Last week, I looked at various aspects of the tax calculation in connection with offshore roll-up funds. I would now like to consider how various categories of investor will be assessed on realised gains made under roll-up funds. Such gains are termed offshore income gains. First, let us look at individuals.
OIGs realised by individuals who are resident or ordinarily resident in the UK but domiciled outside the UK are taxed on the remittance basis (section 761(5) ICTA 1988 applying section 12 TCGA 1992). OIGs realised by individuals who are neither resident nor ordinarily resident in the UK are not chargeable.
OIGs realised by trustees of an offshore trust are not chargeable. However, this does not mean the UK-domiciled beneficiaries of an offshore trust are safe from a charge on the trustees’ gains because section 762 ICTA 1988 applies two important sets of anti-avoidance provisions to OIGs realised by trustees.
First, sections 762(2)-(4) ICTA 1988 apply the provisions of sections 87-90 and sections 96-98 TCGA 1992, dealing with the gains of offshore trusts. References in TCGA 1992 to chargeable gains are to be construed as references to OIGs and references to capital gains tax are construed as references to income tax or corporation tax as appropriate. Thus, beneficiaries who receive capital payments from the trustees will be chargeable proportionately on the trustees’ OIGs to date, up to a maximum of the sums actually received.
Where a capital payment is made to a beneficiary, any OIG will be attributed to it in priority to gains chargeable to capital gains tax. Hence, the beneficiary will have an income tax liability but will not be charged to capital gains tax in respect of that payment and any possibility of a double tax charge is removed by sections 762(3) and (4) ICTA 1988.
Second, OIGs which escape the charge under sections 87-90 and sections 96-98 TCGA 1992 – for example, because the person realising the gain is not a trustee – may be chargeable under section 739 or section 740 ICTA 1988, which sets out anti-avoidance legislation relating to the transfer of assets abroad. Under section 762(5) ICTA 1988, these provisions are to apply as if the OIGs constituted income of the recipient.
What is the situation where a company invests in an offshore roll-up fund, after duly considering the potential detrimental effect on business assets taper relief available for shareholders? Gains realised by a company which is resident outside the UK are chargeable to corporation tax only if the company carries on a trade in the UK through a branch or agency and then only in respect of assets used for trade purposes (sections 761(2)-(4) ICTA 1988).
However, where a nonUK-resident company will be a close company if UK resident, any OIGs will be chargeable to tax as income of its UK-resident shareholders in proportion to their entitlement to assets on a winding-up (section 762(1) ICTA 1988 applying section 13 TCGA 1992). No charge will arise where a shareholder has attributed to him less than one-tenth of the OIG.
Where either the settlor or spouse can benefit under a trust, gains will be assessed on the settlor with a credit for tax suffered by the trustees.
If trustees are holding the asset disposed of for a person who would be absolutely entitled but for being an infant, the OIG is deemed for the purposes of sections 629-631 ITTOIA 2005 to have been paid or applied for the benefit of the child (section 632 ITTOIA 2005). This is likely to give rise to a charge on the parent who made the trust, where the trust is for the absolute benefit of the settlor’s unmarried minor child not in a civil partnership.
Where a roll-up fund is owned by more than one investor, say, jointly by husband and wife, any gains arising on disposal will be split between the owners, usually equally, and assessed on them accordingly.
The joint owners will usually own as joint tenants and, where this is the case, on the death of the first of them to die, their interest will automatically pass to the other outside the terms of the deceased’s will or the laws of intestacy. Despite this automatic passing, the deceased will be treated as making a disposal of the appropriate proportion – usually one half – of the roll-up fund.
What of the future? In 2002, the Government issued a consultative document on offshore funds in which it proposed that some changes to the taxation and administration of offshore funds – particularly non-distributor funds – should be considered.
The original consultative document suggested a completely different taxation basis for roll-up funds. Instead, the Government opted for improving and simplifying the rules that apply for obtaining distributor status.
The Government stated: “There was general agreement that reform was needed but no overall agreement on what shape that reform should take.” In the light of this, the legislation tackled some of the issues which fund managers agreed were causing most difficulty, either in applying the distributing fund tests or in designing and marketing their products in the light of the rules.