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UK To Improve Tax Treatment Of Offshore Funds

by Robert Lee,, London

06 March 2007

HM Revenue and Customs has confirmed that changes will be introduced in Finance Bill 2007 which will improve the tax treatment of certain investment trust companies (ITCs) investing in offshore funds.

Investment Trust Companies (ITC) offer a way for investors to gain exposure to a portfolio of diversified investments. If they meet certain conditions, they are approved by HMRC, and are eligible for particular tax treatment. One of these conditions is that the majority of their income is derived from shares and securities (referred to as eligible income).

As part of its portfolio, an ITC can hold investments in collective investment schemes resident outside the UK (offshore funds). If the offshore fund is not certified by HMRC as 'distributing', the gains on sale of shares or units in that fund are referred to as "Offshore Income Gains" (OIG). These OIGs are included in the taxable income of the ITC.

Until 2005, the prevailing practice was to treat these OIGs as part of the eligible income of an ITC. As part of work on the reform of taxation of UK investors in offshore funds, HMRC realised that this was incorrect, and a change of interpretation was published.

Whilst this could potentially have adversely affected some ITCs, HMRC said that there has been close cooperation between the department and industry to find a solution that will prevent this from happening. The change of interpretation was originally introduced for accounting periods beginning on or after 1 January 2006, but following discussions with industry around the time needed to adjust their operations, this has been delayed.

According to HMRC, the legislation in Finance Bill 2007 will provide certainty for ITCs that Offshore Income Gains will not impact on their status as approved Investment Trust Companies.

A comprehensive report in our Intelligence Report series examining offshore investment, offshore stock exchanges, trusts and hedge funds is available in the Lowtax Library at and a description of the report can be seen at

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