IFM13356 - Offshore Funds: participants in offshore funds: participants within the charge to income tax: income and distributions from non-reporting funds: non-transparent funds

Arrangements that are non-transparent for income purposes and that come within the definition of an offshore fund under section s355(1)(a) or (b) TIOPA 2010 will either have corporate form (such as an open-ended investment company) or will be foreign unit trusts. Foreign unit trusts that are not transparent for income purposes are sometimes referred to as ‘Garland’ unit trusts (following the case of Garland v Archer-Shee (15TC693)).

The UK tax treatment of investors for income purposes will depend on the form of the offshore fund, as explained below.

Corporate funds

Where a fund has corporate form, any distributions received will normally be treated as foreign dividends. The availability of tax credits on such dividends is explained in some detail at IFM13320.

Corporate Funds - ‘Bond Funds’

Finance Act 2009 introduced an amendment to the Income Tax (Trading and Other Income) Act applying from 22 April 2009. Where an offshore fund holds more than 60% of assets in interest-bearing (or economically similar) form, any distribution received by UK investors who are subject to income tax is treated as a payment of yearly interest and not as a dividend. The tax rates applying will be those applying to interest (section 378A ITTOIA 2005). Fund managers should be able to advise UK investors if a fund is a ‘bond fund’, and investors are responsible for determining this.

Non-transparent unit trusts

UK investors in foreign unit trusts that are non-transparent for income purposes are taxable on their proportionate share of income (as ascertained after the trustees have met the expenses of administering the trust) when it is indefeasibly allocated to them, regardless of whether the income is paid to them or is accumulated. Unlike the position for transparent unit trusts (see IFM13364), this income is taxable as miscellaneous foreign income (under Chapter 8 of Part 5 ITTOIA 2005) and the tax rates applying will be those applying to such income.