OFFSHORE REPORTING FUNDS – EXCESS REPORTABLE INCOME AND CAPITAL GAINS

Clients who hold offshore funds often have additional complexity when it comes to their annual tax returns – this article helps to explain the basics of offshore income reporting and how Transact can help your clients ensure they get their reporting right.

Background

The offshore reporting funds (ORF) regime in the UK was introduced in 2009 and applies to investment funds located outside the UK. It aims to provide a tax treatment similar to that of UK-authorised funds for UK investors.

The ORF regime allow offshore funds to accumulate income and for gains to be subject to capital gains tax (CGT), but funds are required to report the accumulated income to investors each year so that they can include this income in their tax returns.

It’s worth noting that offshore reporting funds that distribute income to investors also tend to accumulate small amounts of income that need to be reported. The income is referred to as excess reportable income (ERI). Note that not all offshore funds will be “reporting” funds. If they have not obtained ORF status from HMRC, the gains on disposal are taxed as income, and not under the CGT rules.

How is income reported?

The ERI must be reported to investors six months after the fund’s accounting period end date and, for income tax purposes, the accumulated income is taxable from the date it is reported. Investors in UK authorised investment funds (AIFs) usually receive a tax voucher in relation to distributions from fund managers, which will state the amount of the taxable distribution along with the amount of equalisation (if new units have been acquired during the accounting period to which the distribution relates).

ORF managers, however, are not required to send this information to investors. Instead, they can publish reports, often referred to as “Reports to Participants,” which include details such as the ERI and equalisation, per unit or share. These reports are usually available on the fund manager’s website. The investor is then required to calculate any tax liability based on their unit holding at the end of the reporting period. To make reporting of these amounts simple for investors, we include this information in our annual reports and the taxable income reports available online.

How does the income impact the gains?

Similar to accumulated income from a UK authorised investment fund (AIF), accumulated income from the ORF can be added to the cost pool when calculating gains on disposal. While the accumulated income is taxable in the year it is reported, the adjustments to the base costs for CGT apply from the fund’s reporting end period (i.e. six months earlier).

The problem

The online capital gains tool that we provide on Transact Online will automatically include any ERI and equalisation from ORF. Even though our capital gains report takes the ERI into account, it should be remembered that it is not possible to calculate accurate costs for capital gains purposes until the publication and upload of the ERI data into our systems (which can take another eight weeks after publication by the fund manager).

Example

If an ORF has a fund year end date of 31 January 2025, the fund manager will publish their ERI data on 31 July 2025. For income tax purposes the ERI is deemed to have been paid on 31 July 2025. If an investor disposes of their units on 31 March 2025 they are still required to account for the tax due on the accumulated income that gets reported in the 2025/26 tax-year. However, as the disposal took place on 31 March 2025, any gain arising on the disposal is taxable in the 2024/25 tax year. However, the correct costs to calculate the gain will not be available until the ERI information has been updated in our CG tool, which is likely to be the beginning of October 2025.

Any CG reports generated before our records have been updated will need to be regenerated once the ERI has been included. Usually, the addition of ERI leads to an increase in costs, producing a lower gain. Any equalisation attributable to the distribution is treated as a return of capital and will have the opposite impact.

All information is based on our understanding and interpretation of applicable law and regulation.

 

 

1. Introduction
2. TOL Recent Enhancements 
3. Our New Account Opening API
4. CURO 3 & Fee Reconciliation
5. FCA Ongoing Service Review
6. Transact – BlackRock MPS Update
7. Offshore Reporting Funds – Excess Reportable Income and Capital Gains
8. Tax Year End Reporting – Annual Allowance Charge And Scheme Pays
9. A Study In Gifting – Distributing Benefits From A Relevant Property
10. Interest On Cash
11. Transact Events 2025