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HMRC internal manual

Offshore Funds Manual

Reporting funds: tax treatment of participants in reporting funds: disposals of interests - Regulation 99

Pages at OFM14000 to OFM17000 provide guidance on when a disposal of an interest in an offshore fund will give rise to an offshore income gain (‘OIG’). In all other cases, the disposal of a UK investor’s interest in an offshore fund will be treated as a disposal of an asset for the purposes of tax on chargeable gains.

UK investors will have been charged to tax under regulations 94 to 98 on income distributed by a reporting fund, and on any excess of reported income arising under regulation 94. Therefore, in order to avoid a double charge to tax, any sums specified under regulation 94 are treated as expenditure given for the acquisition of the asset, and allowable as acquisition costs arising under section 38(1)(a) TCGA 1992. See OFM27600 for examples of how this works.

Regulation 101 provides an exception to that rule for charitable companies and charitable trusts, as charitable bodies are exempt from a charge to tax on any reported income. If a charitable body subsequently realised a capital gain on which it would not be exempt because the gain was not applied for charitable purposes then it would not be entitled to deduct amounts reported under section 94(1) as it would not have been charged to tax on such sums.

Sums treated as expenditure in this way are treated as incurred on the fund distribution date for the reporting period in respect of which the amount is treated as distributed. See OFM27200 for the date taken as the fund distribution date.

Where a participant receives an amount in respect of an interest in a reporting fund which is chargeable to tax as income but that amount is received (or treated as received) after the date of the disposal of the interest the amount is treated as received immediately before the disposal for the purposes of regulation 99.


Where an investor disposes of an interest in an offshore reporting fund they will, under normal circumstances, be liable to Capital Gains Tax on any gain made on redemption. The calculation of that gain will however be different depending on whether the fund operates full equalisation, equalisation or no equalisation.

In the case of full equalisation (where equalisation is reported to the investor and is used to reduce the investor’s taxable income) then the equalisation must also be deducted from the purchase price paid by the investor in the CGT calculation on a later disposal.

If the fund does not operate full equalisation (so the equalisation is not reported to the investor at the end of the reporting period) then the investor cannot reduce their taxable income from the fund for equalisation when calculating their income. It then follows that there is no equalisation amount to deduct from their purchase price paid by the investor in the CGT calculation on a later disposal.

Remittance basis users

The proceeds of a disposal of a reporting fund will normally constitute a ‘mixed fund’ for the purposes of the remittance basis rules. This is because the proceeds may have been funded by undistributed (and therefore unremitted) reported income as well as by the original investment and any capital growth.

See the Residence, Domicile and Remittance Basis guidance for further information on the rules contained within FA 2008.