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HMRC internal manual

Offshore Funds Manual

Reporting funds: tax treatment of participants in reporting funds: introduction

The purpose of the offshore funds regulations is to prevent the roll-up of income in offshore funds with any subsequent realisation of the investment being returned to the investor in the form of capital. As with the previous ‘distributing fund’ rules, the regulations provide that where there is roll-up of income any subsequent realisation will be charged to tax as income, rather than to tax on capital gains.

The previous tax rules required the income of a fund to be distributed to UK investors in order for those investors to be charged to tax on capital gains rather than on income on disposal of their interest in the fund. The new reporting funds rules, by contrast, require only that fund income is reported (although it may be distributed in whole or in part as well).

There are specific rules within the regulations to ensure that any sums reported to UK investors are charged to tax as income. The following pages provide more detailed information, but the principle here is that there should not be anything to prevent UK investors accumulating income within an offshore fund providing that the income is taxed as it arises (as happens for investors in UK based funds).