Offshore funds

The UK’s offshore funds rules charge 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 is 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 to its investors. Investors then enter that reported income on their tax returns. In exchange for income reporting and investors paying income tax on that income during the life of the fund, any gain on a disposal of the investor’s holding is then permitted to be taxed as capital.

It is worth noting, by way of background, that the UK’s offshore funds rules were significantly overhauled in 2009. Up until 2009, the definition