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HMRC internal manual

Offshore Funds Manual

HM Revenue & Customs
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Investors in non-reporting funds: distributions: the charge to tax: 'transparent' funds

Limited partnerships, which are transparent for income and capital gains tax purposes, are outside of the offshore funds definition at section s355(1) TIOPA 2010 as investors are subject to tax on income and gains as they arise.

Other types of arrangements that are transparent for income purposes but not transparent for capital gains purposes (section 99 and 103A TCGA - see OFM07000 onwards) such as, for example, so called ‘Baker’ unit trusts (following the case of Archer-Shee v. Baker, 11TC749) or certain foreign contractual arrangements (such as Fonds Commun de Placement (‘FCPs’)) fall within the definition of an offshore fund.

Income: UK tax treatment of investors

For UK tax purposes the income of an income transparent fund is treated as arising directly to its investors (UK investors are charged to tax on income arising net of a deduction for proper expenses of the management of the fund in question, and this is the case for both unit trusts and contractual arrangements). So, for example, if a fund receives interest income then UK investors are charged to tax on their proportionate share of that income as it arises, irrespective of whether or not it is actually distributed to them. Investors may receive reports from the fund to tell them what proportion of the fund’s income they are entitled to, and the split between interest, dividends or property income. Investors should ask for this information if they do not receive it routinely from their fund manager.

Transparent non-reporting funds with interests in reporting funds (regulation 16)

There is a further point to consider with regard to transparent non-reporting funds that hold interests in reporting funds. That is, where the underlying reporting fund does not distribute all of its ‘reportable income’ (see OFM24000 and OFM27000 onwards) then the excess would, if a UK investor held a direct interest in the fund, be treated as income (regulation 94). To ensure that principle is maintained, regulation 16 provides that where the interest is held by a non-reporting fund which is transparent for income purposes then the reportable excess will be similarly treated as additional income in proportion to each investor’s rights.

Transparent non-reporting funds with interests in non-reporting funds (regulation 29)

If an income transparent offshore fund holds less than 5% by value of its gross assets in non-reporting funds then provided that was the case throughout the period that a UK investor held their interest in the top tier fund, an offshore income gain (OIG) will not arise on disposal of that interest even if that fund is a non-reporting fund (there is a relaxation of this rule where a transparent fund holds interests in other non-reporting funds that themselves would not give rise to a charge to tax under regulation 17 - see OFM16500 for details). Conversely, that will not be the case where the 5% limit is exceeded during the period that the investor held their interest. UK investors are responsible for obtaining information relating to whether or not the 5% limit has been exceeded for a particular period of account, but it is expected that funds marketed to UK investors would make this information available as a matter of routine.