UK: Offshore funds - response to IR consultation

Last Updated: 4 September 2002

For consultation document see:


1.1 - The review of the offshore funds legislation is welcomed, because the legislation has not kept pace with a variety of developments which have occurred since 1984, including the impact of the (developing) case law of the European Court of Justice in relation to the Community effects of national tax measures, the proliferation, both geographically and in terms of number, of funds to which the legislation applies, and the comprehensive review of the taxation of Government and Corporate Debt in 1995/1996.

1.2 - Total abolition of the offshore funds regime would solve all of the problems. However, it would re-create the possibility of the tax avoidance which originally stimulated the introduction of the regime.

1.3 - A new regime is therefore indicated. However, any regime which involves investment in UK authorised unit trusts/OEICs being taxed on a more favourable basis than investment in corresponding EU investment products can by no means be guaranteed to withstand EU challenge and the best chances of successful resistance to such a challenge would appear to lie with an anti-avoidance provision that is as narrowly targeted as possible. Such narrow targeting would serve the added desirable purpose of easing the compliance burden.

1.4 - The regime currently applied to corporate investors by FA 1996 Schedule 10, suitably adapted and modified to deal with individual investors, has much to commend it as a model.

1.5 - The existing general principle of taxing individuals on investment returns on a realisation basis should be retained and embodied in any new regime.

1.6 - The remainder of this note is arranged as follows:-
2. Comments in Support
- 2.1 Background
- 2.2 Abolition as a Way Forward
- 2.3 Criteria for a New Regime
- 2.4 Conclusions
3. Responses to Specific Questions in the Consultative Document
4. Miscellaneous minor issues


2.1 – Background

2.1.1 - The field of application of the existing offshore funds legislation is wide. The legislation covers not only the kinds of fund whose operations prompted its introduction (fixed interest and cash funds which do not distribute their income but instead “roll up” income, allowing it to be obtained by the investor when he realises his shares or units 1 ) but also funds that invest in equity shares and in property, and funds which deal in commodities or other assets. The diagram below indicates the kinds of offshore fund commonly found:-

(Open-ended funds to invest in property are not often widely marketed in the UK but are popular elsewhere, for example in Germany, with the result that UK investors may invest in such funds)

2.1.2 - Investment in fixed interest funds is usually characterised by a low degree of risk. The underlying investments of such funds usually yield a total return consisting predominantly of income (as defined for UK tax purposes) rather than capital gain (as so defined). The potential for using such funds to “turn income into capital” for tax avoidance purposes is therefore considerable, and there is a correspondingly strong case for anti-avoidance provisions (to turn an investor’s capital gain on sale of his shares back into income), where that income has not been distributed as dividend.

2.1.3 - The case for applying similar anti-avoidance provisions to the other kinds of fund shown in the diagram (funds that invest in equity shares or property, or which deal in commodities or other assets,“trading funds”) in the same way (effectively to turn capital gains realised by the fund into income) is much weaker, for three reasons:-

(i). In the case of funds that invest in equity shares, the proportion of the total return which is income (as distinct from capital gain) by UK tax criteria, tends to be lower than in the case of fixed interest funds. This reduces the potential for the use of such funds for tax avoidance by turning income into capital.

(ii). In the case not only of equity share but also trading and property funds, the level of risk is higher than in the case of fixed interest funds. It is reasonable therefore to infer that the rewards sought by investors in such funds are not mere tax avoidance but capital growth. Moreover, by encouraging the distribution of income received by the fund as a dividend to the investors (as the existing regime does), the Exchequer lays itself open to the charge of “cherry-picking”. For instance, if an investor has an overall loss on his investment in an offshore fund (i.e. his initial cost of investment exceeds the sum of proceeds of realisation and dividends received), taxing him on the dividends received without allowing him any relief for his loss, as the existing regime does, seems to elevate the Exchequer from a position of equal partner in the investor’s venture to that of preferred creditor. The origin and logical basis for the existing rules lies in the rigid, technical and often counter-intuitive distinction in UK tax law between income and capital. “Fiscal imperialism” is probably no more than a vituperative jibe, but in a global business environment it is questionable whether the income/capital distinction should continue to have as much influence as it now does.

(iii). Investment in cash and fixed interest securities is an activity that a retail investor can carry out himself with a fairly low degree of risk and with reasonable efficiency. This tends not to be the case for investment in the case of venture capital, emerging markets, trading and property funds, where the provision of specialist expertise is important to success. Further, “co-mingling” (leading to the benefits of risk-spreading in the case of equity share funds and access to commercially viable lot sizes in the case of property funds) is fundamental to these kinds of fund and important also in the case of equity share funds that invest in shares traded on established markets. These points suggest that the potential for using, and the actual use made in practice, of non-fixed-interest funds for tax avoidance, as opposed to investment reasons, is limited. While it is true that tax free roll-up of income in UK authorised unit trusts/OEICs is impossible thanks to the ICTA 1988 Section 468 et seq regime, it has to be borne in mind that that regime starts from the position that the trustees or the OEIC are already UK taxpayers. In the light of this, the practical justification for applying the same bar on tax-free roll-up to non-UK funds is far from self-evident.

2.1.4 - Against this general background and in the context of a complete re-appraisal of the legislation, the approach adopted in 1984 (of turning the totality of the investor’s capital gain into income, even that part of it which represents a capital gain obtained by the fund on disposal of its underlying investments) requires re-examination. Indeed at the Report Stage of the Finance (No. 2) Bill (which became FA 1984) Sir William Clark mentioned, as

“a principal cause for concern …the crude bludgeoning effect whereby if an offshore fund cannot always establish itself as a distributor fund, the consequential income tax charge on the investor is based not only on undistributed, rolled-up income, but on any increase in value arising from capital growth within the fund.”
Sir William asked the Government to undertake, during the then coming year, to keep a close watch on the matter, to which the Mimisterial response was that it would be watched “with great care”.

2.2. - Abolition as a way forward

2.2.1 - Subject to EU law considerations, complete abolition is clearly not viable as a way forward. The effect would merely be to re-create the avoidance opportunities which existed before FA 1984, in respect of non-distributing cash and fixed interest funds.

2.2.2 - The aim must therefore be to devise a new regime that:-

  • complies so far as possible with the UK’s international obligations, and
  • is fair to investors in offshore funds, but
  • protects the Exchequer so far as possible against loss through tax avoidance of the kind which is possible in the case of cash/fixed interest funds which do not distribute their income with reasonable promptness.
A “slimmed down” regime, restricted in scope to those kinds of fund giving rise to the most serious risk of avoidance, or “partial abolition”, would seem promising and most likely to survive challenge on EU grounds.

2.3 Criteria for a new regime

2.3.1 - As well as more satisfactory targeting, (see 2.3.2 below) a new regime needs to possess a number of other characteristics:-

(a). Any new regime should comply with the UK’s international obligations. This is particularly important in the European context where there is a possibility of successful challenges at EU level, on the basis of free movement of capital within the EU, cross-border freedom to provide services or state aid, with consequent uncertainty and claims for compensation. It is also significant globally, as national boundaries exercise less and less influence on the marketing of investment products, that the UK’s regime for taxing investment products should not discriminate against funds managed outside the UK. With the passing of exchange control there can no longer be a policy bias against “sending money out of the country” per se. The Table below illustrates four respects in which the existing regime discriminates against offshore funds, as compared with UK authorised unit trusts and OEICs:-

  A B C D
Is there a charge to tax (as income) on accrued income on redemption?  Are underlying Capital Gains taxed as Income when investor realises? Are there investment restrictions which are a pre-condition to a less harsh tax treatment? What happens if fund ceases to be authorised/ qualifying after investor has realised but before the end of the next period of account?
1. UK Authorised Unit Trust/ OEIC No No Yes (imposed for investor protection reasons and enforced by the Regulator) No adverse impact
2. Offshore Fund Yes, qualifying funds only (Note 1) Yes, non qualifying funds only (Note 2) Yes, qualifying funds only, imposed for tax reasons (Note 3) Investor’s total gain, even if all the underlying gain is a capital gain, is subject to tax as income (Note 4)


  1. ICTA 1988 Section 758(3)
  2. The legislation does not distinguish between offshore income gains resulting from the “rolling –up” of income, on the one hand, and disposals by the fund of assets at a gain, on the other.
  3. ICTA 1988 Section 760(3).
  4. This is the effect of the words “which is or has at any material time been a non-qualifying offshore fund” in Section 757(1)(a). A “material time” is, broadly, any time within the investor’s period of ownership. The results can be striking; if an investor owns a holding of shares or units in a fund for 20 years, disposes of them a week into a period of account of the fund, and the fund fails the conditions for distributor status for that period of account, having qualified for the previous 20/21 periods, the investor’s whole gain is an offshore income gain, liable to tax as income.
Compliance with international obligations is dealt with further at 2.3.3-4 below.

(b). Any new regime should impose minimal compliance burdens, see 2.3.5-6 below.

(c). Any new regime should possess as few “rough edges” as possible, consistent with achievement of its objective, see 2.3.7 below.

(d) Any new regime should not venture into the territory of regulation and investor protection, see 2.3.8 below.

2.3.2 - Targeting – a suggested approach. It is suggested that the reform of taxation of Government and Corporate Debt, which post-dated the offshore funds regime by some 12 years, points the way to a simpler and fairer system. FA 1996 Schedule 10, which applies only to corporate investors, operates by identifying by reference to the composition of their portfolios the kinds of fund at which it is aimed. The effect of Schedule 10 is, in very brief terms, that the investor’s interest in the fund is equated for tax purposes to the main content of the portfolio (debt instruments), and the investor’s interest in the fund is taxed accordingly, on a “mark to market” basis. The kind of avoidance which prompted the creation of the existing offshore funds regime is therefore now impossible for companies, whether the new regime applies or not. (As an aside, it should be added that the overlap between the existing regime and the Schedule 10 rules creates confusion and uncertainty. Concern that there may be a double charge is probably unfounded. However, the effect of the introduction of the Corporate and Government Debt Rules without (until now) a re-appraisal of the offshore funds rules appears to mean that the Inland Revenue are be entitled to choose between a charge based on the existing offshore funds regime and one based on the Corporate and Government Debt rules2 . Such a choice is undesirable in a self-assessment environment, and tends to undermine the purpose of simplification which underlay the introduction of the Corporate and Government Debt rules, The then Financial Secretary stated in reply to a Parliamentary question on 17th November 1983 and again in Standing Committee A on 19th June 1984 3 that the then new offshore funds regime would not be confined to particular kinds of fund or to particular activities undertaken, despite the earlier part of the Financial Secretary’s statement 4 in Standing Committee, that it was non-distributing cash funds which had stimulated reform of the legislation. It is clear, however, from the relaxations introduced as the Finance Bill proceeded through Parliament that it was quite unrealistic to adhere to the original targeting approach focused exclusively on the legal relationship between the investor and the fund, to the exclusion of the portfolio. In any event that approach now appears obsolete in the light of FA 1996 Schedule 10, which targets by reference to portfolio. A modified version of Schedule 10 (modified so that the new regime applies in general to individual as well as corporate investors, and to funds which are corporate bodies as well as those which are unit trust schemes and other arrangements (see §4), with appropriate adjustments to the definition of “qualifying investments” in §9) is therefore recommended for consideration. To keep the compliance burden within reasonable limits, a modification to Schedule 10 §8(3) would be highly desirable.

2.3.3 - Any new regime should comply with the UK’s international obligations. The EU issues, including free movement of capital, freedom to provide services and state aid have already been mentioned at 2.3.1(a) above. In the present (limited) state of EU harmonisation, UK-based asset managers will most naturally tend to use UK authorised unit trusts/OEICs, Luxembourg fund managers, Luxembourg SICAVS or fonds communs de placement and so on.. If any new regime attaches tax disadvantages to UK residents who invest in funds managed in a non UK territory in the EU, interference with the non-UK fund manager’s freedom to provide services across the EU on the same terms 5 is likely to be present, and the possibility of an allegation of state aid in favour of UK based fund managers is manifest. Moreover, if the fund in question invests outside the UK there may also be an interference with free movement of capital. Any such challenge could only be resisted on the basis that the new regime is “justifiable”, within the narrow meaning of that concept that the ECJ has evolved, and the more restricted the regime (to cases of blatant tax avoidance), the greater the chances of success in resisting any challenge. It should be noted that a national tax measure is not justifiable simply because it protects the relevant member state’s tax base, as the ECJ has repeatedly emphasised; to be “justifiable” the provision must go further and promote “cohesion” of the Member State’s tax system. It should be added that the “realisations basis” on which offshore income gains are now taxed mitigates the discrimination to some extent and could be relied upon in the event of challenge under EU law. The realisations basis thus furnishes a pragmatic reason for not moving to a “mark to market” or similar basis. (The main argument in favour of a realisations basis is developed at 2.3.6 below).

2.3.4 - Besides the EU issues, further questions arise where the fund is resident in a country with which the UK has concluded a comprehensive Double Tax Treaty which follows the OECD model. Article 10(5) of that Model provides that the UK may not “subject [the fund]’s undistributed profits to a tax on [the fund’s] undistributed profits” even if the undistributed profits consist wholly or partly of profits or income arising in the UK. While many aspects of this provision, which appears to have originated from the League of Nations Model 6, are obscure, the charge under the existing regime does seem to be a tax on undistributed profits 7 and this aspect furnishes an additional argument for restricting the scope of any new regime to the minimum necessary to prevent objectionable forms of avoidance.

2.3.5 - Any new regime should impose minimal compliance burdens. It has to be remembered that the funds which formed the original stimulus for the existing regime were mainly based in the Channel Islands, where the distinction between income and capital receipts is familiar, as are UK accounting conventions and English is the language generally spoken (and written). Different conditions obtain elsewhere. Offshore funds may operate as far afield as Asia; the accounts may not be written in English and/or may be compiled by reference to accounting conventions unfamiliar in the UK, posing translation problems and a need to recast the accounts in connection with applications for distributor fund certification. This is a heavy compliance burden. The legislative intention, as it appears from the discussion in Standing Committee A in the summer of 1984, was to “shepherd” most offshore funds towards distributor status and this objective could readily have been achieved in the context of a limited number of funds operating in only a few territories (the Financial Secretary mentioned a total of about 200 funds8 ). Increasing globalisation of investment business makes the “shepherding” approach seem overambitious and maintenance of the existing regime to place an excessive burden on investors, their advisers and in many cases non-UK managers of offshore funds. By contrast a targeting approach based on that in FA 1996 Schedule 10 would merely require an examination of the fund’s portfolio, details of which will in many cases be obtainable, without extensive translation or recasting, from the fund’s accounts.

2.3.6 - A striking feature of the existing regime, and one which has given rise to the expression of a few qualms in the Consultative Document, is that the charge to tax as income, where it applies, is on a “realisations” basis. There seems to be no reason in principle why, for corporate investors (and again following the FA 1996 Schedule 10 model) the charge should not be on a mark-to-market or similar basis. For individual investors, however, there is a discernible general policy in UK tax legislation of taxing even income which has been “rolled-up” on a realisations basis. This is indeed the approach adopted following the review of taxation of Corporate and Government Debt, for zero coupon bonds and similar investments. There is, it is true, an apparent exception in cases to which ICTA 1988 Section 739 applies. However, no general policy principle ought to be extrapolated from that Section, because the approach underlying Section 739 is that of casting a wide net, and providing an escape clause, in favour of bona fide commercial transactions, for those inadvertently caught within it 9. It seems that at an early stage of the Government’s consideration of the offshore funds issue in the 1983 – 84 era, any attempt to use what is now Section 739 was abandoned10 , probably because the escape clause could successfully have been invoked by any investor in an offshore fund. To apply a mark-to-market or other non-realisations basis of charge to an individual investor would seem therefore to create structural disharmony within the tax legislation unless an escape clause were provided, and it would be exceedingly difficult to devise one which applied only to those forms of investment in offshore funds which are perceived as objectionable. Naturally any requirement for a mark-to-market or similar basis would increase the compliance requirement on individual taxpayers.

2.3.7 - Any new regime should possess as few “rough edges” as possible, consistent with achievement of its objective. The absence of rough edges is not only desirable in itself, but it will help in resisting any challenge based on EU law, by making it easier to show “proportionality” and therefore that the new regime is justified. Noticeable rough edges of the existing regime include:-

  • the conversion of a capital gain into an offshore income gain, taxable as income, if the fund has failed the distributor fund test for only one out of a number of periods of account during which an investor has held his shares or units
  • the taxation of accrued income forming part of the realisation price of shares/units (unparalleled elsewhere in the UK tax code save where ICTA 1988 Section 703, accompanied by the safeguard of a bona fide commercial escape clause, applies).
A new regime along the lines suggested above need contain no such rough edges. It is to be noted that the problem of changes in portfolio causing funds to enter and leave the FA 1996 Schedule 10 regime is addressed at Schedule 10 §5, demonstrating that there are possible solutions, and doubtless one could be found for any new regime.

2.3.8 - Any new regime should not venture into the territory of regulation and investor protection. A very considerable compliance burden results from the decision in 1984 to include the observance of investment restrictions as a pre-condition to distributor status. The original purpose of these restrictions was succinctly explained by the then Financial Secretary to the Treasury:-

“Many people have asked why investment restrictions are should exist at all. They are necessary to prevent income being rolled up into capital gain at one remove. If we did not have them, a fund could readily get round the new rules by putting its investors’ money into another fund or company which accumulated income on their behalf.”11
Despite this explanation, the complexity of the investment restrictions cannot but add to the regulatory burden, and it is doubtful, in the light of subsequent developments, that such complexities are required for tax reasons. In the Government and Corporate Debt legislation, the “roll-up at one remove” to which the Financial Secretary referred is addressed in much simpler terms by FA 1996 Schedule 10 §8(3).

2.4 - Conclusions

The conclusions which, I suggest, follow from the above are as follows:-

  • the existing offshore funds regime needs radical overhaul for three principal reasons. First, it was designed to deal with a limited number of offshore funds which prepared accounts in a UK style, whereas it has now become clear that there is a huge variety of offshore funds across the world with which the existing regime can only deal by creating discriminatory distortions and a substantial compliance burden. Secondly, following a comprehensive review in 1995/96, new legislation has been enacted12 which offers a more sophisticated and fairer technique for dealing with the form of avoidance through offshore funds which the existing offshore funds regime targeted, and which, in the case of corporate investors, introduces unacceptable overlap and confusion. Thirdly, the pace of development of EU law on the Community effects of national tax measures since 1984 has been swift and unremitting, and review of compliance of the UK tax rules on offshore funds, which appear in certain respects to discriminate in favour of UK based vehicles, is overdue
  • the need for anti-avoidance provisions to counter rollup of income through offshore fixed income and cash funds is manifest, but the need to secure compliance with the UK’s EU and other international obligations suggests that such anti-avoidance provisions should have as small a target area as possible
  • the new regime for corporate investors contained in FA 1996 Schedule 10 appears to be a helpful model.


No Subject-matter Response § in text above
5.1 No Change    
5.1.1a Should the current regime be retained? If so, why? A new and more precisely targeted regime should be fashioned, to prevent tax avoidance through offshore bond and cash rollup funds, assuming that such new regime would be compliant with EU law. 2.2
5.2 Repeal without repacement    
5.2.3a Should the current regime be abolished? If so, how can additional compliance burdens for investors be avoided? The current regime should be abolished but replaced by a new, slimmed down, set of rules. Compliance burdens on investors should be minimised by:-
  • more precise targeting (consequently fewer investors “in the net”)
  • targeting by reference to the fund’s portfolio, in a manner similar to FA 1996 Schedule 10 and
  • retaining, for individuals, the realisations basis of taxation.
2.3.2, 2.3.5 and 2.3.6
5.2.3b If the regime is abolished without replacement, how can the use of particular types of offshore fund to convert income into capital gains be avoided? By targeting cash or bond rollup funds and other specifically identified kinds of fund with significant avoidance potential. 2.3.2
5.3 Reform    
5.3.6 Self-assessment    
5.3.6a How can the current regime be improved to give investors greater certainty without affording special treatment to returns of offshore income or gains? By more precise targeting. This will mean that investors in offshore funds with an equity share or property portfolio or which carry on trading activities may enjoy certain advantages not enjoyed by investors in comparable UK authorised unit trusts/OEICs. This minor disparity in treatment is, it is suggested, a fair quid pro quo for the higher risks associated with these kinds of investment (leading in successful cases to higher returns to the Exchequer through the capital gains tax system) and the inevitable practical distinction between funds which are “on the Inland Revenue’s doorstep” and those which are not. The existing non-recognition of losses as income deductions for tax purposes should be addressed and rectified. 2.1.3, 2.3.2
5.3.7a Would making the application process for approval a part of the self-assessment regime be a welcome change? The kind of slimmed- down regime suggested would not, in the case of the vast majority of cases, involve approval as such, merely a determination of the Fund’s portfolio to establish whether or not it complied with some simple test of the kind contained in FA 1996 Schedule 10 §8.  All gains from disposals of shares or units would be taxed in a similar manner to offshore income gains now.  If the fund fully distributes its income there should in principle be no material gain to tax in the case of cash/bond funds, which should (it is suggested) be the sole target. 2.3.2
5.3.8 Investment Restrictions    
5.3.8a Should the rules be changed? If so, what changes should be made and how best could the interests of UK investors be protected? The rules should be changed, by simplification and concentration on the main object, of preventing tax avoidance. The existing rules go too far (and so create needless compliance difficulties) and are open to the criticism that the tax legislator is embarking on a regulatory mission, a purpose expressly disavowed when the existing regime was being formulated (Hansard Col 1218). It is unwise for regulatory activities (and the responsibility for mishaps, when these occur) to be divided between regulators (where the responsibility should properly rest) and the tax collecting authorities. 2.3.8
5.3.8b What safeguards would ensure that offshore funds were not put in a better position than their UK-based equivalents?  First, offshore funds and those who manage them in EU financial centres cannot be discriminated against without “justification”. If they are in a better position in consequence, that will have to be accepted. Secondly, if offshore funds are put in a better position from a regulatory point of view, it is for the regulator to address any investor protection concerns. 2.3.3, 2.3.4, 2.3.8
5.3.8c How far, and in what way, should the rules differentiate between regulated funds and funds that are unregulated (or practically so) in their home states? Not at all – the tax system should not be influenced by regulation.  
5.3.9 UK Equivalent Profits    
5.3.9a Which current UKEP provisions (if any) cause fund managers difficulty? Why are they difficult? The need to calculate UKEP is a burden which can and should be removed by more precise targeting and a simpler taxing system for those funds which are within the target area – see response to 5.3.7a above  
5.3.9b How could they be modified?  
5.3.10a What reliance could be placed on the financial accounts of a fund, instead of a UKEP calculation, so that it might be easier for fund managers to comply with the regime while continuing to safeguard the Exchequer?  
5.3.11 Umbrella fund structures etc.    
5.3.11a Should the rules be changed so that the distribution conditions for certification need only be satisfied at the sub-fund level? The suggested new regime would not depend on satisfaction of conditions as such , but it would be sensible for the more precise targeting recommended above to operate at sub-fund level. 2.3.2
5.3.12a Should the rules be changed to allow particular classes of interest within a single fund to qualify and others to be non-qualifying?
5.3.14 Regulatory impacts of change    
5.3.14a Are fund managers able to give some idea of the preferred rank order of any changes to the current regime that they would like to see? No response  
5.3.15 Treatment of investors in non-qualifying Funds As far as companies are concerned there are no problems in principle (nor, apparently in practice) with deeming income or the application of a mark to market basis. For individuals the position is rather different. Their cash flow problems are probably more acute, and there is a discenible general policy, most recently confirmed by FA 1996 Schedule 13, of taxing them on a realisations basis.

The realisations basis should therefore be retained for individuals.

If the scope of any new regime is suitably curtailed as suggested above, the cash flow cost to the Exchequer arising from a realisations basis should be small.

A criticism that can be made of the existing regime is that it “starts from the wrong end”, by applying UKEP rules to identify income, comparing that with distributions and so, in a sense, defining the true capital gain in the taxpayer’s total return over the life of his investment by default. An approach which may have merit is to permit investors who are caught because their fund is within the new, narrow, target area to demonstrate (at the simplest level, by reference to fund portfolio valuations adjusted to exclude accrued income) how much of their return is attributable to capital gains accrued to the fund during their period of ownership, and deduct that amount from the offshore income gain. The number of funds and investors concerned may be small enough to allow this to be done on a case by case basis, but it might be sensible to allow funds to submit their own statements of capital gain per share/unit for each period of account.


5.4.4 Deeming of taxpayers' income
5.4.4a Are there problems in principle or in practice with deeming of taxpayers’ income from investments in offshore funds regardless of whether the income has actually been received?
5.3.17a Given the current difficulties we perceive with deferral of tax liabilities, what scope is there for investments in non-qualifying funds to be taxed on some form of a mark to market basis?
5.3.17b Are there any alternatives which would address these difficulties?
5.4.4 Deeming of taxpayers' income
5.4.5 Calculation of taxpayers' income
5.4.5a Can or should the current UKEP rules be adapted for the purpose of establishing annual income arising from the fund?
5.4.6a What reliance could be placed on the financial accounts of a fund, instead of a UKEP calculation, so that it might be easier for fund managers to comply with a new regime while continuing to safeguard the Exchequer?
5.4.10 Differentials in the tax treatment of investors  
5.4.10a Given the current difficulties we perceive with deferral of tax liabilities, what scope is there for investment in funds that are non-information providers to be taxed on some form of mark to market basis.
5.4.10b Are there alternatives which likewise would address these difficulties? 
5.4.11a How might a new regime be “incentivised” for investors?
5.4 Replacement    
5.4.2a What are the merits and practicalities of imitating the tax rules for UK authorised funds by adopting a parallel approach to investment in offshore funds and inviting those funds to join a similar form of information-providing regime?  The assumption seems to be that the tax treatment of UK authorised funds is somehow “more correct” than other approaches. Such an assertion needs to be verified. At a practical level, the regime for UK authorised funds depends critically on high quality accounting information. This may not be available for many offshore funds.  
5.4.7 Beneficial owners/nominees     
5.4.7a Where the beneficial owner is represented by a nominee, what particular practicalities are involved that would need to be taken account of if we were to link elements of the tax treatment to the information obligations of the fund? It is not entirely clear why the fund manager needs to know the identity of the beneficial owner of shares/units.  
5.4.8 Revenue clearance of information-providing funds       
5.4.8a If the Revenue were able to confirm a fund as an “information-provider”, what would the clearance process entail and what assurances could be given? Consistently with the response to 5.3.15 above, the scope for information providing funds would be limited to that (likely small) number of funds within the target scope which have UK investors, and the information would merely be such as to enable an accurate figure for accruing capital gains to be calculated reliably.  
5.4.12 Regulatory impacts of change    
5.4.13a Are there any general or specific points that can be made about the regulatory impacts of a replacement, information-providing regime? By limiting the number of types of fund within the regime, and the “information” to that necessary to allow underlying accrued capital gains to be calculated, the cost can be kept low.  
5.4.13b Is it possible to make any estimates of the costs and benefits to fund managers of change to an information-providing regime? A restriction of the scope of the new regime and of the information should result in the new regime being financially attractive to fund managers.  
5.4.13c What kind of transitional period would be necessary if a new regime were implemented? None, though it would probably be fair to allow investors in any funds which currently have distributor status but which will come within the target area of the new regime sufficient time to make a realisation.  


The definition of “material interest in an offshore fund” at ICTA 1988 Section 759(1) has proved to be too wide in two respects:-

The definition includes interests in partnerships and this appears to have been unnecessary (see Inspector’s Manual at §4080); and

The definition also includes so-called Baker trusts (those where the beneficiary has a proprietary right to the underlying income) – see Inspector’s Manual at §4082.

No doubt advantage will be taken of reforms resulting from the Consultation to modify the definition accordingly.

1. As a capital gain, assuming that no income is distributed in the meantime by way of dividend.
2. As the decision of the House of Lords in Liverpool and London and Globe Insurance Co v Bennett (1913) 6 TC 327 suggests.
3. Hansard, Col 1179
4. Hansard, Cols 1177 – 8
5. See the ECJ case of Safir (Case C118-96).
6. And therefore to date from some time before 1946.
7. The charge will, on a literal reading, infringe the Article even if it is placed on the shareholder/investor rather than the company/fund.
8. Hansard, column 1185
9. ICTA 1988 Section 741
10. Hansard, Col 1178
11. Hansard, Column 1214
12. FA 1996 Schedule 10.

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Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.