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HMRC internal manual

Offshore Funds Manual

From
HM Revenue & Customs
Updated
, see all updates

Investors in non-reporting funds: charge to tax on disposal of an interest: the charge to tax - Regulation 17

Offshore income gains

There is a charge to tax on an offshore income gain (‘OIG’) (regulation 17) when a person disposes of an interest in either:

  • a non-reporting offshore fund, or
  • an offshore fund that has, at some point while the interest has been held, been a non-reporting fund (but see under “reporting funds that were previously non-reporting funds” below).

An offshore income gain is treated for tax purposes as income arising at the time of the disposal and is taxable at the appropriate marginal rate for income on the person making (or treated as making) the disposal (regulation 18). There is also a charge to tax when a participant makes an election under regulation 48 to crystallise an offshore income gain (see OFM19000).

Reporting funds that were previously non-reporting funds

Where there is a disposal of an interest in a reporting fund which has previously been a non-reporting fund then in some circumstances there will be no charge to tax on an OIG. These are:

  • Where an election to crystallise an offshore income gain was made by the participant at the time the fund became a reporting fund (regulation 48(2) - see OFM19000).
  • Where, at the time the fund became a reporting fund, the market value of the participant’s interest was such that no election to crystallise an offshore income gain was possible because the resulting offshore income gain would not have been greater than zero (regulation 48(5) - see OFM19000).

Changes of rights

If a change in the terms of a scheme result in it coming within the definition of an offshore fund then UK investors are treated as if they held an interest in an offshore fund from the date of change in the terms of the scheme.

Where such a date of change in the terms of the scheme is with effect from the start of an accounting period and the fund becomes a reporting fund from that date then any subsequent gain realised by investors will be subject to chargeable gains treatment.

Otherwise, the fund becomes a non-reporting fund from the date of change in the terms of the scheme, with the result that any gain realised after this point will be an offshore income gain. If at a later date the fund becomes a reporting fund, investors may then be able to make an election under regulation 48(2) to crystallise any offshore income gain at that point, with any subsequent gain being subject to chargeable gains treatment (provided the fund remains a reporting fund). See OFM19000 for further guidance regarding the election.