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Are you at risk from penalties from offshore investments?


Having reached the end of the tax year, you’ll be looking at the information you need to complete your 2022/23 tax return. While you might be familiar with the process, it’s worth giving extra thought to what’s required for any offshore investments you may have. That’s because offshore reporting is one of the most common pitfalls that catch investors out, potentially resulting in a hefty bill.

If you’re one of around 10% of people in the UK with an offshore investment fund (outside of an ISA or a pension), you must pay tax on income and gains from those funds, even though you may not always be aware that any income has been generated.

HMRC is clamping down on offshore financial interests, increasing their investigations and applying fines for offshore reporting errors. If you make a mistake on your return, you could receive fines dating back several years, plus extra charges from your accountant to review and rectify everything. This could easily end up doubling or tripling the rate you would have paid had you understood your correct position from the start.

You might have already been alerted to the issue if you received one of the hundreds of thousands of offshore ‘nudge’ letters issued by HMRC as part of their campaign to increase compliance. These letters prompt you to review your returns carefully to check if you might have any offshore income or gains to declare. But a crucial piece of the puzzle is missing: many investors don’t know enough about the status of their funds to understand their exposure.

For example, it may be that your portfolio is held on onshore but still contains a fund domiciled elsewhere. Even in the financial services industry, there is a lot of confusion about the tax consequences of offshore investments.

To understand the implications, it’s important to look at the wider context. Offshore funds are classed as either reporting or non-reporting. UK based investment funds are generally required to report to their UK Investors the amount of undistributed income, whereas offshore funds (if non reporting) may keep that information to themselves. Alternatively, an offshore fund can apply for UK reporting fund status, meaning they have to disclose the income they have accrued during the financial year.

Excess Reportable Income

The income you earn from a reporting fund during a reporting period, which isn’t distributed, is termed Excess Reportable Income (ERI). You might not realise there is any tax to pay because ERI is a notional distribution. You don’t actually receive the income; however, it is still chargeable to tax. Adding to the problem, this notional tax position is commonly missing from your consolidated tax voucher, or it could be incorrect, forcing you or your accountant to check the fund’s status and source ERI data, which is notoriously hard to find.

That said, providing you have the right information to make an informed decision, investing in an offshore reporting fund can be beneficial. Profits on reporting funds are subject to capital gains tax rate up to 20%, in contrast with non-reporting funds, which are subject to income tax up to 45%. This difference can result in a significant saving on disposal of your investments. As such, it’s no surprise that the number of reporting funds is growing – according to HMRC they rose from approximately 76,000 funds in April 2020 to over 93,000 in April 2022.

Ultimately you are responsible for the accuracy of your tax return, and staying compliant starts with checking exactly what your portfolio includes. If you are investing through a platform, the biggest questions to ask are: what am I investing in? Is this an onshore or offshore fund? Is it reporting or non-reporting? And find out the tax implications, i.e. if you make a sale will you pay income tax or capital gains tax? Also make sure that the platform provider is giving you all the information you need to pass onto your accountant or complete a self-assessment form.

While a fund’s status is displayed on HMRC’s list of reporting funds, this information doesn’t flow through well enough to accountants and investors at the moment. It needs to be easier for taxpayers to understand their position and access the relevant data. Notional income should be included as standard in the consolidated tax voucher, which you rely on at the end of the year. It would also improve the situation if more platforms highlighted the reporting status of funds, as well as sharing details with investors about how the units they purchase will be affected by tax treatment in the future.

Offshore investing is a complex area, creating challenges for investors and the industry as a whole. As the number of offshore reporting funds is only likely to grow, making information more visible will create benefits across the board, especially as the recent CGT allowance changes mean more taxpayers will soon have gains to report.

Michael Edwards is the Managing Director of FSL, which provides specialist investment tax solutions for the wealth management industry. FSL (Financial Software Ltd.) provides specialist investment tax solutions that simplify the process of management, analysis, and reporting. The firm has a proven track record for developing market-leading products since 1994, including CGiX, the industry’s award-winning capital gains calculator.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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