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HMRC internal manual

Offshore Funds Manual

Investors in non-reporting funds: conversion of a non-reporting fund to a reporting fund: consequences for participants in non-reporting fund - Regulation 48

When a UK investor disposes of an interest in a non-reporting fund, or in a reporting fund which has not been a reporting fund for the entire period that the investor held their interest, an offshore income gain may arise.

In the latter case, the fund may have been a reporting fund for the majority of the time that the investor held their interest prior to disposal, but without any further provision the whole of any basic gain arising would be charged to tax as an offshore income gain.

Regulation 48 applies where an offshore fund ceases to be a non-reporting fund and becomes a reporting fund. It provides an opportunity for a UK investor to make an election for a deemed disposal of their interest at the point of conversion, and to be treated as -

  • disposing of the interest in the non-reporting fund at its market value on the disposal date, and
  • as acquiring a holding in the reporting fund at the beginning of the reporting fund’s first period of account.

An offshore income gain is treated as arising on the deemed disposal and the deemed acquisition is treated as made for the same amount as the deemed disposal.

An election may not be made unless the offshore income gain arising on the deemed disposal is greater than zero, so a loss cannot be crystallized at this point.

Elections must be made by being included in a return made for the tax year which includes the deemed disposal date, or if the investor is chargeable to corporation tax, by being included in the company’s tax return for the accounting period which includes the deemed disposal date. There is no special section on the return to indicate that an election has been made - an offshore income gain should be calculated and returned in the same way as it would on an actual disposal, and it is recommended that an entry is made in the white space (for an income tax return) or in the accompanying computations (for a corporation tax return).

If the interest in the offshore fund is held by an offshore trust and there is a possibility that an offshore income gain could be charged on a UK resident settlor or beneficiary then the settlor or beneficiary should make the election.

If no election is made, then any ‘excess income’ (regulation 94 - see OFM27200) treated as additional distributions and taxed accordingly are allowable as acquisition costs arising under section 38(1)(a) TCGA 1992 (regulation 99 - see OFM27500) when an investor disposes of his or her interest in a fund.

Investment standing at a loss when fund becomes a reporting fund

In such a case (where an election is prevented by regulation 48(5)) the eventual disposal of an interest in the reporting fund will not incur a charge to tax on an offshore income gain (regulation 17(3)(d)).