Catriona Standingford, MD of Brand Financial Training looks at the tax rules that apply to investors in offshore collective funds.
This is an area that seems to cause confusion with some candidates. The following will be useful reading for anyone preparing to take a CII investment exam – notably, AF1, AF4, AF5, J10, R02, R03, R06, Taxation – and is relevant to examinable tax year 2019/20.
This post was originally published on the Brand Financial Training Blog and has been reproduced here with their permission. All content © Brand Financial Training.
Offshore funds are either classed as having reporting status or non-reporting status.
Reporting Funds
Funds must apply to HMRC for reporting fund status, which will be given where income is reported to them. As long as the fund continues to comply with the reporting fund rules, then investors enjoy a tax treatment that is similar to that enjoyed by UK-authorised funds.
HMRC has on its website a list of registered reporting funds, found here.
Once the fund has been registered, it needs to provide investors with details of income earned, so they can complete their self-assessment tax form. Investors will be subject to income tax whether income is distributed or not, and they will pay capital gains tax on any gains made on disposal. Investors can use their dividend allowance against dividend income, their personal savings allowance against interest and their CGT annual exempt amount against gains on disposal.
So, we can think of these as generally being the same as onshore authorised collectives.
Non-Reporting Funds
Any fund that has not received HMRC approval and registration is, by default, a non-reporting fund and does not have to report details of its income; investors are only subject to tax on income in the fund if it is actually distributed to them.
This may seem like the better alternative; however, this must be weighed up against the fact that gains made in a non-reporting fund are calculated using CGT principles but subject to income tax (at a rate of up to 45%), even though that gain may be, in the main, made up of accumulated income. CGT rates are lower than income tax rates, and investors cannot use CGT annual exempt amount. They are also unable to use the personal savings allowance or the dividend allowance.
Summary
Before investing in offshore funds, investors should check whether it is a reporting fund or a non-reporting fund.
Anyone studying the CII investment exams should make sure they understand the taxation of offshore funds depending on their status (and not confuse this with the tax treatment of an offshore investment bond).
