Introduction Details of the Schedule
2.Part 1 of the new Schedule provides a new definition of an “offshore fund” and amends the powers set out in FA 2008 to provide in regulations for the tax treatment of participants in offshore funds. In the new Schedule, paragraph 2 inserts sections 40A to 40G into FA 2008.
3.Section 40A of FA 2008 establishes the meaning of “offshore fund”. Subsection (1) provides that sections 40A to 40G apply for “this group of sections”, that is sections 40A to 42A of FA 2008. Subsection (2) sets out the main definition of the expression “offshore fund”; but it should be noted that this definition is in turn dependent on a definition of the term “mutual fund” – to be found in section 40B. Section 40A(2) limits the meaning of offshore fund to those mutual funds which take one of three forms and which are resident in, or based in, a territory outside the United Kingdom.
4.Paragraph (a) of subsection (2) does not include a limited liability partnership – see subsection (6).
5.Paragraph (b) of subsection (2) includes all mutual funds that are unit trust schemes.
6.Paragraph (c) of subsection (2) does not include a partnership (subsection (3)).
7.“Co-ownership” is explained in subsection (6) and is stated not to be restricted to the meaning of that term in the law of any part of the United Kingdom. It takes its meaning from the law of the territory in which the arrangements take effect.
8.Subsection (5) defines what is meant by participants in arrangements or a fund. This makes clear that it does not matter whether or not the participant has an interest amounting to ownership in the property that is the subject of the arrangements.
9.Section 40B defines the expression “mutual fund” using three conditions, all of which must be met.
10.Condition A in section 40B (subsection (2)) is self-explanatory.
11.Condition B in section 40B (subsection (3)) is that the participants do not have day-to-day control of the property; and subsection (4) explains that having a right to be consulted or to give directions does not itself constitute day-to-day control.
12.Condition C in section 40B (subsection (5)) requires that an investor in the arrangements, as participant, would expect to be able to realise the investment on a basis calculated entirely, or almost entirely, by reference to net asset value (“NAV”) or by reference to an index of any description.
13.Condition C must be read in conjunction with section 40E(1), which restricts the ambit of section 40B. An investor in a company would normally only reasonably expect to be able to realise NAV on the liquidation of the company. So section 40E(1)(a) excludes from section 40B any case where a reasonable investor would only be able to realise the investment in the arrangements in the event of a winding-up, dissolution or termination of the arrangements, except in the case where section 40E(1)(b) applies – see paragraphs 16 to 24 below.
14.Section 40C defines “umbrella arrangements” and how they are to be treated for the purpose of the offshore funds definition. Subsection (1) provides that where there are such arrangements, each separate part (usually known as a ‘sub-fund’) is to be treated as a separate arrangement and the overall arrangements are disregarded. In such a case the overall arrangements do not themselves constitute a mutual fund or an offshore fund.
15.Section 40D deals with a case where there is more than one class of interest in any arrangements. It has the effect that each class of interest is looked at separately for the purpose of determining whether the arrangements constitute a mutual fund, and the main arrangements are disregarded.
16.Section 40E contains the exceptions to the definition of a mutual fund. The effect of subsection (1) is that arrangements are not a mutual fund if the only occasion on which a reasonable investor would expect to be able to realise NAV is winding-up, dissolution or termination of the arrangements, but this is subject to condition X or condition Y being met.
17.Subsection (2) contains Condition X which requires that the arrangements are not such that they are designed to terminate at a fixed date. Subsection (8) provides that a future requirement, such as a vote, which may possibly lead to winding up will not, of itself, mean that the arrangements are designed to terminate on a fixed date.
18.Subsection (3) sets out that if Condition X is not met and the arrangements are designed to terminate at a fixed date, then the arrangements will still not be a mutual fund if Condition Y is met. Condition Y will be met if one or more of three sub-conditions is met.
19.Condition Y1 is that the arrangements do not relate to any “relevant income producing assets”. This term is explained in Section 40F.
20.Condition Y2 is that the participants in the arrangements have no entitlement to benefit from the income arising on the assets that are the subject of the arrangements.
21.Condition Y3 is that all of the income arising is required to be paid or credited to participants in such a manner that a UK resident individual would be charged to income tax on the amounts paid or credited.
22.Subsection (7) prevents Condition Y from applying in circumstances where the arrangements are designed to produce a return that is, in substance, equivalent to interest – with the consequence that such an arrangement will be a mutual fund and hence an offshore fund.
23.Section 40F(1) explains the meaning of relevant income producing assets. Subsection (2) ensures that assets are outside the meaning where there is no income after taking account of hedging arrangements. Subsection (3) ensures that interest on cash temporarily held whilst awaiting investment will not, of itself, mean that the cash is regarded as a relevant income producing asset provided that the cash and the interest arising is invested in non- income producing assets as soon as reasonably practicable.
24.Section 40G gives HM Treasury powers to vary the exceptions to the offshore funds definition by regulations.
25.Paragraphs 3, 4 and 5 of the Schedule amend the regulatory powers in sections 41 and 42 of FA 2008 and insert a new section 42A of FA 2008 so that the regulations can be made with reference to the definition of an offshore fund provided in this Schedule. Certain of the regulations are subject to the affirmative procedure (those under 40B(6), 40G(1) and the first regulations under section 41(1)). Regulations made under all other sections are subject to the negative procedure.
26.Paragraph 6 of the Schedule limits the regulatory powers provided by section 41 FA 2008 to ensure that where there are investments made before 1 December 2009, not previously within the definition of a ‘material interest in an offshore fund’ (see section 759 of the Income and Corporation Taxes Act 1988), these investments will not be subject to the new tax regime to be provided in regulations. A similar protection will apply if investments are made after 1 December 2009, where the investor was obliged to make that investment under a contract entered into before 30 April 2009.
27.Part 2 of the new Schedule inserts a new section 103A into the Taxation of Chargeable Gains Act 1992 (TCGA). The purpose of the new section, introduced by paragraph 8 of the Schedule, is to treat investors’ rights in offshore funds as assets for the purposes of tax on capital gains where this is not already the case. The new section 103A of TCGA is similar to section 99 of that Act which applies to unit trusts.
28.Paragraph 11 makes consequential amendments to the taxes acts to introduce references to the new section 103A of TCGA.
29.Paragraph 12, with paragraphs 13 and 14, provides that section 103A will apply to all holdings of persons subject to capital gains tax in offshore funds from 1 December 2009 and that it will apply to holdings by persons within the charge to corporation tax from a date to be appointed by Treasury order.
30.Paragraphs 15, 16 and 17 provide for investors in affected funds to have the option of making an election to backdate the effect of the new section. An election can be made for tax years 2003-04 onwards (and for corporation tax for accounting periods starting on or after 1 April 2003). An election is irrevocable and will therefore apply in all subsequent tax years or accounting periods.
31.Paragraph 18 provides a transitional rule to calculate the acquisition cost for TCGA purposes of interests held at 1 December 2009 (or, for corporate investors, the appointed date) or the date from which it is elected to apply the new section 103A of TCGA if that is earlier. The rule means that existing acquisition costs relating to the assets held will be carried forward to count as the acquisition cost of units or rights in the fund.