IFM13240 - Offshore Funds: participants in offshore funds: participants within the charge to corporation tax: deemed disposals – reporting funds that become non-reporting funds

Regulation 100 of SI 2009/3001

When a UK investor disposes of an interest in an offshore fund, an offshore income gain (‘OIG’) will arise unless the fund has been a reporting fund throughout the period that the interest was held (see IFM13290), subject only to any transitional provisions that may apply (see IFM12900 onwards).

This would mean that, without any further provision, an investor might hold an interest in a particular fund for many years only for that fund not to qualify for reporting fund status for a particular period, or periods, just before the investor wishes to dispose of the holding, with the result that the disposal would then give rise to an OIG. Regulation 100 therefore applies where an offshore fund ceases to be a reporting fund and becomes a non-reporting fund. It provides that an investor in the fund may make an election to be treated for the purposes of TCGA 1992 as -

• disposing of an interest in the reporting fund at the end of the fund’s final period of account as a reporting fund, and
• acquiring an interest in the (now) non-reporting fund at the beginning of the fund’s first period of account.

By making such a deemed disposal election, the investor will be treated as making a disposal of their interest in a reporting fund and acquiring an interest in a non-reporting fund. Any gain or loss arising on the deemed disposal will be subject to the normal rules applying to corporation tax on chargeable gains (see the Capital Gains Manual). Any subsequent disposal of the interest in the now non-reporting fund will be subject to an OIG on any further gains accrued from the deemed date of disposal and reacquisition.

An election can only be made if a report has been made available to the investor under regulation 90 for the reporting fund’s final period of account.

If such an election is made then the deemed disposal is treated as being made for a consideration equal to the net asset value of the investor’s interest in the fund at the end of the last period of account for which the fund was a reporting fund. The acquisition in the now non-reporting fund is treated as made for the same amount.

Form of election

For investors within the charge to corporation tax, an election must be included in the company’s tax return for the accounting period which includes the deemed disposal date.