UK and International Tax news

AIFs And Holdings In Non Reporting Offshore Funds

Thursday 24th February 2011

On 9 February 2011, the Government made regulations that introduce changes for Authorised Investment Funds (AIFs) with holdings in non-reporting offshore funds. These changes are designed to align the competitive position of AIFs with offshore funds, in particular they allow an AIF with holdings in non-reporting offshore funds to treat those holdings as if they were holdings in reporting funds in certain circumstances, and permit an increase in the proportion of assets they can hold in non-reporting offshore funds before being subject to a different tax treatment.

The October 2010 draft regulations have been amended to allow for additional operational flexibility. These changes are the result of consideration of further input and analysis from the industry as part of the consultation and decision making process.

The regulations have been laid before the House of Commons, are due to come into force on 6 March 2011.

These regulations enable an AIF with holdings in non-reporting offshore funds to treat those holdings as if they were holdings in reporting funds in certain circumstances.  By doing so, for the purposes of making distributions, an AIF will not be subject to corporation tax on any gains that it realises on disposal of its holding. This will result in similar tax treatment of UK investors in AIFs to that of UK investors directly invested in offshore reporting funds holding interests in non-reporting offshore funds.  The change should better align the competitive position of AIFs with offshore reporting funds.

Following consideration of industry comment and suggestions, a change has also been made to the proportion of assets that an AIF can hold in non-reporting offshore funds without the AIF being subject to the special tax treatment that applies to a fund investing in non-reporting offshore funds. This proportion is limited in order to prevent the use of such funds by individuals taxable at the higher rates of income tax to convert underlying income to capital gains. Following the reduction of the margin between the capital gains tax rate and the higher rates of income tax that limit can now be increased to allow more flexibility to AIFs.

Other minor drafting changes follow from comments made on the draft as well as from further legal analysis of the draft text.

If you would like further information on the above, please contact Keith Rushen on 0044 (0)20 7486 2378.

Contact Us