CIOT Comments Further On Implications Of Government's Offshore Fund Proposals For Charities

by Jason Gorringe, Tax-News.com, London

25 August 2008

The Chartered Institute Of Taxation (CIOT) last week issued further comments on changes to the UK's offshore funds regulations proposed by the government earlier this year.

In its initial response to the consultation on the modernisation of the offshore funds regime launched by the UK authorities, the CIOT commented with specific regard to charity investors, observing that:

"The current offshore funds regime provides specific exemptions for charity investors to the extent that their offshore income gains are applied for charitable purposes. As the offshore income gain generally represents a gain realised by the charity when it exits the fund, the availability of the charity exemption is not usually in doubt."

"In so far as the proposals tax investment in non-reporting funds in the same way as the rules currently apply to investment in non-reporting funds, they preserve the existing anomaly that a charity can be taxed on its share of a closely controlled fund’s offshore income gain regardless of whether the charity has realised any value from its investment."

The Institute continued: "However, the proposals for taxing investment in reporting funds pose new problems for charity investors, in that they will be required to report for tax purposes each year their share of the reporting fund’s undistributed income. As the income is undistributed, it cannot be applied to charitable purposes and would therefore not qualify for the charity exemption."

It further observed that:

"As regards offshore bond funds, under the new regime the loan relationship rules only apply where a corporate charity has a relevant interest in a bond fund that is a non-reporting fund. However, the risk of the new rules applying to tax a charity investor on its share of undistributed bond fund income will remain the same, as charity investments in bond funds that are reporting funds will be taxed on the same basis as charity investments in other reporting funds."

"Finally, the Finance Bill 2008 proposes to deny investors in offshore funds the new right to a 10% tax credit on foreign dividends (announced in Budget Note 29). While this does not affect the charity investor’s ability to claim exemption for offshore fund dividends, it means that charitable trusts which incur non-charitable expenditure will not be able to elect (under Income Taxes Act 2007 section 542) to match that expenditure with offshore fund distributions without losing the benefit of the exemption."

In its latest comments, published on Friday, the CIOT reiterated that:

"In summary, we believe that the offshore funds regime should exempt charity investors on the basis of their realised income and gains. A realised basis is simple to apply, results in the fair reporting of the real investment return achieved by the charity and enables its application to charitable purposes to be more easily verified. We believe that this makes sense in the context of the Government's objectives."

It continued:

"Essentially, the concerns of charity investors in offshore funds arising from the new regulations boil down to two aspects - (i) the taxation of undistributed fund gains and (ii) the taxation of undistributed fund income - and how these interact with the reliefs for charities. The first issue arises under the existing legislation and is, unfortunately, preserved by the proposed regulations, whereas the second issue arises out of the specific provisions proposed in the draft regulations."

The full text of the CIOT submission can be found in the Tax News Resources section.

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