IFM13412 - Offshore Funds: participants in offshore funds: the charge to tax on disposal of an interest in a non-reporting fund: the charge to tax

Regulation 17 of SI 2009/3001

Offshore income gains

There is a charge to tax on an offshore income gain (‘OIG’) (regulation 17) when a person disposes of an interest in either:

• a non-reporting offshore fund, or
• an offshore fund that has, at some point while the interest has been held, been a non-reporting fund (but see under “reporting funds that were previously non-reporting funds” below). This also applies to interests acquired under a share exchange or reorganisation, to which s135 or s136 TCGA 1992 applied, and applies from the date of the original acquisition of the interest or from 1 January 1984, whichever is later.

An offshore income gain is treated for tax purposes as income arising at the time of the disposal and is taxable at the appropriate marginal rate for income on the person making (or treated as making) the disposal (regulation 18). There is also a charge to tax when a participant makes an election under regulation 48 to crystallise an offshore income gain (see IFM13270 and IFM13370).

For disposals made on or after 12 August 2014, where the asset was acquired on the vesting of variable remuneration represented by profit under section 836I ITTOIA 2005 (allocation of profit to the AIFM (Alternative Investment Fund Managers) firm), the date on which the variable remuneration was awarded is treated as the date on which consideration was given for the acquisition of the asset.

Reporting funds that were previously non-reporting funds

Where there is a disposal of an interest in a reporting fund which has previously been a non-reporting fund then in some circumstances there will be no charge to tax on an OIG. These are:

• where an election to crystallise an offshore income gain was made by the participant at the time the fund became a reporting fund (regulation 48(2) - see IFM13270 and IFM13370).
• where, at the time the fund became a reporting fund, the market value of the participant’s interest was such that no election to crystallise an offshore income gain was possible because the resulting offshore income gain would not have been greater than zero (regulation 48(5) - see IFM13270 and IFM13370).

Changes of rights

If a change in the terms of a scheme result in it coming within the definition of an offshore fund then UK investors are treated as if they held an interest in an offshore fund from the date of change in the terms of the scheme.

Where such a date of change in the terms of the scheme is effective from the start of a period of account, and the fund becomes a reporting fund from that date, then any subsequent gain realised by investors will be subject to capital gains treatment.

Otherwise, the fund becomes a non-reporting fund from the date of change in the terms of the scheme. The result is that any gain realised after this point will be an offshore income gain. If the fund later becomes a reporting fund, investors may then be able to make an election under regulation 48(2) to crystallise any offshore income gain at that point, and any subsequent gain will be subject to chargeable gains treatment (provided the fund remains a reporting fund). See IFM13270 and IFM13370 for further guidance regarding the election.