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HMRC internal manual

Investment Funds Manual

Offshore Funds: investors in non-reporting funds: computation of offshore income gain: the basic gain

Regulation 39 of SI 2009/3001

Where an offshore income gain falls to be charged on the disposal of an interest in an offshore fund, it will be equal to the ‘basic gain’. The basic gain is an amount equal to the amount which would be the gain on that disposal for the purposes of TCGA 1992.  For a participant chargeable to corporation tax, this amount is without any indexation allowance.

It can be seen from this that an offshore income gain is essentially equal to the increase in value of the investor’s holding over the period it was held, with no provision for reducing that gain by deduction of indexation. This is because the charge to tax on an offshore income gain is a charge on income, although it is calculated in accordance with the rules in TCGA 1992 with relevant modifications.

TCGA92/S37(1) would exclude any sums that have been charged to tax as income from being taken into account in the computation of the ‘basic gain’. For example, if it was possible that an entity could come within the controlled foreign companies’ rules and also within the definition of an offshore fund, then any sums charged to tax as income under the CFC rules would be excluded from the computation of the basic gain. Further guidance on the CFC rules can be found in the International Manual.

Note that the computation of the basic gain is subject in all cases to the following regulations:

(a) regulation 34 (provisions applicable on death) - see IFM13383;

 (b) regulation 36A (exchanges and schemes of reconstruction) - see IFM13284 and IFM13386;

(c) regulation 37 (exchange of interests of different classes - see IFM13288 and IFM13388;

(d) regulation 40 (earlier disposal to which the no gain/no loss basis applies); - see IFM13530;

(e) regulation 41 (modifications of TCGA 1992) - see IFM13540;

(f) regulation 42 (losses) - see IFM13550;

(g) regulation 43 (special rules for certain existing holdings) - see IFM13560.