IFM03510 - Tax treatment of investors in Funds Investing in Non-Reporting Offshore Funds (FINROF): investors within the charge to corporation tax

Basic position

If an investor within the charge to corporation tax (CT) disposes of units in an authorised investment fund (AIF) which was a FINROF during at least some of the period the investor has owned the units, then the basic position is:

  • Any gain on disposal of the units is an income gain;
  • The income gain is treated as income for all tax purposes; and
  • The gain is not calculated with reference to corporation tax and indexation allowance is not available.

See in particular regulations 85M, 85N, 85Z and 85Z1 of SI 2006/964. The basic position is subject to the following.

Exceptions

  • The basic charge does not apply if the investor is a corporate investor who is required to treat units in a FINROF as a loan relationship or a derivative contract – parts 6 and 7 of the Corporation Tax Act 2009 apply instead. See regulation 85Q.
  • The basic charge does not apply if units in a FINROF are held as trading stock and any disposal taken into account in computing profits of a trade. See regulation 85R.
  • The basic charge does not apply to units which form part of an insurance company’s long-term fund. See regulation 85S.
  • Charitable companies and trusts are exempt from the basic charge if the gain is applied for charitable purposes. See regulation 85T.

Investor elections when an AIF enters the FINROF regime

When an AIF enters the FINROF regime, regulation 85L permits investors to elect to be treated as if they had both disposed of their units in the AIF and reacquired them on the day the AIF entered the FINROF regime.

The effect of the election is to crystallise any gain at the date the AIF entered the FINROF regime which is a chargeable gain, not an income gain. As a result, only later gains accruing when the AIF is a FINROF would be income gains.

Such an election must be notified to HMRC along with the relevant tax return for the accounting period which included the date the AIF entered the FINROF regime.

Investor elections when an AIF leaves the FINROF regime

Similarly, when an AIF leaves the FINROF regime, regulation 85Z11 permits an investor to elect to be treated as if it had both disposed of his units in the AIF and reacquired them on the day the AIF left the FINROF regime. The election cannot be made unless the gain is greater than zero.

The effect of the election is to crystallise any gain at the date the AIF left the FINROF regime which is treated as an income gain. As a result, gains accruing after that date are chargeable gains.

Such an election must be notified to HMRC along with the relevant tax return for the accounting period which included the date the AIF left the FINROF regime.