IFM13360 - Offshore Funds: participants in offshore funds: participants within the charge to income tax: income and distributions from non-reporting funds: contents
Regulation 48 of SI 2009/3001
An offshore income gain may arise when a UK investor disposes of an interest in:
- a non-reporting fund, or
- a reporting fund which has not been a reporting fund for the entire period that the investor held their interest.
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.
In those circumstances Regulation 48 allows a UK investor to elect for a deemed disposal of their interest at the point the fund converted into a reporting fund. This has the effect of crystallising any gains up to the date of conversion as offshore income gains. It also allows 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).
Effect of regulation 48 election
With this election, a UK investor is 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.
Disposal date means the final day of the last period of account before the fund becomes a reporting fund.
How regulation 48 election is made
Elections must be made by being included in a return made for the tax year 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 white space (for an income tax return) or in the accompanying computations (for a corporation tax return).
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.
If no election is made, then any ‘excess income’ amounts (regulation 94 - see IFM13322) treated as additional distributions and taxed accordingly are allowable as acquisition costs arising under section 38(1)(a) TCGA 1992 (regulation 99 - see IFM13370) when an investor disposes of his or her interest in the fund.
If the interest owned by the participant represents variable remuneration represented by profit allocated to alternative fund managers (as per section 863I of ITTOIA 2005 (allocation of profit to the AIFM)), an election may not be made if the fund ceases to be a non-reporting fund and becomes a reporting fund before 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)).