an index) and so such arrangements would fall outside the definition of an offshore fund.
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OFM05300 Contents OFM 05310 OFM 05320 OFM 05330 OFM 05340
Limited life companies
General Overseas corporate law Company liquidations Continuation votes
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OFM05310 Particular arrangements: limited life companies: general
Condition C of FA2008/S40B would be satisfied where arrangements are expected to terminate at or within a predetermined time and produce a return by reference to the net asset value of the scheme property. There is no time limit if arrangements have a fixed or determinable life then they are capable of coming within the meaning of a mutual fund and therefore possibly within the definition of an offshore fund, subject to the exception provided where condition Y at FA2008/S40E(3) is met see OFM03115 onwards. In determining whether arrangements that have a fixed or determinable life are an offshore fund, it does not matter whether or not a reasonable investor could expect to realise all or part of an investment by reference to NAV if he or she disposed of an interest on the open market before the date on which the arrangements were designed, or could be determined, to terminate. Neither does it matter if shares in the entity are listed and trade at less than NAV before that date. In both circumstances, it is sufficient that a reasonable investor could expect to realise their investment by reference to NAV on termination of the arrangements, and condition C would therefore be satisfied. The following pages provide further guidance regarding particular circumstances that may apply to limited life companies, and the effect on the consideration of whether arrangements would be viewed as mutual funds.
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OFM05320 Particular arrangements: limited life companies: overseas corporate law Under some overseas corporate law, some companies must liquidate under certain circumstances within a particular time frame. Provided that none of the characteristics set out in the legislation and referred to in this guidance are met, this will not, on its own, mean that such arrangements will be within the definition of a mutual fund, and therefore an offshore fund, for UK tax purposes.
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OFM05330 Particular arrangements: limited life companies: company liquidations An investor may have invested in a company or other arrangement which subsequently goes into liquidation, at which point the investor might reasonably expect to realise their investment at net asset value. However, if a company or other arrangement is outside the definition of an offshore fund before it goes into liquidation, then being in liquidation will not by itself bring that company or arrangement into the definition of an offshore fund. This also applies in the case of self-managed wind downs with the subsequent appointment of a liquidator to complete the liquidation. This treatment would also extend to the purchase of shares in a company after it has entered a self-managed wind down or liquidation. This may not be the case, though, for wind downs and liquidations that are intentionally extended or contrived. Some overseas companies can be liquidated or reconstructed at any time. If there is a decision to do so, at the point of the approval of the reconstruction or liquidation the investors may obtain net asset value. However, the relevant point is whether a reasonable investor can expect the company to be liquidated or reconstructed in order to deliver net asset value. It is necessary to consider the reasonable investors expectation to realise their investment either entirely or almost entirely by reference to net asset value (or by reference to an index) when the company was established (or when there was a change in the investors rights).
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OFM05340 votes Particular arrangements: limited life companies: continuation
If a closed ended company is subject to a continuation vote that may lead to the winding up, dissolution or termination of the arrangements that will not by itself mean that the company will be a mutual fund, and therefore possibly an offshore fund. See OFM03110 for further guidance on continuation votes.
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The 2009 offshore funds regime OFM06000 Contents OFM06050 OFM06100 OFM06150 Introduction
Classification of funds Umbrella funds Classes of interest
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OFM06050 funds The 2009 offshore funds regime: introduction: classification of
In order to determine how an investment, made by a UK investor, in any particular overseas arrangement will be treated for tax purposes, it is first necessary to determine whether the arrangement comes within the definition of an offshore fund as set out at section 40A(2) FA 2008 see OFM02000 onwards. UK investors should be able to get this information from their adviser or directly from the fund itself. It is the investors responsibility to ensure that they know whether they hold an investment in an offshore fund, as defined at section 40A(2). Once the UK investor has determined that a particular arrangement is an offshore fund, they will need to determine whether it is a non-reporting fund or a reporting fund. A fund will be a non-reporting fund unless Part 3 of the Offshore Funds (Tax) Regulations 2009 applies, for a period of account. There is a list of funds that come within the definition of an offshore fund and have successfully applied for reporting fund status on HMRCs website. The list is updated on a monthly basis and can be found at http://www.hmrc.gov.uk/collective/reportingfundlist.pdf. The regulations set out the detailed rules relating to reporting funds, and to the taxation of UK investors in reporting and non-reporting funds.
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OFM06100 The 2009 offshore funds regime: introduction: umbrella funds
Umbrella arrangements means arrangements which provide for separate pooling of the contributions of the participants and the profits or income out of which payments are made to them. References to a part of umbrella arrangements are to the arrangements relating to a separate pool (or sub-fund). See OFM04000 for details of how umbrella funds are treated in relation to the definition of an offshore fund. For the purposes of the detailed rules set out in the regulations, and for this guidance, where there are umbrella arrangements, then any reference to the assets of an offshore fund or the income arising on those assets is a reference to the part of the assets of the main arrangements that relate to a particular separate pool (sub-fund); and any reference to participants in an offshore fund is to investors owning an interest in a particular separate pool (sub-fund).
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OFM06150 The 2009 offshore funds regime: introduction: classes of interest
Where there is more than one class of interest in arrangements (for example, a company or sub-fund with different share classes that each carries different rights), then each class of interest is treated as a separate arrangement. See OFM04500 for details of how separate classes of interest are treated in relation to the definition of an offshore fund. For the purposes of the detailed rules set out in the regulations, and for this guidance, where there are separate classes of interest, then any reference to the assets of an offshore fund is a reference to the assets of the main arrangements or to the part of the assets of the main arrangements that relate to a particular separate pool (sub-fund); any reference to the income of an offshore fund is a reference to the income of the main fund that is attributable to a particular class of interest or to the income arising to the part of the assets of the main arrangements that relate to a particular separate pool (sub-fund); and any reference to participants in an offshore fund is to investors owning an interest in a particular class of interest.
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Investors in non-reporting funds
Contents OFM07000 OFM08000 OFM08500 OFM09000 OFM10000 OFM10500 OFM11000 OFM11500 Introduction Distributions: the charge to tax Disposals of interests Disposals of interests: the charge to tax Exceptions to the charges to tax Computation of offshore income gains Deduction of offshore income gains in computing capital gains Conversion of a non-reporting fund to a reporting fund
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OFM07000 Overview A non-reporting fund is any offshore fund that does not have reporting fund status for a particular period of account. It is possible that a fund may previously have been a reporting fund and subsequently became a non-reporting fund, or vice versa. Whilst a reporting fund has certain obligations to HMRC and to its investors, a nonreporting fund by contrast has no such obligations for UK tax purposes, but it will still of course have to meet its normal obligations to its investors, and UK investors are responsible for ensuring that they make correct returns of any income or gains received from their investment. Offshore income gains (OIGs) The main effect for UK investors invested in non-reporting funds, as opposed to reporting funds, is that on disposal of their interests they will be liable to tax on income on any gains arising (that is, an offshore income gain, or OIG). There are certain exceptions to this see OFM10000 onwards. For guidance as to what happens when a reporting fund becomes a non-reporting fund, and vice versa, see OFM11500 onwards and OFM15500 onwards Guidance for investors in non-reporting offshore funds Part 2 of the Offshore Funds (Tax) Regulations 2009 is solely concerned with the treatment of participants (that is, UK investors) in non-reporting funds and the following pages explain the effect of the regulations. Investors in non-reporting funds: introduction
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Investors in non-reporting funds OFM08000 Income & distributions: the charge to tax
Contents OFM08100 OFM08200 OFM08300 OFM08400 General 'Transparent' funds 'Non-transparent' funds Remittance basis
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OFM08100 general Investors in non-reporting funds: distributions: the charge to tax:
UK investors with an interest in a fund that falls within the definition of an offshore fund at section 40A(2) FA 2008 but that is not a reporting fund will, prior to disposing of all or part of such an interest, only be chargeable to tax on any distributions that they receive (or are treated as receiving, if a fund is transparent for income purposes). An offshore fund may take one of several forms it may be, for instance, a company with share capital, a unit trust, or a contractual arrangement such as a Fonds Commun de Placement (FCP). The tax treatment of income and distributions from each type of arrangement will depend on whether or not it is transparent for income and the general tax rules relating to the form of income or distribution (for example, if received from a corporate fund then the income would normally be taxed as a foreign dividend, but see OFM08400 where the fund is a bond fund, i.e. one that is substantially invested in interest type assets). The detailed guidance regarding UK tax treatment of income from savings and investments can be found in the Savings and Investment Manual (SAIM), which is available on the HMRC website at http://www.hmrc.gov.uk. The following pages provide a summary of the tax treatment of income from offshore funds.
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OFM08200 Investors in non-reporting funds: distributions: the charge to tax: 'transparent' funds
Limited partnerships, which are transparent for income and capital gains tax purposes, are outside of the offshore funds definition at section 40A(2)(c) FA 2008 as investors are subject to tax on income and gains as they arise. Other types of arrangements that are transparent for income purposes but not transparent for capital gains purposes (Section 99 and 103A TCGA see OFM03500 onwards) such as, for example, so called Baker unit trusts (following the case of Archer-Shee v. Baker, 11TC749) or certain foreign contractual arrangements (such as Fonds Commun de Placement (FCPs)) fall within the definition of an offshore fund. Income: UK tax treatment of investors For UK tax purposes the income of an income transparent fund is treated as arising directly to its investors (UK investors are charged to tax on income arising net of a deduction for proper expenses of the management of the fund in question, and this is the case for both unit trusts and contractual arrangements). So, for example, if a fund receives interest income then UK investors are charged to tax on their proportionate share of that income as it arises, irrespective of whether or not it is actually distributed to them. Investors should receive a voucher from the fund to tell them what proportion of the funds income they are entitled to, and the split between interest, dividends or property income. Investors should ask their fund manager for a voucher if they do not receive one. Transparent non-reporting funds with interests in reporting funds (regulation 16) There is a further point to consider with regard to transparent non-reporting funds that hold interests in reporting funds. That is, where the underlying reporting fund does not distribute all of its reportable income (see OFM14000 and OFM15500 onwards) then the excess would, if a UK investor held a direct interest in the fund, be treated as income (regulation 94). To ensure that principle is maintained, regulation 16 provides that where the interest is held by a non-reporting fund which is transparent for income purposes then the reportable excess will be similarly treated as additional income in proportion to each investors rights. Transparent non-reporting funds with interests in non-reporting funds (regulation 29) If an income transparent offshore fund holds less than 5% by value of its gross assets in non-reporting funds then provided that was the case throughout the period that a UK investor held their interest in the top tier fund, an offshore income gain (OIG) will not arise on disposal of that interest even if that fund is a non-reporting fund (there is a relaxation of this rule where a transparent fund holds interests in other non-reporting funds that themselves would not give rise to a charge to tax under regulation 17 - see OFM10200 for details). Conversely, that will not be the case where the 5% limit is exceeded during the period that the investor held their interest. UK investors are responsible for obtaining information relating to whether or not the 5% limit has been exceeded for a particular period of account, but it is
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expected that funds marketed to UK investors would make this information available as a matter of routine.
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OFM08300 Investors in non-reporting funds: distributions: the charge to tax: 'non-transparent' funds Arrangements that are non-transparent for income purposes and that come within the definition of an offshore fund under section 40A(2)(a) or (b) FA 2008 will either have corporate form (such as an open-ended investment company) or will be foreign unit trusts. Foreign unit trusts that are not transparent for income purposes are sometimes referred to as Garland unit trusts (following the case of Garland v Archer-Shee (15TC693)). The UK tax treatment of investors for income purposes will depend on the form of the offshore fund, as explained below. Corporate funds Where a fund has corporate form, any distributions received will normally be treated as foreign dividends. Dividends from offshore funds qualify for the dividend tax credit (for income tax payers) or are exempt (for corporation tax payers) if they are received on or after 22 April 2009, subject to one important exception. Finance Act 2009 introduced an amendment to the Income Tax (Trading and Other Income) Act applying from 22 April 2009, so that where an offshore fund holds more than 60% of assets in interest-bearing (or economically similar) form, any distribution received by UK investors who are subject to income tax is treated as a payment of yearly interest and will not qualify for a dividend tax credit. The rates applying will be those applying to interest (section 378A ITTOIA 2005). Fund managers should be able to tell UK investors if a fund is a bond fund. Corporation tax payers remain subject to the bond fund rules in Chapter 3 of Part 6 of CTA 2009. Non-transparent unit trusts UK investors in foreign unit trusts that are non-transparent for income purposes are taxable on their proportionate share of income (as ascertained after the trustees have met the expenses of administering the trust) when it is indefeasibly allocated to them, regardless of whether the income is paid to them or accumulated. Unlike the position for transparent unit trusts (see OFM08200), that income is taxable as miscellaneous foreign income (under Chapter 8 of Part 5 of ITTOIA 2005, or Chapter 8 of Part 10 CTA 2009) and the tax rates applying will be those applying to such income. Corporation tax payers are subject to the rules in Chapter 3 of Part 6 of CTA 2009 if the fund is a bond fund.
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OFM08400 Investors in non-reporting funds: income & distributions: the charge to tax: remittance basis Where an investor in a (non-transparent) non-reporting offshore fund is taxed on the remittance basis then the remittance basis rules apply to income arising from the holding in that fund as they apply to other income from non-UK sources. Where the fund is transparent for tax-purposes, then the income will arise from the underlying assets and not from the fund. In such a case the income may sometimes arise in the UK (even though the fund itself is domiciled offshore). Where the income arises in the UK the remittance basis does not apply. Where the income arises offshore then the remittance rules will apply. Disposals of interests in non-reporting funds by remittance basis investors See OFM09250
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Investors in non-reporting funds OFM08500 Contents OFM08550 OFM08600 OFM08650 OFM08700 OFM08750 OFM08800 Disposals of interests
Overview Death of participant Exchanging interests in one fund or share class for another Exchanges of securities Schemes of reconstruction Exchange of interests in different classes
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OFM08550 Investors in non-reporting funds: disposals of interests: overview regulations 32 & 33 Basic Rule Where a participant has an interest in a non-reporting offshore fund (or in some circumstances in a reporting fund see OFM15500 onwards) then there is a disposal of an asset for the purposes of the regulations if there would be a disposal of the asset for the purposes of tax on capital gains (under the Taxation of Chargeable Gains Act 1992 TCGA). Except where the regulations provide otherwise (see OFM10220 concerning protected rights) the rules in TCGA also apply to determine the identity of disposals with acquisitions of rights within the same class. Detailed guidance on disposals for TCGA purposes can be found in the Capital Gains Manual, on the HMRC website. There are exceptions to the basic rule as summarised below. Exceptions to basic rule departures from rules in TCGA Death of participant - see OFM08600 Exchange of securities (section 135 TCGA) see OFM08650 Scheme of reconstruction (Section 136 TCGA) see OFM08700 Exchange of interests of different classes (section 127 TCGA) see OFM08750
Offshore funds that are not companies For the purposes of determining whether there has been a disposal or not, TCGA applies to interests in offshore funds that are not companies in the same way as it applies to interests in companies. This is because TCGA applies to interests in unit trusts and to other non-corporate offshore funds in the same way as it does to shares in companies (sections 99 and 103A TCGA). See OFM03550 for further guidance on the rules relating to offshore funds that do not take corporate or unit trust form that were introduced in Finance Act 2009 by the insertion of Section 103A into TCGA.
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OFM08600 Investors in non-reporting funds: disposals of interests: death of participant regulation 34 Where a participant in a non-reporting fund dies then the participants interest in the non-reporting fund is deemed to have been disposed of by the deceased person immediately before the deemed acquisition (on death) by the deceaseds personal representatives (Regulation 34(1) and Section 62(1)(a) TCGA). The disposal is deemed to have taken place at a value equal to the value at which the interest is deemed to be acquired under section 62(1)(a) TCGA by the personal representatives that is market value at the date of death. If the disposal gives rise to an offshore income gain then it is chargeable to income tax (see OFM09000 to OFM 09450). An offshore income gain arises and resulting tax becomes payable before the estate of the deceased person is valued for inheritance tax purposes.
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OFM08650 Investors in non-reporting funds: disposals of interests: exchanging interests in one fund or share class for another In certain circumstances TCGA provides that exchanges of one type of interest for another will not constitute a disposal and acquisition. Those provisions of TCGA are not applicable in some circumstances in the case of exchanges involving interests in non-reporting offshore funds as described in the pages referenced below: Exchange of securities for those in another company OFM08700 Schemes of reconstruction OFM08750 Exchange of interests of different classes OFM08800
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OFM08700 Investors in non-reporting funds: disposals of interests: exchanges of securities regulation 35 Regulation 35(1) prevents section 135 TCGA (exchange of securities for those in another company treated as not involving a disposal) from applying in any case where an interest in a non-reporting fund is exchanged for an interest in an entity that is not a non-reporting fund. Where such an exchange of interests takes place, and regulation 35(1) means that section 135 TCGA does not apply, regulation 35(2) then determines that the exchange will be treated as a disposal of the interests in the non-reporting fund. The disposal is deemed to have taken place at market value (at the time of the exchange) for the purposes of calculating the offshore income gain arising to the person disposing (or deemed to dispose) of the interest. No Chargeable Loss While regulation 35 applies in circumstances where an interest in a non-reporting fund is exchanged for an interest in an entity that is not such a fund it should be noted that this regulation applies for the purpose of offshore income gains only and that no capital gain or loss can arise solely as a result of an event to which this regulation applies. However where such an exchange does lead to an amount being charged to tax as an offshore income gain then the acquisition cost on which any later capital gain or loss is based is the deemed disposal consideration. Protected Rights under regulation 30 If the holding which is exchanged includes an element of protected rights under regulation 30 then no charge to tax on an offshore income gain will apply to that element of the holding and there will be no deemed disposal of that element of the holding.
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OFM08750 Investors in non-reporting funds: disposals of interests: schemes of reconstruction regulation 36 Regulation 36 prevents section 136 TCGA (scheme of reconstruction involving issue of securities treated as an exchange, not a disposal) from applying in any case where an interest in a non-reporting fund is exchanged for an interest in an entity that is not a non-reporting fund. Where such an exchange of interests takes place, and regulation 36(1) means that section 136 TCGA does not apply, then regulation 36(2) determines that the exchange will be treated as a disposal of the interests in the non-reporting fund. The disposal is deemed to have taken place at market value (at the time of the exchange) for the purposes of calculating the offshore income gain arising to the person disposing (or deemed to dispose) of their interest. No Chargeable Loss While regulation 36 applies in circumstances where an interest in a non-reporting fund is exchanged for an interest in an entity that is not such a fund it should be noted that this regulation applies for the purpose of offshore income gains only and that no capital gain or loss can arise solely as a result of an event to which this regulation applies. However where such an exchange does lead to an amount being charged to tax as an offshore income gain then the acquisition cost on which any later capital gain or loss is based is the deemed disposal consideration. Protected Rights under regulation 30 If the holding which is exchanged includes an element of protected rights under regulation 30 then no charge to tax on an offshore income gain will apply to that element of the holding and there will be no deemed disposal of that element of the holding.
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OFM08800 Investors in non-reporting funds: disposals of interests: exchanges of interests in different classes regulation 37 In any case where a non-reporting fund is constituted by a class of interest in main arrangements (see regulation 6 and section 40D Finance Act 2008) it is possible that a different class of interest in the same main arrangements may not constitute a non-reporting fund. Regulation 37 prevents section 127 TCGA (equation of original shares and new holding) from applying in any case where an interest in a non-reporting fund is exchanged for an interest in a fund that is not a non-reporting fund (where those funds are both constituted by classes of interest in the same main arrangements) where such an exchange might otherwise constitute a reorganisation within that section and to which that section would otherwise apply. Where such an exchange of interests takes place, and regulation 37 means that section 127 TCGA does not apply, then regulation 36(6) determines that the exchange will be treated as a disposal of the interest in the non-reporting fund. The disposal is deemed to have taken place at market value (at the time of the exchange) for the purposes of calculating the offshore income gain arising to the person disposing (or deemed to dispose) of their interest. Where such an exchange does lead to an amount being charged to tax as an offshore income gain then see OFM11200 for the effect on capital gains.
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Investors in non-reporting funds OFM09000 The charge to tax on disposal of an interest
Contents OFM09050 Overview OFM09100 The charge to tax OFM09150 The charge to tax: income tax OFM09200 The charge to tax: corporation tax OFM09250 Remittance basis OFM09300 Non-resident settlements OFM09350 Transfer of assets abroad OFM09400 Offshore income gains arising to certain non-resident companies OFM09450 Application of other TCGA provisions
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OFM 09050 Investors in non-reporting funds: charge to tax on disposal of an interest: overview Offshore income gains When there is a gain on the disposal of an interest in an offshore fund then there may be a charge to income tax or to corporation tax on the amount of the gain, treated as income. For the meaning of disposal see OFM08550. Note that the meaning, whilst derived from that used in the Taxation of Chargeable Gains Act 1992 (TCGA), is wider than used in that Act and, in particular, includes the death of the participant holding an interest (see OFM08600). In general the charge to tax is incurred when the disposal is of an interest in an offshore fund that is not a reporting fund or one that, at any time during the period when the interest has been held, had not been a reporting fund. However there are exceptions (see OFM10000 onwards). The following pages give details of the calculation of the gain and the charge to tax. Interaction with capital gains Where there is a charge to tax on an offshore income gain then the amount charged to tax is deducted from the disposal proceeds for the purpose of calculating any capital gain so that any gain is not taxed twice (regulation 45 see OFM11000 onwards). Losses Where there is a loss on disposal then the gain for the purposes of tax on an offshore income gain is nil, that is there is no recognition of losses for the purposes of the regulations (regulation 42). Accordingly, in a case where there is also a disposal for the purposes of TCGA, any loss made (calculated in accordance with that Act) may be treated as a capital loss for the purposes of TCGA.
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OFM 09100 Investors in non-reporting funds: charge to tax on disposal of an interest: the charge to tax Regulation 17 Offshore income gains There is a charge to tax on an offshore income gain (OIG) (regulation 17) when a person disposes of an interest in either: a non-reporting offshore fund, or an offshore fund that has, at some point while the interest has been held, been a non-reporting fund (but see under converted funds below).
An offshore income gain is treated for tax purposes as income arising at the time of the disposal and is taxable at the appropriate marginal rate for income on the person making (or treated as making) the disposal (regulation 18). There is also a charge to tax when a participant makes an election under regulation 48 to crystallise an offshore income gain (see OFM11500). Non-reporting funds that were previously reporting funds Where there is a disposal of an interest in a reporting fund which has previously been a non-reporting fund then in some circumstances there will be no charge to tax on an OIG. These are: Where an election to crystallise an offshore income gain was made by the participant at the time the fund became a reporting fund (regulation 48(2) see OFM11500). Where, at the time the fund became a reporting fund, the market value of the participants interest was such that no election to crystallise an offshore income gain was possible because the resulting offshore income gain would not have been greater than zero (regulation 48(5) see OFM11500).
Changes of rights If a change in the terms of a scheme result in it coming within the definition of an offshore fund then UK investors are treated as if they had always held an interest in an offshore fund. If the fund becomes a reporting fund then investors may be able to make an election under regulation 48(2) to crystallise any offshore income gain at that point, with any subsequent gain being subject to chargeable gains treatment (provided the fund remains a reporting fund). See OFM11500 for further guidance regarding the election.
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OFM 09150 Investors in non-reporting funds: charge to tax on disposal of an interest: the charge to tax: income tax Regulation 18 Participants within the charge to income tax Offshore income gains are charged to tax as miscellaneous income under Chapter 8 of Part 5 of ITTOIA 2005 for the year of assessment in which the disposal is made, but ITTOIA/S688(1) & 689 do not apply (regulation 18(3)).
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OFM09200 Investors in non-reporting funds: charge to tax on disposal of an interest: the charge to tax: corporation tax Regulation 18 Participant within the charge to corporation tax Offshore income gains are charged to tax as miscellaneous income under Chapter 8 of Part 10 of CTA 2009, for the accounting period in which the disposal is made (regulation 18(4)).
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OFM09250 Investors in non-reporting funds: charge to tax on disposal of an interest: remittance basis Regulation 19 Offshore income gains: remittance basis Where an individual is not domiciled in the United Kingdom and the remittance basis applies to the individual for a tax year (see booklet HMRC6 available on the HMRC website at www.hmc.gov.uk) then the amount of any offshore income gain arising in that tax year is treated as relevant foreign income of the individual (Chapter 2 Part 8 ITTOIA). In a case where the individual is the beneficiary of a non-resident settlement and an offshore income gain arises to the trustees of the settlement then different rules apply see OFM09300.
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Investors in non-reporting funds OFM09300 Contents OFM09310 OFM09315 OFM09320 OFM09325 OFM09330 OFM09335 Non-resident settlements
Section 87 (and 87A) TCGA attribution rules Effect of residence and domicile status of beneficiary Section 87 (and 87A) TCGA attribution rules: example Example of non-UK domiciled beneficiary not chargeable on offshore income gain arising prior to 6 April 2008 Example of effect of rebasing election Example of rebasing election having no effect
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OFM09300 Non-reporting funds: charge to tax on disposal of an interest: non-resident settlements: summary - regulations 20, 21 and 24
Offshore income gains arising in non-resident settlement structures As the trustees are non-UK resident they are not chargeable on an offshore income gain that arises to them or to an underlying non-UK resident company. Instead there are rules that can attribute the offshore income gain to a settlor or beneficiary of the trust. The total amount of offshore income gains arising to the settlement in a tax year is designated as the OIG amount. For each year of assessment, the OIG amount can result in an offshore income gain being treated as arising to a settlor or beneficiary in the following ways Firstly consider if the OIG amount can be attributed to beneficiaries of the settlement as offshore income gains in accordance with section 87 (and 87A) TCGA as if it were an amount chargeable to capital gains tax calculated under section 2(2) of that Act (regulation 20(2) see OFM09310). Secondly consider if the OIG amount can be attributed to a settlor or beneficiaries of the settlement as offshore income gains in accordance with the Transfer of Assets rules in Chapter 2 Part 13 ITA. This only applies to the extent the OIG amount has not already been attributed in accordance with section 87 (and 87A) TCGA attribution rules to a person who is resident or ordinarily resident in the UK (regulation 21 see OFM09350). Any OIG amount that is not attributed in accordance with the first two bullet points above is carried forward and the same procedure applies in the next and subsequent tax years.
An offshore income gain arising to a non-resident settlement is not treated as income of the settlor under Chapter 5 Part 5 ITTOIA (regulation 20(1)).
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OFM09310 Non-reporting funds: charge to tax on disposal of an interest: non-resident settlements: section 87 (and 87A) TCGA attribution rules regulation 20
Effect of section 87 (and 87A) attribution rules on offshore income gains arising in non-resident settlement structures If offshore income gains arise to the trustees of a non-resident settlement then, for the tax year in which the gains arise, you consider first if they can be attributed to a beneficiary using attribution rules from section 87 (and 87A) TCGA (regulation 20(2)). These rules are applied with necessary modifications to the capital gains legislation to make it work with offshore income gains (regulation 20(3)). These attribution rules also apply where the offshore income gains arise to a nonresident company underlying the non-resident settlement. Section 13 TCGA applies, with necessary modifications, to attribute offshore income gains arising in a nonresident company (regulation 24). Where the offshore income gain arises to a nonresident company underlying a non-resident settlement section 13(10) TCGA allows the offshore income gain to be attributed to the trustees of the non-resident settlement. The attribution rules from section 87 (and 87A) TCGA can then apply to attribute it to a beneficiary of the settlement. Similarly attributions can be made via section 89 or Schedule 4C TCGA where those rules apply instead of section 87 TCGA. Where there are both offshore income gains and capital gains in a non-resident settlement structure then any capital payments are matched first with offshore income gains (regulation 20(4)) see Example at OFM09320. General guidance on how section 87 TCGA and related provisions work in relation to capital gains is available on the HMRC website www.hmrc.gov.uk in the document New guidance on Capital Gains Tax changes affecting beneficiaries of Non Resident Settlements in the material on Non-resident trusts.
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OFM09315 Non-reporting funds: charge to tax on disposal of an interest: non-resident settlements: section 87 (and 87A) TCGA attribution rules: effect of residence and domicile status of beneficiary regulation 20
Effect of residence / domicile of beneficiary on offshore income gains arising in non-resident settlement structures that are attributed under section 87 (and 87A) TCGA rules regulation 20 Beneficiary is UK resident and domiciled Where attributions are made to a beneficiary who is UK resident or ordinarily resident and is domiciled in the UK, then the full amount of the offshore income gain attributed is liable to tax on the beneficiary as income. Beneficiary is UK resident but non-UK domiciled Where attributions are made to a beneficiary who is UK resident or ordinarily resident but non-UK domiciled then, under section 87 (and 87A) TCGA rules, the full amount attributed may not be chargeable to income tax for the following reasons Such an individual will not be chargeable to income tax on offshore income gains attributed to them to the extent that in the matching process a capital payment received before 6 April 2008 is matched, or an OIG amount for the tax year 2007-08, or earlier, is matched (paragraph 100 Schedule 7 FA 2008).
If the trustees have made a rebasing election under paragraph 126 Schedule 7 FA 2008 then such an individual will not be chargeable on the pre-6 April 2008 element of the offshore income gain attributed to them (paragraph 101 Schedule 7 FA 2008). If such an individual is a remittance basis user they can have the benefit of the remittance basis via the rules in section 87B TCGA.
The full amount of the offshore income gain attributed to the individual reduces the OIG amount of the non-resident settlement structure that is available to match with future capital payments. That is so even though less than the full amount may be chargeable to income tax on the individual. Beneficiary is non-UK resident Offshore income gains can still be attributed to a beneficiary who is not resident or ordinarily resident in the UK using the section 87 TCGA attribution rules. This applies even though they may not be chargeable to tax on such an individual. Any such attribution reduces the OIG amount of the non-resident settlement structure that is available to match with future capital payments. General guidance on how section 87 TCGA and related provisions work in relation to capital gains is available on the HMRC website www.hmrc.gov.uk in the document New guidance on Capital Gains Tax changes affecting beneficiaries of Non Resident Settlements in the material on Non-resident trusts.
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OFM09320 Non-reporting funds: charge to tax on disposal of an interest: non-resident settlements: section 87 (and 87A) TCGA attribution rules: example regulation 20
Allocating capital payments between offshore income gains and chargeable gains arising in non-resident settlements regulation 20(4)
Example where both offshore income gains and capital gains received A settlement with non-UK resident trustees has never been settlor interested and has never received any income. The following OIG amounts and capital gains have been received by the settlement: 2008-09 OIG amount 30,000 2009-10 Chargeable gains 40,000 2010-11 OIG amount 50,000 and chargeable gains 60,000. The first capital payment out of the settlement is made in 2010-11. That is a capital payment of 70,000 to a UK resident and domiciled beneficiary. Regulation 20(4) tells you that you match any capital payments with OIG amounts arising in the non-resident settlement before matching with chargeable gains. This applies even if the OIG amount arose in an earlier year than the capital gain. Using the section 87A TCGA attribution rules the capital payment is matched first with the entire 50,000 OIG amount arising in 2010-11. Then the remaining 20,000 (70,000 - 50,000) is matched with 20,000 of the 30,000 OIG amount arising in 2008-09. The beneficiary is treated as receiving 70,000 offshore income gains chargeable to income tax in 2010-11. There are unmatched OIG amounts and chargeable gains in the settlement to carry forward at 5 April 2011 of: 2008-09 OIG amount 10,000 (30,000 less 20,000 matched with capital payment) 2009-10 Capital gains 40,000 2010-11 Capital gains 60,000.
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OFM09325 Non-reporting funds: charge to tax on disposal of an interest: non-resident settlements: attribution rules: example of non-UK domiciled beneficiary not chargeable on offshore income gain arising prior to 6 April 2008
Example showing how a UK resident but non-UK domiciled beneficiary may not be chargeable to tax on an offshore income gain arising in a non-resident settlement prior to 6 April 2008 paragraph 100 Schedule 7 FA 2008
Example of effect of paragraph 100 Schedule 7 FA 2008 A settlement with non-UK resident trustees has never been settlor interested. The trustees own all the share capital of a non-UK resident company. Neither the trustees nor the company has received any income nor made any chargeable gains. The non-resident company held a material interest in an offshore fund. When that was disposed of in 2005-06 an OIG amount of 60,000 arose. The first capital payments to beneficiaries were made in 2010-11 which were: 40,000 to a UK resident and domiciled beneficiary 40,000 to a UK resident but non-UK domiciled beneficiary 40,000 to a non-UK resident beneficiary. There is a matching of 20,000 of each of these capital payments with the 2005-06 OIG amount. Each beneficiary has 20,000 of offshore income gain attributed to them via section 87 TCGA rules. There are no unmatched OIG amounts to carry forward within the non-resident settlement structure. The UK resident and domiciled beneficiary is chargeable to income tax in 2010-11 on the 20,000 offshore income gain attributed to them. The UK resident but non-UK domiciled beneficiary is not chargeable to income tax on any of the 20,000 offshore income gain attributed to them. This is because the OIG amount used in the section 87 matching process arose before 6 April 2008 paragraph 100(2)(b) Schedule 7 FA 2008. The non-UK resident beneficiary is not chargeable to income tax on any of the 20,000 offshore income gain attributed to them. There are unmatched capital payments of 20,000 to each beneficiary to carry forward at 5 April 2011.
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OFM09330 Non-reporting funds: charge to tax on disposal of an interest: non-resident settlements: attribution rules: example of effect of rebasing election
Example showing how a UK resident but non-UK domiciled beneficiary may benefit from a rebasing election paragraph 101 Schedule 7 FA 2008
Example of effect of rebasing election - paragraph 101 Schedule 7 FA 2008 A settlement with non-UK resident trustees is settlor interested because the settlor can benefit. The trustees own all the share capital of a non-UK resident company. Neither the trustees nor the company has received any income nor made any chargeable gains. The trustees have made a rebasing election under paragraph 126 Schedule 7 FA 2008. The non-resident company purchased a material interest in an offshore fund in 200001. This is disposed of in 2010-11 resulting in an OIG amount of 60,000. The post 5 April 2008 element of that OIG amount is 15,000. The first capital payments made to beneficiaries were made in 2010-11. They were: 40,000 to a UK resident and domiciled beneficiary 40,000 to a UK resident but non-UK domiciled beneficiary 40,000 to a non-UK resident beneficiary. There is a matching of 20,000 of each of these capital payments with the 2010-11 OIG amount. Each beneficiary has 20,000 of offshore income gain attributed to them via section 87 TCGA rules. There are no unmatched OIG amounts to carry forward within the non-resident settlement structure. The UK resident and domiciled beneficiary is chargeable to income tax in 2010-11 on the 20,000 offshore income gain attributed to them. The UK resident but non-UK domiciled beneficiary (where the remittance basis is used) is only chargeable to income tax on 5,000 (20,000 x 15,000/60,000) of the 20,000 offshore income gain attributed to them. That is the post 5 April 2008 element of the 20,000 offshore income gain attributed to them. This is by virtue of paragraph 101 Schedule 7 FA 2008. The non-UK resident beneficiary is not chargeable to income tax on any of the 20,000 offshore income gain attributed to them. There are unmatched capital payments of 20,000 to each beneficiary to carry forward at 5 April 2011.
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OFM09335 Non-reporting funds: charge to tax on disposal of an interest: non-resident settlements: attribution rules: example of rebasing election having no effect Example showing how a UK resident but non-UK domiciled beneficiary may not benefit from a rebasing election paragraph 101 Schedule 7 FA 2008 Example of rebasing election having no effect - paragraph 101 Schedule 7 FA 2008 This example has similar facts as that in OFM09330 with the exception that capital payments are not made to beneficiaries until a year after that in which the OIG amount arises in the offshore trust structure. In such a case there may be no benefits of a rebasing election to a non-UK domiciled beneficiary in respect of any offshore income gain attributed to them. A settlement with non-UK resident trustees is settlor interested because the UK resident and ordinarily resident, but non-domiciled, settlor can benefit. The trustees own all the share capital of a non-UK resident company. Neither the trustees nor the company has received any income nor made any capital gains. The trustees have made a rebasing election under paragraph 126 Schedule 7 FA 2008. The non-resident company purchased a material interest in an offshore fund in 200001. This is disposed of in 2010-11 resulting in an OIG amount of 60,000. The post 5 April 2008 element of that OIG amount is 15,000. The first capital payments made to beneficiaries were made in 2011-12. They were: 40,000 to a UK resident and domiciled beneficiary 40,000 to a UK resident but non-UK domiciled beneficiary (who was also the settlor) 40,000 to a non-UK resident beneficiary. In 2010-11 there have been no capital payments in that year, or earlier years, to beneficiaries. So there can be no attribution of the OIG amount to beneficiaries under the section 87 attribution rules in regulation 20. We then have to consider if there can be an attribution under the transfer of assets rules in regulation 21 for 2010-11. The entire 60,000 OIG amount can be attributed to the settlor as an offshore income gain for that year. The non-UK domiciled settlor is chargeable to income tax in 2010-11 on the 60,000 offshore income gains attributed to them, subject to any remittance basis considerations. The rebasing election has no effect on the amount chargeable to income tax as the attribution has not been made via the section 87 attribution rules. The OIG amount is reduced to Nil (regulation 21(6)). There are no unmatched OIG amounts to carry forward to 2011-12. There is nothing to match with the capital payments made in 2011-12 so the full amount of those payments are unmatched capital payments to carry forward at 5 April 2012.
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OFM 09350 Investors in non-reporting funds: charge to tax on disposal of an interest: transfer of assets abroad Regulation 21 Effect of transfer of assets abroad rules on an offshore income gain When an offshore income gain (OIG) arises to a person resident or domiciled outside the United Kingdom then legislation relating to the transfer of assets abroad applies in relation to that OIG as if the amount were foreign income becoming payable to that person. The relevant legislation is at Chapter 2 Part 13 ITA 2007. This regulation is subject to two exceptionsException 1 non resident settlements (regulation 21(4) and (5)) This rule does not apply to an OIG (or a part of an OIG) that arises to the trustees of a non-resident settlement and which is consequently treated as arising to an individual resident or ordinarily resident in the United Kingdom. Instead the rule relating to OIGs arising to non-resident settlements will take precedence (see OFM09300). Where this exception applies to an OIG (or part of one) then this exception applies in that tax year and any future tax year to the OIG (or part OIG) treated as arising to a person resident or ordinarily resident in the United Kingdom (irrespective of whether or when that treatment leads to a tax charge). Exception 2- OIG treated as arising to person resident or ordinarily resident (regulation 21(3)) This rule does not apply to an OIG that arises to an offshore company and is, as a result of the rule described at OFM09400, treated as arising to a person resident or ordinarily resident in the UK as a result of the gain. Amounts carried forward in non-resident settlements When, as a result of this regulation and Chapter 2 Part 13 ITA, foreign income is treated as arising to a person in a tax year then any OIG amount for a non-resident settlement (see regulation 20(2) and OFM09300) is reduced from the following tax year by the amount of the income.
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OFM 09400 Investors in non-reporting funds: charge to tax on disposal of an interest: offshore income gains arising to certain non-resident companies Regulation 24 Attribution of gains to members of non-resident companies Section 13 TCGA applies to offshore income gains (with appropriate modifications) in the same way as it applies to capital gains. In summary it applies to offshore income gains arising to non-resident companies which would be close companies if they were resident in the United Kingdom. An offshore income gain of the company is treated as an offshore income gain of a member of the company in proportion to the members interest as a participator in the company (provided that the members share of the gain is at more than one tenth of the whole gain after aggregation with that of connected persons). This regulation takes precedence over the transfer of assets abroad rules (OFM09350 see exception 2) More detailed guidance on the application of section 13 TCGA is provided in the Capital Gains Manual.
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OFM 09450 Investors in non-reporting funds: charge to tax on disposal of an interest: application of other TCGA provisions Certain provisions relating to capital gains tax (or to corporation tax on chargeable gains) also have effect in relation to income tax or corporation tax on offshore income gains (OIGs). A person is chargeable to tax on OIGs arising during a year of assessment for any part of which they are resident in the UK (or if they are ordinarily resident in that year) (regulation 22(1)(a) and section 2(1) TCGA). A person carrying on a business in the UK through a branch or agency or a company with a UK permanent establishment is chargeable to tax on OIGs arising on the disposal of a holding in an offshore fund if the holding was held for the purposes of the UK branch, agency or permanent establishment (regulation 22(1)(b) and (c) and sections 10 and 10B TCGA). An individual who is temporarily non-resident (within the meaning of section 10A TCGA) is chargeable to income tax on offshore gains arising during the period of temporary non-residence in the year of return to the UK (Section 10A TCGA as modified by regulation 23).
Detailed guidance on the application of TCGA in each of these cases can be found in the Capital Gains Manual. In each case the regulations apply the provisions of TCGA to tax on offshore income gains in the same way as those provisions ordinarily apply to tax on chargeable gains.
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Investors in non-reporting funds OFM10000 Exceptions to the charge to tax
Contents OFM10020 OFM10040 OFM10060 OFM10080 OFM10100 OFM10120 OFM10140 OFM10160 OFM10180 OFM10200 OFM10220 OFM10240 OFM10260 General Interests treated as loan relationships Interests treated as derivative contracts Intangible fixed assets Excluded indexed securities Rights arising under a policy of insurance Trading stock Long-term insurance funds Non-participating loans Interests in certain transparent funds Rights in certain existing holdings Charitable companies & charitable trusts Registered pension schemes
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OFM10020 general Investors in non-reporting funds: exceptions to the charge to tax:
The purpose of the offshore fund regime is to ensure that income cannot be rolled up free of tax with any subsequent gain on disposal being taxed only as a capital gain. Both the 1984 and 2009 rules achieve this by charging any gains on disposals of interests in arrangements that do not distribute, or report income, to tax as income (offshore income gains, or OIGs). However, where it is not possible to roll-up income in such a way that it would not be taxed as income then there is no need to apply the offshore funds rules. This may be the case where a tax charge is imposed by other parts of the Tax Acts on income arising from an investment in arrangements that may come within the definition of an offshore fund. There are also other circumstances where it would not be desirable to charge a disposal of an interest in an offshore fund to tax as an OIG. The Offshore Funds (Tax) Regulations 2009 therefore set out specifically when a charge to tax on an OIG will not arise. Most of the exceptions are carried forward from the legislation in ICTA that applied to the 1984 regime. The following pages provide guidance on the exceptions in the regulations.
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OFM10040 Investors in non-reporting funds: exceptions to the charge to tax: interests treated as loan relationships Regulation 25(2)
Certain investments in offshore funds are treated as loan relationships under Chapter 3 of Part 6 Corporation Tax Act (CTA) 2009 if they are held by a UK company. Further guidance on when such treatment applies can be found in the Corporate Finance Manual (CFM) on the HMRC website at http://www.hmrc.gov.uk. All income arising from a corporate holding in an offshore fund that is treated as a creditor relationship will be regarded as a loan relationship credit, as will the relevant fair value movement in the value of the holding. This means that corporate investors will be charged to corporation tax on any distributions received and also their proportionate share of income arising to the fund under the loan relationships rules and accordingly regulation 25(2) prevents an OIG charge from arising in relation to any periods when the loan relationships rules apply. Interests not treated as loan relationships for entire period held It is possible that an interest in an offshore fund might not be treated as a loan relationship for the entire period that an interest in an offshore fund is held, because the test that determines that matter is applied to each period for which the investing company prepares accounts. There are rules in Chapter 3 of Part 6 CTA 2009 that determine what happens on acquiring or disposing of a loan relationship (see the CFM for further details). The effect is to treat any gains on disposal for periods when a contract is not treated as a loan relationship as an offshore income gain, but an OIG will not arise in respect of any gains relating to periods where the loan relationship rules apply.
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OFM10060 Investors in non-reporting funds: exceptions to the charge to tax: interests treated as derivative contracts Regulation 25(3)
Certain investments in offshore funds are treated as derivative contracts under Part 7 Corporation Tax Act (CTA) 2009 if they are held by a UK investor subject to corporation tax. Further guidance on when such treatment applies is set out in the Corporate Finance Manual (CFM) on the HMRC website - see http://www.hmrc.gov.uk. In summary, where a company acquires a holding in an offshore fund that is not a direct holding, but a financial instrument based on such a holding and in consequence the company is party to a relevant contract that is not otherwise a derivative contract as defined in the legislation, that holding will be treated as a derivative contract (a relevant contract in the terms of CTA). A relevant contract is treated as if it was a derivative contract and any profits or losses thereon are computed on a fair value basis of accounting. This means that corporate investors will be charged to corporation tax on their proportionate share of any income arising to the fund that is the subject of the contract under the derivative contracts rules and accordingly regulation 25(3) prevents an OIG charge from arising in relation to any periods when those rules apply. Contract not a relevant contract for entire period held It is possible that a contract may not be treated as a relevant contract for the entire period that it is held. There are rules in Chapter 3 of Part 6 CTA 2009 that determine what happens on acquiring or disposing of a relevant contract (see the CFM for further details). The effect is to treat any gains on disposal for periods when a contract is not a relevant contract as an offshore income gain, but an OIG will not arise in respect of any gains relating to periods where the derivative contract rules apply.
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OFM10080 Investors in non-reporting funds: exceptions to the charge to tax: intangible fixed assets Regulation 25(4) Where a company has a holding in an offshore fund and that holding would be subject to the tax rules relating to intangible fixed assets as set out in Part 8 of CTA 2009, then for so long as that is the case the holding will be subject to the intangible fixed asset rules. Those rules contain their own detailed provisions relating to holdings of such assets, and where they apply then any gain on disposal of such an asset will not be treated as an offshore income gain. Detailed guidance on the treatment of intangible fixed assets can be found in the Corporate Intangibles Research & Development Manual (CIRD), on the HMRC website at http://www.hmrc.gov.uk.
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OFM10100 Investors in non-reporting funds: exceptions to the charge to tax: excluded indexed securities Regulation 25(5) ITTOIA05/S433 explains the meaning of excluded indexed securities. They are outside the deeply discounted security rules, and are instead taxed under the capital gains rules. There is further guidance on excluded indexed securities in the Savings and Investment Manual (SAIM), on the HMRC website at http://www.hmrc.gov.uk . Where an interest in an offshore fund would fall to be treated as an excluded indexed security, any gain arising on disposal will not be taxed as an offshore income gain, in order that the capital gains treatment is preserved.
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OFM10120 Investors in non-reporting funds: exceptions to the charge to tax: rights arising under a policy of insurance Regulation 25(6) Where an interest in an offshore fund would fall to be treated as rights under a policy of insurance, any gain arising on disposal will not be taxed as an offshore income gain. Guidance on the tax treatment of policy holders can be found in the Insurance Policyholder Taxation Manual (IPTM) on the HMRC website at http://www.hmrc.gov.uk.
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OFM10140 Investors in non-reporting funds: exceptions to the charge to tax: trading stock Regulation 26 Where an interest in an offshore fund is held as trading stock or its disposal is otherwise taken into account in computing the profits of a trade then the profit on disposal will not also be taxed as an offshore income gain.
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OFM10160 Investors in non-reporting funds: exceptions to the charge to tax: long-term insurance funds Regulation 27 Where an interest in an offshore fund that is an asset of an insurance companys long-term insurance fund is disposed of, any gain arising on disposal will not be taxed as an offshore income gain. In this context, insurance company and long-term insurance fund have the same meaning as in section 431(2) of ICTA. A long-term insurance fund is, broadly, the funds that an insurance company maintains to meet its long term liabilities, such as payments to annuitants.
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OFM10180 Investors in non-reporting funds: exceptions to the charge to tax: non-participating loans Regulation 28 Where an asset is disposed of and it consists of a loan made to an offshore fund on such terms that the loan is not a participating loan, then any gain arising on disposal will not be taxed as an offshore income gain. A participating loan is a loan where the amount payable on redemption exceeds the issue price by an amount which is determined in whole or in part by reference to the income of the non-reporting fund. So, for example, a loan made to an offshore fund on the basis of charging a particular rate of interest, and where the outstanding balance was determined by reference to the principal remaining unpaid plus any accrued interest charges, would not be subject to an offshore income gain if that loan was assigned to another party for a sum that resulted in a gain arising. The purpose of this regulation is to ensure that a loan made to an offshore fund on normal commercial terms (and which does not represent an equity interest in the fund) is not treated as an interest in the fund for tax purposes. Conversely, if the terms of a loan are such that it gives the lender the right to participate in the income of the fund, then it will be within the terms of the offshore funds rules and its disposal may give rise to an offshore income gain.
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OFM10200 Investors in non-reporting funds: exceptions to the charge to tax: interests in certain transparent funds Regulation 29 Limited partnerships, which are transparent for income and capital gains tax purposes, are outside of the offshore funds definition at section 40A(2)(c) FA 2008 as investors are subject to tax on income and gains as they arise. Other types of arrangements that are transparent for income purposes but not transparent for capital gains purposes (Section 99 and 103A TCGA see OFM03500 onwards) such as, for example, certain unit trusts (following the case of Archer-Shee v. Baker) or certain foreign contractual arrangements (such as Fonds Commun de Placement (FCPs)) fall within the definition of an offshore fund. They are therefore subject to the Offshore Funds (Tax) Regulations 2009 (SI2009/3001) generally, with certain modifications as described below. The purpose of the offshore fund regime is to ensure that income cannot be rolled up free of tax, with any subsequent gain on disposal being charged only as a capital gain. If a fund is transparent for income, such as would be the case for certain unit trusts and contractual funds, then any income arising to the fund is treated as arising to an investor in proportion to his rights. This means that income is charged to tax as it arises. However, it might be the case that an income transparent fund that came within paragraph (b) or (c) of section 40A(2) of FA 2008 itself invested in a non-reporting fund, and if that were the case then income could be rolled up in the underlying fund, because income would only be credited to the top fund if it was distributed. In order to counter potential roll-up of income by an income transparent fund in underlying non-reporting funds, whilst also preventing unnecessary administrative burdens for transparent arrangements coming within the definition of an offshore fund and for their investors, any gain on disposal of an interest in an income transparent offshore fund will not be taxed as an offshore income gain unless during a period beginning on the date the interest (or any part of it) was acquired and ending on the date of the disposal, the offshore fund at any time held interests in other non-reporting funds (except for certain other transparent funds see below) which amounted in total to more than 5% by value of the offshore funds assets (Regulation 29(2)), or the transparent fund is a non-reporting fund, and the fund fails to make sufficient information available to participants in the fund to enable those participants to meet their tax obligations in the United Kingdom with respect to their shares of the income of the fund (Regulation 29(3)).
Whilst this does mean that transparent funds will have to monitor their underlying investments, it allows such funds to avoid the need to apply for reporting fund status (and for their UK investors to be charged only capital gains tax or corporation tax on an capital gain arising, rather than incurring an offshore income gain, provided the fund has complied with Regulation 29(2)). It follows that if a transparent offshore fund is invested by more than 5% by value of its total investments in non-reporting non-transparent funds it may apply for reporting fund status in order to allow UK investors to be charged to tax on capital gains on
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disposal rather than to an offshore income gain. If reporting fund status is granted then the fund will be subject to the requirements of the regulations, including those relating to the calculation of income from non-reporting funds (see regulations 69 to 71). Investments by transparent non-reporting funds in other transparent nonreporting funds Regulation 29(4) There is one important relaxation to the requirements of regulation 29(2). That is, if a transparent non-reporting fund (TNRF1) invests in another TNRF (TRNF2) then, where a disposal of an interest in TNRF2 would not itself give rise to an offshore income gain (under regulation 17) for a UK investor, it is ignored in determining whether TNRF1 is invested in non-reporting funds by more than 5% of the value of its assets in total. This is because in such circumstances there can be no significant rollup of income in the underlying fund(s). This means that a TNRFs investments could, for example, consist wholly of interests in other underlying TNRFs that themselves held only, say, UK property. Or, a TNRF could be the top layer fund in a fund of funds structure with multiple layers of other TNRFs below the top fund, provided that each of those underlying TNRFs themselves did not hold more than 5% by value of their assets in total in other nontransparent, non-reporting funds. In deciding whether the investee fund qualifies under this regulation this rule may be applied to the investee fund and to any funds in which it, in turn, holds investments. Provision of information to participants If a fund is unable to provide sufficient information to its UK investors to enable them to meet their UK tax obligations then an offshore income gain will be charged on any gains realised on subsequent disposals of relevant interests. The provision of sufficient information would include details of an investors proportionate share of both income arising to the fund and reported income or offshore income gains arising to it, as well as confirmation as to whether or not the fund has invested more than 5% by value of its assets in non-reporting funds. In practice, many existing income transparent funds with UK investors already provide vouchers to those clients detailing income arising to the fund, for example interest income, and foreign or UK dividends.
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OFM10220 Investors in non-reporting funds: exceptions to the charge to tax: rights in certain existing holdings Regulation 30
Some UK investors will have acquired rights before the definition of an offshore fund at section 40A(2) FA 2008 took effect on 1 December 2009, and those rights may not have constituted a material interest in an offshore fund (within the meaning of section 759 ICTA) under the 1984 offshore funds regime. Such investors may have invested on the understanding that any gains arising would be charged to either capital gains tax or to corporation tax as a capital gain. In order to preserve the treatment that such investors expected when they acquired their interests, where such interests are disposed of then any gain arising on disposal will not be taxed as an offshore income gain provided that the rights were acquired before 1st December 2009, or the rights were acquired on or after 1 December 2009 but in accordance with a legally enforceable agreement in writing that was entered into by the investor before 30th April 2009 (the publication date for Finance Bill 2009).
If the agreement was conditional, the conditions must have been met before 1 December 2009 and not varied on or after that date. See OFM10800 for the rules that apply when an investor holds such grandfathered interests and acquires further interests in the same fund which themselves are subject to the regulations.
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OFM10240 Investors in non-reporting funds: exceptions to the charge to tax: charitable companies & charitable trusts Regulation 31 Disposals of interests in non-reporting offshore funds held by charitable companies (as defined in section 506 ICTA) or charitable trusts (as defined in section 519 ITA) are exempt from any charge to corporation tax or income tax in respect of an offshore income gain provided the gain is applicable and applied for charitable purposes (regulation 31 / section 535 of ITA 2007). If interests in non-reporting offshore funds held by charitable companies or charitable trusts cease to be subject to charitable trusts (note that property held by charitable companies is subject to a trust arrangement), and an offshore income gain would arise on accrued gains on a disposal at that time, then the trustees are treated as if they had disposed of and immediately reacquired that property for a consideration equal to its market value. An offshore income gain accruing on the disposal arising under this paragraph is treated as an offshore income gain not accruing to a charity, and is subject to corporation tax or income tax accordingly. Property will cease to be subject to charitable trusts when a charity loses its charitable status, for example if the charity is a time charity, i.e. an arrangement such as that where assets are held on charitable trusts under the terms of a will and the income applied for charitable purposes until such time as a minor reaches a particular age; when the assets are passed to the ultimate beneficiary chargeable gains, or here an offshore income gain, would arise on the transfer of the assets.
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OFM10260 Investors in non-reporting funds: exceptions to the charge to tax: registered pension schemes Section 186 Finance Act 2004 If a UK registered pension scheme (within the meaning of section 153 FA 2004) disposes of an interest in a non-reporting fund, any gain arising will be exempt from the charge to tax under regulation 17. Similarly, S186(1)(a) would have the effect that an offshore income gain would not be chargeable on a pension fund if it were attributed under regulation 24.
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Investors in non-reporting funds OFM10500 Contents OFM10550 OFM10600 OFM10650 OFM10700 OFM10750 OFM10800 Introduction The basic gain Previous no gain / no loss disposals Modification of chargeable gains legislation Losses Certain existing holdings Computation of offshore income gains
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OFM10550 Investors in non-reporting funds: computation of offshore income gains: introduction Regulation 38 An offshore income gain (OIG) will arise when a UK investor disposes of an interest in a non-reporting fund; a reporting fund that has not held reporting fund status for the entire period during which the investor held their interest; a reporting fund which was previously a non-qualifying fund (i.e. one that did not hold distributing fund status) for the entire period during which the investor held their interest (and in respect of which no election was made under paragraph (4) of Schedule 1 to the Offshore Funds (Tax) Regulations 2009)
and a basic gain arises on such a disposal. The OIG will be an amount equal to the basic gain. The following pages explain that term, and the more detailed provisions that apply to such disposals.
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OFM10600 Investors in non-reporting funds: computation of offshore income gains: the basic gain Regulation 39 Where an offshore income gain falls to be charged on the disposal of an interest in an offshore fund, it will be equal to the basic gain. The basic gain is an amount equal to in the case of a participant (i.e. investor) chargeable to income tax, the amount which would be the gain on that disposal for the purposes of TCGA 1992 without any taper relief; in the case of a participant chargeable to corporation tax, the amount which would be the gain on that disposal for the purposes of TCGA 1992 without any indexation allowance.
It can be seen from this that an offshore income gain is essentially equal to the increase in value of the investors holding over the period it was held, with no provision for reducing that gain by taper relief or deduction of indexation. This is because the charge to tax on an offshore income gain is a charge on income, although it is calculated in accordance with the rules in TCGA 1992 with relevant modifications. TCGA92/S37(1) would exclude any sums that have been charged to tax as income from being taken into account in the computation of the basic gain. So, for example, if it was possible that an entity could come within the controlled foreign companies rules and also within the definition of an offshore fund then any sums charged to tax as income under the CFC rules would be excluded from the computation of the basic gain. Further guidance on the CFC rules can be found in the International Manual (INTM) at http://www.hmrc.gov.uk. Note that the computation of the basic gain is subject in all cases to the following regulations (a) regulation 34 (provisions applicable on death) see OFM08600; (b) regulation 35 (application of section 135 of TCGA 1992) see OFM08700; (c) regulation 36 (application of section 136 of TCGA 1992) see OFM08750; (d) regulation 37 (exchange of interests of different classes see OFM08800; (e) regulation 40 (earlier disposal to which the no gain/no loss basis applies); see OFM10650; (f) regulation 41 (modifications of TCGA 1992) see OFM10700; (g) regulation 42 (losses) see OFM10750; (h) regulation 43 (special rules for certain existing holdings) see OFM10800.
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OFM10650 Investors in non-reporting funds: computation of offshore income gains: previous no gain / no loss disposals Regulation 40
When one group company disposes of an asset to another group company, there will not ordinarily be a chargeable gain or loss for corporation tax purposes on that disposal. This is the result of the no gain / no loss rule in section 171(1) TCGA1992 (for further details see the Capital Gains Manual available on the HMRC website at http://www.hmrc.gov.uk/manuals/cg1manual/). The rule states that, ordinarily, if one member of a group disposes of an asset to another member of the group, and the asset remains within the scope of corporation tax on chargeable gains, the consideration is taken to be such an amount as results in no gain/no loss for the transferor. The no gain/no loss rule fixes both the consideration received for the asset by the transferor and the consideration given for the asset by the transferee. The transferor has neither a chargeable gain nor an allowable loss. The transferee effectively takes over the transferor's capital gains cost, as augmented by indexation up to the time of the transfer under section 56(2) TCGA 1992. This rule is modified by regulation 40 when the asset transferred is an interest in an offshore fund. Where that is the case, then the basic gain on the disposal is computed as if no indexation allowance had been available on any such earlier disposal and, subject to that, neither a gain nor a loss had arisen to the group member making the earlier disposal. Example
Transfer of interest from Company A to Company B (1) Market value of asset at transfer Acquisition cost Indexation allowance to date of transfer Indexed gain Deemed acquisition cost (no gain / no loss) (2) Disposal of holding by Company B Proceeds Deemed acquisition cost less indexation on previous no gain / no loss transfer Basic gain' 275,000 100,000 (20,000) (80,000) 195,000 250,000 (80,000) (20,000) 150,000 100,000
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OFM10700 Investors in non-reporting funds: computation of offshore income gains: modification of chargeable gains legislation Regulation 41 Roll-over relief on transfer of business
Usually, where a 'person (but not a person who is a company) transfers a business to a company as a going concern, together with the whole assets of the business (or the whole of those assets other than cash), in exchange for shares issued by the business, any gain arising on the transfer of the assets is effectively deferred if the relevant conditions in Section 162 of TCGA 1992 are met (roll-over relief on transfer of business - see the Capital Gains Manual (CGM) on the HMRC website at http:/www.hmrc.gov.uk. Where, however, one or more of the assets that form part of the transfer is an interest in an offshore fund then the basic gain arising on such a disposal is computed without regard to any deduction which would otherwise fall to be made under section 162 in computing a chargeable gain in other words, the gain is not deferred, but is immediately charged as an offshore income gain.
Relief for gifts of business assets / Gifts on which inheritance tax is chargeable etc Where any part of a disposal that is not on an arms length basis and which is subject to a claim for relief under either section 165 (relief for gifts of business assets) or section 260 of TCGA 1992 (gifts on which inheritance tax is chargeable etc - see the Capital Gains Manual for further details) the claim does not affect the computation of the basic gain arising on the disposal. In other words, no part of the basic gain can be held over.
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OFM10750 Investors in non-reporting funds: computation of offshore income gains: losses Regulation 42 If, in calculating the basic gain (under regulations 39 to 41) arising on the disposal of an interest in an offshore fund the result would produce a loss, then the basic gain arising on the disposal is treated as nil. This means that, for the purposes of the regulations, no loss is to be treated as arising on a disposal and that any loss arising can be relieved only as a capital loss.
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OFM10800 Investors in non-reporting funds: computation of offshore income gains: certain existing holdings Regulation 43
An investor may hold rights in a fund which comes within the definition of an offshore fund at section 40A(2) FA 2008 but which are subject to the grandfathering provisions in regulation 30 (see OFM10220) because, for example, the fund was either not an offshore fund under the previous definition at section 756A ICTA 1988 or it was but the investor did not hold a material interest (as defined at section 759 ICTA, and which is a concept that no longer applies under the 2009 regime). Where this is the case and an investor holding such grandfathered interests acquires further interests in the same fund which themselves are subject to the regulations, then, on making any subsequent disposals, it will be necessary to identify precisely which rights are being disposed of. In considering that, section 104 TCGA 1992 (share pooling: general interpretative provisions) applies as if the protected (i.e. grandfathered) rights were assets of a different class from the non-protected rights, and all of the protected rights must be treated as disposed of before any of the nonprotected rights.
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Investors in non-reporting funds OFM11000 Contents OFM11050 OFM11000 OFM11150 OFM11200 Introduction Treatment of the disposal - general Rollover relief (S162 TCGA) Consideration on a reorganisation (S128 TCGA) Deduction of offshore income gains in computing capital gains
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OFM11050 Investors in non-reporting funds: deduction of offshore income gains in computing capital gains: introduction Regulation 44
A disposal of an interest in an offshore fund may give rise to an offshore income gain but because the rules relating to when a disposal arises are based on the rules for disposals for capital gains purposes within TCGA 1992, with suitable modifications, it is likely that there will be a disposal for the purposes of capital gains as well. Clearly, to apply two separate charges (one on income on any offshore income gain, and one on any capital gain) would potentially lead to double taxation. There are therefore provisions within the regulations that set out how to calculate capital gains when an offshore income gains arises on a disposal. Those provisions are explained in the following pages.
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OFM11100 Investors in non-reporting funds: deduction of offshore income gains in computing capital gains: treatment of the disposal - general Regulation 45
Where there is a disposal of an interest in an offshore fund which has given rise to an offshore income gain and which would also be a disposal for the purposes of TCGA 1992 (as is likely to be the case), then without some form of deduction for the sum charged as an offshore income gain there could be a double charge to tax (one on income, and one on gains). Section 37(1) TCGA 1992 gives relief where the consideration for a disposal of assets has been subject to a charge to tax on income in other circumstances, and regulation 45 has effect in substitution of that part of TCGA so that an offshore income gain is deducted from the sum that would otherwise be taken as the value of the consideration on disposal for TCGA purposes. In many cases this will eliminate any charge to tax on a capital gain. Where there is a part-disposal so that section 42 of TCGA applies to determine the apportionment of acquisition costs to the disposal then the full amount of disposal consideration is taken into account for the purposes of the calculation required by that section that is, the offshore income gain is not deducted from the disposal consideration for the purposes of calculating the part disposal fraction at section 42(2) (for further details relating to part-disposals see the Capital Gains Manual available on the HMRC website at http://www.hmrc.gov.uk).
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OFM11150 Investors in non-reporting funds: deduction of offshore income gains in computing capital gains: rollover relief (S162 TCGA) Regulation 46
OFM10700 explains that any gains on interests in offshore funds which form part of the assets on the transfer of a business and which would usually be subject to relief under section 162 of TCGA 1992 (roll-over relief) cannot be subject to the relief, and an offshore income gain is charged in respect of any basic gain arising on those interests at that time. On such a transfer, the transferor will receive shares in the company transferee. If the transferor subsequently disposes of part or all those shares, then section 162(4) TCGA provides a formula that reduces the acquisition cost of those shares (the new assets) disposed of (for further details see the Capital Gains Manual available on the HMRC website at http://www.hmrc.gov.uk). It usually works as follows The proportion of aggregate net gains attributable to the consideration received in the form of shares is deducted from the allowable acquisition costs of those shares (i.e. the new asset), and the charge on those gains is thus deferred until the shares are disposed of. Section 162(4) gives instructions for computing the amount attributable to the consideration in shares. It states that the fraction A/B has to be applied to the aggregate net gains, where `A' is the cost of the shares and `B' is the value of the whole consideration received by the transferor in exchange for the business. But where the transfer gave rise to an offshore income gain (because the assets transferred included interests in offshore funds), then B is to be taken to be what it would be if the value of the consideration other than shares so received by the transferor were reduced by an amount equal to the offshore income gain.
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OFM11200 Investors in non-reporting funds: deduction of offshore income gains in computing capital gains: consideration on a reorganisation (S128 TCGA) Regulation 47 Where there is a disposal which gives rise to an offshore income gain and that disposal arises as a result of
regulation 35 (application of section 135 of TCGA 1992: exchange of securities for those in another company see OFM08700), regulation 36 (application of section 136 of TCGA 1992: reconstruction or amalgamation involving issue of securities see OFM08750), or regulation 37 (exchange of interests of different classes see OFM08800).
then TCGA 1992 has effect as if an amount equal to the offshore income gain to which that disposal gives rise were given (by the person making the exchange) as consideration for the new holding (within the meaning of section 128 of TCGA (consideration given or received for new holding on a reorganisation)).
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OFM11500 Investors in non-reporting funds: conversion of a non-reporting fund to a reporting fund: consequences for participants in non-reporting fund Regulation 48 When a UK investor disposes of an interest in a non-reporting fund, or in a reporting fund which has not been a reporting fund for the entire period that the investor held their interest, an offshore income gain may arise. In the latter case, the fund may have been a reporting fund for the majority of the time that the investor held their interest prior to disposal, but without any further provision the whole of any basic gain arising would be charged to tax as an offshore income gain. Regulation 48 applies where an offshore fund ceases to be a non-reporting fund and becomes a reporting fund. It provides an opportunity for a UK investor to make an election for a deemed disposal of their interest at the point of conversion, and to be treated as disposing of the interest in the non-reporting fund at its market value on the disposal date, and as acquiring a holding in the reporting fund at the beginning of the reporting funds first period of account.
An offshore income gain is treated as arising on the deemed disposal and the deemed acquisition is treated as made for the same amount as the deemed disposal. An election may not be made unless the offshore income gain arising on the deemed disposal is greater than zero, so a loss cannot be crystallized at this point. Elections must be made by being included in a return made for the tax year which includes the deemed disposal date, or if the investor is chargeable to corporation tax, by being included in the companys tax return for the accounting period which includes the deemed disposal date. There is no special section on the return to indicate that an election has been made an offshore income gain should be calculated and returned in the same way as it would on an actual disposal, and it is recommended that an entry is made in the white space (for an income tax return) or in the accompanying computations (for a corporation tax return). If the interest in the offshore fund is held by an offshore trust and there is a possibility that an offshore income gain could be charged on a UK resident settlor or beneficiary then the settlor or beneficiary should make the election. If no election is made, then any excess income (regulation 94 - see OFM15600) treated as additional distributions and taxed accordingly are allowable as acquisition costs arising under section 38(1)(a) TCGA 1992 (regulation 99 see OFM15750) when an investor disposes of his or her interest in a fund. Investment standing at a loss when fund becomes a reporting fund In such a case (where an election is prevented by regulation 48(5)) the eventual disposal of an interest in the reporting fund will not incur a charge to tax on an offshore income gain.(regulation 17(3)(d)).
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Reporting funds
Contents OFM12000 OFM12500 OFM13000 OFM13500 OFM14000 OFM14500 OFM15000 OFM15500 OFM16000 OFM16500 OFM16750 OFM17000 Introduction Application for reporting fund status Duties of reporting funds Preparation of accounts Computation of reportable income Transactions not treated as trading transactions Reports to participants Tax treatment of participants in reporting funds Provision of information to HMRC Breaches of reporting fund conditions Constant NAV funds Leaving the reporting fund regime: notice given by fund
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OFM12000 Reporting funds: introduction: general
A reporting fund is an offshore fund within the meaning of section 40A(2) FA 2008 that has applied for and been approved as a reporting fund, and that has not voluntarily left the reporting fund regime (regulation 116) or been excluded by HMRC (regulation 114). There is a list of funds that come within the definition of an offshore fund and that have successfully applied for reporting fund status on HMRCs website. The list is updated on a monthly basis and can be found at http://www.hmrc.gov.uk/collective/reportingfundlist.pdf.
This part of the guidance sets out how a fund can enter the reporting funds regime; what reporting funds must provide to HMRC and to their investors; how reporting funds should compute their reportable income; how breaches of the reporting fund conditions are dealt with; what happens when a fund leaves the reporting funds regime; and the tax treatment of participants in reporting funds.
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Reporting funds OFM12500 Contents OFM12550 OFM12600 OFM12650 OFM12700 OFM12750 OFM12800 OFM12850 Who may apply Conversion from a non-reporting fund Contents of application Form & timing of the application HMRC responses to applications Rejection of application - Appeals Constant NAV funds modification of application process Application for reporting fund status
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OFM12550 Reporting funds: application for reporting fund status: who can apply Regulation 51
Where the fund is an existing fund, the manager of the fund may make an application on the funds behalf for it to be accepted as a reporting fund. It is also possible for applications to be made on behalf of funds yet to be established, and in those circumstances the application should be made by the person who is expected to become the manager of the anticipated fund. Reference to the manager of the fund includes the manager or other person who has or is expected to have day to day control of the property of the fund.
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OFM12600 Reporting funds: application for reporting fund status: conversion from a non-reporting fund Regulation 52 The manager of a non-reporting fund may apply on the funds behalf for it to become a reporting fund provided that either it has never been a reporting fund or, if it has been, that it gave notice under regulation 116 (Termination by notice given by reporting fund) that it was leaving the regime. The term existing fund in regulation 52(2) takes its meaning from regulation 51(3) rather than the meaning within para 3 of Schedule 1 to the regulations. The practical difference is that if a fund did not have reporting fund status (or distributing fund status under the transitional rules in para 3 of Schedule 1) for any period prior to applying to be a reporting fund then an application would be made under regulation 52, rather than regulation 51. Note that if a notice under regulation 116 was previously given but regulation 117 applied so as to treat the fund as having been excluded by HMRC under regulation 114 (because the fund had failed to comply with the requirements of the offshore funds regulations) then the fund cannot reapply It follows that a fund also cannot apply to be a reporting fund if it has previously been excluded from being a reporting fund as a result of a notice given by HMRC under regulation 114 (Consequences of serious breaches).
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OFM12650 Reporting funds: application for reporting fund status: contents of application Regulation 53
Applications must include all of the following a) a statement showing the first period of account for which it is intended the fund should be a reporting fund; b) an undertaking that the fund will not have any periods of account exceeding 18 months; c) a statement of whether the fund intends to use International Accounting Standards (IAS) in the preparation of its accounts or, where it does not, a statement of which generally accepted accounting practice it intends to use; d) where a fund does not intend to prepare its accounts in accordance with IAS, a statement specifying where in the funds accounts the figure which it considers to equate to total comprehensive income for the period can be found (see OFM14150 for an explanation of what is meant by total comprehensive income for the period); and also e) a statement specifying how the fund intends to comply with regulation 66(1)(b) (effective interest income or comparable amounts) and to calculate the adjustment required by regulation 66(2) (see OFM14260); f) an undertaking to meet the requirements relating to reports to participants in the fund; g) an undertaking to meet the requirements relating to the provision of information to HMRC. In addition, applications for existing funds must be accompanied by the fund prospectus or, where the application is for an anticipated fund, the proposed prospectus. Documents provided must either be in English or be accompanied by an English translation. Where a fund provides both short and long prospectuses to potential investors, regulatory requirements dictate that the short version must be translated before the fund in question can market to UK investors, but the long version is not usually translated. Provided that the short version contains all of the relevant details that an investor would rely on before deciding whether to invest (so, for example, the structure of the fund, its investment strategy, its tax status, etc.) then HMRC would not also require a translation of the long version. In respect of items (d) and (e) above, a future fund applying under regulation 51(2) may have established the GAAP it will use but not yet have identified what entries in its accounts will equate to total comprehensive income, or how it will comply with regulation 66 (effective interest income or comparable amounts). If that is the case, an application may still be made but the person applying should explain the position in the notes space of the application form (see below). HMRC are unable to approve a fund as a reporting fund until all of the items required by regulation 53 have been provided. Where the information for (d) and (e) is to be provided at a later date, HMRC will write to request that information under regulation 55(1)(c) and agree the time to be allowed for a response with the applicant, which must in any case be before the commencement of the first period for which reporting fund status is required. HMRC will state whether the application would be accepted in respect of the other requirements of regulation 53. Where the fund applying for reporting fund status is part of an umbrella arrangement or constitutes a class of interest then the documents must relate to the entity which includes the fund.
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A pro-forma application form and checklist is available on HMRCs website see OFM12700 for a link. Once an application for a future fund has been approved by HMRC, there may be a delay in the fund receiving subscriptions from investors. Where that remains the case before the end of a funds first or subsequent accounting periods it is recommended that the manager sends a nil return to HMRC for each reporting period in order to make clear that there has not been a breach under regulation 112 (cases where information is not provided).
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OFM12700 Reporting funds: application for reporting fund status: form & timing of the application Regulation 54 All applications must be made in writing to HMRC, and should be addressed to HMRC Collective Investment Schemes Centre 1st Floor South Concept House 5 Young Street Sheffield S1 4LB All applications must be in English, and supporting documents (if not in English) must be accompanied by a translation into English (but see OFM12650 where long and short versions of prospectuses are issued to investors). A pro-forma application form and checklist can be found on HMRCs website at http://www.hmrc.gov.uk/collective/cis-centre.htm. Whilst not mandatory, it is recommended that these are used to ensure that applications are dealt with as quickly and efficiently as possible. All application forms must be received by HMRC before the expiry of a period of three months beginning on the latest of the first day of the first period of account for which the application is being made for the fund to be treated as a reporting fund; the day on which any investor is first issued units or a similar interest in the fund; or for a fund that was an offshore fund under the previous definition at S.756A ICTA prior to 1 December 2009 (an existing fund as defined in Schedule 1), the first day on which interests in the fund are made available to UK resident investors (for example, by way of advertisement to advisers or potential investors in the case of a retail fund, or by invitation to subscribe made to a qualified investor resident in the UK for private placement). Note that an existing fund means a particular fund, so it could not apply to a new subfund created after 1 December 2009 even if the umbrella fund existed at that date. An application may be withdrawn (by the person entitled to make the application see OFM12550) at any time during a period beginning on the day the application is made and ending on the expiry of a period of 28 days from the day on which HMRC respond (under regulation 55(1) see OFM12750).
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OFM12750 Reporting funds: application for reporting fund status: HMRC responses to applications Regulation 55
HMRC must, within 28 days beginning with the day on which it receives the application, give notice to the person who made the application accepting the application; rejecting the application; or asking for further information in order to consider the application.
HMRC will not accept an application if any of the items required together with an application (set out in regulation 53 see OFM12650) is not supplied, or it is considered that there will be a significant difference, in computing reportable income (see OFM14000 onwards) between the result given by the use of international accounting standards (IAS), and the result given by the use of the accounting practice specified in the application and by the use of the entries in the funds accounts, specified in the application, that are considered to equate to total comprehensive income for the period as that expression is used in IAS (see regulation 63).
Where HMRC have asked for further information (under paragraph (1)(c) of regulation 55), and the person who made the application provides it within a period of 28 days (beginning with the day on which HMRC asked for it, or within any longer period it may have agreed) then HMRC will, within 28 days beginning with the day on which they receive the further information, give notice to the person who made the application either accepting or rejecting the application. There is an appeal process if HMRC rejects an application see OFM12800. There is a list of offshore funds that have successfully applied for reporting fund status on HMRCs website. The list is updated on a monthly basis and can be found at http://www.hmrc.gov.uk/collective/reportingfundlist.pdf.
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OFM12800 Reporting funds: application for reporting fund status: rejection of application - appeals Regulation 56
If HMRC rejects an application, the person who made the application can appeal by giving notice of appeal to HMRC within a period of 42 days beginning with the day on which a notice rejecting the application was given. Appeals will be heard by the First-tier Tribunal (or the Upper Tribunal if so determined by Tribunal procedure rules) who may either uphold or quash the rejection of the application. If the tribunal quashes the rejection of the application, the fund will be treated as a reporting fund as if HMRC had accepted the application in the form in which it was considered by the tribunal.
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OFM12850 Reporting funds: application for reporting fund status: constant NAV funds: modification of application process Regulation 120 A constant NAV fund is an offshore fund whose net asset value (expressed in the currency in which units are issued) does not fluctuate by more than an insignificant amount throughout the funds existence, as a result of the nature of the funds assets, and the frequency with which the fund distributes its income (regulation 118). HMRC would expect that the stability of a constant NAV fund would be such that if units were denominated at (say) 1 (1 Euro), the fund would at all times sell and redeem at that price allowing only for any expenses of selling or redemption to make any difference and that an investor, acting reasonably, would at all times, value a holding of units at 1 for each unit. The reporting fund rules are modified in a number of regards for constant NAV funds see OFM16750 for details.
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Reporting Funds OFM13000 Contents OFM13050 OFM13100 OFM13150 Effect of entry into reporting fund regime General duties of reporting funds Constant NAV funds Duties of reporting funds
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OFM13050 Reporting funds: duties of reporting funds: effect of entry into reporting fund regime Regulation 57
Once HMRC has accepted an application, an offshore fund becomes a reporting fund on whichever is the later of the first day of the first period of account for which it is proposed the fund should be a reporting fund, or the day on which the fund is established (the latter may be later where there is a delay in setting up an offshore fund, and the application was made in respect of a prospective reporting fund). Part 3 of the regulations (Reporting funds and the treatment of participants in reporting funds) applies to the fund and to its UK investors from the date that HMRC accepts an application, and will continue to apply unless and until the fund provides a valid notice that it wishes to leave the reporting fund regime (under regulation 116 see OFM17050) or it is excluded by HMRC (in accordance with regulation 114 see OFM16850).
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OFM13100 58 Reporting funds: duties of reporting funds: general Regulation
On being approved as an offshore fund, a fund has to meet certain obligations to both its UK investors and HMRC to continue to be approved as a reporting fund for each reporting period. In particular, reporting funds are required to prepare accounts in accordance with the requirements of Chapter 4 of Part Three of the regulations (see OFM13500 onwards); provide a computation of their reported income in accordance with the requirements of Chapter 5 of Part Three of the regulations (see OFM14000 onwards); provide reports to participants in accordance with the requirements of Chapter 7 of Part Three of the regulations (see OFM15000 onwards); and provide information to HMRC in accordance with the requirements of Chapter 9 of Part Three of the regulations (see OFM16000 onwards).
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OFM13150 Reporting funds: duties of reporting funds: constant NAV funds Regulation 121
A constant NAV fund is an offshore fund whose net asset value (expressed in the currency in which units are issued) does not fluctuate by more than an insignificant amount throughout the funds existence, as a result of the nature of the funds assets, and the frequency with which the fund distributes its income (regulation 118). The reporting fund rules are modified in a number of regards for constant NAV funds see OFM16750 onwards for details.
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Reporting Funds OFM13500 Contents OFM13550 OFM13600 OFM13650 Acceptable accounting policy Changes in accounting policy Changes of accounting practice Preparation of accounts
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OFM13550 Reporting funds: preparation of accounts: acceptable accounting policy Regulation 59 Reporting funds must prepare their accounts in accordance with international accounting standards (IAS), or alternatively in accordance with the generally accepted accounting practice (GAAP) specified in the funds application for reporting fund status. Some GAAPs permit a degree of choice in applicable standards and particular rules may apply to certain entity types such as OEICs, for example. Therefore, although a particular GAAP may be acceptable, it remains the responsibility of reporting funds to correctly calculate reportable income. A list of GAAPs that have been accepted by HMRC on application for reporting fund status is available on the HMRC website on pages maintained by the Collective Investment Schemes Centre (CISC) at http://www.hmrc.gov.uk/collective/ciscentre.htm. The pages includes notes detailing the entries in accounts prepared in accordance with each GAAP that are considered to equate to total comprehensive income (TCI) for a period, and any adjustments that would be required. The notes have been prepared based on applications received by HMRC and should not be considered to be exhaustive, and reporting funds remain responsible for correctly calculating TCI. CISC can provide assistance in cases of doubt or where GAAPs that have yet to be approved are used contact details are shown on their web pages.
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OFM13600 Reporting funds: preparation of accounts: change in accounting policy Regulation 60
Where a fund changes its accounting policy from one period of account to the next one in accordance with the law and practice in relation to each of those periods, and that change results in a change in the accounting value of an asset or a liability of the fund, then a corresponding debit or credit (as appropriate) must be brought into account for the later period. Here, accounting value means the carrying value of the asset or liability recognised for accounting purposes.
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OFM13650 Reporting funds: preparation of accounts: changes of accounting practice Regulation 61
Where a fund changes its accounting practice in drawing up a reporting funds accounts from one period of account to the next period of account, and the accounts for the later period are in accordance with a generally accepted accounting practice (GAAP), then if the accounts for the later period are prepared in accordance with international accounting standards (IAS), the offshore fund is only required to give notice of that to HMRC; but if the accounts for the later period are not prepared in accordance with IAS then the fund must apply to HMRC for approval of that GAAP, unless the GAAP in question has been approved by HMRC and included in a list on the HMRC web pages maintained by the Collective Investment Schemes Centre (CISC) (see OFM13550 for further details). The application must be accompanied by a statement specifying the entries in the funds accounts that are considered to equate to total comprehensive income for the period as that expression is used in IAS.
HMRC must give notice to the offshore fund either accepting or rejecting the application within 28 days beginning with the day on which HMRC receive such an application.
Appeals against HMRC rejection of application If HMRC reject an application, the fund can appeal by giving notice of appeal to HMRC within a period of 42 days beginning with the day on which the notice rejecting the application was given. Appeals will be heard by the First-tier Tribunal (or the Upper Tribunal if so determined by Tribunal procedure rules) who may either uphold or quash the rejection of the application. Failure to apply for approval of GAAP not in accordance with IAS Failure to make an application where required to do so by regulation 66 would be considered to be a serious breach and would result in the fund ceasing to be a reporting fund (regulation 113(3) - see OFM16630).
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Reporting funds OFM14000 Contents OFM14050 OFM14100 OFM14150 OFM14200 OFM14250 OFM14300 Introduction Duty to provide a computation Figures to be used in computation Adjustments for capital items Adjustments for special classes of income Equalisation Computation of reportable income
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OFM14050 Reporting funds: computation of reportable income: introduction
Reporting funds must provide a report to their UK investors of the funds reportable income, and the investors proportionate share of that income (see OFM15000 onwards). A report must also be made to HMRC (see OFM16000 onwards). The reported income notified to each investor will be the investors proportionate share of the funds income derived from its accounts (which must be computed in accordance with international accounting standards (IAS), or alternatively in accordance with an approved generally accepted accounting practice (GAAP) see OFM13500 onwards), with adjustments for certain items as required by the regulations. The following pages provide further guidance on the duty to provide a computation, the figures to be used and the required adjustments.
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OFM14100 Reporting funds: computation of reportable income: duty to provide a computation Regulation 62 Reporting funds must provide a computation of their reportable income for each period of account for which the offshore funds regulations apply.
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OFM14150 Reporting funds: computation of reportable income: figures to be used in computation Regulation 63 The starting point for calculating the reportable income of a reporting fund for a period of account is, in the case of a fund using International Accounting Standards, the total comprehensive income for the period as expressed in IAS1, or alternatively for a fund not using IAS, an equivalent amount. An equivalent amount means the amount specified in the funds application as total comprehensive income for the period and agreed by HMRC as being equivalent. For example, in the case of a fund using UK GAAP it will be the Net revenue/expense after taxation of the fund (see paragraph 3.33 of the Investment Management Associations Statement of Recognised Practice (the IMA SORP). Any adjustments to the starting point in reaching the figure for reportable income should only be made once, regardless of whether such an adjustment could fall to be made under more than one part of the Regulations, and where the result of the final calculation is negative then reportable income is taken to be nil. The adjustments to be made to the starting figure in order to reach the figure for reportable income are explained in the following pages.
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OFM14200 Reporting funds: computation of reportable income: adjustments for capital items Regulations 64 and 65 Reporting funds must identify capital items that would fall under the heading Net capital gains/losses in accounts prepared using the Investment Management Associations Statement of Recognised Practice (the IMA SORP). The figure used as the starting point must be adjusted for any gains or losses falling within the heading by deducting gains and adding losses. That figure must also be adjusted by adding: any other expenses directly related to the acquisition or disposal of investments; and any costs relating to the setting up, merger or dissolution of the fund
Trading income No trading income or profits may be deducted from the starting point in accordance with this regulation, even in cases where the IMA SORP might classify such income or profit as capital, except in cases where regulation 80 applies (see OFM14500 onwards).
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Reporting Funds OFM14250 Contents OFM14260 OFM14270 OFM14280 OFM14290 Effective interest income From wholly-owned subsidiaries From other reporting funds From non-reporting funds Adjustments for special classes of income
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OFM14260 Reporting funds: computation of reportable income: adjustments for special classes of income: effective interest income Regulation 66 If the accounting practice used does not include the effective interest method for calculating interest income (as in IAS 39) then it must either use another method of bringing interest income into account in such a way that the expected gain or loss in value of an interest bearing asset over its life is taken into account as interest (revenue) income or if that is not the case then an adjustment must be made to increase the reportable income over the expected life of the asset by any expected increase in value of the asset (and correspondingly to decrease reportable income by any expected loss over the life of the asset). The adjustment may be made by any reasonable method providing that it takes into account the full expected gain or loss on the asset and is reasonably comparable to the effective interest method. This does not prevent it from being less complex than the effective interest method (for example straight line amortisation would be acceptable) providing that it does not consistently reduce the figure reached for reportable income when compared with the effective interest method.
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OFM14270 Reporting funds: computation of reportable income: adjustments for special classes of income: income from wholly-owned subsidiaries Regulation 67 A wholly owned subsidiary, for the purposes of the offshore funds regulations, means a company where the whole of the issued share capital (subject to the paragraph below) is directly and beneficially owned by a fund falling within the definition of an offshore fund, or by the trustees of such a fund for the benefit of the fund, or where it is owned in such a manner that it near as possible corresponds to either of those categories. If a company has only one class of issued share capital, then reference to the whole of the issued share capital means a reference to at least 95 per cent of the share capital. In any case where any of the conditions above apply, the consequences are that the receipts, expenditure, assets and liabilities of the subsidiary are to be regarded as arising to the fund itself (subject to apportionment where the funds interest in the subsidiary company is less than 100% - regulation 67(4)). The fund should then, in all other respects, ignore its interest in that company, including any distributions or other payments made to it by the subsidiary. Additionally, any adjustments to the treatment of capital items required by regulations 64 and 65 must be made to the amounts treated as arising to the fund. If the accounts of the subsidiary are consolidated into those of the fund then no adjustment should be needed in respect of this regulation as the consolidation will have achieved the required result.
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OFM14280 Reporting funds: Computation of reportable Income: adjustments for special classes of income: income from other reporting funds Regulation 68 Where a reporting fund (referred to as RF1, or Reporting Fund 1, in the regulations) has an interest in another reporting fund (RF2), the income arising to RF1 is the amount reported to it by RF2 i.e. RF1s share of RF2s reported income. The amount (if any) by which RF1s proportionate share of the reported income of RF2 for a period of account (of RF2) exceeds any actual distributions made in respect of that period should be added to the amount specified in regulation 63, after that amount has been adjusted in respect of capital amounts under regulations 64 and 65 (regulation 68(2)). This excess amount should be added in the period of account for RF1 when the relevant fund distribution date for RF2 occurs (regulation 68(3) and (4)). In the event that RF2 fails to report in time then RF 1 must include an estimate in its own reported income and then make any necessary correction in the first period it receives the required information from RF2 (regulation 68(3) and (5)).
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OFM14290 Reporting funds: computation of reportable income: adjustments for special classes of income: income from non-reporting funds Regulations 69 and 70 Non-reporting fund holdings with full information regulation 69 A reporting fund (RF) may have an interest in one or more non-reporting funds (NRF). Where that is the case and all of the conditions set out in regulation 69 apply then RF may carry out its own calculation of the reportable income for NRF and take this into account in calculating its own reportable income. It is then able to treat its interest in NRF as an interest in a reporting fund for the purposes of its own calculation of reportable income and regulation 68, applying to interests of reporting funds in other reporting funds, will apply accordingly. Income from other non-reporting funds regulation 70 Where any of the conditions in regulation 69 are not met, then no adjustments may be made. The effect of this will be that the starting figure which reflects total return will remain unadjusted in respect of RFs interest in NRF so that the full amount of the total return (or fair value increase) will be reflected in reported income. This also applies if the conditions in regulation 69 have been met in earlier periods but are no longer met (regulation 71). Where the fair value of RFs interest in NRF decreases, so as to produce a loss, that loss may be carried forward to later periods of account to set against fair value gains that would, without the set-off of such losses, be taken into account in calculating RFs reportable income. This is subject to the condition that RF must have been a reporting fund for all periods in which such losses are made. Losses may only be used once, and they may not be set off to the extent that they have been used to reduce income for the period of account in which they were incurred.
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OFM14300 Reporting funds: computation of reportable income: equalisation Regulation 72 When a participant redeems an interest in a fund the sum paid out to the exiting participator may include an element in respect of that participants right to income accrued since the previous distribution date. Where this is the case then, providing that the fund operates equalisation arrangements, as defined in paragraphs (1) to (3) of regulation 72, such amounts may be deducted from the sum of reportable income available for the benefit of the remaining participants.
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Reporting funds OFM14500 Contents OFM14550 OFM14600 OFM14650 OFM14700 OFM14750 OFM14800 Introduction Conditions Clearances Treatment of investment transactions Investment transactions Investment manager exemption (IME) Transactions not treated as trading
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OFM14550 Reporting funds: transactions not treated as trading: introduction Regulation 73 The Authorised Investment Funds (Tax) (Amendment) Regulations 2009 (SI 2009/2036) introduced rules that prevent defined financial transactions carried out by diversely owned UK authorised investment funds (AIFs) from being characterised as trading transactions for tax purposes. The rules give diversely owned AIFs certainty that gains on the realisation of certain types of investments cannot be recharacterised as profits arising from a trade which would then be taxable as income. The rules operate by reference to certain conditions that must be met and to specified transactions contained within a white list (in Part 2B of those regulations). Chapter 6 of Part 3 of the Offshore Funds (Tax) Regulations 2009 introduce similar rules for offshore funds. Specifically, regulations within that chapter provide certainty that specified transactions will not be treated as trading transactions for reporting funds that meet the equivalence condition at regulation 74, and the genuine diversity of ownership (GDO) condition at regulation 75 in that chapter. The type of offshore funds able to access the white list within the Offshore Funds (Tax) Regulations 2009 is intended to replicate as closely as possible the type of fund comprising UK AIFs meeting the GDO condition. It follows that the test does not therefore rely on any particular fund type, but whether or not the conditions for equivalence are met. Any fund meeting those conditions will be able to access the white list and, equally, any fund unable or unwilling to meet those conditions will not be able to do so. The following pages provide further guidance on the conditions, and the white list transactions.
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OFM14600 Reporting funds: transactions not treated as trading: conditions Regulations 74 & 75 The equivalence condition (regulation 74) The equivalence condition will be met if either the reporting fund is recognised by the Financial Services Authority (FSA) under one of sections 264, 270 or 272 of the Financial Services and Markets Act 2000 (FSMA 2000), or the fund is a UCITS (Undertaking for Collective Investment in Transferable Securities) fund. The genuine diversity of ownership (GDO) condition (regulation 75) The GDO condition in the Offshore Fund Regulations is intended to prevent close groups of investors from taking advantage of the white list provisions as they are only aimed at investors in widely pooled schemes, rather than those using closely held arrangements that may in reality be for the benefit of a tightly restricted group, for example a group of family members or a group of companies in common ownership. The concept of the GDO was first introduced in 2008 for Property AIFs, and the GDO rules in the Offshore Funds Regulations are similar to the condition applying to UK AIFs in regulation 9A of The Authorised Investment Funds (Tax) (Amendment) Regulations 2009 (SI 2009/2036) except that: The GDO condition applies to UK AIFs at sub-fund level, whereas it applies to reporting funds at share class level if a reporting fund is by reference to a class of share; UK AIFs have certain rules for feeder funds for Property AIFs that do not apply to reporting funds; There is no prescribed form of the documentation that must be produced by reporting funds containing the statements and undertakings in Condition A (regulation 75(2)) (in the regulations applying to UK AIFs those statements must be made in the instrument constituting the fund and the prospectus).
Guidance on the GDO conditions for UK AIFs is available in the Company Taxation Manual (CTM) on the HMRC website and, subject to the modifications noted above, will also apply for the purposes of the GDO condition at regulation 75 of the Offshore Funds Regulations. Additionally, for the purposes of condition C in regulation 75(4)(a), marketing in the context of alternative funds includes via local private placement mechanisms. In particular, it should be noted that the CTM guidance states that If there is no doubt that a fund has or is intended to have a wide range of unconnected investors then it will clearly have no difficulty in meeting the GDO and advance clearance will not be necessary. The following page deals with advance clearances, but the important point is that if a fund can demonstrate that it is, as a matter of fact, widely held (and continues to be so) then HMRC will accept that the GDO condition is met.
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OFM14650 Reporting funds: transactions not treated as trading: clearances Regulations 77 to 79 The manager of a reporting fund, or of a non-reporting fund that makes an application for reporting fund status under regulation 52, can apply for clearance that the fund meets the equivalence and the genuine diversity of ownership (GDO) conditions. An application can also be made in respect of a prospective fund that intends to obtain reporting fund status. Clearance applications should not be made as a matter of routine if there is no doubt that a fund can demonstrate that it meets the GDO condition in regulation 75 or that it is, as a matter of fact, widely held (and continues to be so) then HMRC will accept that the GDO condition is met. Applications Applications must be in writing, accompanied by the documents specified in regulation 75(2) (relating to statements and undertakings by the fund). Applications should be clearly marked Clearance Application Equivalence & GDO Conditions and sent to HMRC Collective Investment Schemes Centre 1st floor Concept House 5 Young Street Sheffield S1 4LB A pro forma application form that applicants may wish to use is available on the HMRC website under the Collective Investment Schemes Centre (CISC) pages. HMRC response to applications HMRC will notify the applicant within 28 days from when they receive the application and documents (or, if they request further information, within 28 days of receiving such further information) giving the clearance (which may be subject to conditions), or refusing clearance. HMRC will explain the reasons for any refusal, and such a refusal will not prevent a further application but clearly it would be expected that the reasons for the refusal would be addressed before a further application was made. Reliance on clearances A reporting fund may only rely on a clearance in relation to any period of account if the instrument constituting the fund or its prospectus includes a statement that is in accordance with the relevant statements in the documents provided to HMRC with the funds application (in accordance with regulation 75(2)) and the fund does not act in any way that is in contravention of any such statement. The fund must also continue to meet the GDO condition. If the fund materially amends any of the documents sent with its original application then it must make a new application if it wishes to rely on the clearance.
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OFM14700 Reporting funds: transactions not treated as trading: treatment of investment transactions Regulation 80 If a reporting fund that is a diversely owned fund, (i.e. one that meets the conditions in regulations 74 and 75 (see OFM14600)) carries out an investment transaction as defined within regulation 81 (meaning of investment transaction) then the transaction in question will not be treated as a trading transaction. Specifically, this means that for the purposes of computing the reporting funds reportable income in accordance with Chapter 5 of the Offshore Funds Regulations the transaction in question will be treated as an investment transaction and cannot be re-characterised as a trading transaction but see the paragraph below under the heading Capital and revenue. Where the conditions are met, all capital profits, gains or losses arising from investment transactions are treated as non-trading. Capital profits, gains and losses for this purpose are any profits, gains or losses treated as capital for accounting purposes under the IMA Statement of Recommended Practice (SORP). Capital and revenue Regulation 80 treats gains and losses from investment transactions (as defined in regulations 81 to 89 see OFM14750) as being either Capital or Revenue as characterised by the SORP. The result is that amounts so characterised as capital may be adjusted in accordance with regulations 64 or 65 but revenue profits (as characterised in the SORP) from investment transactions remain included in the computation of reportable income. For example, interest calculated under the effective yield method (or some similar method calculated under regulation 66) must be included within the computation of reportable income even where regulation 80 applies to prevent any capital profit on disposal of the instrument being characterised as trading income. Reporting funds and trading Where regulation 80 does not apply, it remains a question of fact whether or not activities carried out by a reporting fund amount to trading for tax purposes. In such cases, the normal principles for determining whether or not there is a trade will apply and there is no automatic assumption that transactions which are not investment transactions for the purposes of regulation 80 will be trading transactions by default. Where a reporting fund carries out financial transactions and regulation 80 does not apply, the principles set out in the guidance in the Business Income Manual (BIM), available on the HMRC website, should be considered.
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OFM14750 Reporting funds: transactions not treated as trading: investment transactions Regulations 81 to 89 Regulations 81 to 89 specify the types of transaction that are an investment transaction for the purposes of regulation 80. The regulations provide that an investment transaction is any transaction: in stocks or shares; in a relevant contract; which results in the diversely owned fund becoming party to a loan relationship or related transaction; in units in a collective investment scheme; in securities (not included in the above categories); consisting in the buying or selling of foreign currency; or in a carbon emissions trading product.
The categories above are the same categories that apply to UK AIFs, in regulation 14F of SI2009/2036. The meaning of the above terms is explained in guidance published in the Company Taxation Manual (CTM) on the HMRC website and that guidance also applies for the purposes of regulations 81 to 89 of the Offshore Funds Regulations. Any transaction that is not specified in regulations 81 to 89 will not be an investment transaction for the purposes of regulation 80. This does not mean, however, that the transaction will be a trading transaction by default. Such a transaction may still be non-trading on first principles (see OFM14700).
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OFM14800 Reporting funds: transactions not treated as trading: Investment Manager Exemption (IME)
Regulation 80(2) of the regulations, which confirms that certain transactions are treated as non-trading transactions, applies only for the purposes of Chapter 5 of the regulations; that is for the purposes of computing an offshore fund's reportable income in order to establish the UK tax position of participants in the fund. The regulations are made under powers enabling provision to be made about the tax treatment of participants in an offshore fund (section 41 FA 2008) and they should be read in that context. Specifically, the regulations do not make or purport to make rules that affect the taxation of any of the funds referred to therein as 'offshore funds'; only to regulate the taxation of the returns from those funds to persons taxable under UK legislation. Funds that are taxable in the UK are dealt with by other legislation. It is a question of fact whether or not, for the purposes of that other legislation, a nonresident fund is carrying on a trade in the UK. Where such a fund is carrying on a trade in the UK through an investment manager operating here, the protection of the Investment Manager Exemption may be available in relation to any 'investment transaction' specified in the Investment Manager (Specified Transaction) Regulations 2009. Guidance on the Investment manager Exemption can be found in the International Manual on the HMRC website.
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Reporting funds OFM15000 Contents OFM15050 OFM15100 OFM15150 General Contents of report Long accounting periods: incomplete information Reports to participants
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OFM15050 Reporting funds: reports to participants: general
Reporting funds are required to make available a report to each of their participants who hold an interest in the fund at the end of the reporting period in question for each reporting period (regulation 90(1)). This is to enable UK participants to make a return of their proportionate share of the reportable income (the reported income for each investor). It can also be used by participants that are themselves reporting funds in computing their own reportable income. Note that the obligation is to the participants (investors) rather than to nominees. A reporting fund can make a report available on a website where this may present difficulties see below. A reporting period is (regulation 91) in the case of a reporting fund with a period of account of 12 months or less, the period of account ; where the period of account is greater than 12 months, there will be two reporting periods: the first being the first 12 months of the period of account, and the second being the remainder of the period. (The period of account of a reporting fund cannot be longer than eighteen months regulation 53(1)(b)).
The report must be made available to the participants within six months of the day immediately following the final day of the reporting period in question (regulation 90(5)), so for example a fund with a reporting period of, say, 1 January 2010 to 31 December 2010 must make the report available to its participants by no later than 1 July 2011. The report must be in English (regulation 90(6)). A report can be made available in a number of different ways it can be sent to UK investors by post, it can be sent to UK investors by means of an electronic communications service (for example, as a PDF document attached to an email), it can be made available on a website accessible to UK investors and to HMRC, or it can be published in a newspaper which is published in English, in the United Kingdom, and is readily available in all parts of the United Kingdom.
If reports are not sent by post then the method of providing them to investors must be agreed with them. Agreement in this sense would be satisfied, for example, by a tickbox on the application form; sending communications to investors or updating fund documentation from time-to-time, with a set time for comments (including via nominees).
The report does not have to be personalised for the investor see OFM15100 for the required contents of a report.
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OFM15100 Reporting funds: reports to participants: contents of report Regulation 92
The report sent or made available to investors of a reporting fund for each reporting period must include all of the following 1. the amount actually distributed to participants (i.e. all investors, which will include UK investors) per unit of interest in the fund in respect of the reporting period; 2. the excess of the amount of the reported income per unit of interest in the fund for the reporting period over the amount actually distributed to participants per unit of interest; 3. the dates on which distributions were made; 4. the fund distribution date (per regulation 94(4) see OFM15600); 5. a statement of whether or not the fund remains a reporting fund at the date the fund makes the report available. The reported income of a reporting fund for a reporting period means the reportable income of the fund for the reporting period, computed by or on behalf of the fund, and provided in the report for the reporting period to the participants in the fund. The reported income per unit of a reporting fund for a report is computed by dividing the reported income of the fund for the reporting period by the number of units in the fund in issue at the end of the reporting period, An amount actually distributed to participants per unit of interest in the fund in respect of the reporting period must be computed at the time the distribution is made. An amount per unit of interest in the fund must be expressed to at least four decimal places of a pound (or other currency unit) of value per unit. If the amount of the reported income per unit of interest in the fund for the reporting period is equal to, or less than, the amount actually distributed to participants per unit of interest in the fund in respect of the reporting period, the amount to be stated in respect of (2) above is nil. See OFM15150 where a fund has long accounting periods and there is incomplete information available when preparing a report (regulation 93).
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OFM15150 Reporting funds: reports to participants: long accounting periods - incomplete information Regulation 93 Where a reporting fund has a period of account exceeding 12 months and it cannot compute its reportable income for the first 12 months (the relevant reporting period) of that period of account (as required by regulation 92), then the fund may either calculate its reportable income based on the information reasonably available to it; or apportion the income of that period of account to the two reporting periods by time (or by some other method if this can be shown to give a more just and reasonable result). In either case, the reported income for the second reporting period within the period of account must include all amounts not accounted for in the relevant reporting period referred to above.
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Reporting funds OFM15500 Contents OFM15550 Introduction OFM15600 General provisions OFM15650 Participants chargeable to income tax OFM15700 Participants chargeable to corporation tax OFM15750 Disposals of interests OFM15800 Deemed disposal election OFM15850 Charitable companies & charitable trusts OFM15900 Anti-avoidance provisions OFM15950 Remittance Basis Tax treatment of participants in reporting funds
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OFM15550 Reporting funds: tax treatment of participants in reporting funds: introduction The purpose of the offshore funds regulations is to prevent the roll-up of income in offshore funds with any subsequent realisation of the investment being returned to the investor in the form of capital. As with the previous distributing fund rules, the regulations provide that where there is roll-up of income any subsequent realisation will be charged to tax as income, rather than to tax on capital gains. The previous tax rules required the income of a fund to be distributed to UK investors in order for those investors to be charged to tax on capital gains rather than on income on disposal of their interest in the fund. The new reporting funds rules, by contrast, require only that fund income is reported (although it may be distributed in whole or in part as well). There are specific rules within the regulations to ensure that any sums reported to UK investors are charged to tax as income. The following pages provide more detailed information, but the principle here is that there should not be anything to prevent UK investors accumulating income within an offshore fund providing that the income is taxed as it arises (as happens for investors in UK based funds).
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OFM15600 Reporting funds: tax treatment of participants in reporting funds: general provisions Regulation 94 A reporting fund is required to make a report to its participants for each reporting period (whilst this is principally for UK investors for the purposes of the regulations, other participants such as other offshore funds with an interest in a reporting fund may also need a report). Regulation 92 sets out what each report must contain (see OFM15100), which includes details of sums actually distributed to participants as well as sums reported to them that represent the excess of the reported income of the fund over the sums actually distributed. Sums actually distributed will be subject to a charge to tax in accordance with the normal provisions within the Tax Acts relating to the type of income in question (for example, a corporate fund would distribute income in the form of foreign dividends and in the hands of UK investors they would be subject to the normal rules relating to such income; the Savings and Investment Manual (SAIM) on the HMRC website contains detailed guidance on the treatment of UK investors with foreign income generally and the following pages of this manual provide more details specifically related to investments in offshore funds). Where the whole of the reportable income of a fund is not distributed then the excess is treated in the following ways Reporting fund which is a non-transparent fund Where the fund is non-transparent for income purposes (such as would be the case for an open-ended investment company, or OEIC for example the International Manual (INTM) on the HMRC website contains details of whether particular entity types are transparent or opaque for income purposes) then the Tax Acts have effect as if the excess of the reported income over the distributions made by the fund in respect of the reporting period were additional distributions made to the participants in the fund in proportion to their rights (regulation 94(1)). Where an investor holds some interests that are grandfathered (as a result of regulation 30) and some that are not, the excess specified in regulation 94 is reduced proportionately. The tax treatment of the excess for UK investors will depend on whether they are within the charge to income tax or corporation tax and the form of the nontransparent fund see the following pages for further details. Reporting fund which is a transparent fund In the case of a reporting fund which is a transparent fund, such as would be the case for certain unit trusts, for example, the Tax Acts have effect as if the excess of the reported income over the distributions made by the fund in respect of the reporting period were additional income of the participants in the fund in proportion to their rights (regulation 94(2)). The tax treatment of UK investors of the excess will depend on whether they are within the charge to income tax or corporation tax see the following pages for further details. Where an investor holds some interests that are grandfathered (as a result of regulation 30) and some that are not, the excess specified in regulation 94 is reduced proportionately.
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Date treated as made The excess in both cases is treated as made on the fund distribution date to participants holding an interest in the fund at the end of the reporting period. The fund distribution date for a reporting period of a reporting fund is in a case where the reporting fund issues its report to participants within a period of six months beginning with the day immediately following the last day of the reporting period, the date on which the report is issued, and in any other case, the last day of the reporting period.
In the event of a report being issued to investors more than six months after the day immediately following the last day of the reporting period, it is possible that UK taxpayers may have already filed tax returns in the absence of details of the excess of reported income. In such circumstances, taxpayers should already have included details of their best estimate of the excess, and they may need to file amended returns when the details are finally received.
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Reporting funds: tax treatment of participants in reporting funds OFM15650 Participants chargeable to income tax
Contents OFM15660 OFM15670 OFM15680 Corporate funds Other non-transparent funds Transparent funds
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OFM15660 Reporting funds: tax treatment of participants in reporting funds: participants chargeable to income tax: corporate funds Regulation 95 Where a reporting fund takes corporate form, any sums distributed together with any excess of reported income will be treated as foreign dividends (unless the fund is a bond fund see below). Until 22 April 2009, dividends received from offshore funds did not carry any entitlement to a dividend tax credit but from that date they will do so unless the distribution is from a bond fund (section 378A ITTOIA 2005). Any sums treated as an excess of reported income also carry an entitlement to a foreign tax credit, unless the fund is a bond fund (regulation 95(4)). Bond funds From 22 April 2009 there is a change to the way dividends from offshore funds which are substantially invested in interest-bearing assets (commonly known as bond funds) are treated for tax purposes. Where an offshore fund holds more than 60% of assets in interest-bearing (or economically similar) form, any distribution or excess of reported income is treated as a payment of yearly interest (section 378A ITTOIA 2005 / regulation 95(3)). Such sums do not qualify for a dividend tax credit and the tax rates that apply are those applying to interest. Fund managers should be able to tell UK investors if a fund is a bond fund. Remittance basis users Where individuals not domiciled in the United Kingdom are taxed on the remittance basis then the normal remittance basis rules will apply to income arising from the reporting fund. In the case of income that is reported but is not distributed then that income has not been remitted to the UK.
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OFM15670 Reporting funds: tax treatment of participants in reporting funds: participants chargeable to income tax: other non-transparent funds Regulation 96 Arrangements that are non-transparent for income purposes and that come within the definition of an offshore fund under section 40A(2)(b) FA 2008 (that is, funds that do not take corporate form) will be foreign unit trusts. Foreign unit trusts that are not transparent for income purposes are sometimes referred to as Garland unit trusts (following the case of Garland v Archer-Shee (15TC693)). Non-transparent unit trusts UK investors in foreign unit trusts that are non-transparent for income purposes are taxable on their proportionate share of income (as ascertained after the trustees have met the expenses of administering the trust) when it is indefeasibly allocated to them, regardless of whether the income is paid to them or accumulated. Unlike the position for transparent unit trusts, that income is taxable as miscellaneous foreign income (under Chapter 8 of Part 5 of ITTOIA 2005) and the tax rates applying will be those applying to such income. If there is an excess of reported income over the amount allocated (for example if the unit trust has invested in another reporting fund and has itself received reports of income which was not actually distributed to it) then the excess must be treated by the participant in the same way as the allocated income (that is as miscellaneous foreign income (under Chapter 8 of Pat 5 of ITTOIA 2005). Remittance basis users Where individuals not domiciled in the United Kingdom are taxed on the remittance basis then the normal remittance basis rules will apply to income arising from the reporting fund. In the case of income that is reported but is not distributed then that income has not been remitted to the UK.
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OFM15680 Reporting funds: tax treatment of participants in reporting funds: participants chargeable to income tax: transparent funds Regulation 97 Limited partnerships, which are transparent for income and capital gains tax purposes, are outside of the offshore funds definition at section 40A(2)(c) FA 2008 as investors are subject to tax on income and gains as they arise. Other types of arrangements that are transparent for income purposes but not transparent for capital gains purposes (Section 99 and 103A TCGA see OFM03500 onwards) such as, for example, so called Baker unit trusts (following the case of Archer-Shee v. Baker, 11TC749) or certain foreign contractual arrangements (such as Fonds Commun de Placement (FCPs)) fall within the definition of an offshore fund. Income: UK tax treatment of investors No matter what the legal form of a transparent reporting fund, for UK tax purposes the income of an income transparent fund is treated as arising directly to its investors (UK investors are charged to tax on income arising net of a deduction for proper expenses of the management of the fund in question, and this is the case for both unit trusts and contractual arrangements). So, for example, if a fund receives interest income then UK investors are charged to tax on their proportionate share of that income as it arises, irrespective of whether or not it is actually distributed to them. Investors should receive a voucher from the fund to tell them what proportion of the funds income they are entitled to, and the split between interest, dividends, property income, etc. Investors should ask their fund manager for a voucher if they do not receive one. If a transparent reporting fund holds investments in other reporting funds then investors are also taxable on their proportionate share of any income reported but not actually distributed by the underlying fund (regulation 94(2)). This will become part of the excess to be reported by the transparent reporting fund. Such excess reported income is charged to tax as miscellaneous foreign income under Chapter 8 of Part 5 ITTOIA 2005 (regulation 97(4)), and it is chargeable at investors highest tax rate. Remittance basis users In a case where the reporting fund is transparent for UK tax purposes then the income will arise from the underlying assets and not from the fund. In such a case the income may sometimes arise in the UK (even though the fund itself is domiciled offshore). Where the income arises in the UK the remittance basis does not apply. Where the income arises offshore then the remittance rules will apply.
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OFM15700 Reporting funds: tax treatment of participants in reporting funds: participants chargeable to corporation tax Regulation 98 Corporate investors in offshore funds will be chargeable to corporation tax on any distributions received from reporting funds under general principles, and on any excess of reported income of the fund invested in under regulation 94(1) and (2). Where such investors are taxable under regulation 94(1) on excess reported income, that amount will be treated as exempt if it would be exempt had it been an actual distribution. The bond fund rules in Chapter 3 of Part 6 CTA 2009 (relationships treated as loan relationships) may apply if a reporting fund held more that 60% by value of its investments in debt type assets at any time during an investing companys accounting period see the Corporate Finance Manual (CFM)).
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OFM15750 Reporting funds: tax treatment of participants in reporting funds: disposals of interests Regulation 99 Pages at OFM08500 to OFM10500 provide guidance on when a disposal of an interest in an offshore fund will give rise to an offshore income gain (OIG). In all other cases, the disposal of a UK investors interest in an offshore fund will be treated as a disposal of an asset for the purposes of tax on chargeable gains. UK investors will have been charged to tax under regulations 94 to 98 on income distributed by a reporting fund, and on any excess of reported income arising under regulation 94. Therefore, in order to avoid a double charge to tax, any sums specified under regulation 94 are treated as expenditure given for the acquisition of the asset, and allowable as acquisition costs arising under section 38(1)(a) TCGA 1992. See OFM15760 for examples of how this works. Regulation 101 provides an exception to that rule for charitable companies and charitable trusts, as charitable bodies are exempt from a charge to tax on any reported income. If a charitable body subsequently realised a capital gain on which it would not be exempt because the gain was not applied for charitable purposes then it would not be entitled to deduct amounts reported under section 94(1) as it would not have been charged to tax on such sums. Sums treated as expenditure in this way are treated as incurred on the fund distribution date for the reporting period in respect of which the amount is treated as distributed. See OFM15600 for the date taken as the fund distribution date. Where a participant receives an amount in respect of an interest in a reporting fund which is chargeable to tax as income but that amount is received (or treated as received) after the date of the disposal of the interest the amount is treated as received immediately before the disposal for the purposes of regulation 99. Remittance basis users The proceeds of a disposal of a reporting fund will normally constitute a mixed fund for the purposes of the remittance basis rules. This is because the proceeds may have been funded by undistributed (and therefore unremitted) reported income as well as by the original investment and any capital growth.
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OFM15760 Reporting funds: tax treatment of participants in reporting funds: disposals of interests example Example The following example uses a fairly simple scenario to illustrate how an investor might determine base cost for chargeable gains purposes. It uses an example fund that does not operate equalisation. Liz is a UK resident. She purchases 10,000 units in X Equity Fund, a Guernsey openended investment company, on 1 May 2010 for 2.50 per unit. She disposes of all of the units on 31 December 2016 for 4.50 per unit. The funds aim is to provide a mix of income and capital growth. It has a policy of distributing 25% of its income to investors and accumulating the rest. The fund prepares its accounts to 31 December each year, and makes distributions on 31 March. It sends a report to each of its investors electronically on 1 May each year (containing the information required by regulation 92 including details of actual distributions and the excess of reported income per unit over the sums actually distributed). The fund is not a bond fund. Liz received the following distributions and reports of excess of reported income
Period ending 31/12/2010 31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016 Sum distributed 210 320 360 420 440 610 660 Date distributed 31/03/2011 31/03/2012 31/03/2013 31/03/2014 31/03/2015 31/03/2016 31/03/2017 Returned in Tax Year 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 Sum accumulated 630 960 1,080 1,260 1,320 1,830 1,980 Date reported 01/05/2011 01/05/2012 01/05/2013 01/05/2014 01/05/2015 01/05/2016 01/05/2017 Returned in Tax Year 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18
Liz receives a total of 45,000 on the sale of her units. She has been charged to income tax on all sums distributed to her, and she has also been charged to income tax on the excess income accumulated within the fund and reported to her each year, as shown above (regulation 95(4) provides that the excess income specified by regulation 94(1) is charged to tax under S.397A ITTOIA 2005, as would the sums actually distributed to her in accordance with normal principles). The sums actually distributed to Liz are ignored for the purposes of calculating her base cost for chargeable gains tax. The value of the accumulated sums, however, is reflected in the price that Liz receives on the sale of her units. As Liz has already been charged to tax on those sums, and in order to avoid a potential double charge to tax, the total of the accumulated income (9,060 the total from the column headed sum accumulated above) is, in addition to the sum Liz paid for the units on acquisition, treated as falling within S.38(1)(a) TCGA 1992 (acquisition and disposal costs).
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Lizs total base cost is therefore
25000 9060 34060
Acquisition cost of units Total accumulated income Total
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OFM15800 Reporting funds: tax treatment of participants in reporting funds: deemed disposal election Regulation 100 When a UK investor disposes of an interest in an offshore fund, an offshore income gain (OIG) will arise unless the fund has been a reporting fund throughout the period that the interest was held (see OFM15750), subject only to any transitional provisions that may apply (see OFM17500 onwards). This would mean that, without any further provision, an investor might hold an interest in a particular fund for many years only for that fund not to qualify for reporting fund status for a particular period, or periods, just before the investor wished to dispose of the holding with the result that the disposal would then give rise to an OIG. Regulation 100 therefore applies in the case of an offshore fund which ceases to be a reporting fund and becomes a non-reporting fund. It provides that an investor in the fund may make an election to be treated for the purposes of TCGA 1992 as
disposing of an interest in the reporting fund at the end of the funds final period of account as a reporting fund, and acquiring an interest in the (now) non-reporting fund at the beginning of the funds first period of account.
By making such a deemed disposal election, the investor will be treated as making a disposal of their interest in a reporting fund and acquiring an interest in a nonreporting fund. Any gain or loss arising on the deemed disposal will be subject to the normal rules applying to chargeable gains tax (CGT) or corporation tax on chargeable gains (see the Capital Gains Manual on the HMRC website at www.hmrc.gov.uk). Any subsequent disposal of the interest in the now non-reporting fund will be subject to an OIG on any further gains accrued from the deemed disposal date. An election can only be made if a report has been made available to the investor under regulation 90 for the reporting funds final period of account. If such an election is made then the deemed disposal is treated as being made for a consideration equal to the net asset value of the investors interest in the fund at the end of the last period of account for which the fund was a reporting fund. The acquisition in the now non-reporting fund is treated as made for the same amount. Form of election Investors within the charge to income tax must make an election in a return made for the tax year which includes the deemed disposal date. For investors within the charge to corporation tax, an election must be included in the companys tax return for the accounting period which includes the deemed disposal date. If the interest in the offshore fund is held by an offshore trust and there is a possibility that an offshore income gain could be charged on a UK resident settlor or beneficiary then the settlor or beneficiary should make the election.
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OFM15900 Reporting funds: tax treatment of participants in reporting funds: anti-avoidance provisions Regulations 102 to 105 There are provisions within regulations 102 to 105 that relate specifically to financial traders if they hold interests in reporting funds that satisfy the conditions in regulation 73 (the equivalence and genuine diversity of ownership conditions). These are anti-avoidance provisions to ensure that financial traders cannot avoid a charge to tax on certain transactions dealt with under regulations 80 to 89, on which they would otherwise be chargeable, by holding them through a fund that satisfied the conditions in regulation 73. The term financial trader is defined in regulation 105 and can in certain circumstances include connected persons - that regulation should be referred to for full details, but broadly a financial trader will be one of the following a banking business; an insurance business (excluding life assurance business regulation 105(2)); or a business dealing in trading assets so that profits arising from the holding of investments in a reporting fund would form part of the trading profits of the business.
Amounts brought into account (regulation 103) The sums to be brought into account by financial traders with interests in reporting funds satisfying the conditions in regulation 73 are all distributions received or treated as received for a relevant period: that is, a period of account (for income tax payers) or accounting period (for corporation tax payers), plus any further sums to be brought into account in respect of the movement in value of the interest(s) as follows A) where the interest is held throughout the relevant period, the difference between the market values of the interest from the beginning of that period to the end of that period; B) where the interest is acquired during the relevant period and is held throughout the remainder of the relevant period, the difference between the market value of the interest at the end of the relevant period and the acquisition cost of the interest; C) where the interest is held at the beginning of the relevant period and disposed of during the period, the difference between the disposal value of the interest and the market value of the interest at the end of the period immediately preceding the relevant period; or D) where the interest is acquired and disposed of during the relevant period, the difference between the disposal value of the interest and its acquisition cost. Exceptions (regulation 104) The treatment that applies under regulation 103 explained above does not apply if either the interest in the reporting fund forms part of the financial traders stock in trade and all the profits and losses, including distributions, arising in respect of the interest are included in the computation of the financial traders trading profits for the relevant period, and that interest is accounted for under
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generally accepted accounting practice on the basis of fair value accounting, or the interest is a relevant holding in respect of which the provisions of section 490 of CTA 2009 (holdings in OEICs, unit trusts and offshore funds treated as creditor relationship rights) apply in relation to the financial trader (see OFM10040).
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OFM15950 Reporting funds: tax treatment of participants in reporting funds: remittance basis Where individuals not domiciled in the United Kingdom are taxed on the remittance basis then the normal remittance basis rules will apply to income arising from the reporting fund. In the case of income that is reported but is not distributed then that income has not been remitted to the UK. Transparent Funds In a case where the reporting fund is transparent for UK tax purposes then the income will arise from the underlying assets and not from the fund. In such a case the income may sometimes arise in the UK (even though the fund itself is domiciled offshore). Where the income arises in the UK the remittance basis does not apply. Where the income arises offshore then the remittance rules will apply. Disposals The proceeds of a disposal of a reporting fund will normally constitute a mixed fund for the purposes of the remittance basis rules. This is because the proceeds may have been funded by undistributed reported income as well as by the original investment and any capital growth.
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Reporting funds OFM16000 Contents OFM16050 OFM16100 Annual reporting requirements Obligation to provide information Provision of information to HMRC
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OFM16050 Reporting funds: provision of information to HMRC: reporting requirements Regulation 106 OFM13100 provides an overview of the duties that offshore funds have once they have been approved as a reporting fund. One of those duties is that a reporting fund must provide the following to HMRC within six months of the end of each period of account (a) its audited accounts (see OFM13500 onwards); (b) its computation of its reportable income for the period of account based on its audited accounts (see OFM14000 onwards); (c) a copy of the report made available to UK investors for each reporting period falling within the period of account (including, for each reporting period, the information specified in regulation 92(1) see OFM15100); (d) the reported income of the fund for each reporting period falling within the period of account; (e) the amount actually distributed to participants in respect of each reporting period falling within the period of account; (f) the number of units in the fund in issue at the end of each reporting period falling within the period of account; (g) the amount of the reported income per unit of interest in the fund in respect of each reporting period falling within the period of account; (h) a declaration confirming that the fund has complied with the obligations specified in regulations 53 (contents of an application see OFM12650) and 58 (general duties of reporting funds see OFM13100). The above information should be sent to HMRC Collective Investment Schemes Centre (CISC) 1st Floor South Concept House 5 Young Street Sheffield S1 4LB (See OFM01000 for a list of contacts at CISC if you need to speak to someone regarding provision of information to HMRC.)
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OFM16100 Reporting funds: provision of information to HMRC: obligation to provide information Regulation 107 In order to ensure that the offshore funds regime functions properly HMRC may, from time to time, need to request certain information, particulars or documents from reporting fund managers. As offshore funds are clearly not within any UK jurisdiction, except to the extent that they are required to comply with the reporting fund regulations if they wish to be approved as reporting funds, HMRC cannot use its normal enquiry powers provided by the Tax Acts. Regulation 107 therefore provides HMRC with the necessary powers to require reporting funds to provide information, particulars or documents. Initial request HMRC will only issue a formal notice when a fund or its manager has not adequately responded to an informal request for the information required. Such an initial request, as it is referred to in regulation 107, must be given to the fund or its manager within a period of one year from the day that the fund provided the information required under regulation 106 (see OFM16050). Formal notice When a reporting fund or its manager does not provide all of the information requested under an initial request then HMRC may give notice requiring the fund or its manager to provide such information, particulars or documents in the power or possession of the fund or its manager within a period specified in the notice (this cannot to be less than 42 days, and may be extended by HMRC where they consider it reasonable to do so), that HMRC reasonably require to check whether the fund has met or continues to meet its obligations under the regulations. Reporting funds and managers have a right of appeal against such notices. A notice of appeal must be given to HMRC within a period of 42 days beginning with the day on which the formal notice was given. Appeals will be heard by the First-tier Tribunal (or the Upper Tribunal if so determined by Tribunal procedure rules) who may either uphold, vary or quash the notice. . Failure to provide information, particulars or documents If a reporting fund fails to provide the requested information, particulars or documents within the time specified in the notice issued by HMRC or within such further time as HMRC may agree, it will be considered to have breached the reporting fund requirements set out in the regulations. Such a breach will be considered to be a serious breach, and will result in HMRC issuing an exclusion notice (regulation 113 - see OFM16500 onwards for details of breaches and their consequences).
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Reporting funds OFM16500 Contents OFM16550 OFM16600 OFM16650 Introduction Types of breaches Consequences of breaches Breaches of reporting fund conditions
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OFM16550 Reporting funds: breaches of reporting fund conditions: introduction
Entry into the reporting funds regime is subject to a number of conditions and obligations on the part of funds. The regime is designed to provide a level of certainty to funds, for example by allowing them to apply for reporting fund status in advance of preparing their first accounts, or indeed in advance of the fund actually being formally set up. In order for the reporting fund regime to work as intended it is important that funds admitted into the regime meet the obligations placed on them by the regulations, and as funds will not otherwise be within the jurisdiction of HMRC there are sanctions available to HMRC to address any breaches. Reporting funds should be able to meet their obligations, but where there is a failure to do so and a breach of the reporting fund requirements occurs then the intention is that any response should be reasonable and proportionate. However, where a fund commits a serious breach of the requirements of the regulations, or a combination of minor breaches within a certain period, the fund may be excluded from the reporting fund regime. The following pages provide more information on minor and serious breaches, and how they are treated.
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Reporting funds OFM16600 Contents OFM16605 OFM16610 OFM16615 OFM16620 OFM16625 OFM16630 General Difference between reported income and reportable income Provision of report that is incorrect or incomplete Cases where information is not provided Minor breaches Serious breaches Breaches of reporting fund conditions: types of breaches
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OFM16605 Reporting funds: breaches of reporting fund conditions: types of breaches: general Regulation 108
The regulations define two types of breaches - minor breaches and serious breaches. The two types of breaches are discussed in more detail in the following pages. In summary a breach is, specifically, a breach of part of the requirements of a fund and / or its manager as set out in the regulations; a breach will either be a minor or serious breach; where a breach that is not a serious breach is discovered by the fund itself and rectified without HMRC having discovered the breach as a result of an informal request or a notice for information to be provided (see OFM16100) then it will not be considered to be a breach; minor breaches, provided there is a reasonable excuse or where they are inadvertent and remedied as soon as reasonably possible, will not affect a funds reporting fund status unless there are a specified number of such minor breaches within a certain period (see OFM16620); funds will only be excluded from the reporting fund regime for serious breaches, which includes a specified number of minor breaches within a certain period (see OFM16630); there is an appeal process when a fund is excluded from the reporting fund regime by way of an exclusion notice issued by HMRC see (OFM17100).
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OFM16610 Reporting funds: breaches of reporting fund conditions: types of breaches: differences between reported income and reportable income Regulation 110 It is important that a reporting fund correctly calculates its reportable income (regulation 63 see OFM14000 onwards), because if it does not then the income reported to the funds UK investors will in turn be incorrect, but it is possible that, for various reasons, the reported income of a fund may differ from what should have been reported. Where there is a difference between the correct reportable income of a reporting fund for a period of account, and the reported income of the fund for all reporting periods comprised in the period of account, there may be a breach of the regulations. To determine this, once it has been established that the computation of reportable income was incorrect (where HMRC conclude that the difference is more than 10%, they must give notice to the fund of that conclusion), two figures must be compared for each reporting period comprised in the period of account (a) the amount of the reported income for that reporting period, and (b) the amount of the correct reportable income for the period of account that is referable to that reporting period. Whether there has been a breach of the regulations will depend on the difference between those two figures, as follows. Difference of 10% or less If the difference between the two amounts above is 10% or less of the reportable income, there is no breach of the regulations. However, this does not constitute a de minimis for reporting purposes, and funds should not adjust their reportable income in such a way. Difference more than 10% but not more than 15% If the difference between the two amounts is more than 10% but 15% or less of the reportable income then an amount equal to the difference must be added to the reported income in any one of the following ways for the reporting period in which the error is established, or for the following reporting period, or the fund must make a supplementary report for the period of account in which the difference occurs within 3 months of the end of the period of account in which the error is established. The supplementary report must be made to any investor who held an interest in the fund at the end of the period of account in which the difference occurred. If the supplementary report is made as soon as reasonably possible, there is a minor breach, but otherwise there is a serious breach (see OFM16650 onwards consequences of breaches).
Difference more than 15% If the difference between the two amounts is more than 15% of the reportable income, the reporting fund must make a supplementary report to investors for the period of account in which the difference occurs within 3 months of the end of the period of account in which the error is established. The supplementary report must
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be made to any investor who held an interest in the fund at the end of the period of account in which the difference occurred. If the supplementary report is made as soon as reasonably possible, there is a minor breach, but otherwise there is a serious breach (see OFM16650 onwards consequences of breaches).
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OFM16615 Reporting funds: breaches of reporting fund conditions: types of breaches: provision of incorrect or incomplete report Regulation 111 If a reporting fund provides an incorrect or incomplete report to its UK participants or to HMRC as required by Chapters 7 or 9 of the regulations, other than one that is incorrect due to a difference between reported income and reportable income under regulation 110 (see OFM16610), there is a minor breach if the reporting fund provides a correct report as soon as reasonably possible. If the reporting fund does not provide a correct report as soon as reasonably possible, there is a serious breach. (See OFM16650 onwards consequences of breaches).
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OFM16620 Reporting funds: breaches of reporting fund conditions: types of breaches: information not provided Regulation 112 If a reporting fund does not provide the information specified in regulation 106(1) (see OFM16050) to HMRC for a period of account and a report to all its UK investors (regulations 90 & 92 see OFM15000 onwards) for each reporting period comprised in that period of account, by the day following the expiry of a period of six months beginning immediately after the end of the period of account (referred to as the relevant date in regulation 112), there may be a breach of the regulations, as explained below. Information provided within four months of the relevant date If the reporting fund provides the information within a period of four months beginning on the relevant date, then no breach of the regulations will be considered to arise. Information provided within twelve months of the relevant date If the reporting fund does not provide the information within a period of four months beginning on the relevant date but does provide the information within a period of twelve months beginning on the relevant date, a minor breach arises. Information not provided within twelve months of the relevant date If the reporting fund does not provide the information within a period of twelve months beginning on the relevant date, there is a serious breach. (See OFM16650 onwards consequences of breaches).
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OFM16625 Reporting funds: breaches of reporting fund conditions: types of breaches: minor breaches Regulation 108
A breach of a requirement imposed by the regulations is a minor breach if it is not specified as a serious breach (under regulations 110 to 113) provided the fund or the fund manager has a reasonable excuse for the breach, or the breach is inadvertent and remedied as soon as reasonably possible. Where a reporting fund corrects what would otherwise be regarded as a minor breach without any HMRC intervention (that is, HMRC do not ask the fund to provide them with information, etc, under regulation 107) then no breach will be considered to arise at all. For these purposes, if HMRC request further information to assist a fund in correcting a breach which the fund has drawn to HMRC attention then that will not, of itself, constitute an intervention.
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OFM16630 Reporting funds: breaches of reporting fund conditions: types of breaches: serious breaches Regulation 113 In addition to the circumstances described in OFM16610 to 16620 which could give rise to a serious breach unless specified remedial action is taken, a serious breach will occur in the following circumstances a reporting fund has a period of account exceeding 18 months; a reporting fund has used an accounting practice that is not in accordance with IAS and has not been approved by HMRC; a reporting fund or its managers do not provide the information, particulars or documents requested by HMRC in a notice given under regulation 107(1) (see OFM16100) within the time specified, and there is no appeal against the notice within the time specified in regulation 107(6); and if a reporting fund does appeal against a notice given under regulation 107(1), but the tribunal varies the notice and the fund or its managers fail to provide the information, particulars or documents within the time specified in the notice as varied, and there is no appeal against the decision of the tribunal.
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Reporting funds OFM16650 Breaches of reporting fund conditions: consequences of breaches
Contents OFM16660 OFM16670 OFM16680 Consequences of minor breaches Consequences of serious breaches Appeals against exclusion from reporting fund regime
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OFM16660 Reporting funds: breaches of reporting fund conditions: consequences of breaches: minor breaches Regulation 109
A reporting fund that is in minor breach of the regulations will continue to be treated as a reporting fund, unless there are minor breaches on four separate occasions in a period of ten years beginning with the first day of the period of account in which the first breach occurs, in which event the fourth breach will be a serious breach (see OFM16630). Note though that if a single event results in more than one minor breach within a single period of account then only one minor breach is treated as arising in that period of account.
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OFM16670 Reporting funds: breaches of reporting fund conditions: consequences of breaches: serious breaches Regulation 114 When a serious breach arises under regulations 110 to 113 (see OFM16610 to 16620, and OFM16630), or as a consequence of a number of minor breaches under regulation 109 (see OFM16660), and HMRC give notice of the serious breach to the fund in question then the fund will be treated as a non-reporting fund for the reporting period in which HMRC gives the notice and for all subsequent periods. This is subject to two variations where i. the fund, or its managers, fail to provide information requested by HMRC as a result of a notice under regulation 107 and the fund has not appealed against the notice the fund will be treated as a non-reporting fund for the period in which the notice under regulation 107 was given and for all subsequent periods;
ii. a notice under regulation 107 was issued and the fund has appealed against the notice where the tribunal then varies the notice but the fund or its managers fail to provide the information required by the varied notice and do not appeal against the decision of the tribunal the fund will be treated as a non-reporting fund for the period in which the notice as varied was given and for all subsequent periods.
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OFM16680 Reporting funds: breaches of reporting fund conditions: consequences of breaches: appeals against exclusion from reporting fund regime Regulation 115
If HMRC issue an exclusion notice to a reporting fund under regulation 114 (see OFM16670), the fund can appeal against that notice. Any appeal must be given to HMRC within a period of 42 days, beginning with the day on which the exclusion notice is given. Appeals will be heard by the First-tier Tribunal (or the Upper Tribunal if so determined by Tribunal procedure rules) who may either uphold or quash the notice.
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OFM16750 Reporting funds: constant NAV funds Regulations 118 to 124
A constant NAV fund is an offshore fund whose net asset value (expressed in the currency in which units are issued) does not fluctuate by more than an insignificant amount throughout the funds existence, as a result of the nature of the funds assets, and the frequency with which the fund distributes its income (regulation 118). The reporting fund rules are modified in a number of respects for constant NAV funds, as follows Application for reporting fund status regulation 120 On making an application for reporting fund status, a constant NAV fund need not provide all of the items required by regulation 53 (see OFM12650). Instead, together with its application it is only required to provide a statement of the first period of account for which it is proposed that the fund should be treated as a constant NAV fund for the purposes of the regulations, a statement that the fund is, or will be, a constant NAV fund at the beginning of that first period of account, and an undertaking to notify HMRC if the fund ceases to be a constant NAV fund.
Unless HMRC rejects an application (because, for example, it is incomplete), a fund becomes a constant NAV fund on whichever is the later of the first day of the first period of account for which it is proposed the fund should be a constant NAV fund, or the day on which the fund is established (the latter may be later where there is a delay in setting up an offshore fund, and the application was made in respect of a prospective constant NAV fund). Once a fund has been accepted as a constant NAV fund, it does not need to comply with the requirements of Chapters 4 to 9 of the regulations (which deal with the preparation of accounts, the computation of reportable income, transactions not treated as trading, reports to participants (i.e. investors), the tax treatment of participants, and the provision of information to HMRC). The fund will then continue to be treated as a constant NAV fund until it notifies HMRC that it has ceased to be a constant NAV fund. However if, after a fund has been accepted as a constant NAV fund, the value of the funds assets (expressed in the currency in which units in the fund are issued) rises by more than an insignificant amount and the fund has not notified HMRC that it has ceased to be a constant NAV fund then a participant who subsequently disposes of an interest in the fund and who makes a chargeable gain on the disposal is treated as making an offshore income gain (regulation 123).
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OFM17000 Reporting funds: leaving the reporting fund regime: notice given by fund - Regulation 116 If a reporting fund no longer wishes to be a reporting fund it can give notice specifying a day from which the reporting fund regulations will cease to apply to the fund. Any day specified must be the last day of a period of account of the reporting fund, and the notice must be given in writing to HMRC before that specified day. The fund must also make the notice available to each participant before the specified day (by, for example, writing to or emailing those investors, or publishing the information on a website or in a newspaper widely circulated within the UK). Note that the requirement to notify participants is not restricted to UK residents as interests may be held on a UK investors behalf by an offshore trust, or the fund may have investors that are themselves offshore funds and thus need to be informed that the fund has left the reporting fund regime. A fund that has received an exclusion notice (see OFM16870) cannot subsequently give notice itself that it wishes to leave the reporting fund regime and if such a notice is given it will not have effect, unless the fund successfully appeals against the exclusion notice (see OFM16680).
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Transitional rules OFM17500 Contents OFM17550 OFM17600 OFM17650 OFM17700 OFM17750 OFM17800 Transitional rules
Introduction Existing fund becomes non-reporting fund on 1 December 2009 Applications for distributing fund status for overlap period Existing distributing fund: no application for distributing or reporting fund status Offshore fund previously a non-qualifying fund Reporting fund previously not within definition of an offshore fund
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OFM17550 Transitional rules: introduction - Schedule 1 para (2)
The definition of an offshore fund at section 40A(2) FA 2008 (inserted by FA 2009) applies to interests acquired on or after 1 December 2009 and replaces the previous definition at section 756A ICTA. The 2009 definition is supplemented by the Offshore Funds (Tax) Regulations 2009 which contain the operational rules, whereas the operational rules relating to the previous definition were contained within Chapter 5 of Part 17 and Schedules 27 & 28 of ICTA. The regulations contain a number of consequential amendments to parts of the Tax Acts that made reference to the legislation within ICTA these can be found at regulations 125 to 131. Schedule 1 of the regulations contains transitional provisions. These are explained over the following pages. In addition to the transitional rules, which as the name suggests only address situations that may occur during the transition period, there are further provisions within the offshore funds regulations that address particular situations that may arise going forward, as follows Regulation 30: rights in certain existing holdings (as at 1 December 2009, i.e. grandfathering provisions) see OFM10220; Regulation 43: special rules for certain existing holdings (identification rules on disposal where investor has some rights in an offshore fund that are grandfathered and some that are not) see OFM10800; Regulation 48: conversion of non-reporting fund to reporting fund (deemed disposal election by investors) see OFM11500; Regulation 100: deemed disposals of interests (election by investors where a reporting fund becomes a non-reporting fund) see OFM15800.
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OFM17600 Transitional rules: existing fund becomes non-reporting fund on 1 December 2009 - Schedule 1 para (2) Paragraph (2) of Schedule 1 makes it clear that if an investor holds an interest in a fund on 1 December 2009 that came within the definition at section 756A ICTA and also comes within the definition at section 40A FA 2008 from that date then, if the fund becomes a non-reporting fund at that (or any later) date and an investor subsequently disposes of an interest in the fund then any gain on the disposal will be taxed as an offshore income gain in respect of the entire period that the investor held the interest in the fund. Where the fund was previously a non-distributing fund for the purposes of Chapter 5 of Part 17 of ICTA then this will not result in any change to the investor on a disposal of their interest. However, where the fund was previously a distributing fund there could be an adverse effect for the investor if the fund does not then successfully apply for reporting fund status. There are therefore further provisions within Paragraph (3) of Schedule 1 that may apply see OFM17700.
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OFM17650 Transitional rules: applications for distributing fund status for overlap period - Schedule 1 paras (3) and (6) Paragraph (3) of Schedule 1 contains transitional provisions that allow existing funds, should they wish to do so, to apply in writing to HMRC for distributing fund status for the period of account that straddles the 1 December 2009 (called the overlap period in paragraph (3)), and if a successful application has been made for the overlap period, to also apply to continue to be treated as a distributing fund for the succeeding period.
but only in respect of periods ending on or before 31 May 2012 (paragraph 3B). If a fund makes a successful application for distributing fund status for the overlap period and / or the succeeding period and then immediately becomes a reporting fund for the subsequent period of account, it will be treated as if it had been a reporting fund from the first day that it actually became a distributing fund to the period ending on the last day of the overlap or succeeding periods for which it obtained distributing fund status - provided, of course, it was in fact a distributing fund continuously during that time (paragraph (6) Schedule 1). In order to allow an application for distributing fund status for the overlap period the old offshore funds legislation continues to be effective for this purpose (Paragraph 3(4)). The application for distributing fund status for this period (and for the succeeding period, if desired and if permitted by paragraph 3(3) or 3(3A)) is therefore made under the old legislation in Chapter 5 of Part 17 Income and Corporation Taxes Act 1988.
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OFM17700 Transitional rules: existing distributing fund: no application for distributing or reporting funds status - Schedule 1 para (4) If a distributing fund does not become a reporting fund immediately following the end of the last period of account for which it was approved as a distributing fund then UK investors would, without any further provision, be charged to tax on an offshore income gain when they subsequently disposed of their interest in the fund. Paragraph (4) of Schedule 1 provides for UK investors to make a deemed disposal election to be treated as disposing of an interest in a distributing fund at the end of the funds last period of account for which it was approved as a distributing fund, and acquiring an interest in a non-reporting fund at the beginning of the funds first period of account for which it is not a distributing fund, for chargeable gains purposes. A deemed disposal will be treated as made for a consideration equal to the net asset value of the investors interest in the fund at the deemed disposal date, and any gain or loss will come into charge at that date. The deemed acquisition will be treated as made for consideration equal to the deemed disposal proceeds. If the investor is chargeable to income tax, the election must be made by being included in a return made for the tax year which includes the deemed disposal date. If the investor is chargeable to corporation tax, the election must be made by being included in the company tax return for the accounting period which includes the deemed disposal date.
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OFM17750 Transitional rules: reporting fund previously a non-qualifying fund - Schedule 1 para (5) The deemed disposal provisions under regulation 48 that apply when a non-reporting fund converts to a reporting fund (see OFM11500) are modified by para (5) of Schedule 1 where a fund that was a non-distributing fund prior to 1 December 2009 becomes a reporting fund from 1 December 2009 (because its period of account commences on that date and it successfully applies for reporting fund status). References to a non-reporting fund are substituted with references to the existing fund. This transitional rule is necessary because a fund cannot be a non-reporting fund before the regulations take effect on 1 December 2009, and so without this provision investors in a fund that was a non-distributing fund (under the old rules) and had a period of account ending on 30 November 2009, but subsequently became a reporting fund with effect from 1 December 2009, would be unable to make a deemed disposal election under regulation 48. UK investors will therefore be able to make a deemed disposal and realise an offshore income gain on any accrued gains to that date, with any further gains on a subsequent disposal from then on being subject to tax on chargeable gains (provided the fund has maintained reporting fund status from 1 December 2009 to the date of disposal).
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OFM17800 Transitional rules: reporting fund previously not within definition of an offshore fund - Schedule 1 para (7) A fund that was not an offshore fund within the definition in Chapter 5 of Part 17 of ICTA prior to 1 December but is within the definition in section 40A(2) applying to holdings acquired on or after 1 December 2009 can apply for reporting fund status in relation to a period of account that is current on 1 December 2009 (note this only applies to funds that were not previously within the ICTA definition so funds that were within the ICTA definition may only apply for reporting fund status from the beginning of the first period of account commencing on or after 1 December 2009 and not for periods that are current as at 1 December 2009). Applications must be received by HMRC on or before 31 May 2010.
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Transitional rules OFM17500 Transitional rules

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