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HMRC internal manual

Offshore Funds Manual

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


The following example uses a fairly simple scenario to illustrate how an investor might determine base cost for chargeable gains purposes. It uses an example fund that does not operate equalisation.

Liz is a UK resident. She purchases 10,000 units in X Equity Fund, a Guernsey open-ended investment company, on 1 May 2010 for £2.50 per unit. She disposes of all of the units on 31 December 2016 for £4.50 per unit.

The fund’s aim is to provide a mix of income and capital growth. It has a policy of distributing 25% of its income to investors and accumulating the rest. The fund prepares its accounts to 31 December each year, and makes distributions on 31 March. It sends a report to each of its investors electronically on 1 May each year (containing the information required by regulation 92 - including details of actual distributions and the ‘excess’ of reported income per unit over the sums actually distributed). The fund is not a bond fund.

Liz received the following distributions and reports of excess of reported income -

ending Sum
distributed Date
distributed Returned
in Tax Year Sum
accumulated Date
reported Returned
in Tax Year              
  31/12/2010 210 31/03/2011 2010/11 630 01/05/2011 2011/12
  31/12/2011 320 31/03/2012 2011/12 960 01/05/2012 2012/13
  31/12/2012 360 31/03/2013 2012/13 1,080 01/05/2013 2013/14
  31/12/2013 420 31/03/2014 2013/14 1,260 01/05/2014 2014/15
  31/12/2014 440 31/03/2015 2014/15 1,320 01/05/2015 2015/16
  31/12/2015 610 31/03/2016 2015/16 1,830 01/05/2016 2016/17
  31/12/2016 660 31/03/2017 2016/17 1,980 01/05/2017 2017/18

Liz receives a total of £45,000 on the sale of her units. She has been charged to income tax on all sums distributed to her, and she has also been charged to income tax on the ‘excess’ income accumulated within the fund and reported to her each year, as shown above (regulation 95(4) provides that the excess income specified by regulation 94(1) is charged to tax under S.397A ITTOIA 2005, as would the sums actually distributed to her in accordance with normal principles).

The sums actually distributed to Liz are ignored for the purposes of calculating her base cost for chargeable gains tax. The value of the accumulated sums, however, is reflected in the price that Liz receives on the sale of her units. As Liz has already been charged to tax on those sums, and in order to avoid a potential double charge to tax, the total of the accumulated income (£9,060 - the total from the column headed ‘sum accumulated’ above) is, in addition to the sum Liz paid for the units on acquisition, treated as falling within S.38(1)(a) TCGA 1992 (acquisition and disposal costs).

Liz’s total base cost is therefore - £
Acquisition cost of units 25000
Total accumulated income 9060
Total 34060