To put things in context, offshore funds are classed as either reporting or non-reporting. Whereas UK-based investment funds are generally required to report the amount of undistributed income to their UK investors, offshore funds (if non-reporting) do not have to. If they choose, an offshore fund can apply for UK reporting fund status, mandating them to disclose the income they have accrued during the financial year.

The income earned from a reporting fund during a reporting period that is not distributed is called excess reportable income (ERI). ERI may be thought of as an additional profit that accumulates in an offshore fund, i.e., a notional distribution. Gains on disposals of reporting funds are subject to capital gains tax (CGT) at a rate of up to 20 per cent; this is in contrast with non-reporting funds, which are subject to income tax up to 45 per cent.

Considerations

ERI payments are usually declared and payable six months after the fund’s accounting period ends. If a trust is being shut down and is unaware of the pending ERI amount, the exit charge for the value of the trust may need adjustment to account for the payment. On a positive note, the amount of ERI subject to income tax can be added to the CGT base cost of the reporting fund units, thereby reducing the capital gain when the units are sold.

If a trust invests in a non-reporting fund, any gains made when sold are treated as subject to income tax but losses are offset against capital gains.