Supporting offshore funds in seeking and maintaining UK reporting fund status with HMRC. This specialist regime provides an advantageous tax treatment for investments made by UK investors in offshore funds.
The reporting fund status regime provides an advantageous tax treatment for investments made by UK investors in offshore funds. A UK individual investor is liable to pay income tax for any gains realised on investments made in offshore funds, attracting a tax rate of up to 45%. However, where an offshore fund obtains and maintains reporting fund status, UK investors can have their gains taxed at capital gains tax rates of up to 20%. Considering the significant difference in the tax impact for UK investors, ensuring that an offshore fund has reporting fund status greatly increases its marketability in the UK. Once a fund is approved by HMRC, its name is published on a publicly available list that can be found on this link.
The decision to enter the reporting fund status regime is optional and impacts the taxation of UK investors both annually and upon eventual disposal. To comply with the regime, reporting funds must annually provide to HMRC a calculation of ‘reportable income’ and determine whether any ‘excess reportable income’ (ERI) arises per reporting share class or series. A report to investors is then circulated with the amount of ERI, to be included in their personal tax return. Any dividend paid reduces the amount of ERI to be included in the investor’s tax return, however, where no dividend is paid, the ERI is taxable regardless, thus sometimes creating a dry tax charge for investors. As majority of fund expenses (with the exception of performance fees) qualify as revenue and are deductible in nature, the ERI is often zero. Therefore, where funds generate significant capital gains, obtaining reporting fund status can be highly advantageous.
Selecting the right service provider to support of reporting fund status is essential, both is terms of technical experience and cost. We increasingly come across situations where funds have breached conditions and HMRC have subsequently barred them from the regime, a situation that has little to no remedy under the legislation. As a consequence investors are left with a materially higher UK tax bill than expected. Having a service provider with team of experienced professionals that specialise in this area is critical. Conversely we also see situations where the costs associated with compliance have gone unchecked for many years and investors are not getting a good deal.
How we can help:
- Help managers navigate through the offshore funds legislation and determine whether it is beneficial to register the fund under the UK reporting fund status regime by assessing whether the fund is investing or trading.
- Register offshore funds under the reporting fund status regime with HMRC by completing the necessary application and considering the most suitable elections to be made, based on the specific requirements of the fund.
- Liaise directly with administrators of the fund (where required) to prepare annual calculations to determine whether any ERI arises in the fund.
- Assist with preparing the required communication to be circulated to investors under the reporting fund status regime.
- Assist with completing ongoing compliance requirements by preparing the annual reporting fund status calculations and compiling and making the annual submission of documents to HMRC.