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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

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Offshore Funds Manual
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

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Offshore Funds Manual
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.

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Offshore Funds Manual
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 .

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Offshore Funds Manual 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 5 .

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. 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). This manual provides guidance on the definition of an offshore fund (see OFM02000 onwards). in particular to deal with occasions of minor or inadvertent breaches. It detaches the tax definition of an offshore fund from the regulatory definition and instead bases the tax definition on characteristics. UK investors would be charged to tax on income rather than on capital gains. 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. regardless of whether that income is distributed to them or accumulated in the fund. Instead. a facility for an advance application to be a reporting fund. 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. 6 . introduced in 1984. inserted by FA 2009. a requirement (for reporting funds) to report fund income to UK investors rather than the requirement to distribute income. 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). rather than being charged to tax as income. the consideration of only one ‘layer’ of funds for reporting funds. was established on the basis that if an offshore fund did not distribute at least 85% of its income then. The definition applying to the 2009 regime is contained within section 40A FA 2008.Offshore Funds Manual OFM01550 Introduction: overview of the 2009 offshore funds regime: general The previous tax regime for UK investors in offshore funds. on disposal of interests in the fund. with modifications for tax purposes. revised rules to deal with breaches of conditions. from which income is chargeable to tax as income on an arising basis. 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. Funds will either be ‘reporting funds’ or ‘non-reporting 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. The legislation giving the definition and the detailed rules of the 1984 regime was contained within ICTA 1988. and treating investments in non-reporting funds in the same way as under the 1984 regime for investments in non-distributing funds. and the detailed rules relating to the operation of the regime contained within the Regulations (see OFM06000 onwards). that treatment will apply if an offshore fund’s 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.

apply to be a ‘reporting fund’. 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. it is the responsibility of investors to otherwise obtain and record such information.uk/collective/reportingfundlist. A fund. and to participants (investors) that show their proportionate share of that income. Funds may apply for reporting fund status in advance or in arrears. They must provide reports to both HMRC.gov.hmrc. subject to certain time limits – see OFM12700 for details. an offshore fund to which Part 3 of the Offshore Fund (Tax) Regulations 2009. to include a computation showing their reportable income. once granted reporting fund status. Full details can be found at OFM17000 onwards. 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. In addition. The list is updated on a monthly basis and can be found at http://www. does not apply.Offshore Funds Manual 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. 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. on meeting certain conditions. which include making reports as described above for each period of account. See OFM01700 for an overview of the treatment of UK investors in reporting funds. 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. and provide reports of their ‘reportable income’. reporting funds must make certain information available to HMRC when requested to do so.pdf. Reporting funds must prepare accounts in accordance with an acceptable accounting policy. Although it is expected that they would provide details of distributions as a matter of routine to UK investors. which deals with reporting funds. 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. 7 . may rely on that status going forward subject to continued compliance with the reporting funds rules. There is a list of funds that come within the definition of an offshore fund and have successfully applied for reporting fund status on HMRC’s website. subject to an appeals process.

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

UK investors will be subject to tax on any gains arising as if those gains were income – that is.Offshore Funds Manual 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. There are some exceptions – see. 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). providing the fund in question has been a reporting fund for the entire period that an investor has held their interest. 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. on the ‘offshore income gain’ (‘OIG’). The list is updated on a monthly basis and can be found at http://www. as well as the ‘reported income’ (i. On disposal of an interest in a non-reporting fund. if the fund is transparent for income purposes then the investor will be chargeable to tax on income arising on the underlying investments. There is a list of funds that come within the definition of an offshore fund and have successfully applied for reporting fund status on HMRC’s website. for example.pdf. UK investors must make a return of their income to include both the actual distributions received.e. on any subsequent disposal of that interest. They will be liable to income or corporation tax as appropriate on the total of those sums. Alternatively. their proportionate share of the fund’s reportable income in excess of the sums distributed). the investor will be subject to tax on any capital gain (or loss) arising. There are also rules relating to transparent funds with interests in reporting funds.gov. In most cases. 9 . to ensure that investors in the top layer fund are chargeable to tax on their proportionate share of the underlying fund’s reportable income – see OFM08000 for further details. OFM01900 for an overview of transitional arrangements where a reporting fund was a ‘non-qualifying’ fund under the previous offshore funds regime. then. 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.hmrc.uk/collective/reportingfundlist.

Once a fund that existed prior to the operative date of the 2009 regime becomes a reporting (or non-reporting) fund. 10 .Offshore Funds Manual 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.on the HMRC website at http://www. then the new rules will apply as explained in the overview at OFM01700 and in the detailed guidance set out later in this manual. and for the purposes of corporation tax on income.htm ) until the 2009 rules within FA 2008 and the Offshore Funds (Tax) Regulations 2009 take effect (see OFM00500).hmrc. There are some transitional rules for offshore funds relating to periods of account straddling 1 December 2009 and immediately thereafter – see OFM01900. for accounting periods ending on or after 1st December 2009.uk/manuals/saimmanual/Index. 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’ .gov. there are transitional rules that may apply – see OFM01900. Again. and for distributions made on or after 1st December 2009.

In other words.Offshore Funds Manual OFM01900 Introduction: overview of the 2009 offshore funds regime: transitional arrangements .see OFM17650. UK investors UK investors who –   held a ‘material interest’ in a qualifying fund (i. it can obtain distributing status for the succeeding period as well. for any period of account that straddles the 1 December date (the ‘overlap period’ – paragraph 3 Schedule 1 of the regulations). if desired (para (3) of Schedule 1). However.e. no application for distributing fund status can be made for periods of account ending after 31 May 2012 . 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 fund’s only options from that time will be to be a reporting or a non-reporting fund. 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). This is likely to be a common situation. 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. See OFM17600 for full details. but there are other possibilities and the transitional rules set out what happens when –   an investor held a ‘material’ interest in a qualifying (i. A fund can apply for distributing fund status under the rules of the previous regime for offshore funds. 11 . 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). If a fund is successful in obtaining distributing status for the overlap period. 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. as it is not possible to apply for reporting fund status. the transitional provisions within paragraph 3 of Schedule 1 simply provide a mechanism to apply for distributing fund status for the overlap period.overview Offshore funds Offshore funds may apply for reporting fund status only for periods of account commencing on or after 1 December 2009.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).

Regulation 48: conversion of non-reporting fund to reporting fund (deemed disposal election by investors) – see OFM11500. 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. Accordingly. i. Regulation 100: deemed disposals of interests (election by investors where a reporting fund becomes a non-reporting fund) – see OFM15800.e.Offshore Funds Manual The rules applying in each of these cases are set out at OFM17500 onwards. 12 . This is not strictly a ‘transitional’ issue as it may have relevance for many years to come. 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. In addition. 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.e. an investor may have held a ‘non-material’ interest in a non-qualifying (i. ‘grandfathering’ provisions) – see OFM10220 for full details.

Offshore Funds Manual 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 13 .

Offshore Funds Manual 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 14 .

with a subsequent realisation at (or nearly at) net asset value. Section 40E therefore provides exceptions to the meaning of ‘mutual fund’ for certain closed-ended funds where income roll-up would not be possible. “arrangements” has a wide meaning and is not limited to. It follows. That term is defined at section 40B. 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.Offshore Funds Manual OFM02050 Introduction Characteristics based definition The definition of an offshore fund is based on characteristics. Section 40A makes it clear that an ‘offshore fund’. therefore. The relevant legislation is at FA2008/Ss40A – 40G. for example. However. (or by reference to an indexed value) in capital form. the legal documents establishing a fund. 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. must be a ‘mutual 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)). in a case where the top level entity is in a position to control any underlying entity. This is subject to the situation where rights of investors change during the holding of their investment (see OFM09100). a partnership agreement that makes it clear that underlying companies will be wound up by a certain date) then. that in a ‘fund of funds’ situation. whatever its legal form. 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. it is necessary to consider each set of arrangements independently of the others in the structure – so. 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. 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). those terms are relevant to determining whether the underlying entity itself is an offshore fund. 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. a limited partnership cannot be viewed as being part of any other ‘arrangements’ and thus forming part of an ‘offshore fund’. that is. 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). 15 . for example. including those headed by fully transparent entities such as limited partnerships.

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.gov.uk/cap/links-dec07. 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.2009/3001) .Offshore Funds Manual If the arrangements are not a mutual fund then they cannot be an offshore fund. Although this is not a formal clearance service. The exceptions in Section 40E only apply to ‘closed-ended’ arrangements.htm#annexb . including the circumstances in which HMRC will and will not provide an opinion. 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. enquirers should consider the guidance concerning clearance requests available on the HMRC website at http://www. inserted by FA 2009). It will often be clear that a particular set of arrangements either does or does not come within the definition.hmrc. 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. 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). 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.I. but HMRC recognise that will not always be the case.) 16 . In particular. 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.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’). after having considered the guidance in this manual in relation to all of the facts. If.

17 . entirely or nearly entirely by reference to the net asset value (‘NAV’) of their proportionate share of the scheme property or an index. These sorts of arrangements are usually transparent for income purposes – there is further guidance on income transparent arrangements.) at the end of its life. 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 Cayman registered company with a limited life that. unless any of the exceptions at FA2008/S40E apply. including details of when an offshore income gain will not arise for UK investors. could be reasonably expected to provide redemption by reference to NAV (etc. entirely or nearly entirely by reference to the net asset value (‘NAV’) of their proportionate share of the scheme property or an index. and those arrangements may be based anywhere in the world. 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). 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. An example of such a fund would be a Jersey property unit trust (‘JPUT’). Open-ended contractual arrangements Arrangements that take contractual form and that permit investors to redeem their interests on request or at intervals.Offshore Funds Manual 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. 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. An example of such a fund would be Belgian SICAVs. although it did not permit redemptions on request. 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. 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. it is not possible to provide a list of all entity types that come within the definition of an offshore fund. at OFM03500 onwards. at OFM03500 onwards.

HMRC consider would not come within the definition.Offshore Funds Manual Further guidance Further guidance on particular entity types (such as limited life companies) is provided in this manual at see OFM05000 onwards. in general. 18 . See OFM02110 for the types of arrangements that. 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.

for example. See OFM03000 onwards for further guidance. 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. 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. it is not possible to provide a list of all entity types that do not come within the definition of an offshore fund. 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. 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)). HMRC consider would come within the definition. Further guidance Further guidance on particular entity types (such as limited life companies) is provided in this manual at OFM05000 onwards. and those arrangements may be based anywhere in the world. 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. Closed-ended arrangements within the exceptions at FA2008/S40E Arrangements with fixed share capital or similar. 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.Offshore Funds Manual 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. entirely or nearly entirely by reference to the net asset value (‘NAV’) of their proportionate share of the scheme property or an index. 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). 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). 19 . that otherwise would come within the definition of a mutual fund. in general. and nor are they limited life. This would include. See OFM02100 for the types of arrangements that.

• on the date that the investor acquired them.Offshore Funds Manual 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. The same treatment may apply to holdings acquired after 1 December 2009 but only where they were acquired under a written. were not an offshore fund within the previous meaning at Chapter 5 of Part 17 Income and Corporation Taxes Act (‘ICTA’) 1988. that is they are not treated as relevant holdings in an offshore fund. If such an agreement was conditional. 20 . or  were within the definition but did not constitute a ‘material interest’ (s759 ICTA 1988 before 1/12/2009) are subject to preserved treatment. See OFM17500 onwards for full details of the transitional provisions contained within the offshore funds regulations. then all of the conditions must have been satisfied before 30 April 2009 in order for this provision to apply. 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.

Offshore Funds Manual 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 21 .

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) .Offshore Funds Manual 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. 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) . Those pages discuss each type of mutual fund in more detail. or disposing of assets of any description. but broadly the definition is applied to a company. or based in. alternatively. and OFM02110 for examples of the types of arrangements that are not within the definition of an offshore fund. 22 . a territory outside the United Kingdom. by reference to an index 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. The meaning of the term ‘mutual fund’ is given by section 40B FA 2008. 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. See OFM02100 for examples of the types of arrangements that are within the definition of an offshore fund. trust or any other vehicle or arrangement that meets the following characteristics – • it is not UK tax resident. and is explained in more detail at OFM02500 onwards. 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. holding. • it exists to enable participants to take part in the benefits arising from acquisition.see OFM02400).see OFM02350). 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) . managing.

So. But under the characteristics based approach. 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. 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. and OFM02500 onwards for guidance regarding the meaning of the term ‘mutual fund’.Offshore Funds Manual 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’. 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. except for a non-resident limited liability partnership (LLP) incorporated under UK law (The Limited Liability Partnerships Act 2000). Open-ended investment companies and other companies with similar characteristics would fall within section 40A(2)(a). 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). which is excluded by section 40A(6) FA 2008. 23 . So. It is expected that relatively few fixed share capital companies will 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). for example. See OFM05200 onwards for further guidance on fixed share capital companies.

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’. 24 . unless exceptionally the trust is ‘closed-ended’ – that is. It will usually be the case that offshore trust arrangements will not come within the definition of a mutual fund.Offshore Funds Manual 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’. but those that do come within the meaning of a mutual fund at FA2008/S40B will be offshore funds.

so would take its meaning from the law of the territory in which the arrangements take effect. those not constituted by bodies corporate or where property is held on trust) creating rights in the nature of coownership. for example. Co-ownership is not restricted to the meaning of that term in the law of any part of the United Kingdom.e. 25 . which take effect by virtue of the law of a territory outside the UK. contractual arrangements such as Luxembourg Fonds Commun de Placement (‘FCPs’). See OFM02500 for guidance regarding the meaning of the term ‘mutual 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). but see OFM03500 onwards for further information concerning these and other types of contractual arrangements that are transparent for income purposes.Offshore Funds Manual 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. Types of mutual funds that come within the definition of an offshore fund at FA2008/S40A(2)(c) would include. are brought within the definition of an offshore fund.

Offshore Funds Manual Definition of an offshore fund OFM02500 – Meaning of mutual fund Contents OFM02600 OFM02700 Introduction Conditions 26 .

broadly. 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. have the characteristics of pooled investments. Whether arrangements amount to a mutual fund depends on three conditions (Conditions A to C).in other words. 27 . If arrangements relate to a number of separate pools of assets then each asset pool is considered separately. all of which must apply to the ‘participants’ of the arrangements being considered.and it makes no difference whether they directly own the underlying property of the arrangements or not. The conditions bring within the meaning of ‘mutual fund’ those arrangements that. the investors . Similarly if an asset pool has different classes of interest then each class of interest is considered separately. There are exceptions to the definition of a mutual fund given by FA2008/S40E (see OFM03000 onwards). So. For more details see FA2008/Ss 40C and 40D. Conditions A to C are considered in more detail in the following pages. for example. an interest in a trust or other contractual arrangement which may well give the participant a direct ownership right (FA2008/S40A(5)).Offshore Funds Manual 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. ‘Participants’ are those persons who take part in the arrangements – that is. including money . it does not matter what the underlying investments are. which relate to umbrella arrangements and arrangements comprising more than one class of interest (see OFM04000 and OFM04500).

Offshore Funds Manual 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 28 .

I. The condition is deliberately drawn widely so that it applies to a broad range of arrangements that are designed to facilitate pooled investment. 2009/3001) contains regulations setting out exceptions from the charge to an offshore income gain (see OFM10000 onwards). and real property and also includes contracts and derivatives. management or disposal of the property. holding. for example. or to receive profits or income from those transactions or sums paid out of such profits or income’. Chapter 3 of The Offshore Funds (Tax) Regulations 2009 (S. sums charged to tax under the loan relationships rules. 29 . 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. ‘Property’ in this context therefore applies to all asset classes. This would include. equities. including securities.Offshore Funds Manual 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.

not all of the individual participants must have day-to-day control. ‘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. In the case of a fund with an advisory committee. So. In order for the arrangements to satisfy condition B. if the scheme manager held units or shares in the fund managed then that would not prevent condition B from being satisfied. the right to a vote at annual general meetings would not be considered to amount to day-to-day control. 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. In this context. 30 . even if only one participant does not have day-to-day control the arrangements would satisfy condition B. 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).Offshore Funds Manual 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. regardless of the extent of their interest in the fund. So. which would typically comprise either a few key investors or independent investment experts.

The exceptions to the meaning of the term ‘mutual fund’ relate directly to Condition C. So. in this context. if a fund has a limited life. as participant in the arrangements. but it does mean that an investor could reasonably expect to rely on realisation as described. sale to a third party. or by distribution of assets on the termination of a fund for example. or • an index of any description. Realisation of an investment has a wide meaning. 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. and hence an offshore fund– see OFM03100 onwards. 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. See OFM02720 for guidance on the meaning of a ‘reasonable investor’.Offshore Funds Manual OFM02715 Meaning of mutual fund: conditions: condition ’C’ – Section 40B(5) Finance Act 2008 Condition C requires that a ‘reasonable investor’ would. does not necessarily mean that an enforceable right exists. and OFM02725 regarding realising an investment on a basis calculated entirely. To ‘expect’. 31 . or almost entirely. and so may be by redemption. by reference to NAV or an index of any description. 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.

It is assumed that such an investor (whether an individual.Offshore Funds Manual 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. 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. 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. 32 . corporate investor.

provides a clear distinction between a mutual fund and a company organised in the way that. an investment trust company in the UK is organised. on its own. buy-back arrangements normally take effect when there is a large discount to NAV. in the sense that it does not allow investors to redeem their shares on request. and where certain other conditions (condition ‘X’ or ‘Y’) apply (section 40E(1)(b) . OFM05250 provides further guidance on share buy-backs and share issuance. 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 33 .Offshore Funds Manual 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. 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. 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). when read in conjunction with section 40E(1). may not mean that the arrangements constitute a mutual fund. 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. For example.see OFM03100 onwards). dissolution or termination of the arrangements. and so ETFs would be expected to qualify as mutual funds. 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. It depends on what the arrangements are intended to provide. but may also be used in very exceptional circumstances to buy back at a very small discount or at NAV which. Such a company is a closed-ended company. 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. nor does it issue new shares on request (but see OFM05300 onwards where such closed-ended companies have a limited life). 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. On the other hand. Open-ended and closed-ended arrangements Condition C. For example. 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.

but condition Y3 might – see OFM03130. 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. but which is expressed in terms of an index. this is subject to exceptions where conditions ‘X’ or ‘Y’ apply. 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. 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). 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. In many cases investments designed to produce an indexed return are likely to be nonincome producing (that is. 34 . Again.Offshore Funds Manual arrangements being in place such that a reasonable investor could expect to receive NAV or close to NAV on selling their interest. Where an investment is by reference to an index that reflects both capital growth and income returns then condition Y1 would not apply. 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. they reflect capital growth only) in which case the exception provided by FA2008/S40E(4) – condition Y1 – will apply (see OFM03100 onwards).

2 and 3 year lives. For example. or if it did not apply then any gain would be subject to capital gains tax or corporation tax. 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. 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. a UK investor would be treated as making a partdisposal of his or her interest (see TCGA92/S42). as opposed to a liquidation of all of the fund’s assets on a winding-up. or perhaps ‘close to NAV’ if remaining negligible assets are not in fact distributed). without reinvesting the proceeds. Step 4: the fund is formally wound up and any remaining assets distributed. 35 . and would also therefore be an offshore fund as defined at FA2008/S40A. Step 3: the sums realised on the occasion of each disposal are distributed to investors and. 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. at the various maturity dates. Note that in the example above. In those circumstances condition C would be satisfied and the fund would be a mutual fund. finally. as the nature of the fund’s 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. If regulation 17 did apply then an offshore income gain would arise on any gain. 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.but that would not be the case for the example above.Offshore Funds Manual 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. 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 . no entitlement to income arising in the fund or income of the fund is distributed – see OFM03115 onwards). so long as conditions A and B were also satisfied and none of the exceptions at FA2008/S40E applied. Where this or a similar fact pattern is present. Step 2: the assets are realised. There would be an expectation of realising an investment in such an arrangement at or close to NAV (‘at NAV’ on the final distribution.

Offshore Funds Manual 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 36 .

Offshore Funds Manual OFM03105 Exceptions to meaning of mutual fund: introduction – Section 40E(3) Finance Act 2008 In order to meet the definition of an offshore fund. 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. section 40E provides exceptions to certain types of arrangements that would otherwise be mutual funds. ‘X’ or ‘Y’. except certain types of closed-ended arrangements from the meaning of a ‘mutual fund’. 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. however. 37 .  Section 40E(1)(a) has the effect that ‘open-ended’ arrangements (i. The conditions ‘X’ or ’Y’ do. arrangements must be a mutual fund.e. (FA 2008/S40E(1)(a)). Section 40B provides three conditions. 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. 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. such as in a case where there is a final redemption of a class of interest. Even if all three conditions are met. are met (FA 2008/40E(1)(b)). which must be met for arrangements to be a mutual fund . and one of two conditions. as opposed to a liquidation of all of the fund’s assets on a winding-up (see OFM02730). A to C.see OFM02700.

So for example. will not be an offshore fund. condition X could not be satisfied. This condition means. so can include all agreements and understandings. it was clear that the fund would reinvest the proceeds of asset realisations and was not ‘limited life’ in any other regard). in itself. that ordinary shares in any company with defined share capital (that is. For example. for example. 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.Offshore Funds Manual OFM03110 Exceptions to meaning of mutual fund: condition X – Section 40E(2) Finance Act 2008 The most important exception. 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. four years’ time ‘subject to market conditions’ or some other broad statement. Similarly. say. of course. 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. if a reasonable investor. could not have any 38 . “determinable” has a wide meaning. 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 government’s 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). provided by condition X (section 40E(2). if a fund prospectus stated that the fund was intended to wind-up after it had realised all of its assets. As elsewhere “arrangements” has a wide meaning and is not limited to the documents establishing the fund. 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. is that a reasonable investor cannot expect the arrangements to terminate on or by a date fixed in advance. not an open-ended company with variable share capital) and which does not have a limited life. if a fund’s assets consist of short-dated debt instruments. unless the fund was reasonably likely to re-invest funds from disposals. but those assets consisted of debt instruments none of which was longer dated than 5 years then the termination date would be determinable (unless. So. 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. or commercial leases with a life of 20 years then. mean that condition X is not met. 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. considering all of the facts.

Offshore Funds Manual expectation that a continuation vote would fail then. provided the continuation vote was not for a determinable period and absent any other factors. 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. 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. the arrangements could not be said to have a determinable life and condition X could then 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. and a reasonable investor would be expected to invest on the basis that a fund would be successful. 39 . Even if a date of termination is stated or determinable. However. so that condition X could not be satisfied.

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. The question of whether or not arrangements are designed to produce such a return is determined by reference to the facts. Such arrangements would include. zero dividend preference shares (‘ZDPs’). Y1 to Y3. 40 .Offshore Funds Manual 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. closed–ended capital only arrangements are excluded from the definition of a mutual fund in certain circumstances by the exceptions provided by FA2008/S40E. for example. Condition Y is expressed in terms of three alternative sub-conditions. for example £100 invested provides for a return of £150 in 3 years’ time. and is not limited to arrangements that provide similar returns to those provided by placing money on deposit (so. for example. to the return on an investment of money at interest (section 40E(7)). 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. then Condition Y could not be satisfied. 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. This is because the purpose of the offshore fund rules is to ensure that income cannot be converted into capital by using offshore arrangements.

HMRC accept that cash awaiting investment. for example. if they were held directly by an individual resident in the United Kingdom. such as extreme volatility in the markets. 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). • A further exception applies where incidental income arises from cash awaiting investment being placed on deposit. The exception provided by condition Y1 is designed to exclude arrangements which invest in assets intended to give a purely capital growth based return. 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). the arrangements are not a mutual fund if none of the assets of the arrangement are “relevant income-producing assets” (see below). 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. the individual would be charged to income tax (section 40F(1)). 41 . That would include. 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). so that a delay in investing sums subscribed would be reasonable provided the delay was not contrived. 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. This is subject to limited exceptions.Offshore Funds Manual 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. 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. condition Y1 will not be met where the arrangements are designed to produce a return for investors that is equivalent. However. in substance. sums that would be treated as offshore income gains generated by the sale of investments in underlying non-reporting funds. There may also be exceptional circumstances applying. The term ”relevant income producing assets” is defined at FA2008/S40F and means assets which produce income on which.

42 . where the holders of capital shares or units are not entitled to any of the income or any benefit arising from the income.Offshore Funds Manual 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. in substance. or to any benefit arising from such income. the arrangements are not a mutual fund if the participants have no entitlement to any income arising under the arrangements. However. 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). 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. condition Y2 will not be met where the arrangements are designed to produce a return for investors that is equivalent.

This would prevent. but HMRC will accept that expenses are reasonably deducted where they would. 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.Offshore Funds Manual 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 could in theory be satisfied if the arrangements being considered are transparent for income purposes. Regulation 29 of The Offshore Funds (Tax) Regulations 2009 does. in substance. 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. of course. capital items from being deducted. Condition Y3 is framed in terms of individuals resident in the United Kingdom (FA2008/S40E(6)(b)). 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. However. be deductible for a reporting fund in calculating its reportable income under Chapter 5 of The Offshore Funds (Tax) Regulations 2009. then the fund may choose to distribute a measure of income determined in some other manner (for example. 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). for example. So. If a fund would face difficulty in determining the measure of income to be distributed on the above basis. for example. Condition Y3 will not be met where the arrangements are designed to produce a return for investors that is equivalent. Definition of an offshore fund 43 . There would. however. ‘Reasonable expenses’ is not defined. sums that would be treated as offshore income gains generated by the sale of investments in underlying non-reporting funds. 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. broadly. such as so-called “Baker” unit trusts and Fonds Commun de placement (‘FCPs’). would be open-ended (that is. 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. 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. That would include. 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. 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.

Offshore Funds Manual Definition of an offshore fund 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 44 .

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. as capital gains computations could become very complex.45 - . This led to considerable difficulties for investors when they disposed of their interests. This is not the case for interests in offshore unit trusts which were and are subject to section 99 TCGA 1992. the offshore funds regime for taxing offshore income gains was not applicable as investors were treated as holding. Section 103A will automatically apply with effect from 1 December 2009 for all interests in such funds held by capital gains tax payers. and the rights of the participants in the fund were shares in that company. Therefore. Income arising retains its character where arrangements are fiscally transparent. An election for a . Section 103A does not change the tax treatment of such arrangements for income purposes – they remain fiscally transparent. That is.Offshore Funds Manual 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. or the date from which an election for earlier tax years or accounting periods applies (see below). and for corporation tax payers from 1 April 2010. Luxembourg Fonds Commun de placement (‘FCPs’)). 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. for capital gains purposes. 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. those arrangements are treated as opaque for capital gains purposes from the operative date (see below). or when new investors were admitted to the fund. the operative dates referred to above. 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. investors are entitled to income as it arises (from whatever source or country) and UK investors are taxable on such income as it arises. 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. interests in the underlying assets rather than in the fund itself. 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. unless the arrangements are a reporting fund or the exception in regulation 29(1) applies (see OFM03600 and OFM10200). But whilst such funds came within the previous definition of an offshore fund. so that for the purposes of tax on chargeable gains a unit trust is treated as if the fund was a company. regardless of whether income is actually distributed.

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. in respect of which the election is being made.Offshore Funds Manual particular year or accounting period is irrevocable. 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.46 - . Where an election for opaque treatment is made. or accounting period. 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). 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).

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. subject to conditions. 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. Regulation 29 of The Offshore Funds (Tax) Regulations 2009 provides that. for example. 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). 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. income transparent funds can still choose to apply for reporting fund status if they wish to because.47 - . 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. Even where regulation 29 is capable of applying.Offshore Funds Manual 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. .

• The overall arrangements are disregarded. but where there are different trustees for each sub-fund then each must be considered separately. the trustees of the overall trust arrangements will usually also be the trustees of each separate 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.Offshore Funds Manual 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. Umbrella arrangements will not themselves be treated as an offshore fund.48 - . The same approach applies to an individual cell of a protected cell company. In the case of a unit trust scheme. The “central management and control” test is also applicable to unit trusts. References to part of an umbrella arrangement are to the arrangements relating to a separate pool (or ‘sub-fund’). Instead – • Each sub-fund and each class of interest is treated as an offshore fund in its own right. it would usually follow that each sub-fund has the same residence status as the overall arrangement. • The umbrella fund is not treated as an offshore fund. . For umbrella arrangements and protected cell companies. and so their residence status determines the residence of the fund.

certain types of loan may give a return which tracks NAV or is based on an index. particularly a company. all other investors would expect to be able dispose of their interest at or close to NAV. For example. while the main arrangements are disregarded.Offshore Funds Manual 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. (See also OFM05100 regarding exchange traded funds).49 - . as a consequence of the market makers’ ability to redeem or create units. For example. 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. . 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. This includes the case where there is more than one class of interest in a part of an umbrella arrangement (sub-fund). However. 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. 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. It is possible for an entity. in the case of an exchange traded fund. 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. A class of interest may also be created as a result of new issues or conversions of existing rights. “Class of interest” is not limited to share classes. Where there is more than one class of interest in a sub-fund.

50 - .Offshore Funds Manual Definition of an offshore fund 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 .

.51 - .Offshore Funds Manual 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.

and therefore within the definition of an offshore fund.Classes of interest). and so would be expected to meet the characteristics set out in the legislation and to come within the meaning of a mutual 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 .Offshore Funds Manual 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. .52 - .

As is the case for other fund types. are open-ended. So. but not to arrangements that are equivalent to a UK Property Authorised Investment Fund (‘PAIF’) which. 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).Offshore Funds Manual 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. for example. for example. like any ETF. The particular terms relating to any arrangements have to be considered in each case. like other UK authorised investment funds. This would be the case for overseas arrangements that are equivalent to a UK Real Estate Investment Trust (‘UK-REIT’). satisfy Condition C. HMRC cannot provide a comprehensive list of different types of overseas property funds that come within the definition of an offshore fund. So.53 - . 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. . 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.

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.54 - . The following pages consider specific examples of fixed share capital arrangements and their interaction with the offshore funds tax definition in more detail. . But under the characteristics based approach. for example. 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).Offshore Funds Manual OFM05200 Particular arrangements: fixed share capital companies It is expected that very few fixed share capital companies will fall within the new definition. So. So. 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. 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.

etc. 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. 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. 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. 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). 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. Similar considerations apply where the shares trade at a premium. . and there is no determinable termination date. 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. When considering an investor’s rights. An undertaking or guarantee. This would include any arrangements introduced as a result of changes to the constitution of a scheme. with any subsequent gain being subject to chargeable gains treatment (provided the fund remains a reporting fund). Provided the share buy-back arrangements are made to prevent the discount becoming too large by reference to net asset value. 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. a reasonable investor could not expect to realise their investment at or close to NAV. so for example if the fund manager undertook to redeem or buy back an investor’s shares in tranches the arrangements could still be within the definition. to buy back or redeem only a part of an investor’s 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.55 - .Offshore Funds Manual 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. account should be taken of all scheme documents. Similarly. However. For example. absent any factors that could lead to an investor being able to expect to redeem their investment at or close to NAV. 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 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. 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). 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. promotional documentation or communications to determine what guarantees or undertakings may have been given to the investor. See OFM 09100 and OFM11500 for further guidance.

. 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. a subsequent buy-back or issue of shares would not.Offshore Funds Manual Where no guarantees or undertakings are given when the arrangements are set up or the scheme terms are amended. by itself.56 - .

Offshore Funds Manual Definition of an offshore fund OFM05300 Contents OFM 05310 OFM 05320 OFM 05330 OFM 05340 Limited life companies General Overseas corporate law Company liquidations Continuation votes .57 - .

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. it is sufficient that a reasonable investor could expect to realise their investment by reference to NAV on termination of the arrangements. or could be determined. to terminate.58 - . subject to the exception provided where condition Y at FA2008/S40E(3) is met – see OFM03115 onwards. and the effect on the consideration of whether arrangements would be viewed as mutual funds.Offshore Funds Manual 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. The following pages provide further guidance regarding particular circumstances that may apply to limited life companies. and condition C would therefore be satisfied. . In both circumstances. In determining whether arrangements that have a fixed or determinable life are an offshore fund. Neither does it matter if shares in the entity are listed and trade at less than NAV before that date.

on its own. for UK tax purposes. .59 - . mean that such arrangements will be within the definition of a mutual fund.Offshore Funds Manual OFM05320 Particular arrangements: limited life companies: overseas corporate law Under some overseas corporate law. this will not. and therefore an offshore fund. Provided that none of the characteristics set out in the legislation and referred to in this guidance are met. some companies must liquidate under certain circumstances within a particular time frame.

It is necessary to consider the reasonable investor’s 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 investor’s rights). then being in liquidation will not by itself bring that company or arrangement into the definition of an offshore fund. the relevant point is whether a reasonable investor can expect the company to be liquidated or reconstructed in order to deliver net asset value. However. though. Some overseas companies can be liquidated or reconstructed at any time. . if a company or other arrangement is outside the definition of an offshore fund before it goes into liquidation. for wind downs and liquidations that are intentionally extended or contrived.Offshore Funds Manual OFM05330 Particular arrangements: limited life companies: company liquidations An investor may have invested in a company or other arrangement which subsequently goes into liquidation.60 - . However. at which point the investor might reasonably expect to realise their investment at net asset value. This treatment would also extend to the purchase of shares in a company after it has entered a self-managed wind down or liquidation. at the point of the approval of the reconstruction or liquidation the investors may obtain net asset value. This may not be the case. If there is a decision to do so. This also applies in the case of self-managed wind downs with the subsequent appointment of a liquidator to complete the liquidation.

See OFM03110 for further guidance on continuation votes. and therefore possibly an offshore fund.61 - . dissolution or termination of the arrangements that will not by itself mean that the company will be a mutual fund. .Offshore Funds Manual 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.

Offshore Funds Manual The 2009 offshore funds regime OFM06000 Contents OFM06050 OFM06100 OFM06150 Introduction Classification of funds Umbrella funds Classes of interest .62 - .

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.Offshore Funds Manual OFM06050 funds The 2009 offshore funds regime: introduction: classification of In order to determine how an investment.pdf.hmrc. Once the UK investor has determined that a particular arrangement is an offshore fund. UK investors should be able to get this information from their adviser or directly from the fund itself. The regulations set out the detailed rules relating to reporting funds. made by a UK investor. The list is updated on a monthly basis and can be found at http://www. . A fund will be a non-reporting fund unless Part 3 of the Offshore Funds (Tax) Regulations 2009 applies. in any particular overseas arrangement will be treated for tax purposes. as defined at section 40A(2). It is the investor’s responsibility to ensure that they know whether they hold an investment in an offshore fund.gov. and to the taxation of UK investors in reporting and non-reporting funds.uk/collective/reportingfundlist. for a period of account.63 - . they will need to determine whether it is a non-reporting fund or a reporting fund. There is a list of funds that come within the definition of an offshore fund and have successfully applied for reporting fund status on HMRC’s website.

64 - . 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 for this guidance. where there are umbrella arrangements. . and any reference to participants in an offshore fund is to investors owning an interest in a particular separate pool (sub-fund). References to a part of umbrella arrangements are to the arrangements relating to a separate pool (or ‘sub-fund’). For the purposes of the detailed rules set out in the regulations.Offshore Funds Manual 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. See OFM04000 for details of how umbrella funds are treated in relation to the definition of an offshore fund.

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. For the purposes of the detailed rules set out in the regulations.  . 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. where there are separate classes of interest. See OFM04500 for details of how separate classes of interest are treated in relation to the definition of an offshore fund. and for this guidance.Offshore Funds Manual OFM06150 The 2009 offshore funds regime: introduction: classes of interest Where there is more than one class of interest in arrangements (for example.65 - .

Offshore Funds Manual 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 .66 - .

an offshore income gain. or ‘OIG’). It is possible that a fund may previously have been a reporting fund and subsequently became a non-reporting fund. and vice versa. There are certain exceptions to this – see OFM10000 onwards. UK investors) in non-reporting funds and the following pages explain the effect of the regulations.67 - . is that on disposal of their interests they will be liable to tax on income on any gains arising (that is. and UK investors are responsible for ensuring that they make correct returns of any income or gains received from their investment. or vice versa. Offshore income gains (‘OIGs’) The main effect for UK investors invested in non-reporting funds. 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. but it will still of course have to meet its normal obligations to its investors. Investors in non-reporting funds: introduction . as opposed to reporting funds. Whilst a reporting fund has certain obligations to HMRC and to its investors.Offshore Funds Manual OFM07000 Overview A non-reporting fund is any offshore fund that does not have reporting fund status for a particular period of account. a nonreporting fund by contrast has no such obligations for UK tax purposes. For guidance as to what happens when a reporting fund becomes a non-reporting fund.

Offshore Funds Manual 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 .68 - .

one that is substantially invested in interest type assets).gov. if a fund is ‘transparent’ for income purposes). The detailed guidance regarding UK tax treatment of income from savings and investments can be found in the Savings and Investment Manual (‘SAIM’).uk. but see OFM08400 where the fund is a ‘bond fund’. for instance. a unit trust. prior to disposing of all or part of such an interest.Offshore Funds Manual 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. which is available on the HMRC website at http://www. An offshore fund may take one of several forms – it may be.69 - . or a contractual arrangement such as a Fonds Commun de Placement (‘FCP’). i. 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.e. . The following pages provide a summary of the tax treatment of income from offshore funds. only be chargeable to tax on any distributions that they receive (or are treated as receiving.hmrc. if received from a corporate fund then the income would normally be taxed as a foreign dividend. a company with share capital.

Conversely. for example. dividends or property income.Offshore Funds Manual OFM08200 Investors in non-reporting funds: distributions: the charge to tax: 'transparent' funds Limited partnerships. irrespective of whether or not it is actually distributed to them. if a fund receives interest income then UK investors are charged to tax on their proportionate share of that income as it arises. where the underlying reporting fund does not distribute all of its ‘reportable income’ (see OFM14000 and OFM15500 onwards) then the excess would. but it is . be treated as income (regulation 94). that will not be the case where the 5% limit is exceeded during the period that the investor held their interest. for example. Baker. 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. so called ‘Baker’ unit trusts (following the case of Archer-Shee v. 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. if a UK investor held a direct interest in the fund. Investors should ask their fund manager for a voucher if they do not receive one. 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. 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 investor’s rights. and the split between interest. To ensure that principle is maintained. 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 . which are transparent for income and capital gains tax purposes. and this is the case for both unit trusts and contractual arrangements).see OFM10200 for details). 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. 11TC749) or certain foreign contractual arrangements (such as Fonds Commun de Placement (‘FCPs’)) fall within the definition of an offshore fund. So. Investors should receive a voucher from the fund to tell them what proportion of the fund’s income they are entitled to.70 - . 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. That is. UK investors are responsible for obtaining information relating to whether or not the 5% limit has been exceeded for a particular period of account.

71 - .Offshore Funds Manual expected that funds marketed to UK investors would make this information available as a matter of routine. .

that income is taxable as miscellaneous foreign income (under Chapter 8 of Part 5 of ITTOIA 2005. 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. as explained below.72 - . subject to one important exception. any distributions received will normally be treated as foreign dividends. Corporate funds Where a fund has corporate form. The UK tax treatment of investors for income purposes will depend on the form of the offshore fund. Finance Act 2009 introduced an amendment to the Income Tax (Trading and Other Income) Act applying from 22 April 2009. 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 rates applying will be those applying to interest (section 378A ITTOIA 2005). 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. Corporation tax payers are subject to the rules in Chapter 3 of Part 6 of CTA 2009 if the fund is a bond fund. or Chapter 8 of Part 10 CTA 2009) and the tax rates applying will be those applying to such income. . regardless of whether the income is paid to them or accumulated. Fund managers should be able to tell UK investors if a fund is a ‘bond fund’. 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.Offshore Funds Manual 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. Corporation tax payers remain subject to the bond fund rules in Chapter 3 of Part 6 of CTA 2009. Unlike the position for transparent unit trusts (see OFM08200). so that where an offshore fund holds more than 60% of assets in interest-bearing (or economically similar) form.

Where the income arises in the UK the remittance basis does not apply. Where the income arises offshore then the remittance rules will apply.Offshore Funds Manual 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.73 - . In such a case the income may sometimes arise in the UK (even though the fund itself is domiciled offshore). then the income will arise from the underlying assets and not from the fund. Disposals of interests in non-reporting funds by remittance basis investors See OFM09250 . Where the fund is transparent for tax-purposes.

Offshore Funds Manual 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 .74 - .

on the HMRC website.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. 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). There are exceptions to the basic rule as summarised below.75 - . TCGA applies to interests in offshore funds that are not companies in the same way as it applies to interests in companies. Detailed guidance on disposals for TCGA purposes can be found in the Capital Gains Manual. . 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.Offshore Funds Manual 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’). Exceptions to basic rule – departures from rules in TCGA     Death of participant . 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.

Offshore Funds Manual
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 participant’s 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 deceased’s 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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Offshore Funds Manual
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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Offshore Funds Manual
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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Offshore Funds Manual
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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then regulation 36(6) determines that the exchange will be treated as a disposal of the interest in the non-reporting fund. and regulation 37 means that section 127 TCGA does not apply. . 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. 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.80 - . 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.Offshore Funds Manual 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.

Offshore Funds Manual 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 .81 - .

However there are exceptions (see OFM10000 onwards). Losses Where there is a loss on disposal then the gain for the purposes of tax on an offshore income gain is nil. whilst derived from that used in the Taxation of Chargeable Gains Act 1992 (TCGA). Note that the meaning. 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. in particular. in a case where there is also a disposal for the purposes of TCGA. includes the death of the participant holding an interest (see OFM08600). treated as income. The following pages give details of the calculation of the gain and the charge to tax. Accordingly. at any time during the period when the interest has been held. is wider than used in that Act and. any loss made (calculated in accordance with that Act) may be treated as a capital loss for the purposes of TCGA. For the meaning of ‘disposal’ see OFM08550. .82 - . had not been a reporting fund.Offshore Funds Manual 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. that is there is no recognition of losses for the purposes of the regulations (regulation 42). 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).

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). 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. the market value of the participant’s 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). 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.Offshore Funds Manual 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. Where. or an offshore fund that has. See OFM11500 for further guidance regarding the election.  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. at the time the fund became a reporting fund. with any subsequent gain being subject to chargeable gains treatment (provided the fund remains a reporting fund). at some point while the interest has been held.83 - . There is also a charge to tax when a participant makes an election under regulation 48 to crystallise an offshore income gain (see OFM11500). 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). . been a non-reporting fund (but see under “converted funds” below).

.Offshore Funds Manual 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.84 - . but ITTOIA/S688(1) & 689 do not apply (regulation 18(3)).

for the accounting period in which the disposal is made (regulation 18(4)).85 - .Offshore Funds Manual 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. .

hmc.Offshore Funds Manual 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. 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.gov.86 - .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). .

87 - .Offshore Funds Manual 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 .

Offshore Funds Manual OFM09300 Non-reporting funds: charge to tax on disposal of an interest: non-resident settlements: summary . 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. 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)). 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). Instead there are rules that can attribute the offshore income gain to a settlor or beneficiary of the trust. For each year of assessment. .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. 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).88 - . The total amount of offshore income gains arising to the settlement in a tax year is designated as ‘the OIG amount’.

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.89 - .gov. to attribute offshore income gains arising in a nonresident company (regulation 24). for the tax year in which the gains arise. These attribution rules also apply where the offshore income gains arise to a nonresident company underlying 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.hmrc.uk in the document “New guidance on Capital Gains Tax changes affecting beneficiaries of Non Resident Settlements” in the material on Non-resident trusts. with necessary modifications.Offshore Funds Manual 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. you consider first if they can be attributed to a beneficiary using attribution rules from section 87 (and 87A) TCGA (regulation 20(2)). Similarly attributions can be made via section 89 or Schedule 4C TCGA where those rules apply instead of section 87 TCGA. These rules are applied with necessary modifications to the capital gains legislation to make it work with offshore income gains (regulation 20(3)). General guidance on how section 87 TCGA and related provisions work in relation to capital gains is available on the HMRC website www. . 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. Section 13 TCGA applies.

Any such attribution 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. then the full amount of the offshore income gain attributed is liable to tax on the beneficiary as income. under section 87 (and 87A) TCGA rules.gov. or an OIG amount for the tax year 2007-08. This applies even though they may not be chargeable to tax on such an individual. 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.  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. 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.90 - .uk in the document “New guidance on Capital Gains Tax changes affecting beneficiaries of Non Resident Settlements” in the material on Non-resident trusts.hmrc. is matched (paragraph 100 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. or earlier. 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).Offshore Funds Manual 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. General guidance on how section 87 TCGA and related provisions work in relation to capital gains is available on the HMRC website www.

000 to a UK resident and domiciled beneficiary.000 2010-11 OIG amount £50.000 2010-11 Capital gains £60.000. . The first capital payment out of the settlement is made in 2010-11.000 OIG amount arising in 2008-09.£50. 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) is matched with £20.000 (£70.Offshore Funds Manual 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.000 of the £30. That is a capital payment of £70.000.000 and chargeable gains £60. Then the remaining £20.000 matched with capital payment) 2009-10 Capital gains £40.000 less £20.000 offshore income gains chargeable to income tax in 2010-11.000 . 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.91 - .000 2009-10 Chargeable gains £40. The following OIG amounts and capital gains have been received by the settlement: 2008-09 OIG amount £30. The beneficiary is treated as receiving £70. Using the section 87A TCGA attribution rules the capital payment is matched first with the entire £50.000 OIG amount arising in 2010-11. This applies even if the OIG amount arose in an earlier year than the capital gain.000 (£30.

There are no unmatched OIG amounts to carry forward within the non-resident settlement structure. The UK resident but non-UK domiciled beneficiary is not chargeable to income tax on any of the £20.000 to a UK resident and domiciled beneficiary £40. Neither the trustees nor the company has received any income nor made any chargeable gains.000 of each of these capital payments with the 2005-06 OIG amount. There is a matching of £20.000 to a UK resident but non-UK domiciled beneficiary £40. Each beneficiary has £20. 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 UK resident and domiciled beneficiary is chargeable to income tax in 2010-11 on the £20. There are unmatched capital payments of £20.000 of offshore income gain attributed to them via section 87 TCGA rules. . The trustees own all the share capital of a non-UK resident company. The non-UK resident beneficiary is not chargeable to income tax on any of the £20. 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 2008.000 to each beneficiary to carry forward at 5 April 2011.000 offshore income gain attributed to them.000 offshore income gain attributed to them. The first capital payments to beneficiaries were made in 2010-11 which were: £40.92 - .Offshore Funds Manual 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.000 to a non-UK resident beneficiary.000 offshore income gain attributed to them.

000.000 of each of these capital payments with the 2010-11 OIG amount. The non-resident company purchased a material interest in an offshore fund in 200001.000 to a non-UK resident beneficiary.000 offshore income gain attributed to them. The UK resident and domiciled beneficiary is chargeable to income tax in 2010-11 on the £20.000 to a UK resident and domiciled beneficiary £40.Offshore Funds Manual 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 . The non-UK resident beneficiary is not chargeable to income tax on any of the £20.000 offshore income gain attributed to them. . Neither the trustees nor the company has received any income nor made any chargeable gains.000/£60. There are unmatched capital payments of £20. This is by virtue of paragraph 101 Schedule 7 FA 2008. There is a matching of £20.000 (£20.93 - . Each beneficiary has £20.000 offshore income gain attributed to them. There are no unmatched OIG amounts to carry forward within the non-resident settlement structure.000 of offshore income gain attributed to them via section 87 TCGA rules. The first capital payments made to beneficiaries were made in 2010-11.000 to a UK resident but non-UK domiciled beneficiary £40. That is the post 5 April 2008 element of the £20. The trustees own all the share capital of a non-UK resident company. This is disposed of in 2010-11 resulting in an OIG amount of £60. They were: £40. The post 5 April 2008 element of that OIG amount is £15.000 to each beneficiary to carry forward at 5 April 2011. The trustees have made a ‘rebasing’ election under paragraph 126 Schedule 7 FA 2008.000. The UK resident but non-UK domiciled beneficiary (where the remittance basis is used) is only chargeable to income tax on £5.000) of the £20.000 x £15.000 offshore income gain attributed to them.paragraph 101 Schedule 7 FA 2008 A settlement with non-UK resident trustees is settlor interested because the settlor can benefit.

.000 to a UK resident but non-UK domiciled beneficiary (who was also the settlor) £40. The first capital payments made to beneficiaries were made in 2011-12.000 offshore income gains attributed to them. So there can be no attribution of the OIG amount to beneficiaries under the section 87 attribution rules in regulation 20. A settlement with non-UK resident trustees is settlor interested because the UK resident and ordinarily resident. but non-domiciled.000. 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.000 OIG amount can be attributed to the settlor as an offshore income gain for that year. This is disposed of in 2010-11 resulting in an OIG amount of £60. They were: £40.000 to a UK resident and domiciled beneficiary £40. subject to any remittance basis considerations. 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. or earlier years. The trustees have made a ‘rebasing’ election under paragraph 126 Schedule 7 FA 2008. The post 5 April 2008 element of that OIG amount is £15. The non-UK domiciled settlor is chargeable to income tax in 2010-11 on the £60. 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.94 - . We then have to consider if there can be an attribution under the transfer of assets rules in regulation 21 for 2010-11. to beneficiaries.000. Neither the trustees nor the company has received any income nor made any capital gains. In 2010-11 there have been no capital payments in that year.000 to a non-UK resident beneficiary. There are no unmatched OIG amounts to carry forward to 2011-12. The trustees own all the share capital of a non-UK resident company. The OIG amount is reduced to Nil (regulation 21(6)).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.Offshore Funds Manual 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 . The entire £60. The non-resident company purchased a material interest in an offshore fund in 200001. settlor can benefit.

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). as a result of this regulation and Chapter 2 Part 13 ITA. 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). . Amounts carried forward in non-resident settlements When. 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. Exception 2.Offshore Funds Manual 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.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.95 - . treated as arising to a person resident or ordinarily resident in the UK as a result of the gain. as a result of the rule described at OFM09400.

96 - . An offshore income gain of the company is treated as an offshore income gain of a member of the company in proportion to the member’s interest as a participator in the company (provided that the member’s share of the gain is at more than one tenth of the whole gain after aggregation with that of connected persons).Offshore Funds Manual 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. 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. 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. .

agency or permanent establishment (regulation 22(1)(b) and (c) and sections 10 and 10B TCGA).   Detailed guidance on the application of TCGA in each of these cases can be found in the Capital Gains Manual.Offshore Funds Manual 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).97 - . .  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). 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. 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. 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).

Offshore Funds Manual 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 .98 - .

99 - . The following pages provide guidance on the exceptions in the regulations. Both the 1984 and 2009 rules achieve this by charging any gains on disposals of interests in arrangements that do not distribute. to tax as income (‘offshore income gains’. or ‘OIGs’). or report income. Most of the exceptions are carried forward from the legislation in ICTA that applied to the 1984 regime. . The Offshore Funds (Tax) Regulations 2009 therefore set out specifically when a charge to tax on an OIG will not arise. 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. 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. 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.Offshore Funds Manual 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. However.

hmrc. but an OIG will not arise in respect of any gains relating to periods where the loan relationship rules apply.uk.100 - . 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. . 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. because the test that determines that matter is applied to each period for which the investing company prepares accounts. 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. Further guidance on when such treatment applies can be found in the Corporate Finance Manual (‘CFM’) on the HMRC website at http://www. 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).Offshore Funds Manual 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. as will the relevant fair value movement in the value of the holding.gov.

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. 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. In summary. 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 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. where a company acquires a holding in an offshore fund that is not a direct holding. 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. but an OIG will not arise in respect of any gains relating to periods where the derivative contract rules apply.uk.gov. . Further guidance on when such treatment applies is set out in the Corporate Finance Manual (‘CFM’) on the HMRC website . 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).see http://www.Offshore Funds Manual 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. that holding will be treated as a derivative contract (a ‘relevant contract’ in the terms of CTA).101 - .hmrc.

Offshore Funds Manual 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. 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. and where they apply then any gain on disposal of such an asset will not be treated as an offshore income gain.uk.102 - .gov.hmrc. 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. .

hmrc.103 - .Offshore Funds Manual 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’. any gain arising on disposal will not be taxed as an offshore income gain.uk . There is further guidance on excluded indexed securities in the Savings and Investment Manual (‘SAIM’). . on the HMRC website at http://www. and are instead taxed under the capital gains rules. Where an interest in an offshore fund would fall to be treated as an excluded indexed security.gov. They are outside the deeply discounted security rules. in order that the capital gains treatment is preserved.

gov.Offshore Funds Manual 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.hmrc. .104 - . 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.uk. any gain arising on disposal will not be taxed as an offshore income gain.

.105 - .Offshore Funds Manual 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.

A long-term insurance fund is. the funds that an insurance company maintains to meet its long term liabilities. ‘insurance company’ and ‘long-term insurance fund’ have the same meaning as in section 431(2) of ICTA. such as payments to annuitants. . In this context.Offshore Funds Manual 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 company’s long-term insurance fund is disposed of. any gain arising on disposal will not be taxed as an offshore income gain. broadly.106 - .

then it will be within the terms of the offshore funds rules and its disposal may give rise to an offshore income gain.Offshore Funds Manual 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. 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. 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. for example. 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. 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. if the terms of a loan are such that it gives the lender the right to participate in the income of the fund.107 - . So.

and if that were the case then income could be rolled up in the underlying fund. then any income arising to the fund is treated as arising to an investor in proportion to his rights. Baker) or certain foreign contractual arrangements (such as Fonds Commun de Placement (‘FCPs’)) fall within the definition of an offshore fund. This means that income is charged to tax as it arises. In order to counter potential roll-up of income by an income transparent fund in underlying non-reporting funds. 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 fund’s assets (Regulation 29(2)). with any subsequent gain on disposal being charged only as a capital gain. If a fund is transparent for income. with certain modifications as described below. 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. certain unit trusts (following the case of Archer-Shee v.108 - . for example. whilst also preventing unnecessary administrative burdens for transparent arrangements coming within the definition of an offshore fund and for their investors. or the transparent fund is a non-reporting fund. 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. such as would be the case for certain unit trusts and contractual funds.  Whilst this does mean that transparent funds will have to monitor their underlying investments. They are therefore subject to the Offshore Funds (Tax) Regulations 2009 (SI2009/3001) generally. 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 . 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. The purpose of the offshore fund regime is to ensure that income cannot be rolled up free of tax. 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. 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)). However. because income would only be credited to the top fund if it was distributed. 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. rather than incurring an offshore income gain.Offshore Funds Manual OFM10200 Investors in non-reporting funds: exceptions to the charge to tax: interests in certain transparent funds – Regulation 29 Limited partnerships. provided the fund has complied with Regulation 29(2)). which are transparent for income and capital gains tax purposes.

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. 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.Offshore Funds Manual disposal rather than to an offshore income gain. for example. This is because in such circumstances there can be no significant rollup of income in the underlying fund(s). and foreign or UK dividends. 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). consist wholly of interests in other underlying TNRFs that themselves held only. UK property. 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). a TNRF could be the top layer fund in a fund of funds structure with multiple layers of other TNRFs below the top fund. non-reporting funds. if a transparent non-reporting fund (‘TNRF1’) invests in another TNRF (TRNF2) then. 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 means that a TNRF’s investments could. That is. holds investments.109 - . in turn. The provision of ‘sufficient information’ would include details of an investor’s proportionate share of both income arising to the fund and reported income or offshore income gains arising to it. In practice. . for example interest income. Or. say. many existing income transparent funds with UK investors already provide vouchers to those clients detailing income arising to the fund. 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 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. provided that each of those underlying TNRFs themselves did not hold more than 5% by value of their assets in total in other nontransparent.

. In order to preserve the treatment that such investors expected when they acquired their interests. 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. 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. the conditions must have been met before 1 December 2009 and not varied on or after that date.Offshore Funds Manual 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. If the agreement was conditional. 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. 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.110 - . 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).

i. would arise on the transfer of the assets. when the assets are passed to the ultimate beneficiary chargeable gains. for example if the charity is a ‘time charity’. An offshore income gain accruing on the disposal arising under this paragraph is treated as an offshore income gain not accruing to a charity.e. or here an offshore income gain. and is subject to corporation tax or income tax accordingly. . then the trustees are treated as if they had disposed of and immediately reacquired that property for a consideration equal to its market value. 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.Offshore Funds Manual 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). Property will ‘cease to be subject to charitable trusts’ when a charity loses its charitable status.111 - . 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.

Offshore Funds Manual 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. 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 24.112 - . any gain arising will be exempt from the charge to tax under regulation 17. . Similarly.

Offshore Funds Manual 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 .113 - .

The OIG will be an amount equal to the basic gain.Offshore Funds Manual 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. 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. and the more detailed provisions that apply to such disposals.e. The following pages explain that term. .114 - . a reporting fund which was previously a non-qualifying fund (i.

 It can be seen from this that an offshore income gain is essentially equal to the increase in value of the investor’s holding over the period it was held. with no provision for reducing that gain by taper relief or deduction of indexation. although it is calculated in accordance with the rules in TCGA 1992 with relevant modifications. (h) regulation 43 (special rules for certain existing holdings) – see OFM10800.e.Offshore Funds Manual 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. 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.hmrc. it will be equal to the ‘basic gain’.115 - . So. in the case of a participant chargeable to corporation tax. investor) chargeable to income tax. (b) regulation 35 (application of section 135 of TCGA 1992) – see OFM08700. This is because the charge to tax on an offshore income gain is a charge on income. the amount which would be the gain on that disposal for the purposes of TCGA 1992 without any taper relief. (d) regulation 37 (exchange of interests of different classes – see OFM08800. (c) regulation 36 (application of section 136 of TCGA 1992) – see OFM08750. (e) regulation 40 (earlier disposal to which the no gain/no loss basis applies). 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. the amount which would be the gain on that disposal for the purposes of TCGA 1992 without any indexation allowance. Further guidance on the CFC rules can be found in the International Manual (‘INTM’) at http://www.gov. (f) regulation 41 (modifications of TCGA 1992) – see OFM10700. (g) regulation 42 (losses) – see OFM10750. 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’. .uk. – see OFM10650. for example. The basic gain is an amount equal to –  in the case of a participant (i.

000 100. if one member of a group disposes of an asset to another member of the group. ordinarily. neither a gain nor a loss had arisen to the group member making the earlier disposal. This rule is modified by regulation 40 when the asset transferred is an interest in an offshore fund. The transferor has neither a chargeable gain nor an allowable loss.000 . 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. then the basic gain on the disposal is computed as if no indexation allowance had been available on any such earlier disposal and. 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.000) (80.000) (20. as augmented by indexation up to the time of the transfer under section 56(2) TCGA 1992.000 250.gov.hmrc. The transferee effectively takes over the transferor's capital gains cost. the consideration is taken to be such an amount as results in no gain/no loss for the transferor.000 100.000) 150.000 (20.116 - . and the asset remains within the scope of corporation tax on chargeable gains. Where that is the case.000 (80. 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.uk/manuals/cg1manual/). The rule states that.000) 195.Offshore Funds Manual 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. subject to that.

uk.gov. together with the whole assets of the business (or the whole of those assets other than cash). 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. In other words. where a 'person’ (but not a ‘person’ who is a company) transfers a business to a company as a going concern.see the Capital Gains Manual (‘CGM’) on the HMRC website at http:/www.117 - . the gain is not deferred. Where. no part of the basic gain can be held over. however.see the Capital Gains Manual for further details) the claim does not affect the computation of the basic gain arising on the disposal. 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 . in exchange for shares issued by the business. . 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 arm’s 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 .Offshore Funds Manual 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. but is immediately charged as an offshore income gain.hmrc.

Offshore Funds Manual OFM10750 Investors in non-reporting funds: computation of offshore income gains: losses – Regulation 42 If. for the purposes of the regulations. 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. . This means that. no loss is to be treated as arising on a disposal and that any loss arising can be relieved only as a capital loss. then the basic gain arising on the disposal is treated as nil.118 - .

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.e. section 104 TCGA 1992 (share pooling: general interpretative provisions) applies as if the protected (i. and which is a concept that no longer applies under the 2009 regime). for example.Offshore Funds Manual 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. then. In considering that. 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. it will be necessary to identify precisely which rights are being disposed of. on making any subsequent disposals. and all of the protected rights must be treated as disposed of before any of the nonprotected rights. .119 - . grandfathered) rights were assets of a different class from the non-protected rights.

120 - .Offshore Funds Manual 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 .

to apply two separate charges (one on income on any offshore income gain. with suitable modifications. it is likely that there will be a disposal for the purposes of capital gains as well. . 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.121 - . Clearly. and one on any capital gain) would potentially lead to double taxation.Offshore Funds Manual 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.

hmrc. 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.Offshore Funds Manual OFM11100 Investors in non-reporting funds: deduction of offshore income gains in computing capital gains: treatment of the disposal .uk).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). . and one on gains).122 - . 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. 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.gov. 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. In many cases this will eliminate any charge to tax on a capital gain. 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.

If the transferor subsequently disposes of part or all those shares. the transferor will receive shares in the company transferee. Section 162(4) gives instructions for computing the amount attributable to the consideration in shares. and the charge on those gains is thus deferred until the shares are disposed of. But where the transfer gave rise to an offshore income gain (because the assets transferred included interests in offshore funds).gov.123 - . . and an offshore income gain is charged in respect of any ‘basic gain’ arising on those interests at that time.hmrc. 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. It states that the fraction A/B has to be applied to the aggregate net gains.e. On such a transfer.Offshore Funds Manual 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.uk). the ‘new asset’). 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. 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. 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.

or regulation 37 (exchange of interests of different classes – see OFM08800).124 - .Offshore Funds Manual 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). 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)). regulation 36 (application of section 136 of TCGA 1992: reconstruction or amalgamation involving issue of securities – see OFM08750). .

Elections must be made by being included in a return made for the tax year which includes the deemed disposal date. In the latter case. by being included in the company’s tax return for the accounting period which includes the deemed disposal date. and to be treated as   disposing of the interest in the non-reporting fund at its market value on the disposal date.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. or if the investor is chargeable to corporation tax. an offshore income gain may arise. the fund may have been a reporting fund for the majority of the time that the investor held their interest prior to 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). 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. then any ‘excess income’ (regulation 94 . 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. It provides an opportunity for a UK investor to make an election for a deemed disposal of their interest at the point of conversion. or in a reporting fund which has not been a reporting fund for the entire period that the investor held their interest. If no election is made. Regulation 48 applies where an offshore fund ceases to be a non-reporting fund and becomes a reporting fund.(regulation 17(3)(d)). .Offshore Funds Manual 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. but without any further provision the whole of any basic gain arising would be charged to tax as an offshore income gain. so a loss cannot be crystallized at this point. An election may not be made unless the offshore income gain arising on the deemed disposal is greater than zero. 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. and as acquiring a holding in the reporting fund at the beginning of the reporting fund’s first period of account.125 - . 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.

126 - .Offshore Funds Manual .

Offshore Funds Manual 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 .127 - .

pdf. and that has not voluntarily left the reporting fund regime (regulation 116) or been excluded by HMRC (regulation 114).Offshore Funds Manual 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 the tax treatment of participants in reporting funds. 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 HMRC’s website. . how breaches of the reporting fund conditions are dealt with. what reporting funds must provide to HMRC and to their investors. The list is updated on a monthly basis and can be found at http://www.128 - .hmrc. what happens when a fund leaves the reporting funds regime.uk/collective/reportingfundlist.gov. This part of the guidance sets out –       how a fund can enter the reporting funds regime. how reporting funds should compute their reportable income.

Appeals Constant NAV funds – modification of application process Application for reporting fund status .Offshore Funds Manual 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 .129 - .

Offshore Funds Manual
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 fund’s 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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Offshore Funds Manual
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 fund’s 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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Offshore Funds Manual
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 fund’s 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 HMRC’s 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 fund’s 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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. so it could not apply to a new subfund created after 1 December 2009 even if the umbrella fund existed at that date.hmrc.756A ICTA prior to 1 December 2009 (an ‘existing fund’ as defined in Schedule 1).gov.134 - .  the day on which any investor is first issued units or a similar interest in the fund.Offshore Funds Manual OFM12700 Reporting funds: application for reporting fund status: form & timing of the application – Regulation 54 All applications must be made in writing to HMRC. by way of advertisement to advisers or potential investors in the case of a retail fund. or  for a fund that was an offshore fund under the previous definition at S.htm. 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. 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 first day on which interests in the fund are made available to UK resident investors (for example.uk/collective/cis-centre. or by invitation to subscribe made to a qualified investor resident in the UK for private placement). A pro-forma application form and checklist can be found on HMRC’s website at http://www. Whilst not mandatory. Note that an existing fund means a particular fund. 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). 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). it is recommended that these are used to ensure that applications are dealt with as quickly and efficiently as possible.

pdf. There is an appeal process if HMRC rejects an application – see OFM12800. give notice to the person who made the application either accepting or rejecting the application. 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. give notice to the person who made the application –    accepting the application.hmrc. There is a list of offshore funds that have successfully applied for reporting fund status on HMRC’s website. and the result given by the use of the accounting practice specified in the application and by the use of the entries in the fund’s accounts. rejecting the application. in computing reportable income (see OFM14000 onwards) between the result given by the use of international accounting standards (‘IAS’). or within any longer period it may have agreed) then HMRC will.gov. Where HMRC have asked for further information (under paragraph (1)(c) of regulation 55). or it is considered that there will be a significant difference. The list is updated on a monthly basis and can be found at http://www. that are considered to equate to “total comprehensive income for the period” as that expression is used in IAS (see regulation 63). within 28 days beginning with the day on which they receive the further information. or asking for further information in order to consider the application.135 - .Offshore Funds Manual OFM12750 Reporting funds: application for reporting fund status: HMRC responses to applications – Regulation 55 HMRC must. .uk/collective/reportingfundlist. within 28 days beginning with the day on which it receives the application. specified in 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.

appeals – Regulation 56 If HMRC rejects an 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. If the tribunal quashes the rejection of the application. 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. 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. .136 - .Offshore Funds Manual OFM12800 Reporting funds: application for reporting fund status: rejection of application .

would at all times. as a result of the nature of the fund’s assets.137 - . 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. value a holding of units at €1 for each unit. acting reasonably. and the frequency with which the fund distributes its income (regulation 118).Offshore Funds Manual 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 fund’s existence. . 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 reporting fund rules are modified in a number of regards for constant NAV funds – see OFM16750 for details.

138 - .Offshore Funds Manual 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 .

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). 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. . 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.Offshore Funds Manual OFM13050 Reporting funds: duties of reporting funds: effect of entry into reporting fund regime – Regulation 57 Once HMRC has accepted an application.139 - . 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.

Offshore Funds Manual OFM13100 58 Reporting funds: duties of reporting funds: general – Regulation On being approved as an offshore fund. reporting funds are required to –     prepare accounts in accordance with the requirements of Chapter 4 of Part Three of the regulations (see OFM13500 onwards). 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. provide reports to participants in accordance with the requirements of Chapter 7 of Part Three of the regulations (see OFM15000 onwards).140 - . In particular. and provide information to HMRC in accordance with the requirements of Chapter 9 of Part Three of the regulations (see OFM16000 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). .

The reporting fund rules are modified in a number of regards for constant NAV funds – see OFM16750 onwards for details.Offshore Funds Manual 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 fund’s existence. as a result of the nature of the fund’s assets. and the frequency with which the fund distributes its income (regulation 118). .141 - .

Offshore Funds Manual Reporting Funds OFM13500 Contents OFM13550 OFM13600 OFM13650 Acceptable accounting policy Changes in accounting policy Changes of accounting practice Preparation of accounts .142 - .

gov. 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. Some GAAPs permit a degree of choice in applicable standards and particular rules may apply to certain entity types such as OEICs.Offshore Funds Manual 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 fund’s application for reporting fund status. 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. although a particular GAAP may be acceptable. for example. 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.143 - .htm. . and reporting funds remain responsible for correctly calculating TCI. The notes have been prepared based on applications received by HMRC and should not be considered to be exhaustive.hmrc. it remains the responsibility of reporting funds to correctly calculate reportable income. Therefore. and any adjustments that would be required.uk/collective/ciscentre.

144 - . Here. then a corresponding debit or credit (as appropriate) must be brought into account for the later period.Offshore Funds Manual 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. . ‘accounting value’ means the carrying value of the asset or liability recognised for accounting purposes. and that change results in a change in the accounting value of an asset or a liability of the fund.

the offshore fund is only required to give notice of that to HMRC. . then –   if the accounts for the later period are prepared in accordance with international accounting standards (‘IAS’).Offshore Funds Manual OFM13650 Reporting funds: preparation of accounts: changes of accounting practice – Regulation 61 Where a fund changes its accounting practice in drawing up a reporting fund’s accounts from one period of account to the next period of account.145 - . 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. and the accounts for the later period are in accordance with a generally accepted accounting practice (‘GAAP’). Appeals against HMRC rejection of application If HMRC reject an application. 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 fund’s accounts that are considered to equate to “total comprehensive income for the period” as that expression is used in IAS. 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). 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. 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.

146 - .Offshore Funds Manual 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 .

The reported income notified to each investor will be the investor’s proportionate share of the fund’s income derived from its accounts (which must be computed in accordance with international accounting standards (IAS). The following pages provide further guidance on the duty to provide a computation.Offshore Funds Manual OFM14050 Reporting funds: computation of reportable income: introduction Reporting funds must provide a report to their UK investors of the fund’s reportable income. and the investor’s proportionate share of that income (see OFM15000 onwards). the figures to be used and the required adjustments. .147 - . with adjustments for certain items as required by the regulations. A report must also be made to HMRC (see OFM16000 onwards). or alternatively in accordance with an approved generally accepted accounting practice (GAAP) – see OFM13500 onwards).

148 - .Offshore Funds Manual 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. .

. Any adjustments to the starting point in reaching the figure for reportable income should only be made once.33 of the Investment Management Association’s Statement of Recognised Practice (the IMA SORP). regardless of whether such an adjustment could fall to be made under more than one part of the Regulations. an equivalent amount. For example. The adjustments to be made to the starting figure in order to reach the figure for reportable income are explained in the following pages. in the case of a fund using UK GAAP it will be the “Net revenue/expense after taxation” of the fund (see paragraph 3. and where the result of the final calculation is negative then reportable income is taken to be nil. in the case of a fund using International Accounting Standards. the ‘total comprehensive income for the period’ as expressed in IAS1.Offshore Funds Manual 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. An ‘equivalent amount’ means the amount specified in the fund’s application as ‘total comprehensive income for the period’’ and agreed by HMRC as being equivalent. or alternatively for a fund not using IAS.149 - .

Offshore Funds Manual 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 Association’s Statement of Recognised Practice (the IMA SORP). and any costs relating to the setting up. even in cases where the IMA SORP might classify such income or profit as capital. .150 - . 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. except in cases where regulation 80 applies (see OFM14500 onwards). 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.

Offshore Funds Manual 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 .151 - .

. 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.Offshore Funds Manual 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).152 - . 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.

the consequences are that the receipts. 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. ignore its interest in that company. 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% . The fund should then. for the purposes of the offshore funds regulations.153 - . expenditure. Additionally. 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. In any case where any of the conditions above apply. If a company has only one class of issued share capital. or where it is owned in such a manner that it near as possible corresponds to either of those categories. in all other respects. 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. . then reference to ‘the whole of the issued share capital’ means a reference to at least 95 per cent of the share capital. or by the trustees of such a fund for the benefit of the fund.regulation 67(4)).Offshore Funds Manual OFM14270 Reporting funds: computation of reportable income: adjustments for special classes of income: income from wholly-owned subsidiaries – Regulation 67 A wholly owned subsidiary. including any distributions or other payments made to it by the subsidiary.

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)). after that amount has been adjusted in respect of capital amounts under regulations 64 and 65 (regulation 68(2)). . 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)). The amount (if any) by which RF1’s 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. RF1’s share of RF2’s reported income.154 - .e. or Reporting Fund 1. the income arising to RF1 is the amount reported to it by RF2 – i. in the regulations) has an interest in another reporting fund (‘RF2’).Offshore Funds Manual 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’.

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. will apply accordingly. so as to produce a loss.155 - . . applying to interests of reporting funds in other reporting funds. This also applies if the conditions in regulation 69 have been met in earlier periods but are no longer met (regulation 71). Losses may only be used once. then no adjustments may be made. Income from other non-reporting funds – regulation 70 Where any of the conditions in regulation 69 are not met. be taken into account in calculating RF’s reportable income. without the set-off of such losses.Offshore Funds Manual 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. Where the fair value of RF’s interest in NRF decreases. that loss may be carried forward to later periods of account to set against fair value gains that would. 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. This is subject to the condition that RF must have been a reporting fund for all periods in which such losses are made. The effect of this will be that the starting figure which reflects total return will remain unadjusted in respect of RF’s interest in NRF so that the full amount of the total return (or fair value increase) will be reflected in reported income.

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.156 - .Offshore Funds Manual 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 participant’s right to income accrued since the previous distribution date. Where this is the case then.

157 - .Offshore Funds Manual 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 .

Offshore Funds Manual 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. It follows that the test does not therefore rely on any particular fund ‘type’. Specifically. Any fund meeting those conditions will be able to access the white list and. but whether or not the conditions for equivalence are met. . and the genuine diversity of ownership (‘GDO’) condition at regulation 75 in that chapter. any fund unable or unwilling to meet those conditions will not be able to do so. 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 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. 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.158 - . and the white list transactions. The following pages provide further guidance on the conditions. equally. 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.

rather than those using closely held arrangements that may in reality be for the benefit of a tightly restricted group. or the fund is a UCITS (‘Undertaking for Collective Investment in Transferable Securities’) fund. for example a group of family members or a group of companies in common ownership. but the important point is that if a fund can demonstrate that it is. 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. 270 or 272 of the Financial Services and Markets Act 2000 (‘FSMA 2000’). In particular. 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. will also apply for the purposes of the GDO condition at regulation 75 of the Offshore Funds Regulations.’ The following page deals with advance clearances. whereas it applies to reporting funds at share class level if a reporting fund is by reference to a class of share. as a matter of fact. The concept of the GDO was first introduced in 2008 for Property AIFs. 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. for the purposes of condition C in regulation 75(4)(a). UK AIFs have certain rules for feeder funds for Property AIFs that do not apply to reporting funds. ‘marketing’ in the context of alternative funds includes via local private placement mechanisms. widely held (and continues to be so) then HMRC will accept that the GDO condition is met. Additionally.159 - . 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.Offshore Funds Manual 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.

An application can also be made in respect of a prospective fund that intends to obtain reporting fund status. 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 fund’s application (in accordance with regulation 75(2)) and the fund does not act in any way that is in contravention of any such statement. HMRC will explain the reasons for any refusal. 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. widely held (and continues to be so) then HMRC will accept that the GDO condition is met. The fund must also continue to meet the GDO condition.160 - . . if they request further information. or of a non-reporting fund that makes an application for reporting fund status under regulation 52. 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. within 28 days of receiving such further information) giving the clearance (which may be subject to conditions).Offshore Funds Manual OFM14650 Reporting funds: transactions not treated as trading: clearances – Regulations 77 to 79 The manager of a reporting fund. HMRC response to applications HMRC will notify the applicant within 28 days from when they receive the application and documents (or. 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. accompanied by the documents specified in regulation 75(2) (relating to statements and undertakings by the fund). Applications Applications must be in writing. as a matter of fact. or refusing clearance. can apply for clearance that the fund meets the equivalence and the genuine diversity of ownership (‘GDO’) conditions. 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.

available on the HMRC website. gains or losses arising from “investment transactions” are treated as non-trading. Where the conditions are met. 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. 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. 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. should be considered. Specifically. it remains a question of fact whether or not activities carried out by a reporting fund amount to trading for tax purposes. gains and losses for this purpose are any profits.Offshore Funds Manual OFM14700 Reporting funds: transactions not treated as trading: treatment of investment transactions – Regulation 80 If a reporting fund that is a ‘diversely owned fund’. 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.161 - . (i. all capital profits. 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. this means that for the purposes of computing the reporting fund’s 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 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’). Reporting funds and trading Where regulation 80 does not apply. Capital profits. gains or losses treated as capital for accounting purposes under the IMA Statement of Recommended Practice (SORP).e. In such cases. For example.

Such a transaction may still be non-trading on first principles (see OFM14700). in a “relevant contract”. that the transaction will be a trading transaction by default. Any transaction that is not specified in regulations 81 to 89 will not be an “investment transaction” for the purposes of regulation 80. or in a carbon emissions trading product. in securities (not included in the above categories).Offshore Funds Manual 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. however. in regulation 14F of SI2009/2036. which results in the diversely owned fund becoming party to a “loan relationship” or “related transaction”. 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.162 - . in units in a collective investment scheme. consisting in the buying or selling of foreign currency. This does not mean. . The categories above are the same categories that apply to UK AIFs.

applies only for the purposes of Chapter 5 of the regulations. a nonresident fund is carrying on a trade in the UK.Offshore Funds Manual OFM14800 Reporting funds: transactions not treated as trading: Investment Manager Exemption (IME) Regulation 80(2) of the regulations. 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. 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'. 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. which confirms that certain transactions are treated as non-trading transactions. 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. Funds that are taxable in the UK are dealt with by other legislation. . Specifically. for the purposes of that other legislation. It is a question of fact whether or not. only to regulate the taxation of the returns from those funds to persons taxable under UK legislation. Guidance on the Investment manager Exemption can be found in the International Manual on the HMRC website.163 - .

164 - .Offshore Funds Manual Reporting funds OFM15000 Contents OFM15050 OFM15100 OFM15150 General Contents of report Long accounting periods: incomplete information Reports to participants .

as a PDF document attached to an email). and is readily available in all parts of the United Kingdom. or it can be published in a newspaper which is published in English. The report must be in English (regulation 90(6)). The report does not have to be personalised for the investor – see OFM15100 for the required contents of a report. for example. by –   a ‘tickbox’ on the application form. the period of account . If reports are not sent by post then the method of providing them to investors must be agreed with them. it can be made available on a website accessible to UK investors and to HMRC. A reporting fund can make a report available on a website where this may present difficulties – see below. 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)). (The period of account of a reporting fund cannot be longer than eighteen months – regulation 53(1)(b)). so for example a fund with a reporting period of. it can be sent to UK investors by means of an electronic communications service (for example. A report can be ‘made available’ in a number of different ways –     it can be sent to UK investors by post. 1 January 2010 to 31 December 2010 must make the report available to its participants by no later than 1 July 2011. with a set time for comments (including via nominees). sending communications to investors or updating fund documentation from time-to-time. It can also be used by participants that are themselves reporting funds in computing their own reportable income. there will be two reporting periods: the first being the first 12 months of the period of account. A ‘reporting period’ is (regulation 91) –   in the case of a reporting fund with a period of account of 12 months or less. say.Offshore Funds Manual 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)). in the United Kingdom. This is to enable UK participants to make a return of their proportionate share of the reportable income (the ‘reported income’ for each investor). where the period of account is greater than 12 months.165 - . and the second being the remainder of the period. ‘Agreement’ in this sense would be satisfied. . Note that the obligation is to the participants (investors) rather than to nominees.

Offshore Funds Manual
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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. Regulation 92 sets out what each report must contain (see OFM15100). 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).Offshore Funds Manual 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. the excess specified in regulation 94 is reduced proportionately. 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. 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. 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. other participants such as other offshore funds with an interest in a reporting fund may also need a report). 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)). such as would be the case for certain unit trusts.170 - . 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. for example. 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. Where an investor holds some interests that are grandfathered (as a result of regulation 30) and some that are not. 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)). 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. Reporting fund which is a transparent fund In the case of a reporting fund which is a transparent fund.

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.Offshore Funds Manual 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 last day of the reporting period. . and in any other case.  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. and they may need to file amended returns when the details are finally received. the date on which the report is issued.171 - . taxpayers should already have included details of their best estimate of the excess. 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.

172 - .Offshore Funds Manual 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 .

173 - .Offshore Funds Manual 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. . 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. 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). Such sums do not qualify for a dividend tax credit and the tax rates that apply are those applying to interest. 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). 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. Fund managers should be able to tell UK investors if a fund is a bond fund. 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)). Any sums treated as an excess of reported income also carry an entitlement to a foreign tax credit. In the case of income that is reported but is not distributed then that income has not been remitted to the UK. Until 22 April 2009.

. In the case of income that is reported but is not distributed then that income has not been remitted to the UK. 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. funds that do not take corporate form) will be foreign unit trusts.Offshore Funds Manual 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. 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). 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. 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)). Unlike the position for transparent unit trusts. 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.174 - . regardless of whether the income is paid to them or accumulated.

Where the income arises offshore then the remittance rules will apply. which are transparent for income and capital gains tax purposes. property income. 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)). if a fund receives interest income then UK investors are charged to tax on their proportionate share of that income as it arises. Where the income arises in the UK the remittance basis does not apply. for example. for example. 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. 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. 11TC749) or certain foreign contractual arrangements (such as Fonds Commun de Placement (‘FCPs’)) fall within the definition of an offshore fund. and this is the case for both unit trusts and contractual arrangements). dividends. irrespective of whether or not it is actually distributed to them. So. Income: UK tax treatment of investors No matter what the legal form of a transparent reporting fund. Investors should receive a voucher from the fund to tell them what proportion of the fund’s income they are entitled to.Offshore Funds Manual OFM15680 Reporting funds: tax treatment of participants in reporting funds: participants chargeable to income tax: transparent funds – Regulation 97 Limited partnerships. 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. and it is chargeable at investors’ highest tax rate. This will become part of the excess to be reported by the transparent reporting fund. 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. . and the split between interest. Investors should ask their fund manager for a voucher if they do not receive one. so called ‘Baker’ unit trusts (following the case of Archer-Shee v. Such excess reported income is charged to tax as miscellaneous foreign income under Chapter 8 of Part 5 ITTOIA 2005 (regulation 97(4)). In such a case the income may sometimes arise in the UK (even though the fund itself is domiciled offshore). Baker.175 - . etc.

Offshore Funds Manual
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 company’s 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 investor’s 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 fund’s 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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Liz’s total base cost is therefore –
£ 25000 9060 34060

Acquisition cost of units Total accumulated income Total

- 179 -

and acquiring an interest in the (now) non-reporting fund at the beginning of the fund’s first period of account. or periods. without any further provision. 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). By making such a deemed disposal election. Regulation 100 therefore applies in the case of an offshore fund which ceases to be a reporting fund and becomes a non-reporting fund.gov. For investors within the charge to corporation tax. subject only to any transitional provisions that may apply (see OFM17500 onwards).180 - . .uk). This would mean that. An election can only be made if a report has been made available to the investor under regulation 90 for the reporting fund’s final period of account. 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. The acquisition in the now non-reporting fund is treated as made for the same amount.hmrc.Offshore Funds Manual 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. 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 investor’s interest in the fund at the end of the last period of account for which the fund was a reporting fund. 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. 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 fund’s final period of account as a reporting fund. just before the investor wished to dispose of the holding with the result that the disposal would then give rise to an OIG. 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. an election must be included in the company’s tax return for the accounting period which includes the deemed disposal date. 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. the investor will be treated as making a disposal of their interest in a reporting fund and acquiring an interest in a nonreporting fund. 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.

arising in respect of the interest are included in the computation of the financial trader’s trading profits for the relevant period. C) where the interest is held at the beginning of the relevant period and disposed of during the period. 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 trader’s stock in trade and all the profits and losses. by holding them through a fund that satisfied the conditions in regulation 73. 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. B) where the interest is acquired during the relevant period and is held throughout the remainder of the relevant period. on which they would otherwise be chargeable. 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. 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. an insurance business (excluding life assurance business – regulation 105(2)). but broadly a financial trader will be one of the following –    a banking business. 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. the difference between the disposal value of the interest and its acquisition cost. including distributions. a period of account (for income tax payers) or accounting period (for corporation tax payers). or D) where the interest is acquired and disposed of during the relevant period.that regulation should be referred to for full details. and that interest is accounted for under .181 - . the difference between the market value of the interest at the end of the relevant period and the acquisition cost of the interest.Offshore Funds Manual 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). The term ‘financial trader’ is defined in regulation 105 and can in certain circumstances include connected persons . 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. the difference between the market values of the interest from the beginning of that period to the end of that period.

unit trusts and offshore funds treated as creditor relationship rights) apply in relation to the financial trader (see OFM10040).  .182 - .Offshore Funds Manual 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.

Where the income arises offshore then the remittance rules will apply. This is because the proceeds may have been funded by undistributed reported income as well as by the original investment and any capital growth.183 - . 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.Offshore Funds Manual 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 such a case the income may sometimes arise in the UK (even though the fund itself is domiciled offshore). In the case of income that is reported but is not distributed then that income has not been remitted to the UK. Disposals The proceeds of a disposal of a reporting fund will normally constitute a ‘mixed fund’ for the purposes of the remittance basis rules. Where the income arises in the UK the remittance basis does not apply. .

184 - .Offshore Funds Manual Reporting funds OFM16000 Contents OFM16050 OFM16100 Annual reporting requirements Obligation to provide information Provision of information to HMRC .

(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. (f) the number of units in the fund in issue at the end of each reporting period falling within the period of account. the information specified in regulation 92(1) – see OFM15100).) . 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. (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. 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). (d) the reported income of the fund for each reporting period falling within the period of account.Offshore Funds Manual 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. (b) its computation of its reportable income for the period of account based on its audited accounts (see OFM14000 onwards). (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). (e) the amount actually distributed to participants in respect of each reporting period falling within the period of account.185 - .

particulars or documents If a reporting fund fails to provide the requested information. 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. Failure to provide information. HMRC cannot use its normal enquiry powers provided by the Tax Acts. particulars or documents from reporting fund managers. particulars or documents.Offshore Funds Manual 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. 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. it will be considered to have breached the reporting fund requirements set out in the regulations. Reporting funds and managers have a right of appeal against such notices. particulars or documents within the time specified in the notice issued by HMRC or within such further time as HMRC may agree. Such a breach will be considered to be a serious breach. Such an ‘initial request’. . . and will result in HMRC issuing an exclusion notice (regulation 113 . 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.see OFM16500 onwards for details of breaches and their consequences).186 - . 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. that HMRC reasonably require to check whether the fund has met or continues to meet its obligations under the regulations. and may be extended by HMRC where they consider it reasonable to do so). 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). vary or quash the notice. as it is referred to in regulation 107. Appeals will be heard by the First-tier Tribunal (or the Upper Tribunal if so determined by Tribunal procedure rules) who may either uphold. need to request certain information. Regulation 107 therefore provides HMRC with the necessary powers to require reporting funds to provide information. from time to time.

Offshore Funds Manual Reporting funds OFM16500 Contents OFM16550 OFM16600 OFM16650 Introduction Types of breaches Consequences of breaches Breaches of reporting fund conditions .187 - .

. or indeed in advance of the fund actually being formally set up. The regime is designed to provide a level of certainty to funds. the fund may be excluded from the reporting fund regime. and as funds will not otherwise be within the jurisdiction of HMRC there are sanctions available to HMRC to address any breaches. and how they are treated.188 - .Offshore Funds Manual 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. However. 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. Reporting funds should be able to meet their obligations. where a fund commits a serious breach of the requirements of the regulations. for example by allowing them to apply for reporting fund status in advance of preparing their first accounts. or a combination of minor breaches within a certain period. The following pages provide more information on ‘minor’ and ‘serious’ breaches. 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.

Offshore Funds Manual 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 .189 - .

funds will only be excluded from the reporting fund regime for serious breaches. will not affect a fund’s reporting fund status unless there are a specified number of such minor breaches within a certain period (see OFM16620).‘minor’ breaches and ‘serious’ breaches. 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.    . provided there is a reasonable excuse or where they are inadvertent and remedied as soon as reasonably possible. a breach will either be a ‘minor’ or ‘serious’ breach. In summary –    a ‘breach’ is. minor breaches. specifically. which includes a specified number of minor breaches within a certain period (see OFM16630). a breach of part of the requirements of a fund and / or its manager as set out in the regulations.190 - . 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).Offshore Funds Manual OFM16605 Reporting funds: breaches of reporting fund conditions: types of breaches: general – Regulation 108 The regulations define two types of breaches . The two types of breaches are discussed in more detail in the following pages.

Difference more than 15% If the difference between the two amounts is more than 15% of the reportable income. for various reasons. 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. Difference of 10% or less If the difference between the two amounts above is 10% or less of the reportable income. they must give notice to the fund of that conclusion). and the reported income of the fund for all reporting periods comprised in the period of account. there is no breach of the regulations. as follows. 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. To determine this. because if it does not then the income reported to the fund’s UK investors will in turn be incorrect. there is a minor breach. and (b) the amount of the correct reportable income for the period of account that is referable to that reporting period. 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. and funds should not adjust their reportable income in such a way. or for the following reporting period. The supplementary report must . Where there is a difference between the correct reportable income of a reporting fund for a period of account. the reported income of a fund may differ from what should have been reported. Whether there has been a breach of the regulations will depend on the difference between those two figures. 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. However.Offshore Funds Manual 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). there may be a breach of the regulations. If the supplementary report is made as soon as reasonably possible.191 - . but it is possible that. 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. this does not constitute a ‘de minimis’ for reporting purposes. but otherwise there is a serious breach (see OFM16650 onwards – consequences of breaches). once it has been established that the computation of reportable income was incorrect (where HMRC conclude that the difference is more than 10%.

192 - . If the supplementary report is made as soon as reasonably possible. but otherwise there is a serious breach (see OFM16650 onwards – consequences of breaches). there is a minor breach. .Offshore Funds Manual 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.

.Offshore Funds Manual 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. 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. (See OFM16650 onwards – consequences of breaches). there is a serious breach. other than one that is incorrect due to a difference between reported income and reportable income under regulation 110 (see OFM16610).193 - .

there may be a breach of the regulations. 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). 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. 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. a minor breach arises. as explained below.Offshore Funds Manual 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. 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. then no breach of the regulations will be considered to arise. (See OFM16650 onwards – consequences of breaches). there is a serious breach. .194 - .

Offshore Funds Manual 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. For these purposes. under regulation 107) then no breach will be considered to arise at all. or the breach is inadvertent and remedied as soon as reasonably possible. HMRC do not ask the fund to provide them with information. . of itself.195 - . Where a reporting fund corrects what would otherwise be regarded as a minor breach without any HMRC intervention (that is. constitute an intervention. 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. etc.

a reporting fund or its managers do not provide the information. and if a reporting fund does appeal against a notice given under regulation 107(1).Offshore Funds Manual 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.  . and there is no appeal against the decision of the tribunal. particulars or documents within the time specified in the notice as varied.196 - . and there is no appeal against the notice within the time specified in regulation 107(6). but the tribunal varies the notice and the fund or its managers fail to provide the information. a serious breach will occur in the following circumstances –    a reporting fund has a period of account exceeding 18 months. particulars or documents requested by HMRC in a notice given under regulation 107(1) (see OFM16100) within the time specified. a reporting fund has used an accounting practice that is not in accordance with IAS and has not been approved by HMRC.

197 - .Offshore Funds Manual 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 .

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. 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.198 - .Offshore Funds Manual 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. in which event the fourth breach will be a serious breach (see OFM16630). .

Offshore Funds Manual 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. This is subject to two variations where – i. 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. 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. . ii. and OFM16630). 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. the fund. or its managers. or as a consequence of a number of minor breaches under regulation 109 (see OFM16660).199 - .

. the fund can appeal against that notice.Offshore Funds Manual 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).200 - . 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. Any appeal must be given to HMRC within a period of 42 days. beginning with the day on which the exclusion notice is given.

the tax treatment of participants. transactions not treated as trading.Offshore Funds Manual 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 fund’s existence. it does not need to comply with the requirements of Chapters 4 to 9 of the regulations (which deal with the preparation of accounts. investors). and an undertaking to notify HMRC if the fund ceases to be a constant NAV fund. 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. . as follows – Application for reporting fund status – regulation 120 On making an application for reporting fund status. and the frequency with which the fund distributes its income (regulation 118).e. 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. Instead. 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. as a result of the nature of the fund’s assets. after a fund has been accepted as a constant NAV fund. a constant NAV fund at the beginning of that first period of account. or will be. The reporting fund rules are modified in a number of respects for constant NAV funds. Once a fund has been accepted as 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. the computation of reportable income. and the application was made in respect of a prospective constant NAV fund). reports to participants (i. it is incomplete). However if. for example. a statement that the fund is.201 - . a constant NAV fund need not provide all of the items required by regulation 53 (see OFM12650). Unless HMRC rejects an application (because. and the provision of information to HMRC). the value of the fund’s 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).

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. unless the fund successfully appeals against the exclusion notice (see OFM16680). .202 - . or publishing the information on a website or in a newspaper widely circulated within the UK). 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. and the notice must be given in writing to HMRC before that ‘specified day’. Note that the requirement to notify participants is not restricted to UK residents as interests may be held on a UK investor’s behalf by an offshore trust.Offshore Funds Manual OFM17000 Reporting funds: leaving the reporting fund regime: notice given by fund . for example. 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. writing to or emailing those investors. The fund must also make the notice available to each participant before the specified day (by. Any day specified must be the last day of a period of account of the reporting fund.

203 - .Offshore Funds Manual 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 .

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. The 2009 definition is supplemented by the Offshore Funds (Tax) Regulations 2009 which contain the operational rules.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. . there are further provisions within the offshore funds regulations that address particular situations that may arise going forward. ‘grandfathering provisions) – see OFM10220. as follows –     Regulation 30: rights in certain existing holdings (as at 1 December 2009. Schedule 1 of the regulations contains transitional provisions.Offshore Funds Manual OFM17550 Transitional rules: introduction . In addition to the transitional rules. whereas the operational rules relating to the previous definition were contained within Chapter 5 of Part 17 and Schedules 27 & 28 of ICTA.204 - . i.e. which as the name suggests only address situations that may occur during the transition period. These are explained over the following pages. 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. Regulation 100: deemed disposals of interests (election by investors where a reporting fund becomes a non-reporting fund) – see OFM15800. Regulation 48: conversion of non-reporting fund to reporting fund (deemed disposal election by investors) – see OFM11500.

However. .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. 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. There are therefore further provisions within Paragraph (3) of Schedule 1 that may apply – see OFM17700. 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.205 - .Offshore Funds Manual OFM17600 Transitional rules: existing fund becomes non-reporting fund on 1 December 2009 . 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.

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)).provided. . 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.Schedule 1 paras (3) and (6) Paragraph (3) of Schedule 1 contains transitional provisions that allow existing funds. but only in respect of periods ending on or before 31 May 2012 (paragraph 3B). 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.Offshore Funds Manual OFM17650 Transitional rules: applications for distributing fund status for overlap period . it was in fact a distributing fund continuously during that time (paragraph (6) Schedule 1). 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 . and if a successful application has been made for the overlap period. of course. 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)). The application for distributing fund status for this period (and for the succeeding period. to also apply to continue to be treated as a distributing fund for the succeeding period.206 - . should they wish to do so.

the election must be made by being included in the company tax return for the accounting period which includes the deemed disposal date.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. and acquiring an interest in a non-reporting fund at the beginning of the fund’s first period of account for which it is not a distributing fund. A deemed disposal will be treated as made for a consideration equal to the net asset value of the investor’s interest in the fund at the deemed disposal date. . 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 fund’s last period of account for which it was approved as a distributing fund.Offshore Funds Manual OFM17700 Transitional rules: existing distributing fund: no application for distributing or reporting funds status . The deemed acquisition will be treated as made for consideration equal to the deemed disposal proceeds. If the investor is chargeable to corporation tax. for chargeable gains purposes. and any gain or loss will come into charge at that date. the election must be made by being included in a return made for the tax year which includes the deemed disposal date. without any further provision.207 - . be charged to tax on an offshore income gain when they subsequently disposed of their interest in the fund. If the investor is chargeable to income tax.

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). 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 2009.208 - . 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). References to a non-reporting fund are substituted with references to ‘the existing fund’.Offshore Funds Manual OFM17750 Transitional rules: reporting fund previously a non-qualifying fund . would be unable to make a deemed disposal election under regulation 48. but subsequently became a reporting fund with effect from 1 December 2009. This transitional rule is necessary because a fund cannot be a ‘non-reporting fund’ before the regulations take effect on 1 December 2009. UK investors will therefore be able to make a deemed disposal and realise an offshore income gain on any accrued gains to that date. .

. Applications must be received by HMRC on or before 31 May 2010.Offshore Funds Manual OFM17800 Transitional rules: reporting fund previously not within definition of an offshore fund .209 - .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).