Tuesday, October 21, 2014

New U.K. Offshore Funds Tax Rules To Enter Into Effect May 27, 2011

By David Gubbay, Mark Stapleton, and Daniel Hawthorne, of Dechert LLP, London.

New regulations to amend the United Kingdom’s tax regime for offshore funds will take effect on May 27, 2011. Managers of offshore funds with U.K. reporting fund status should pay particularly close attention to the final provisions regarding income equalisation and the opportunities and obligations these provisions present.

The United Kingdom’s new tax regime for offshore funds and the associated reporting fund rules which enable U.K. resident investors to obtain favourable capital gains tax rates have been in place since December 2009 (see analysis at WSLR, February 2010, page 30). In February 2011, draft regulations were published setting out a series of proposed amendments to improve the practical operation of the rules (see analysis by Mark Stapleton and Daniel Hawthorne, of Dechert LLP, London, at WSLR, May 2011, page 30). The draft regulations placed particular emphasis on changes to the rules on income equalisation, with a view to eliminating the “last man standing” issue, which currently can arise where a reporting fund does not operate equalisation. Essentially, this could result in U.K. investors in the fund at the end of a reporting period being allocated a disproportionate amount of fund income for tax purposes, which would be especially unwelcome for certain investors, such as U.K. individuals, who pay a higher rate of tax on income than on capital gains.

In summary, the draft regulations proposed that some form of income equalisation or income adjustment be mandatory for reporting funds. The aim of such equalisation or income adjustment was broadly to allocate fund income across investors in a fairer manner, taking into account incoming or outgoing investors. A series of alternatives were available, ranging from “full equalisation”, through plain “equalisation” to “income adjustment” on the basis of either accounting income or reported income. The suggestion of four alternative approaches to equalisation was, perhaps unsurprisingly, criticised for over-complexity…

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