IFM13373 - Offshore Funds: participants in offshore funds: participants within the charge to income tax: disposals: reporting funds: 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 open-ended 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	Sum distr’d	Date distr’d	Tax year returned	Sum accum’d	Date reported	Tax year returned
31/12/2010	210	31/3/2011	2010-11	630	1/5/2011	2011-12
31/12/2011	320	31/3/2012	2011-12	960	1/5/2012	2012-13
31/12/2012	360	31/3/2013	2012-13	1,080	1/5/2013	2013-14
31/12/2013	420	31/3/2014	2013-14	1,260	1/5/2014	2014-15
31/12/2014	440	31/3/2015	2014-15	1,320	1/5/2015	2015-16
31/12/2015	610	31/3/2016	2015-16	1,830	1/5/2016	2016-17
31/12/2016	660	31/3/2017	2016-17	1,980	1/5/2017	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 S38(1)(a) TCGA 1992 (acquisition and disposal costs).

Liz’s total base cost is therefore:

	£
Acquisition cost of units	25000
Total accumulated income	9060
Total base cost	34060