IFM13324 - Offshore Funds: participants in offshore funds: participants within the charge to income tax: reporting funds: income and distributions: tax transparent funds

Regulation 97 – transparent offshore funds of SI 2009/3001

Arrangements that fall within the definition of an offshore fund and are transparent for income purposes but not transparent for capital gains purposes include, for example, so called ‘Baker’ unit trusts (following the case of Archer-Shee v. Baker, 11TC749) and certain foreign contractual arrangements (such as Fonds Commun de Placement (‘FCPs’)).

Income: UK tax treatment of investors

No matter what the legal form of a transparent reporting fund, 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 should receive a “voucher” or other report from the fund to tell them what proportion of the fund’s income they are entitled to, and the split between interest, dividends, property income, etc. Investors should ask their fund manager for such a voucher or report if they do not receive one.

If a transparent reporting fund holds investments in other reporting funds then investors are also taxable on their proportionate share of any income reported but not actually distributed by the underlying fund (regulation 94(2)). This will become part of the excess to be reported by the transparent reporting fund. Such excess reported income is charged to tax as miscellaneous foreign income under Chapter 8 of Part 5 ITTOIA 2005 (regulation 97(2)), and it is chargeable at investors’ highest marginal tax rate.