Introduction: background to the treatment of UK investors in offshore funds
A tax regime for UK investors in offshore funds was first introduced in 1984. Broadly, its purpose was to counter arrangements that, before its introduction, enabled investors within the charge to UK tax (‘UK investors’) to accumulate income in an offshore fund free of tax and, when the investment was realised, to be subject only to tax on capital gains rather than having to pay tax on income. In contrast, a combination of regulatory and tax rules meant that UK investors had to pay tax annually on income from UK funds. The relevant legislation was in Chapter 5 of Part 17 ICTA 1988 (repealed by Schedule 2 of the Offshore Funds (Tax) Regulations 2009 (S.I. 2009/3001)).
The rules relating to the treatment of UK investors in offshore funds were amended on several occasions in the years since 1984, and replaced by the regime now within Part 8 of the Taxation (International and Other Provisions) Act 2010, supplemented by regulations contained within the Offshore Funds (Tax) Regulations 2009. The legislation covering the 1984 regime in Income and Corporation Taxes Act (‘ICTA’) 1988 was repealed at the time the new regime took effect.
The new regime has effect for the purposes of -
- income tax for the tax year 2009-10 and subsequent tax years, and for distributions made on or after 1st December 2009, and for the purposes of capital gains tax in relation to disposals made on or after 1 December 2009;
- for the purposes of corporation tax on income, for accounting periods ending on or after 1st December 2009, and for the purposes of corporation tax on chargeable gains in relation to disposals made on or after 1 December 2009.
This is subject to certain transitional arrangements - see OFM32000 onwards.
The purpose of both the original and the replacement offshore funds tax regimes remains the same, and they work by charging gains on realisations of interests in offshore fund investments to tax as income rather than as capital gains, unless certain conditions are met.
Further details regarding the operation of the previous regime can be found at OFM01000. The remainder of this manual is concerned with the replacement regime, referred to in this manual as the 2009 regime, and references made to ‘offshore funds’ are made in that context.