Offshore Funds Taxation
Overview
Offshore funds are based outside the UK – usually in low tax areas, for example The Channel Islands, Isle of Man, Luxembourg and Dublin. The funds are collective investment vehicles structured like an OEIC.
The two types of Offshore Funds and their taxation
Reporting funds
- Dividends & interest are treated in the same way as UK based Funds
- Capital Gains is subject to the normal CGT rules
- If it holds more than 60% of assets in interest bearing securities any distribution will be treated as a payment of interest
- It does not have to distribute all of the income earnt, but must declare it to HMRC
- A UK investor will be taxed on their share of the income even if they don’t receive the payments
Non-reporting funds
- Usually roll up funds meaning no income is paid out to the investor
- The gain is calculated in the normal way but it is taxed at income tax rates rather than CGT rates (this is the main difference between non reporting funds and their reporting counterparts).
Questions - Use Your Note Taker To Jot Down Ideas / Calculations
1. What ADDITIONAL reporting is a reporting fund obliged to make compared to a non-reporting fund?
a) Only interest bearing income must be reported to HM Revenue and Customs.
b) All income must be reported to the FCA.
c) Only dividend income must be reported to HM Revenue and Customs.
d) All income must be reported to HM Revenue and Customs.
B)
Reporting funds do not have to distribute all of their income to investors, however they are
required to report all income to HMRC.
2. Lance and Richard are both UK residents and higher rate taxpayers. They have both realised a gain of
£15,000. Lance’s is from his reporting offshore fund and Richard’s is from his non-reporting offshore
fund. Assuming they have both fully utilised their CGT exemption and their personal savings
allowance in the 2017/18 tax year, their tax liabilities will result in:
a) Richard paying £3,000 more than Lance.
b) Lance paying £1,800 more than Richard.
c) Lance paying £3,000 more than Richard.
d) Richard paying £1,800 more than Lance.
A)
Both are higher rate tax payers but one is invested in a reporting fund and one is invested in a non-
reporting fund. For a reporting fund gains will be taxed at CGT rates – so the gain of £15,000 for
Lance is taxed at 20% giving a tax payable of £3,000. For a non-reporting fund gains will be taxed at
income tax rates – so the gain of £15,000 for Richard will be taxed at 40% giving a tax payable of
£6,000 – which is £3,000 more than the tax that Lance is paying.
3. Louis has invested in an offshore reporting fund. It is TRUE to say that:
a) the fund must distribute all of its profits.
b) capital profits are potentially subject to capital gains tax.
c) capital profits are potentially subject to income tax.
d) income is always distributed net of 20% tax.
B)
Reporting vs. Non reporting funds. Reporting funds have their capital profits charged at CGT rates,
whereas non-reporting funds have capital profits charged at income tax rates.
4. Freddie, a higher rate tax payer, firmly believes he will be a basic rate tax payer when he needs to
realise any investments. If he is looking to invest offshore, which of these options is MOST likely to
be appropriate for him?
a) Index fund.
b) Non-reporting fund.
c) Distributor fund.
d) Reporting fund.
B)
The non-reporting fund is most appropriate as he would not have to tax during the term of
investment – only on encashment. If invested in a reporting fund income tax would be paid on
income from the fund regardless of whether it is paid out. On encashment Ben would pay 20% tax as
he would then be a basic rate tax payer – he would benefit from the roll up over the term.
- Further study text reading: Pages 213-217