A: Offshore funds are defined in the legislation at TIOPA 2010 s354-s363 with the secondary legislation found in the Offshore Funds (Tax) Regulations 2009 (SI 2009/3001). Offshore funds are either a reporting fund or non-reporting fund. It is always important to establish which type of fund the client has as both have differing tax treatments on disposals of units in the fund.
A reporting fund is an offshore fund which has satisfied the conditions to be an ‘eligible offshore fund’ and has been granted approval by HMRC. HMRC keep a list of reporting funds that have been approved as reporting funds here. A non-reporting fund is a fund that has not obtained reporting status or has left or been excluded from the reporting fund regime.
Disposals of units in a reporting fund will be subject to CGT on any capital gains or losses that arise. SI 2009/3001 Reg 99.
However, profits on disposals of units in a non-reporting fund will give rise to an offshore income gain. This is then subject to income tax as the offshore income gain is taxed as miscellaneous income under Chapter 8 Part 5 ITTOIA 2005 owing to SI 2009/3001 Reg 18.
If the disposal of units in a non-reporting fund gives rise to a loss, then the basic income gain arising on the disposal is treated as nil – SI 2009/3001 Reg 42. This means that for the purposes of the offshore funds legislation, no loss is to be treated as arising. Instead, a capital loss is deemed to arise. As the loss is treated as a capital loss, it will not be possible to offset the loss against offshore income gains of the same or a later period. See IFM13550. Capital losses can only be offset against capital gains in the year or carried forward against future gains – TCGA 1992 s1.
In summary, your client will be able to offset the capital loss against the gain on the reporting fund as both are charged under the CGT legislation. However, the client will not be able to offset any remaining capital loss against the disposal of the non-reporting fund as this is charged to income tax.
For commentary on Offshore Funds, see Direct Tax in Depth at 783-000.
