Guidance for investors on the Reporting Fund Regime
Mark Eade takes a look at the Reporting Fund Regime and provides guidance on what UK investors and individuals need to be aware of
Mark Eade (Partner, Financial Services Tax) 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?
In summary, the Reporting Fund 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-reporting 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 this is received or not.
Background to the regime?
The wider offshore fund regime was introduced to broadly counter arrangements that enabled UK investors to accumulate income in an offshore fund free of tax and maintain capital gains tax treatment on exit.
In general, UK investors realising gains in respect of an offshore fund are subject to Income Tax rates unless the fund has joined the Reporting Fund Regime. UK investors realising gains in an offshore reporting fund will be subject to Capital Gains Tax rates.UK 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 that qualify and wish to join the regime are required to make an application to HM Revenue & Customs (HMRC). This application should, in general, 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 HMRC and investors within six months of the fund year end. UK investors report this income on their personal tax returns and pay Income Tax on it accordingly.
The calculation of reportable income requires the fund’s accounting profit to be split between sub-funds, share classes and series (as appropriate). This is typically 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. The UK investor will pay Income Tax on dividends received in the year, and any undistributed Excess Reportable Income (ERI). To the extent that a UK investor is paying tax on ERI, this can correspond to a dry tax charge.
What about funds of funds?
For multi-tiered funds, further adjustments are required to reflect the income of the underlying funds in which they invest. The methodology for achieving this depends on the reporting fund status of the underlying fund investment, and the level of access the fund has to appropriate information.
What about fund converting?
For a UK investor in a fund that changes from being a non-reporting fund to a reporting fund, this may not automatically change the treatment on disposal from Income Tax to Capital Gains Tax.
It can be necessary for the individual to make an election to be taxed on a deemed gain 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 can help you with:
- Application for reporting fund status, including reviewing the status of the fund.
- 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
- Provision of compliance advice on the merger or closure of funds
- Advising on wider UK tax matters, including wording in the prospectus and fund structuring.
Would you like to know more?
If you would like to discuss your specific circumstances or if you have any further questions on the Reporting Fund Regime, please contact Mark Eade using the form below.