UK: Reporting Fund Status

The offshore funds rules were originally enacted at a time, as now, when there was a substantial difference between the rates of income tax and capital gains tax, to prevent investors in offshore vehicles from converting income accumulated within the offshore vehicle into capital on the disposal of that interest. The offshore funds rules therefore provide that gains made on the disposal of an interest in an offshore fund are subject to income tax, rather than capital gains tax. The effect of this is to increase the tax payable on gains realised by the investor from 18% to 40% (potentially 50% from 6 April 2010) substantially reducing his net profit. The exception to this is for "distributor status funds", those which distribute their income to investors on an annual basis - the income is taxed annually and the gain made on disposal is subject to capital gains tax treatment.

The government has signalled its intention to change the regime, in order to provide greater certainty to investors, simplify the rules and achieve parity with UK investors in UK authorised funds. The government has also taken the opportunity to widen the scope of the offshore fund definition, to catch a greater number of arrangements. The government has issued a number of consultation documents concerning the changes it intends to make to the offshore funds regime. In summary, it is intended to:

  • Amend the definition of an offshore fund, so that it no longer relies on the definition contained in FSMA 2000. The effect of this is that the definition has been widened so that it may catch arrangements not previously within the definition of an offshore fund, most particularly closed-ended companies and contractual arrangements such as derivatives; and
  • Change the distributor status regime to a reporting status regime, so that funds do not need to physically distribute income in order to benefit from capital gains tax treatment, although investors will be taxed as if they had received the distribution. Transitional rules have been proposed for investors currently holding offshore funds, with or without distributor status.

Under the current definition many offshore structures - such as closed-ended companies or structures where the investor is tied in for a fixed period of seven or more years - fall outside the definition of an offshore fund even if they are, in practice, administered in a similar way to other offshore vehicles which are caught.

The new rules are designed to catch many of the vehicles which were structured to fall outside of the existing definition. Under the new rules an offshore fund means

  • a mutual fund constituted by a body corporate resident outside the UK or
  • a mutual fund under which property is held on trust for participants by non-UK resident trustees or
  • any other arrangements creating rights in the nature of co-ownership where the persons managing the property are resident outside the UK or the arrangements take effect by virtue of the law of a territory outside the UK.

A mutual fund broadly is one which meets conditions A to C.

  • Condition A is that the purpose or effect of the arrangements is to enable participants to participate in the acquisition, holding, management or disposal of property or receive profits or income arising from the acquisition, holding, management or disposal of property. This is very similar to one of the limbs of the current definition of a collective investment scheme.
  • Condition B is that the participants do not have day to day control of the management of the property. Again, this is similar to the current definition of a collective investment scheme.
  • Condition C is that reasonable investors would expect to be able to realise an investment on a basis calculated entirely or almost entirely by reference to net asset value or an index of any description. This is different to the current definition in a number of important respects. Arrangements will not be a mutual fund for the purposes of condition C if a reasonable investor would expect to be able to realise net asset value only on a winding up, dissolution or termination provided that there are no arrangements in place for the fund to wound up by the end of a specified period or there are such arrangements but none of the assets held by the fund are income producing assets.

A broadening of the offshore fund definition?

It appears that the new definition of an offshore fund has led to a subtle broadening of its terms. The current requirement that an investor must hold a "material interest" in an offshore fund has been removed. This rule stated that an investor only held a material interest if it could reasonably be expected at the time that he acquired his interest he would be able to realise the value of his interest by surrender, transfer or otherwise over the next seven years. The reason this has been removed is to remove the disparity between investors in the same fund who acquired their interests at different times.

At present, closed ended companies are generally excluded from the definition, on the basis that the only companies which are collective investment schemes for the purposes of the FSMA definition are open-ended companies. However, although the consultation paper states that very few closed ended companies are intended to be caught by the legislation and that this will only be the case where they mimic open-ended companies, the new legislation represents a widening of the net. As set out above, where an investor only receives NAV on liquidation (which will be the case for a closed-ended company) and that fund is designed to wind up on a set date, they will only be outside the offshore funds rules if they invest in assets which are not income producing assets. This could be problematic for funds which are structured as limited life companies for commercial reasons (these types of funds automatically terminate after a set period so that there are no difficulties with the management receiving their carry).

Contractual arrangements

In addition, the guidance states that contractual arrangements that are considered to be neither bodies corporate nor tax transparent will be treated as open-ended bodies corporate. There is a concern that this would catch contractual arrangements such as derivatives and structured notes, since they will also meet conditions A to C.

Particular investment vehicles

The government has confirmed that tax transparent vehicles such as limited partnerships are outside the current offshore funds definition under general principles of taxation, since investors are subject to tax on income and gains as they arise. They will therefore also be outside the new offshore funds definition.

The December 2008 consultation document also refers to arrangements which are transparent for income tax purposes but not for capital gains tax purposes - this would include a Baker trust, a fund vehicle which is sometimes used for the holding of real estate.

Umbrella funds will not themselves be offshore funds. Each separate fund within an umbrella fund structure may be an offshore fund. Individual cells within a protected cell company may also be an offshore fund, as under the current rules.

The consultation document confirms that arrangements which are equivalent to UK-REITS will be outside the definition of an offshore fund, although an arrangement which is equivalent to a UK Property Authorised Investment Fund will be within the new definition.

At present, exchange traded funds (ETFs) are usually treated as offshore funds, as investors are able to realise close to net asset value from them on an exit. The consultation document states that it is intended that most ETFs will be offshore funds for the purposes of the new definition. However, if a listed arrangement results in the share value reflecting almost entirely the net asset value of the underlying assets due to commercial factors or market trends, rather than a pre-planned arrangement, this will not be within the definition of an offshore fund.

Insurance policies will remain excluded from the definition of an offshore fund and will still be subject to income tax under ITTOIA 2005.

Transitional provisions

Investors who currently hold investments which are outside the current offshore funds definition but which will be brought into the rules by the new definition will be subject to grandfathering provisions, so that any investments made before 1 October 2009 remain outside the new offshore funds rules. Investments made after 1 October 2009 will be subject to the revised definition
The government will ensure that the transitional rules are not abused.

Applying for reporting fund status

An offshore fund will be able to apply for approval in advance of the fund's first accounting period and HMRC will be able to give clearance that it meets the conditions for the regime. Reporting fund status will continue unless the fund no longer wishes to qualify or no longer meets the conditions. The fund will need to submit its accounts to HMRC annually for them to be audited.


Reporting Funds status maybe helpful to those funds whose strategies are not compatible with a policy of making regular distributions. However, it does mean the investors will need to balance the more favourable 18% capital gains tax rate on realisations against the "dry tax charge" on income.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

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.