Tax treatment of offshore income gains for non doms

UK Residents are subject to UK tax on the profit on disposal of an interest in an offshore fund. As most members will know, the UK tax implications differ according to whether the fund is a reporting fund or a non-reporting fund. If an offshore fund is not a reporting fund a UK resident investor who disposes of an interest in the fund is treated as having made an offshore income gain and the gain will be subject to income tax at their highest income tax rate (ie up to 50%). If the investor is investing in a reporting fund, it will pay capital gains tax on any gain at the current rate of 18% or 28% but will also be required to report their proportionate share of the total Fund income. Any distributions by the funds will be treated as income in the normal way and will be subject to the dividend tax rate if the payment is from a Fund largely invested in equities. As from 22 April 2009 these types of distributions will attract a non-repayable tax credit. If the payment is from a Fund which is substantially invested in interest bearing assets, meaning more than 60% by asset value, then the payment will be treated as 'interest' and taxed at the individuals highest income tax rate. No tax credit is available. Non UK domiciliaries Offshore income gains are treated as Relevant Foreign Income for the purposes of the Offshore Fund legislation. As above if the individual is investing in reporting funds any gain realised on the disposal of his interest will, subject to the remittance basis, be charged to capital gains tax. A gain on any disposal of a non reporting fund will be chargeable to income tax but again this is subject to the remittance basis being claimed. Separation of source If a non dom is claiming the remittance basis, in many cases it won't be important to assess whether the gain is an income gain or capital gain. However, where funds will be remitted to the UK careful consideration should be given to segregating offshore income gains and capital gains in order to be able to identify the source of any funds remitted to the UK. Mixed funds As has been noted by one of our members, an offshore income gain, just like any other gain will constitute a mixed fund for tax purposes. A mixed fund doesn't just include a bank account, but also includes any asset that consists of more than one source of income, gain or capital. Therefore if the remittance basis is claimed in a year that an offshore income gain arises, any future remittance of the proceeds would be subject to the mixed fund ordering rules. This means that remittances would be the taxable income first before the tax free capital was remitted. Losses on offshore income gains The Offshore Funds legislation only applies where there is an offshore income gain so where a loss arises on a disposal there is no income tax relief. The loss will however be allowable for Capital Gains Tax purposes. Non residents don't qualify for any loss relief but non domiciled individuals may if they make the appropriate loss election. Offshore Trusts Where an offshore income gain arises to a non resident trust the trustees are not subject to UK tax on the gain. However UK beneficiaries who receive capital payments from Offshore Trusts are subject to income tax to the extent that the capital payment is represented by an offshore income gain. Non domiciled UK resident Settlors and Beneficiaries are able to benefit from the remittance basis of assessment on offshore income gains.