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Defining an Offshore Fund

I am struggling with the categorisation

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A client has some money that he keeps in Spain to facilitate the payment of service charges etc. on his apartment there.  He is UK resident.  He has put some funds into a low risk investment over there, as suggested by Santander.  He needs to encash about 4 or 5,000 euros each year, to keep his Santander current account in Spain ticking over.  The specific description of the investment, is Santander Generacion (generation) 3 Clase (class) B Fondos (fund).  From the client's vague description and the limited paperwork I have seen, this seems to be akin to a unit trust holding.  However, no distributions are paid out, nor does there appear to be any accumulation of income.  The value of the units held, fluctuates.

When drafting my client's 2021 tax return using HMRC's software, there was a nudge in place, saying "HMRC routinely receives information from other countries about foreign income, assets and gains.  Our records indicate you may (my emphasis) need to complete the foreign section.".  There is no income from the apartment but I do wonder about the investment and whether it meets the definition of an Offshore Fund.  As I understand it, gains on disposals of Offshore Funds are taxed as income, rather than being dealt with as chargeable gains (which would be dead easy, as covered by annual exemption).

I have not had to deal with this area before and I realise the above details are sketchy.  But from what I've said, can I ask anyone familiar with this field, if it does indeed sound as if my client's investment does meet the definition of an Offshore Fund, or am I fretting needlessly?  I have read a stack of HMRC guidance and the whole subject is very complex.  Is there a way of finding out definitively?  The client is unable to help.

Any thoughts would be welcome.

Replies (10)

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By Paul Crowley
28th May 2021 13:19

Let the product seller inform the client.
They operate in both countries

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By Matrix
28th May 2021 14:03

If it is a reporting fund then it should publish the income to include on your client’s tax return.

Agree with above, see what correspondence the client has received.

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By Hugo Fair
28th May 2021 15:50

"The client is unable to help."
Do you mean unwilling (in which case he/she should be your ex-client), or unable (as in doesn't know the answer)?
Assuming the latter, client should have no problem in asking Santander any question that you present to him - or indeed in clarifying the nature of the 'investment' and its status for UK tax purposes.

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Replying to Hugo Fair:
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By Geoff56
28th May 2021 16:21

The client would like to help very much, but does not particularly understand these things. Basically, he trusted that Santander were recommending a better home for the funds not required imminently, than his current account. I will ask him to put the question(s) to Santander, and although he may find it a bit daunting, he will do his best. He will probably understand neither the question, nor the answer.

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By Tax Dragon
28th May 2021 16:33

I'd ask Santander too. But two resources may be useful to you.
Pt 8 of TIOPA (s355) is the starting point.
https://www.gov.uk/government/publications/offshore-funds-list-of-report.... (If it's an offshore fund and not on the list then, as you say, gains are taxed as income.)

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By richard thomas
28th May 2021 22:22

From a quick look at Santander's Spanish website (which is in English if you so choose) it seems to me that Fondos are transparent entities for income tax purposes, like Fonds Commun de Placement in Francophone countries. However you imply there is no income, merely increases in value - if that is really true then there is no UK income tax implication. Usually in funds like these income is accumulated and contributes to the value of the holding, so income tax is payable on the client's share of the income as it arises, as with an accumulation unit trust.

The CGT treatment may be different and the fund not be transparent for the purposes of the tax, and the OIG rules may apply.

I would expect the managers to provide the investors with information about any income arising. You should read the Offshore Funds Regulations 2009 (I apologise in advance if you find them tough going because I was responsible for their drafting: but they are aimed at the fund managers not the investors) and HMRC's Investment Funds Manual.

You should as others have said get the client to do their bit.

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Replying to richard thomas:
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By Tax Dragon
28th May 2021 23:01

Tbh (and no offence, but) anyone that could tell me the definition of an offshore fund from reading the regulations would be suffering from severe sleep deprivation. (And would have had to have diverted to s355 to find the answer anyway - and I think even that most basic point isn't easy to work out from the Regs. In fact, having suggested you think the Regs might not even be relevant, this possibly not being an offshore fund, you're inviting the OP to be particularly masochistic in advising him/her to read the whole lot.)

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Replying to richard thomas:
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By Geoff56
29th May 2021 16:52

Thanks for all this: I will get back onto it after the weekend. I have spent a fair amount of time reading HMRC's Investment Funds Manual. At times it felt like Groundhog Day: I would go from link to link to link, only to end up back where I started.
Aside from the question of distributed or accumulated income, if this is an Offshore Fund, and if my client makes a gain on the modest amount that he needs to encash each year, then I understand the gain is declared as income, not as a CGT amount.

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Replying to Geoff56:
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By richard thomas
31st May 2021 13:30

As far as your last sentence is concerned, the question whether an OIG chargeable to income tax arises on disposal of part or all of your client's interest in the fund depends on three conditions. One is whether the fund is an offshore fund (and I am pretty certain that a Spanish fund of the type appearing on Santander's website is an offshore fund) and the second is whether it is a "transparent fund" within the meaning of reg 11 of those regs (and again I'm pretty sure that this is the case with that type of fund).

The third condition is whether reg 29 of the Offshore Fund (Tax) Regs, which in general terms excludes the OIG regime except in two circumstances, applies in your client's case.

The first circumstance that makes the gain chargeable to income tax is that the fund in which your client has an interest has itself interests in "non-reporting offshore funds" (ie those not appearing on HMRC's published list) representing more than 5% of its asset value.

The second is that:

"the fund fails to make sufficient information available to participants in the fund to enable those participants to meet their tax obligations in the United Kingdom with respect to their shares of the income of the fund." (reg 29(3)(c))

See IFM13470 for HMRC's interpretation of this circumstance. It may be that the fund has does what it should by way of information but you client doesn't realise it. But that is not the issue - the issue is whether the find has made the necessary information available by sending the client details of the income arising and their proportionate share.

There is a further wrinkle with transparent funds. Whether the gain is charged to income tax as an OIG, or to CGT under s 103D TCGA, a deduction is due for the amounts of any income which

"is taken into account as a receipt or other credit of the participant in calculating an amount chargeable to income tax,"

The question with this is whether it applies simply if the client is liable on undistributed income (as with a transparent fund they will be) or of it requires an actual self-assessment to be made. I think the former is the only sensible rule.

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Replying to richard thomas:
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By Geoff56
01st Jun 2021 12:53

Thank you, Richard. I really am grateful that you should have taken the time and trouble to help me, with such a detailed reply.

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