TECHNICAL BRIEFING OFFSHORE FUNDS REGIME
technical
A more flexible tax regime
Last December saw a new offshore funds tax regime come into force in the UK, which
will have an impact on all UK investment in funds domiciled abroad. The latest framework
offers greater flexibility and a less uncertain climate for investors
A new offshore funds tax
regime commenced in the
UK on 1 December. This
impacts investments by UK
investors in funds domiciled
outside the UK (including
the Crown Dependencies
such as Jersey,
Guernsey or the Isle or
Man). The reformed regime
is more flexible and provides
much greater certainty
about the tax treatment
of investment in offshore
funds by UK investors.
l Distributor status
The Offshore Funds Regime
was first introduced in 1984
as an anti-tax avoidance
measure and has been subject
to a number of amendments
over the years. The
regime is designed to prevent
UK investors achiev-
ing a tax advantage by
accumulating gross income
in an offshore fund and,
when the investment is
realised, being subject to
capital gains tax (CGT) on
the full return rather than
income tax (at 0%, 20% or
40% – or 50% from next
April).
Before 1 December –
and currently if the fund is
subject to transitional rules
(see table on p34) – an offshore
fund could be either
‘distributing’ or ‘non-distributing’.
A Briton investing in
a non-distributing fund is
subject to income tax on
the full return on realisation
of the investment (called an
offshore income gain),
whereas investment in a
distributing fund is subject
to CGT on realisation.
In order to achieve this
more favourable treatment
for investors, however, the
fund must distribute each
year at least 85% of income
(UK equivalent profits or
the accounting profit). The
investor is then subject to
income tax on the distributions.
This treatment was
designed to mirror the
treatment of investment in
UK-domiciled funds, which
have to distribute 100% of
their income each year.
l Reporting funds
The purpose of the new
regime is the same – to
ensure that income is taxed
annually – but it is significantly
different from its
predecessor.
The previous tax definition
of an offshore fund
relied upon the definition
of a ‘collective investment
scheme’ as defined in the
Financial Services and
Markets Act 2000 (FSMA),
with appropriate modifications.
Following Budget
2009, there is a new definition
of an offshore fund,
which detaches from the
regulatory definition and is
now characteristics-based.
This new definition of
an offshore fund for UK
tax purposes applies to a
company, trust or any other
vehicle or arrangement:
■ Which is not UK
tax-resident;
■ Where the purpose of
the arrangements is to
enable participation in
the acquisition, holding,
management or disposal
of the property; or to
receive profits or income
arising from the acquisi-
Julie Patterson, director of
authorised funds and taxation,
Investment Management
Association
FEBRUARY 2010 [www.international-adviser.com] INTERNATIONAL ADVISER
33
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