The reporting fund regime allows UK investors to obtain capital gains tax (CGT) treatment when disposing of investments in offshore funds. For top rate income tax payers, this can lead to a reduction in tax rates on disposals from 50% to 28%. This preferential tax treatment may improve the marketability of offshore investments to UK investors.
UK offshore fund rules
UK offshore fund rules are designed to prevent UK investors avoiding income tax by accumulating income tax-free offshore. Without these rules, investors would pay tax at the more favourable CGT rates when the income is realised on disposal of their investment.
When do they apply?
The rules will typically apply to non-UK open-ended arrangements or collective investment vehicles that allow investors to redeem their interest by reference to net asset value (NAV).
Benefits of reporting fund status
Gains made by individuals on disposal of investments in offshore funds that have reporting fund status are subject to CGT rather than income tax. For those that pay tax at the top rate, this can mean a headline tax rate on disposal of 28% (or 0% if covered by the CGT annual exemption) rather than 50%, significantly improving an investor's overall return. It was announced in the March 2012 Budget that the top rate of income tax will fall to 45% (an effective 30.6% on net dividend income) from 6 April 2013.
In exchange for providing the preferential CGT treatment on disposal, HMRC requires that investors pay income tax annually on their share of the income earned by the fund, whether or not physically paid out by the fund. This means both distributing and accumulation funds may apply for reporting fund status.
Applying for reporting fund status
An application for reporting fund status is made by the fund itself. Having made an initial application to join the regime, the fund is required to make annual filings with HMRC. This annual filing principally comprises a calculation of the income earned by the fund during the period, calculated in accordance with relevant tax legislation.
The results of this calculation must also be made available to UK investors, in a format prescribed by HMRC. UK investors then use this information when preparing their personal tax returns.
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.