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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 is 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 their 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 they have 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?
- 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. - 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 frequently asked questions 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?
Reporting fund | Non-reporting fund |
| Actual distributions are taxed as income | Actual distributions are taxed as income |
| Undistributed income is taxed as income for that period (‘excess reportable income’), with a deemed distribution date six months following the end of the period | Undistributed income is not taxed at that time |
| Disposal of shares in the fund is taxed at capital gains tax rates | Disposal of shares in the fund is taxed at income tax rates |
| Fund has initial and annual reporting requirements | No fund reporting requirements |
| Reporting fund status can be a positive marketing tool to potential UK investors | Some UK investors may not wish to invest in non-reporting funds |
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 suggest 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
- General structuring advice on funds
Frequently asked questions about reporting funds
How can an offshore fund become a reporting fund?
Initial application:
- 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
- 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.