IFM13260 - Offshore Funds: participants in offshore funds: participants within the charge to corporation tax: deemed disposals – non-reporting funds that become reporting funds
Regulation 48 of SI 2009/3001
When a UK investor disposes of an interest in a non-reporting fund, or in a reporting fund which has not been a reporting fund for the entire period that the investor held their interest, an offshore income gain may arise.
In the latter case, the fund may have been a reporting fund for the majority of the time that the investor held their interest prior to disposal, but without any further provision the whole of any basic gain arising would be charged to tax as an offshore income gain.
Regulation 48 applies where an offshore fund ceases to be a non-reporting fund and becomes a reporting fund. It provides an opportunity for a UK investor to make an election for a deemed disposal of their interest at the point of conversion. This has the effect of crystallising any gains up to the date of conversion as offshore income gains and allowing any later gains to be treated as capital gains, provided that the fund remains a reporting fund up to the date of disposal of the interest. With this election, a UK investor is to be treated as -
- disposing of the interest in the non-reporting fund at its market value on the disposal date, and
- as acquiring a holding in the reporting fund at the beginning of the reporting fund’s first period of account.
An offshore income gain is treated as arising on the deemed disposal and the deemed acquisition is treated as made for the same amount as the deemed disposal.
An election may not be made unless the offshore income gain arising on the deemed disposal is greater than zero, so a loss cannot be crystallised at this point.
Elections must be made by being included in the company’s tax return for the accounting period which includes the deemed disposal date. There is no special section on the return to indicate that an election has been made - an offshore income gain should be calculated and returned in the same way as it would on an actual disposal, and it is recommended that an entry is made in the accompanying computations to a corporation tax return).
If no election is made, then any ‘excess income’ (regulation 94 - see IFM14150) treated as additional distributions and taxed accordingly is allowable as acquisition costs arising under section 38(1)(a) TCGA 1992 (regulation 99 - see IFM13290) when an investor disposes of its interest in a fund.
If the interest owned by the participant represents variable remuneration represented by profit allocated to alternative investment fund managers (section 836I ITTOIA 2005), an election may not be made under regulation 48 if the fund ceases to be a non-reporting fund and becomes a reporting fund before the date on which the remuneration has vested in the participant.
Investment standing at a loss when fund becomes a reporting fund
Where an election is prevented by regulation 48(5), because the investment in the non-reporting fund stood at a loss at the date of conversion to a reporting fund, the eventual disposal of an interest in the reporting fund will not incur a charge to tax on an offshore income gain (regulation 17(3)(d)).