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HMRC internal manual

Offshore Funds Manual

HM Revenue & Customs
, see all updates

Reporting funds: tax treatment of participants in reporting funds: participants chargeable to income tax: transparent funds - Regulation 97

Limited partnerships, which are transparent for income and capital gains tax purposes, are outside of the offshore funds definition at section S355 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

No matter what the legal form of a transparent reporting fund, 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 should receive a “voucher” or other report from the fund to tell them what proportion of the fund’s income they are entitled to, and the split between interest, dividends, property income, etc. Investors should ask their fund manager for such a voucher or report if they do not receive one.

If a transparent reporting fund holds investments in other reporting funds then investors are also taxable on their proportionate share of any income reported but not actually distributed by the underlying fund (regulation 94(2)). This will become part of the excess to be reported by the transparent reporting fund. Such excess reported income is charged to tax as miscellaneous foreign income under Chapter 8 of Part 5 ITTOIA 2005 (regulation 97(2)), and it is chargeable at investors’ highest tax rate.

Remittance basis users

In a case where the reporting fund is transparent for UK tax purposes then the income will arise from the underlying assets and not from the fund. In such a case the income may sometimes arise in the UK (even though the fund itself is domiciled offshore). Where the income arises in the UK the remittance basis does not apply. Where the income arises offshore then the remittance rules will apply.