Introduction: overview of the 2009 regime for offshore funds: Introduction
The previous tax regime for UK investors in offshore funds, introduced in 1984, was established on the basis that if an offshore fund did not distribute at least 85% of its income then, on disposal of interests in the fund, UK investors would be charged to tax on income rather than on capital gains. This was to prevent the possibility of rolling up income in an offshore fund with any subsequent disposal being subject only to tax on capital gains, rather than being charged to tax as income. The purpose of the legislation was to align the tax treatment of interests held by UK investors in offshore funds with that of interests in investments in UK funds, from which income is chargeable to tax as income on an arising basis.
The 2009 regime has a similar purpose but moves away from the requirement that income is distributed in order for UK investors to enjoy the more favourable capital gains treatment on disposals of interests. Instead, that treatment will apply if an offshore fund’s income is reported to UK investors in such a way that UK investors are charged to tax on their share of the ‘reported income’ of the fund, regardless of whether that income is distributed to them or accumulated in the fund. Funds will either be ‘reporting funds’ or ‘non-reporting funds’.
The previous tax definition of an offshore fund was based upon the regulatory definition of ‘collective investment schemes’ as set out in the Financial Services and Markets Act 2000 (FSMA), with modifications for tax purposes. The legislation giving the definition and the detailed rules of the 1984 regime was contained within ICTA 1988.
The definition applying to the 2009 regime is contained within S355 TIOPA 2010. It detaches the tax definition of an offshore fund from the regulatory definition and instead bases the tax definition on characteristics. The detailed operational rules relating to the treatment of UK investors are contained within regulations (the Offshore Funds (Tax) Regulations 2009). The key features of the new regime for offshore funds rules include:
- a new tax definition of an offshore fund (section 355 TIOPA 2010);
- a facility for an advance application to be a reporting fund;
- a requirement (for reporting funds) to report fund income to UK investors rather than the requirement to distribute income;
- the consideration of only one ‘layer’ of funds for reporting funds; there are no longer either percentage investment restrictions nor a limit to the number of ‘layers’ of funds into which a reporting fund can invest;
- revised rules to deal with breaches of conditions, in particular to deal with occasions of minor or inadvertent breaches; and
- treating investments by most UK investors in non-reporting funds in the same way as under the 1984 regime for investments in non-distributing funds.
So whilst the 2009 regime for offshore funds treats investors within the charge to UK tax in a similar manner to the 1984 regime it aims to provide greater certainty to funds and to their investors as well as more flexibility to deal with breaches of the rules. This manual provides guidance on the definition of an offshore fund (see OFM04000 onwards), and the detailed rules relating to the operation of the regime contained within the Regulations (see OFM11000 onwards).