The offshore fund regime was introduced to stop investors from gaining an advantage by rolling up income in offshore structures and paying capital gains tax on disposal. Instead, the gains arising from investments in offshore funds will be subject to income tax unless the fund has joined the reporting fund regime.
The reporting fund regime allows investors to qualify for capital gains tax on ultimate disposal rather than income tax.
Joining the regime
To join the regime, the fund completes a one-off application before the end of the first period it wishes to claim reporting fund status.
Annual compliance requirements
Once a fund is registered as a reporting fund, it will need to:
- Prepare a calculation of the fund’s reportable income and provide investors with a report of the fund’s Excess Reportable Income per a unit
- Confirm to HMRC that the fund has met the regime’s requirements during the year to HMRC.
The deadline for submitting these is six months after the fund’s year-end.
Excess Reportable Income
As mentioned above, the fund must calculate the Excess Reportable Income. The Excess Reportable Income is the income of the fund, adjusted to remove any capital gains and include any effective interest. Any revenue expenses are deductible (such as management fees, but not performance fees).
Treatment of individuals
When an individual holds an interest in a reporting fund, the disposal is taxed as a capital gain at 20%, rather than as income at 45%.
Any Excess Reportable Income is deemed to arise six months after the fund’s year-end.
Any Excess Reportable Income taxable on the investor will be deductible in calculating the capital gains on disposal.
The investor needs to be aware that if a fund changes from a non-reporting fund to a reporting fund whilst holding the investment, the disposal would not automatically qualify for capital gains treatment on disposal. To be eligible for capital gains treatment, they need to make an election.
How we can help
We would be able to help with the application for reporting fund status, annual compliance, and reporting and advice for individuals investing in offshore funds.
