Tax on offshore funds that do not have UK reporting status

tg99

Is my understanding correct in that whilst any gain (calculated in the same way as for reporting funds, shares etc) from a non reporting fund is subject to income tax, any loss can still be set against capital gains in the normal way (but not against income tax)? And that the same matching rules apply as they do for capital gains tax (eg 30 day rule, 104 holdings etc)?

bowlhead99

Yes.

Longer answer:
Basically you do your normal capital gains calcs. Say that produces a basic gain of £20,000. That will be chargeable as £20,000 of 'offshore income gain' which is charged at your marginal rate on the income tax system. For the CGT system you have still made a gain, but to avoid you being double taxed, you can take £20000 of gain which is going through the 'offshore income gain' system, off the capital gain to leave you with zero capital gain remaining for the CGT regime.

However let's say you lose £20000 on the investment instead. You do the capital gain calc and it says you've lost £20k. The 'basic gain' to be considered under the offshore income gain rules is not a gain, it's a loss ; so it's treated as nil for the purposes of the offshore income gain rules. This means there's no ability to knock it off your income tax bill, as it never made it into the OIG system - you can only look to the CGT system to get relief on the loss.

So then you would say for CGT purposes: hmm, my loss on this disposal is £20k, the amount I can deduct as having been dealt with under the OIG system is £nil, so my loss for CGT is £20k less £nil which is a £20k loss. You are still in the CGT system for that £20k loss and could take relief against your CGT gains of the current year or carry forward to use against future gains. Although, afaik, if you were carrying forward some CGT losses to future years, they wouldn't help against future 'OIG' gains because such future 'basic gains' would be calculated and flip over to the OIG system before you got a chance to relieve them with CGT losses.

You may find https://www.gov.uk/hmrc-internal-manuals/offshore-funds-manual/ofm17500 to be of use.

tg99

Thanks for the detailed reply. One thing, where you say !!!8220;You are still in the CGT system for that £20k loss and could take relief against your CGT gains of the current year or carry forward to use against future gains!!!8221;, presumably you can only carry forward net losses after all your capital gains and losses have been added up for the year? E.g. imagine it was a £5k loss rather than £20k then if you had no other gains or losses that year you could carry it forward. However, if you had say other net gains of £3k you could only carry forward £2k, if you had other net gains of £6k you could not carry any of it forward (and hence can!!!8217;t do anything to avoid effectively !!!8216;wasting!!!8217; the £5k loss in the latter example since the £6k of other net gains was already within your cgt annual exempt amount)? I do believe you can however elect which tax year in the future to bring any carried forward losses back into play, e.g. if the following year you had net gains of say £10k you would continue to carry the loss forward given the £10k is within the exempt amount so nothing to pay.

bowlhead99

tg99 wrote: »

One thing, where you say

"You are still in the CGT system for that £20k loss and could take relief against your CGT gains of the current year or carry forward to use against future gains"

presumably you can only carry forward net losses after all your capital gains and losses have been added up for the year?

Yes, when I said you can take relief *or* carry forward... it's not to say you have a choice- I just meant whichever the circumstances dictated.

So, if you have other gains, your capital loss can be used against those other capital gains... (and must be, and will be all used up if there are sufficient capital gains, whether or not you would have preferred to have been allowed to use your exemption against the gross capital gains instead of only against the net capital gains after offsetting the current year capital losses); but if there were any left over losses after you had set them against your capital gains, you can carry them forward, as long as you declare them so HMRC knows about them. What you *can't* do is use them against income tax

E.g. imagine it was a £5k loss rather than £20k then if you had no other gains or losses that year you could carry it forward.

Yes

However, if you had say other net gains of £3k you could only carry forward £2k,

Yes

If you had other net gains of £6k you could not carry any of it forward (and hence can't do anything to avoid effectively 'wasting' the £5k loss in the latter example since the £6k of other net gains was already within your cgt annual exempt amount)?

Yes in that situation your £6k capital gains were already covered by the exemption but having a £5k loss means you only have £1k of net gains so you only need £1k of the £11k+ exemption that HMRC would have been willing to give you, so you don't get as much of a good deal out of HMRC. You can't choose to grab a bigger exemption and take the losses forward instead.

You could of course plan it better and simply not make one of the disposals so either you don't realise the £6k gain yet (allowing you to carry the £5k net loss to a future period) or don't realise the £5k loss (allowing you to use a bigger exemption against the £6k gain, and make the £5k loss in some future year instead.. But that relies on to being able to manage without the cashflow from one of the disposals this year, and maybe by next year the gain would not be as much as £6k or the loss might be worse than £5k

I do believe you can however elect which tax year in the future to bring any carried forward losses back into play, e.g. if the following year you had net gains of say £10k you would continue to carry the loss forward given the £10k is within the exempt amount so nothing to pay.

Yes once your unused net losses to carry forward have been recorded by HMRC, you don't *have* to use them at the next opportunity, and if you do, you don't have to use all of them.

For example if in a couple of years time you have £13k of net gains and the annual exemption is £12k at that time, you can choose to use just £1k of the carried forward capital losses to make £12k of net gain, and the full £12k of exemption will mean there's no tax to pay, leaving most of your carried forward losses unused, to carry forward again.

Sounds like you have it sussed.