Frequently asked questions
How can an offshore fund become a reporting fund?
- the one-off application needs to be submitted before the end of the accounting period for which the fund intends to be a reporting fund; and
- if the share class or the fund is launched during the last three months of the accounting period, the deadline for the reporting fund application is extended by three months from the first day on which interests in the fund were made available to UK resident investors.
What are the ongoing obligations for a reporting fund?
Following the initial application, the reporting funds are required to provide HMRC with the following reports each year within six months from the fund’s year end:
- a computation of the reportable income and excess reportable income (ERI) per share class or per series where the fund issues series;
- a report to investors including the ERI amount, which needs to be shared with the fund investors as well;
- a copy of the audited financial statements; and
- a declaration confirming that the fund is compliant with the reporting fund regulations.
How can UK investors benefit from the reporting fund regime and what is the UK tax treatment?
- Gains on disposal arising on UK individual investors in offshore reporting funds will attract capital gains tax at 20% (instead of 45% income tax), but also a ‘dry’ tax charge on any ERI arising from the fund.
- Each year, a UK investor in a reporting fund will pay income tax on their share of the fund’s ERI, together with any actual distributions made by the fund.
Can an existing non-reporting fund become a reporting fund?
- When an existing non-reporting fund becomes reporting, its UK investors can still benefit from the fund’s newly obtained reporting status. In some cases, the investor may need to make an election. If relevant, this election will crystallise a gain, which gets taxed at that point as income. From the election date onwards, the UK investor will be able to benefit from capital gains tax on future disposals of the investment. A UK investor who does not make the election cannot benefit from the reduced tax rate upon disposal.
What about UK tax-transparent funds?
- UK investors in a transparent fund are directly taxed on the income from the fund.
- For UK investors in a UK tax-transparent fund, the income from the fund is computed as arising directly to them, net of a deduction for fund management expenses. For example, when a fund receives interest income, its UK investors are charged to UK tax on their proportionate share of that interest as it arises, irrespective of whether or not the money is actually distributed to them.
- A UK tax-transparent reporting fund, like non-transparent funds, must provide its investors with details of reportable income within six months from the fund’s year end on an annual basis.
- When a UK investor disposes of an interest in a UK tax-transparent reporting fund, the tax treatment is the same as for other reporting funds and will attract capital gains tax.
- If, however, the UK tax-transparent reporting fund invests in a reporting fund, its UK investors will be charged to UK income tax upon their disposal of interests in the UK tax-transparent reporting fund.