HMRC keeps an eye on offshore fund investors

In early November, HMRC undertook a distinctly non-festive bulk mailing.

“We receive information about investment funds and this information shows that you may have invested in Offshore Investment Funds.”

Those slightly discomforting words are contained in a letter which HMRC sent out in early November. It was sent to a subset of taxpayers whose tax affairs are dealt with by HMRC’s Wealthy & Mid-Sized Business unit. What the letter shows is:

  • HMRC continues to be focused on offshore evasion as an area to raise additional revenue. It makes sense for HMRC to do so – the ‘Panama Papers’ exposure of 2016 is reported to have netted £190m so far for the Exchequer.
  • The Common Reporting Standard (CRS), which came fully into force in October 2018, is now being used by HMRC to target individuals. The CRS provides an automatic exchange of information between the tax authorities of over 100 countries.

As HMRC says in its letter, “How to treat amounts gained from an investment fund can be complex.” Most of the offshore funds now marketed to UK resident investors are ‘reporting’ funds and many of these distribute all of the income they receive. As a result, their tax treatment is very much like their UK-based counterparts, with any gains subject to capital gains tax. However, problems start to arise when some of the income of a ‘reporting’ fund is accumulated within the fund. Such unseen income remains taxable as personal income.

Unsurprisingly, the other category of offshore fund is a ‘non-reporting fund’. If these types of fund distribute income, then it is taxable in the normal way as either dividends or interest. However, any capital gains – including those from accumulated income – are taxed under income tax rules on sale. That harsher treatment explains why ‘non-reporting’ funds are not often recommended to UK resident investors.

HMRC’s action does not mean offshore funds should be avoided. In some circumstances, they have a valuable role to play. One point that the HMRC letter effectively does make is that if you want to invest in these types of funds, you need advice to avoid the potential tax pitfalls.

Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

20th December 2019