What is an offshore fund for UK tax purposes?

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Accepted Answer

Here is a comprehensive answer on the definition of an offshore fund for UK tax purposes.

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## What the law says

The definition of an offshore fund for UK tax purposes is found in **section 355 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010)**. The definition is **characteristics-based** and is deliberately detached from the regulatory definition of a "collective investment scheme".

An offshore fund must be a **"mutual fund"** (as defined in s.356 TIOPA 2010) that is resident in, or based in, a territory **outside the United Kingdom**.

### The "mutual fund" characteristics

Broadly, a mutual fund is a company, trust, or other vehicle or arrangement that meets **all** of the following characteristics:

1. It is **not UK tax resident**;
2. It exists to enable participants to **take part in the benefits** arising from the acquisition, holding, managing, or disposing of assets of any description;
3. The participants do **not have day-to-day control** of the management of the property (whether or not they have the right to be consulted or give directions); and
4. A **"reasonable investor"** would expect to be able to realise any investment based entirely or almost entirely by reference to the **net asset value** of the assets under management, or alternatively by reference to an **index** of any description.

### The three legal forms

A mutual fund falls within the definition of an offshore fund if it takes one of three forms:

| Form | Statutory provision |
|---|---|
| A **body corporate** resident outside the UK | s.355(1)(a) TIOPA 2010 |
| Property held **on trust** for participants by trustees resident outside the UK | s.355(1)(b) TIOPA 2010 |
| **Other arrangements** creating rights in the nature of co-ownership, taking effect under the law of a territory outside the UK | s.355(1)(c) TIOPA 2010 |

> **Exclusion:** Foreign **partnerships** within the scope of s.355(1)(c) are specifically excluded from the definition of an offshore fund by **section 355(2) TIOPA 2010**.

The same definition in s.355 TIOPA 2010 applies across multiple tax codes, including for income tax, corporation tax, and capital gains tax purposes.

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## HMRC guidance / practice

**Purpose of the regime:** The offshore fund rules were first introduced in 1984 to prevent UK investors from accumulating income in an offshore fund free of tax and then realising it as a capital gain rather than income. The rules were substantially updated in 2009 and are now contained in **Part 8 of TIOPA 2010** and **The Offshore Funds (Tax) Regulations 2009 (SI 2009/3001)**.

**Reporting vs. non-reporting funds:** Under the current regime, an offshore fund is either a **"reporting fund"** or a **"non-reporting fund"**. Capital gains treatment on disposal is only available to UK investors if the fund reports its income to them (a reporting fund). If it does not (a non-reporting fund), gains on disposal are taxed as **income** rather than capital gains.

**Investor's responsibility:** It is the **investor's own responsibility** to determine whether they hold an interest in an offshore fund as defined. HMRC publishes a monthly updated list of funds that have successfully applied for reporting fund status on GOV.UK.

**Transparent funds:** Where an offshore fund is **transparent** for UK tax purposes, income arises from the underlying assets rather than from the fund itself. In that case, the remittance basis does not apply to income arising in the UK; it is charged to tax on the UK resident individual as it arises.

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Form	Statutory provision
A body corporate resident outside the UK	s.355(1)(a) TIOPA 2010
Property held on trust for participants by trustees resident outside the UK	s.355(1)(b) TIOPA 2010
Other arrangements creating rights in the nature of co-ownership, taking effect under the law of a territory outside the UK	s.355(1)(c) TIOPA 2010