Budget Notes


Who is likely to be affected?

1. Managers of, and investors in, overseas based funds such as open-ended investment companies, unit trust schemes and similar arrangements.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to provide powers to make regulations dealing with the taxation of investors in offshore funds and the rules for allowing certain funds to be classed as 'reporting funds'.

3. The definition of what constitutes an offshore fund will not be changed in Finance Bill 2008. The Government intends to continue its discussions with industry on this point and will legislate for a revised definition in Finance Bill 2009.

Operative date

4. The measure will have effect on a date to be appointed by Treasury order.

Current law and proposed revisions

5. An 'offshore fund' is any type of fund that is resident outside the United Kingdom or established under foreign law and would, if it were established in the United Kingdom, constitute a collective investment scheme for the purposes of the Financial Services and Markets Act 2000 (FISMA).

6. Where a fund is certified by HM Revenue & Customs (HMRC) as a qualifying fund, which is a test that must be satisfied each year, then the fund is required to distribute at least 85 per cent of its income and any investor disposing of their interest in the fund is subject to a more favourable tax treatment than if the fund is non-qualifying. This is because on disposal of their interest they are liable to capital gains tax (CGT) or corporation tax on chargeable gains, instead of being chargeable to income tax or corporation tax on income, as they would be if the fund was a non-qualifying offshore fund.

7. This measure will mean that, in order to retain CGT treatment for investors disposing of an interests in the fund, an 'offshore fund' will no longer have to make a distribution but will instead be able to 'report' income to investors who will then be subject to tax on the reported income.

8. Draft regulations will be published shortly after the Finance Bill, which set out the conditions that an offshore fund must fulfil in order to ensure that a disposal of an interest in the fund is subject to CGT treatment.

9. It is expected that the conditions for obtaining the new qualifying fund status will be less onerous, and the test required for this will only be applied at the outset (instead of, as now, annually). It is also envisaged that minor failures to keep to the conditions will not result, as they do at present, in the fund being removed retrospectively from the more favourable regime.

Further advice

10. If you have any questions about this change, please contact John Buckeridge on 020 7147 2560 (e-mail: john.buckeridge@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk