UK

If a non-UK fund has, or is looking for, UK investors, you should consider the impact of the UK’s offshore fund tax regime. Registering the fund under the ’reporting fund regime’ with the UK tax authorities often seen as beneficial and may provide an incentive for UK investors to invest in the fund.

Reporting Fund Status regime

The reporting fund regime - attractiveness to UK investors

A non-UK fund (‘offshore fund’) can apply to HMRC for reporting fund status. As a result, on the disposal of an investment a UK individual would be taxed at capital gains tax rates on all growth in value up to 20% rather than the default income tax rates of up to 45%.

While obtaining reporting fund status may not be appropriate for all offshore funds with UK investors depending on the investor profile of the fund, by electing into this regime an offshore fund will generally be more attractive to UK investors. The decision is optional, but by not electing in, a fund may limit the number of UK investors wanting to invest.

Reporting fund status overview

Without reporting fund status, the default position is that an investor in an offshore fund will pay income tax at up to 45% on any realised gains.

If the offshore fund has elected into the reporting fund regime, realised gains will instead be subject to capital gains tax rates, currently at a maximum of 20%. In order to qualify for this rate, an investor will also be subject to tax on his share of the fund’s annual income. Each year, the fund must calculate the excess reportable income per share net of qualifying expenses and any dividends paid. The investor must pay tax on any dividends received subject to whether or not the fund classifies as a bond fund, and subject to dividends being classified as interest, together with this annual ‘excess reportable income’. The investor would pay tax at the income tax rates on these annual amounts, though it should be noted that the investor could be paying UK tax on excess reportable income, when he has not necessarily received any cash from the fund (this is a dry tax charge). Over the lifetime of the fund, the investor would usually expect to incur low annual tax charges, with considerable savings on tax when any gain is realised.

What does an offshore fund need to do?

1. Initial application to HMRC
   
   The one-off application normally needs to be submitted before the end of the accounting period for which the fund intends to be a reporting fund, or within three months of shares being made available to UK investors, if later. The fund can apply for particular share classes or particular sub funds to become reporting funds rather than the whole fund.
   
   
2. Annual reporting
   
   Following the initial application, the fund is required to provide HMRC and its investors with a calculation of the excess reportable income per share class, alongside various other information and supporting documents (see the FAQs section below for more information). This is due within six months of each accounting period end.

What are the differences between a reporting and a non-reporting fund?

How can we help

We can provide the following services:

• advice on the UK offshore fund rules and UK reporting fund regime, generally including a review or an illustration of indicative tax savings for your UK investors;
• a review of the prospectus of the fund from a UK reporting fund perspective and suggested changes to it;
• advice on and the preparation of initial applications to enter the UK reporting fund regime;
• advice on, preparation of and support in relation to annual excess reportable income calculations reports to investors and relevant disclosures to the UK tax authorities;
• advice on the impact of changes such as introducing new share classes, conversions and mergers, together with changes to tax legislation;
• advice on tax-transparent funds; and
• general structuring advice on funds.