IFM13100 - Offshore Funds: Participants in offshore funds: introduction: background to the treatment of UK investors in offshore funds

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. The regulations, broadly, 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.

Offshore funds are either ‘reporting’ or ‘non-reporting’ funds.

Investors in reporting funds

UK investors in a reporting fund must be provided with a report (by one of several permitted methods) for each period of account showing sums actually distributed to them for each unit of interest held. The report will also show details of any excess forming the balance of its ‘reportable income’ for each unit of interest held in the fund at the end of the reporting period (see the guidance at IFM12600 onwards for further details).

UK investors must make a return of their income to include both the actual distributions received, as well as the ‘reported income’ (i.e. their proportionate share of the income in excess of the sums distributed). They will be liable to income or corporation tax as appropriate on the total of those sums.

In most cases, providing the fund in question has been a reporting fund for the entire period throughout which an investor has held their interest then, on any subsequent disposal of that interest, the investor will be subject to tax on any capital gain (or loss) arising. There are some exceptions - see, for example, IFM12150 for an overview of transitional arrangements where a reporting fund was a ‘non-qualifying’ fund under the pre-2009 offshore funds regime.

There is a list of funds that come within the definition of an offshore fund and have successfully applied for reporting fund status on gov.uk. The list is updated on a monthly basis.

Investors in non-reporting funds

UK investors in non-reporting funds are chargeable to income tax or corporation tax on any distributions the fund actually makes to them. Alternatively, if the fund is transparent for income purposes then the investor will be chargeable to tax on income arising on the underlying investments.

There are also rules relating to transparent funds with interests in reporting funds, to ensure that investors in the top-layer fund are chargeable to tax on their proportionate share of the underlying fund’s reportable income - see IFM12560 for further details.

On disposal of an interest in a non-reporting fund, UK investors will be subject to tax on any gains arising as if those gains were income - that is, on the ‘offshore income gain’ (‘OIG’).