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HMRC internal manual

Offshore Funds Manual

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HM Revenue & Customs
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Reporting funds: tax treatment of participants in reporting funds: anti-avoidance provisions - Regulations 102 to 105

There are provisions within regulations 102 to 105 that relate specifically to financial traders if they hold interests in reporting funds that satisfy the conditions in regulation 73 (the equivalence and genuine diversity of ownership conditions).

These are anti-avoidance provisions to ensure that financial traders cannot avoid a charge to tax on certain transactions dealt with under regulations 80 to 89, on which they would otherwise be chargeable, by holding them through a fund that satisfied the conditions in regulation 73.

The term ‘financial trader’ is defined in regulation 105 and can in certain circumstances include connected persons - that regulation should be referred to for full details, but broadly a financial trader will be one of the following -

  • a banking business;
  • an insurance business (excluding life assurance business - regulation 105(2)); or
  • a business dealing in trading assets so that profits arising from the holding of investments in a reporting fund would form part of the trading profits of the business.

Amounts brought into account (regulation 103)

The sums to be brought into account by financial traders with interests in reporting funds satisfying the conditions in regulation 73 are all distributions received or treated as received for a ‘relevant period’: that is, a period of account (for income tax payers) or accounting period (for corporation tax payers), plus any further sums to be brought into account in respect of the movement in value of the interest(s) as follows -

  1. where the interest is held throughout the relevant period, the difference between the market values of the interest from the beginning of that period to the end of that period;
  2. where the interest is acquired during the relevant period and is held throughout the remainder of the relevant period, the difference between the market value of the interest at the end of the relevant period and the acquisition cost of the interest;
  3. where the interest is held at the beginning of the relevant period and disposed of during the period, the difference between the disposal value of the interest and the market value of the interest at the end of the period immediately preceding the relevant period; or
  4. where the interest is acquired and disposed of during the relevant period, the difference between the disposal value of the interest and its acquisition cost.

Exceptions (regulation 104)

The treatment that applies under regulation 103 explained above does not apply if either -

  • the interest in the reporting fund forms part of the financial trader’s stock in trade and all the profits and losses, including distributions, arising in respect of the interest are included in the computation of the financial trader’s trading profits for the relevant period, and that interest is accounted for under generally accepted accounting practice on the basis of fair value accounting,

or

  • the interest is a relevant holding in respect of which the provisions of section 490 of CTA 2009 (holdings in OEICs, unit trusts and offshore funds treated as creditor relationship rights) apply in relation to the financial trader (see OFM16100).