IFM13372 - Offshore Funds: participants in offshore funds: participants within the charge to income tax: disposals: reporting funds
Regulation 99 of SI 2009/3001
IFM13380 to IFM13560 provides guidance on when a disposal of an interest in an offshore fund will give rise to an offshore income gain (‘OIG’). In all other cases, the disposal of a UK investor’s interest in an offshore fund will be treated as a disposal of an asset for the purposes of tax on chargeable gains.
UK investors will have been charged to tax under regulations 94 to 98 on income distributed by a reporting fund, and on any excess of reported income arising under regulation 94. To avoid a double charge to tax, any sums specified under regulation 94 are treated as expenditure given for the acquisition of the asset, and as allowable as acquisition costs arising under section 38(1)(a) TCGA 1992. See IFM13373 for examples of how this works.
Regulation 101 provides an exception to that rule for charitable companies and charitable trusts, as charitable bodies are exempt from a charge to tax on any reported income. If a charitable body subsequently realised a capital gain on which it would not be exempt because the gain was not applied for charitable purposes then it would not be entitled to deduct amounts reported under section 94(1) as it would not have been charged to tax on such sums.
Sums treated as expenditure in this way are treated as incurred on the fund distribution date for the reporting period in respect of which the amount is treated as distributed. (See IFM13222 for the date taken as the fund distribution date).
Where a participant receives an amount in respect of an interest in a reporting fund which is chargeable to tax as income but that amount is received (or treated as received) after the date of the disposal of the interest the amount is treated as received immediately before the disposal for the purposes of regulation 99.
Equalisation
Where an investor disposes of an interest in an offshore reporting fund they will, under normal circumstances, be liable to a Capital Gains charge on any gain made on redemption. The calculation of that gain will however be different depending on whether the fund operates full equalisation (where equalisation details are reported to the investor), equalisation or no equalisation (where equalisation details are not reported to the investor). See IFM12544 to IFM12552 for further comments.
Full equalisation
In determining the capital gains tax (or corporation tax on chargeable gains) on disposal of the interest, the equalisation amount must be deducted from the purchase price paid by the investor in the CGT calculation on a later disposal. The equalisation amount is the part of the acquisition price which is attributed to the undistributed income which has accrued to the fund in the period up to the time of the acquisition.
Example
Kofi disposes of his interest in a reporting fund by way of cancellation of the 50 units he acquired at a cost of £12 each. The equalisation amount when the units were acquired was deemed to be £2. The redemption price of the units was £18 per unit. The chargeable gains on disposal are calculated as follows.
| £ | £ | |
|---|---|---|
| Redemption price | 18 | |
| Acquisition cost | 12 | |
| Equalisation amount on acquisition | (2) | |
| (10) | ||
| Chargeable gain on disposal | 8 |
Equalisation or no equalisation
If the fund does not operate full equalisation (so the equalisation is not reported to the investor at the end of the reporting period) then the investor cannot reduce their taxable income from the fund for equalisation when calculating their income. It then follows that there is no equalisation amount to deduct from their purchase price paid by the investor in the CGT calculation on a later disposal.
Remittance basis users
The proceeds of a disposal of a reporting fund will normally constitute a ‘mixed fund’ for the purposes of the remittance basis rules, applicable to UK resident investors subject to income tax. This is because the proceeds may have been funded by undistributed (and therefore unremitted) reported income as well as by the original investment and any capital growth.
See the Residence, Domicile and Remittance Basis guidance at RDRM3000 for further information on the rules contained within FA 2008.