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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: 'non-transparent' funds

Arrangements that are non-transparent for income purposes and that come within the definition of an offshore fund under section s355(1)(a) or (b) TIOPA 2010 will either have corporate form (such as an open-ended investment company) or will be foreign unit trusts. Foreign unit trusts that are not transparent for income purposes are sometimes referred to as ‘Garland’ unit trusts (following the case of Garland v Archer-Shee (15TC693)).

The UK tax treatment of investors for income purposes will depend on the form of the offshore fund, as explained below.

Corporate funds

Where a fund has corporate form, any distributions received will normally be treated as foreign dividends. Dividends from offshore funds qualify for the dividend tax credit (for income tax payers) or are exempt (for corporation tax payers) if they are received on or after 22 April 2009, subject to one important exception.

Corporate Funds - ‘Bond Funds’

Finance Act 2009 introduced an amendment to the Income Tax (Trading and Other Income) Act applying from 22 April 2009, so that where an offshore fund holds more than 60% of assets in interest-bearing (or economically similar) form, any distribution received by UK investors who are subject to income tax is treated as a payment of yearly interest and will not qualify for a dividend tax credit. The rates applying will be those applying to interest (section 378A ITTOIA 2005). Fund managers should be able to tell UK investors if a fund is a ‘bond fund’. Corporation tax payers remain subject to the bond fund rules in Chapter 3 of Part 6 of CTA 2009.

Non-transparent unit trusts

UK investors in foreign unit trusts that are non-transparent for income purposes are taxable on their proportionate share of income (as ascertained after the trustees have met the expenses of administering the trust) when it is indefeasibly allocated to them, regardless of whether the income is paid to them or accumulated. Unlike the position for transparent unit trusts (see OFM13200), that income is taxable as miscellaneous foreign income (under Chapter 8 of Part 5 of ITTOIA 2005, or Chapter 8 of Part 10 CTA 2009) and the tax rates applying will be those applying to such income. Corporation tax payers are subject to the rules in Chapter 3 of Part 6 of CTA 2009 if the fund is a bond fund.