IFM13340 - Offshore Funds: participants in offshore funds: participants within the charge to income tax: reporting funds that become non-reporting funds: deemed disposal election

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 IFM13330), 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. The result would be 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 continues as 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 non-reporting 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 capital gains tax (CGT) or 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 accruing 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

Investors within the charge to income tax must make an election in a return made for the tax year which includes the deemed disposal date.