IFM13254 - Offshore Funds: participants in offshore funds: participants within the charge to corporation tax: income and distributions from non-reporting funds: transparent funds

Income: UK tax treatment of investors

For UK tax purposes the income of an income-transparent fund is treated as arising directly to its investors. UK investors are charged to tax on income arising net of a deduction for proper expenses of the management of the fund in question, and this is the case for both unit trusts and contractual arrangements. For example, if a fund receives interest income then UK investors are charged to tax on their proportionate share of that income as it arises, irrespective of whether or not it is actually distributed to them. Investors may receive reports from the fund to tell them what proportion of the fund’s income they are entitled to, and the split between interest, dividends or property income. Investors should ask for this information if they do not receive it routinely from their fund manager, to enable them to complete their tax returns accurately.

The expenses that are deductible in calculating the reportable income of a transparent reporting fund are the same as those in calculating the reportable income of a non-transparent fund. A deduction is allowable for the proper expenses of management of the fund. Where the expense is a general expense, it should be treated as such and may be deducted in whatever order is preferred, usually against interest income before dividend income. Where the expense is specific, it should be deducted in arriving at the figure of net income from the particular source.

Transparent non-reporting funds with interests in reporting funds (regulation 16 of SI 2009/3001)

There is a further point to consider with regard to transparent non-reporting funds that hold interests in reporting funds. That is, where the underlying reporting fund does not distribute all of its ‘reportable income’ (see IFM12500 and IFM13000 onwards) then the excess would, if a UK investor held a direct interest in the fund, be treated as income (regulation 94). To ensure that this principle is maintained, regulation 16 provides that where the interest is held by a non-reporting fund which is transparent for income purposes, then the reportable excess will be similarly treated as additional income in proportion to each investor’s rights.

Transparent non-reporting funds with interests in non-reporting funds (regulation 29)

If an transparent offshore fund holds 5% or less by value of its gross assets in non-reporting funds then, provided that this was the case throughout the period that a UK investor held their interest in the investing fund, an offshore income gain (OIG) will not arise on disposal of that interest even if that fund is a non-reporting fund. Where the transparent fund holds interests in other non-reporting funds that themselves would not give rise to a charge to tax under regulation 17 then such interests are not counted towards the 5% limit. Where the 5% limit is exceeded during the period that the investor held their interest in the transparent fund any gain on disposal will be an OIG.

UK investors are responsible for obtaining information relating to whether or not the 5% limit has been exceeded for a particular period of account, but it is expected that funds marketed to UK investors would make this information available as a matter of routine.