IFM02250 - Authorised investment funds (AIFs): Interests in non-reporting offshore funds

Introduction

There are special rules to prevent investors rolling up income in offshore funds and converting it to a chargeable gain on disposal of units in a fund – see IFM12000. When an investor disposes of units in an offshore fund which does not make a report to investors about income arising to them, and does not report to HMRC – a “non-reporting offshore fund” (NROSF) – the gain arising on disposal is an offshore income gain (OIG), not a chargeable gain. OIGs are taxable as income.

When an AIF has invested in a NROSF and disposes of its units, there are special rules on whether the AIF has made an OIG or a chargeable gain.

AIFs which determine and distribute income arising in a NROSF – regulation 14ZA and 14ZC of SI 2006/964

The disposal by an AIF in a NROSF will not give rise to an OIG (regulation 14ZB) if the following conditions are met:

  1. The AIF has access to the accounts of the NROSF;
  2. The AIF had sufficient information about the NROSF to enable it to compute reportable income;
  3. The AIF has prepared a computation of reportable income; and
  4. The amount of the excess of reportable income over amounts distributed by the NROSF have been included in the amounts available for distribution to the AIF’s investors.

AIFs which begin to meet the four conditions in regulation 14ZA

Regulation 14ZC applies where an AIF did not meet these four conditions throughout the whole period it owned its interest in the NROSF. If the AIF began to meet all four conditions from a date on or after 6 March 2011, that is known as the “deemed date”. The AIF is treated as having both disposed of its interest in the NROSF and reacquired it on the deemed date, provided the AIF notifies HMRC on its tax return that a deemed date has occurred.

The effect is that an OIG is crystallised on the deemed date, meaning that the gain accruing to the AIF is taxed as income for the appropriate period. Gains accruing after the deemed date are taxed as chargeable gains.

AIFs which are index tracking funds investing in NROSF - regulation 14ZD

Regulation 14ZD applies to AIFs which are index tracking funds and which have invested in NROSFs. If certain conditions are met throughout the period the AIF owns an interest in the NROSF, gains on disposal of units in the NROSF are treated as chargeable gains, not OIGs. The conditions are:

  1. The aim of an AIF’s investment policy is to replicate the performance of a “qualifying index”;
  2. The main purpose of the investment in the NROSF is to represent the composition of the qualifying index; and
  3. The AIFs income and capital returns replicate as closely as possible the returns from the investments comprising the qualifying index.

A “qualifying index” must meet three conditions:

  • The index is based on the value of securities listed on a recognised stock exchange or traded on a regulated market;
  • The Financial Conduct Authority (or overseas equivalent) must recognise the index on the basis that it is diverse, represents an adequate benchmark of the market and is published so as to make it widely available; and

The index is calculated and published by a body which is independent of the AIF and its manager.