34
TECHNICAL BRIEFING OFFSHORE FUNDS REGIME
KEY POINTS
The new regime has removed
several requirements
considered burdensome under
the former system, such as
having to retrospectively apply
for distributor – now changed
to to ‘reporting’ – status.
Offshore bond funds now also
receive the same tax benefits,
including a 10% dividend tax
credit, as onshore funds.
“
The new offshore
funds regime does
not require an
offshore fund to
distribute income.
It may instead
choose to report
income to investors.
Offshore funds will
therefore be badged
as either ‘reporting
funds’ or ‘nonreporting
funds’
”
tion, holding, management
or disposal of the
property or sums paid
out of such profits or
income;
■ Where the participants
do not have day-to-day
control of the management
of the property
(whether or not they
have the right to be consulted
or give directions);
and
■ Where a reasonable
investor would expect
to be able to realise any
investment based
(almost) entirely by reference
to the net asset
value of the property or
an index of any
description.
Also, the new offshore
funds regime does not
require an offshore fund to
distribute income. It may
instead choose to report
income to investors. Offshore
funds will therefore
be badged as either ‘reporting
funds’ or ‘non-reporting
funds’. The income
tax consequences for investors
are similar to those
under the old regime,
except that for reporting
funds investors are taxed
on their share of that
reported income, even
though they have received
no distributions.
Reporting funds are
required to prepare
accounts in accordance
with an acceptable accounting
policy (as agreed by
HMRC), and to adjust the
total return of the fund in
accordance with UK fund
accounting rules. UK investors
must be informed of
their proportionate share
of the calculated income
and include it on their
annual tax return.
l Less problematic
Two other troublesome
features of the old regime
Tax rates for investors 2009-10
UK investors Dividends from Interest from
off/onshore off/onshore
equity funds bond funds
Non-taxpayers 0% 0%
Basic-rate taxpayers 0% 20%
Higher-rate taxpayers 25% 40%
Additional-rate taxpayers 36.1% 50%
From 6 Apr ’10, those earning £150,000 or more will be required to pay income tax of 50% on
their income. UK investors in this category will pay an effective tax of 36.1% on any income
generated from investments in an offshore equity fund. Source: IMA
have also been removed.
Firstly, offshore funds used
to have to apply annually
and retrospectively for distributor
status, which meant
considerable uncertainty
for investors and fund
managers. Now, funds can
apply prospectively for
reporting fund status and
thereafter simply submit
annual information.
Secondly, under the previous
regime, if an offshore
fund qualified for a number
of years but failed the test
in one year, this would taint
the entire period of investor’s
holdings and disposals
were subject to income tax,
as if the fund had never
been distributing. Under
the new regime, if a fund
seriously breaches the
requirements, investments
in previous ‘good’ years
need not be affected.
Investors can elect to be
treated as if they had disposed
of their investment in
the reporting fund (and
therefore suffer CGT) and
are newly invested in a
non-reporting fund, on
which they will suffer an
offshore income gain on
future disposal.
l Transitional rules
An existing distributor fund
with an accounting period
ending after 1 December
can elect to continue under
that regime for the accounting
period. A manager may
then make one further
election for distributor
status in the subsequent
accounting period.
A new offshore fund
established after 1 December
may apply for distributor
status for the transitional
period if it is within an
umbrella where another
sub-fund already has distributor
status. If not, the
new fund must adhere to
the new reporting fund
regime.
The 2009 Budget also
introduced changes to
ensure the parity of treatment
for UK investors
between onshore and offshore
equity and bond
funds. A 10% dividend tax
AVOIDING BEING TAXED TWICE
Proceeds from sale of fund: £1,000
Less cost of original investment in fund: (£500)
Less reported income which has not been
paid in cash over life of holding: (£200)
Total taxable gain: £300
CGT @ 18% (assuming annual exempt already used) £54
If the investor had not kept accurate records of income retained in
the fund, then in this example additional CGT would be suffered on
the £200 (i.e. an additional tax charge of £36).
credit, which was previously
available only to UK dividend
distributions, is now
available to dividends paid
by incorporated offshore
funds.
A new offshore bond
fund regime was also introduced,
which taxes distributions
from funds invested
at least 60% in interestbearing
instruments (or
economically similar instruments)
as interest rather
than dividends.
l Capital gains tax
When disposing of units in
a reporting fund, a UK
investor may be required
to prepare a CGT calculation
that has an additional
complication compared to
the previous distributor
funds regime.
Distributor funds had to
distribute as least 85% of
income (and typically distributed
100%) to UK investors.
The fund’s net asset
value was reduced accordingly.
The unit price therefore
broadly reflected the
true capital return of the
fund and not accumulated
income, and the cash
received on disposals could
be used by investors as the
proceeds for their CGT calculation,
without material
double taxation arising.
Under the new regime,
investors in funds that fully
distribute income will be in
the same position as previously.
But the unit price of
a reporting fund that distributes
none or only some
of its income will include
an element of income
return. On disposal, in
order to avoid being taxed
twice on the same income,
investors will need to know
how much income has
been retained in the fund
throughout the period of
their investment (see the
adjacent table).
INTERNATIONAL ADVISER [www.international-adviser.com] FEBRUARY 2010
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