Offshore funds

The UK’s offshore funds regime charges realisations of interests in offshore funds to tax as income rather than as chargeable gains, unless the offshore fund is accepted into and complies with the requirements of the reporting fund regime.

The purpose behind the UK’s offshore funds tax legislation has always been the prevention of UK tax avoidance by using offshore fund vehicles to roll up income and thereby convert income flows (generally taxed at higher rates) into capital gains (generally taxed at lower rates). The rules therefore seek to tax gains realised by UK investors in offshore funds as income returns (termed ‘offshore income gains’) rather than as capital returns, unless the offshore fund ‘reports’ income that has been retained by the fund (ie rolled up in the fund) to its investors. Investors then enter that reported income on their tax returns. In exchange for income reporting and investors paying income tax on the income arising during the life of the fund, any gain on a disposal of the investor’s investment is then permitted to be taxed as capital.

By way of background, one should be aware that