Changes to New UK Offshore Funds Regulations

There has been a bit of a shakeup in the world of offshore investment in the UK. The regulations governing offshore investments needed updating, and therefore the UK Government has proposed some amendments to current offshore funds regulations, the Offshore Funds (Tax) Regulations 2009, which came into force on the 22nd December 2009. These amendments will mean big changes for some, and not a great deal for others. But what exactly are these changes?


Removal of ‘Material Interest' and Definition Change

The first thing to change is the definition of an offshore fund . In pre-1st December regulations, an offshore fund was tied to the FSMA 2000 definition of a ‘collective investment scheme'. However, many offshore funds did not completely fulfil the FSMA requirements, leading to a potentially tax advantageous investment scenarios where the investment opportunity was similar to a UK counterpart, but falling just short of the FSMA-linked definition of an offshore fund.

Another problem was the vague definition of ‘material interest' creating potential unequal treatment of investors. Investors only had to pay tax on investments where they held a ‘material interest', and the vague definition was a cause for confusion and uncertainty. The Government has now removed the ‘material interest' requirement.

The replacement is an alteration of the definition of an offshore fund by using a characteristics-based ‘mutual fund' test. Investment schemes that are identified as mutual funds are classified as offshore funds if they are non-UK resident for tax purposes.

It is clear, however, that previous investors that were deemed to hold non-material interests in offshore funds may be unfairly subject to the new regulations. The Government has made provisions for any non-material investments made before 1st December 2009 to ensure that this doesn't happen.


Distributing and Reporting

Distributing and non-distributing have been redefined as reporting and non-reporting, with almost all current offshore funds defaulting to non-reporting, with reporting status requiring subsequent application. Reporting funds are required to report at least 90% of all reportable income within 6 months of each period end to investors and HMRC. Failure to report income will potentially lead to loss of reporting status. Reporting fund status is desirable because it offers a higher degree of tax certainty and increased ease of administration.


Who Should be Aware?

All investors who were subject to tax deductions resulting from offshore fund investments under the previous regulations will be affected by the new regulations. In addition, any investors in non-UK funds that were not previously subject to tax will now need to recheck their obligations, since the definition of an offshore fund has changed and the ‘material interest' rule has been abolished.

All income tax resulting from an offshore fund will be subject to the new rules for the tax year 2009/10. Corporation tax on income is also affected for any accounting periods that end on or after the 1st December 2009. Capital gains tax is affected only for any disposals made on or after the 1st December 2009.


Nate Wood writes for Integral Search and Selection, tax recruitment specialists. For more detailed information on the changes outlined above, visit Integral Search & Selection.