HMRC targets offshore investment fund holders

HMRC will be sending high net worth individuals advisory letters warning them to submit offshore investment returns correctly to avoid tax penalties  

These letters will be sent out early this month by HMRC’s wealthy & mid-sized business unit and are designed to educate customers on offshore investment funds so they comply with their tax obligations in advance of the online self-assessment deadline- 31 January 2020.

HMRC’s compliance crackdown comes after research identified information about overseas investment funds leading the tax attorney to believe individuals may have invested in these types of funds without full disclosure.

UK tax legislation broadly defines an offshore fund as an investment scheme of where the trustees or operators are not resident in the UK. Offshore funds may exist in various legal forms:

  • companies;
  • unit trusts;
  • investment partnerships; and
  • contractual agreements.

The status of the fund will affect how HMRC tax these investments and individuals must declare the right amounts on their tax return.

The total amount of all the distributions paid to investors during the fund’s accounting period is called Reportable Income. Individuals will need to declare this in their UK Self-Assessment tax return.

Any profit from a fund that is not distributed to investors, either as dividends or interest, is called Excess Reportable Income (ERI). ERI is treated as a distribution of income to the investors.

For UK tax purposes, HMRC treats this distribution as if the individual had received the ERI on the Fund Distribution Date.

This is six months after the end of the fund’s accounting period, which means it should be included in the ERI in the UK Self-Assessment tax return for the tax year, which includes the fund distribution date.

HMRC warned that people often make a mistake when disposing of an interest in a non‐reporting fund.

If offshore income and gains are reported incorrectly, they will have to pay a 200% tax penalty on any increase in the value of the investment.

When calculating this increase, they must not use any capital gains tax indexation allowance or taper relief, it must treat it as non-dividend income.

An HMRC spokesperson told Accountancy Daily: ‘Ensuring the correct UK tax is paid on offshore investment funds can be complex. This activity is to help people with complex affairs make sure that they have paid the right amount of tax at the right time.’

Gary Ashford CTA, partner at law firm Harbottle & Lewis, said: ‘There have been various UK disclosure campaigns in recent years and many of the disclosures made will have included corrections on such matters, alerting HMRC to the scale of the problem.

As the automatic exchange of information has progressed - more recently with the introduction of the Common Reporting Standard - HMRC will have become aware of UK residents holding overseas investments, including in offshore funds.

‘In 2009 the UK introduced new rules around offshore funds, essentially placing them into reporting funds and non-reporting funds.

‘The tax treatment between the two status of funds are very different, most notably with disposals of interests in non-reporting funds being charged to income tax rather than capital gains tax.

‘Given that capital gains tax rates are significantly lower than income tax, this can result in significant tax under payments, with consequences for interest and penalties.

‘It has long been the case that significant tax issues can arise from such investments. Given that the UK has just been through a campaign to report all offshore income and gains correctly or face 200% penalties I would urgently advise such investors to double check these matters have been correctly dealt with.’

HMRC Sample letter- offshore investment funds

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