The reporting fund regime allows UK investors to obtain capital
gains tax 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 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% (30.6% for
dividend income) from 6 April 2013. The table below shows the
comparison for a top rate taxpayer making a disposal prior to 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.
Specific Questions relating to this article should be addressed directly to the author.
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