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Guidance for investors on the Reporting Fund Regime

Stephen Kenny (Partner, Financial Services) takes a look at the Reporting Fund Regime and provides guidance on what UK investors and individuals need to be aware of.

What is the Reporting Fund Regime?

The Reporting Fund Regime was introduced for periods commencing on or after 1 December 2009.

The regime allows UK investors to treat realised gains in qualifying offshore funds as capital disposals. Such gains are taxed at Capital Gains Tax rates rather than the higher Income Tax rates payable on disposals of interests in non-qualifying funds.

In return for this beneficial tax treatment the investor is required to pay Income Tax on their share of the annual ‘reportable’ income of the fund, whether received or not.

In return for this beneficial tax treatment the investor is required to pay Income Tax on their share of the annual ‘reportable’ income of the fund

Why was the regime introduced?

The regime was introduced to prevent investors from obtaining a tax advantage by reinvesting income back into offshore funds rather than bringing it onshore.

Gains in respect of an offshore fund are subject to Income Tax unless the fund has joined the regime.

Reporting fund status can therefore be attractive to UK-resident investors due to the disparity between the top rates of Capital Gains Tax and Income Tax.

How does a fund join the regime?

Funds wishing to join the regime are required to make an application by submitting a form CISC 1. This should be made before the end of the first period for which the fund wishes reporting status to apply. Advance applications are also possible.

What are the ongoing requirements?

A qualifying fund should perform a calculation of reportable income on an annual basis and provide this to both HM Revenue & Customs (HMRC) and investors within six months of the fund year end. Investors report this income on their personal tax returns and pay Income Tax on it accordingly.

The calculation of reportable income requires the accounting profit to be split between qualifying share classes.

This is adjusted to remove any capital gains and to include any relevant income, such as effective interest, which is not recognised in the fund accounts. The reportable income is also adjusted for any distributions made by the fund in respect of the year.

What about funds of funds?

For multi-tiered funds, further adjustments are required to reflect the reportable income of the underlying funds in which they invest.

The methodology for achieving this depends on the reporting fund status of the sub-fund and the level of access the fund has to the sub-fund’s records.

What about individuals?

 Where a fund changes from being a non-reporting fund to a reporting fund, for an individual this does not automatically change the treatment on disposal from Income Tax to capital gains.

It can be necessary for the individual to make an election to be taxed on the gains up to the date of change in status. This can trigger a dry tax charge on the individual.

Where you are a participator in a fund which changes status, we would be able to discuss the tax implications and the best way to protect your tax status going forward.

How we can help

We have been preparing applications and calculations of reportable income from the start of the regime. We have experience of dealing with a broad range of fund structures and work effectively with fund administrators to ensure funds remain compliant with the regime with the minimum of disruption to your business.

We currently act for over 50 funds with reporting fund status. We work closely with both fund administrators and HMRC to ensure our clients remain compliant.

We can help you with:

  • Application for reporting fund status
  • Provision of advice on the implication of reporting fund status to the fund’s investors
  • Preparation of the annual reporting fund calculation and the report to participators
  • Preparation of the effective interest adjustment
  • Provision of compliance advice on the merger or closure of funds

If you would like to discuss your specific circumstances or if you have any further questions on the Reporting Fund Regime, please contact Stephen Kenny or Daniel Edgson using the details on this page.