The UK tax authority, Her Majesty’s Revenue and Customs (HMRC) has issued its new Offshore Funds Practice Manual. This sets out official guidance as to which funds will be treated as “offshore funds” for UK tax purposes and details of HMRC’s approach as to how offshore funds will be treated. The redemption or sale of an interest in an offshore fund by a UK investor is treated as income, rather than as a capital disposal. This means that, for example, UK personal investors would be charged income tax (at rates of up to 50%) rather than capital gains tax (at a flat rate of 18%) on a redemption or sale of their interest in the fund.
The most significant changes are that:
- A fund will be able to avoid being treated as an offshore fund for tax purposes if it becomes a “reporting fund”. A “reporting fund” will be obliged to report all of its income to HMRC, and any UK investors will be taxed on their share of that income, regardless of whether or not they have actually received this income. Previously, a fund needed to actually distribute at least 85% of its income to investors in order to avoid offshore fund treatment.
- There are significant changes to the definition of an offshore fund. A fund need no longer be a “collective investment scheme” within the UK Financial Services and Markets Act. Instead, subject to certain exceptions, it will be treated as an offshore fund if it has certain characteristics. These are that (i) the fund is not a UK tax resident; (ii) the fund enables investors to take part in any benefit arising from the acquisition, holding, management or disposal of assets; (iii) the investors do not have day-to-day control of the management of the assets; and (iv) a reasonable investor would expect to be able to realize his investment based entirely or almost entirely by reference to the net asset value of the assets under management or to any index.
The new Offshore Funds Practice Manual sets out in some detail how HMRC intends to apply these new rules.