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HMRC internal manual

Savings and Investment Manual

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HM Revenue & Customs
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Collective investment schemes: offshore funds: offshore income gains: equalisation

Equalisation

The information in this manual applies to transactions up to 30 November 2009. The Offshore Funds Manual is currently being updated for the offshore funds regime from 1 December 2009.

This charge is designed to overcome difficulties which funds operating the type of arrangements described in CG57705 would otherwise have experienced in obtaining distributing fund status.

Although described as an offshore income gain, the equalisation charge actually consists of a portion of the gross consideration received by an investor on the disposal of his interest in a distributing fund operating equalisation arrangements. It represents the element of fund income accruing to the investor in respect of the accounting period of the fund in which the disposal takes place, and which is either included in the proceeds paid to the investor on the redemption or repurchase by the fund of his shares or units, or would have been so included had the disposal been to the fund.

The equalisation charge on accrued income is likely to be quite small in relation to the total proceeds received by an investor. The residual gain chargeable under the chargeable gains rules may therefore be significant, particularly where the investment has been held for a number of years.

Equalisation details returned by a taxpayer should be accepted without enquiry. Where no such details are provided, but the interest disposed of is in a distributing fund which is stated on the Collective Investment Schemes Centre’s list () to have operated equalisation arrangements at the time of the disposal, the taxpayer should be so advised and asked for details of the amount included in the disposal proceeds in respect of equalisation. Normally this is shown on the redemption voucher but the taxpayer should be asked to approach the fund for the information where it is not otherwise available. It is unlikely that difficulty will be experienced in obtaining the necessary information, since by definition the equalisation charge can only arise in relation to a fund which has been certified as a distributing fund, and it is expected that such funds will co-operate in all matters resulting from a successful application to the Board. If problems are encountered in determining the equalisation gain, CTISA (Financial Services Team) will give whatever advice they can.

If an equalisation gain arises on the disposal of an interest other than to a fund or its managers, and a distribution referable to that interest is subsequently paid either to the person making the disposal or to a person connected with him (as defined inITA07/S993 and CTA10/S1122), the amount of that distribution is reduced for United Kingdom tax purposes by the amount of the equalisation gain. If, exceptionally, the equalisation gain exceeds the first such subsequent distribution, the balance of the gain is set off against later distributions until it has been fully exhausted. This relief does not extend to a disposal to a third party.