HMRC’s is writing to taxpayers who may hold, or have recently held, investments in an offshore fund. HMRC says that the letter is part of an “educational campaign to provide investors with useful information in relation to the tax rules for investments in offshore funds” and that it is “not a compliance check”. A document enclosed with the letter provides further information.

What is an offshore fund?  

An offshore fund is an investment fund which is based outside the UK and meets certain conditions. HMRC’s guidance on GOV.UK includes the following examples of non-UK investment funds that could be offshore funds if they meet the conditions: 

• non-UK unit trusts, such as a Jersey Property Unit Trust (JPUT) or Guernsey Property Unit Trust (GPUT);
• non-UK corporate funds, such as a Société d’Investissement à Capital Variable (SICAV) or Irish Collective Asset-Management Vehicle (ICAV); and
• non-UK co-ownership arrangements, such as Fonds Commun de Placement (FCP) or Common Contractual Fund (CCF). 

The fund manager should be able to confirm if an investment fund is an offshore trust.  

How are investors taxed? 

The tax treatment is determined in part by whether the fund is a reporting fund or a non-reporting fund. Briefly, a reporting fund is required to report its income to HMRC for each reporting period. A non-reporting fund is an offshore fund that is not a reporting fund. 

Briefly, the income distributed from reporting and non-reporting funds is taxable as either interest, dividends or property income. The fund manager should provide this information. In addition, investors in reporting funds are taxed on their share of any excess reported income (ERI). ERI is any income generated by the fund that is not distributed to investors. Special rules apply for bond funds.  

Any gains realised on the disposal of units in an offshore fund are taxed as follows: 

• fund is a reporting fund: taxable as capital gains; and
• fund is a non-reporting fund: taxable as an offshore income gain (OIG) at the investor’s highest marginal tax rate. Capital losses cannot be set against an OIG. 

HMRC’s guidance (HS265) provides further information, including on how to complete the foreign pages (SA106) of the SA tax return. It also confirms that it is not necessary to report income from, and gains on investments, in offshore funds held within an individual savings account (ISA). 

What do I need to do? 

HMRC is encouraging investors in offshore funds to: 

• Check the fund’s reporting status. This can be done using the fund manager’s report and HMRC’s list of reporting funds. In the letter, HMRC notes that “reporting status can vary by fund, sub-fund, share class and period”, so it is important that you find the exact name (parent name and sub fund) or the International Securities Identification Number (ISIN).
• Ensure their tax position is correct. Investors should check they have applied the tax rules correctly for the current tax year and previous tax years and consider showing their tax adviser HMRC’s letter if they have one. HMRC’s guidance explains how to amend a tax return and how to make a voluntary disclosure where it is too late to amend a return.
• Keep records. HMRC explains in the letter that investors “should keep any fund statements and investor reports, as well as details of any distributions, excess reported income, disposal proceeds and acquisition costs”.