NON-REPORTING FUNDS

by John McLaughlin, in ,

To date, Non-UK domiciled individuals who have been resident in the UK for less than seven years may not have worried too much about the UK taxation of their foreign (non-UK) investments. They can legally ignore these (provided that this income is not remitted to the UK) by claiming the “The Remittance Basis” of taxation.

From 6th April 2025, the new Foreign Income and Gain (FIG) regime will replace the current rules for taxation non-domiciles. It could mean that foreign investments are exposed to UK taxation much earlier than expected. For those affected, it is crucial that they review their portfolio before 5th April 2025.

Alternatively, a UK investor with a foreign investment portfolio should still be aware of the potential tax implications of certain non-UK investments. Please note, this is not investment advice but merely a brief description of the tax consequences of certain foreign investments.

The investments in question are collective investment arrangements (funds/units trusts etc) that are more commonly known as “Non-Reporting Funds” (NRF). There are some non-UK funds that do have “Reporting” status agreed with HMRC and which do not carry the punitive tax treatment of the “Non-Reporting” variety. These “Reporting” funds are published by HMRC on their List of Approved Funds. Offshore funds that do not appear on this list are Non-Reporting Funds.

 

Tax Treatment
The treatment of the two types of fund are as follows;

Reporting funds – Favourable tax treatment
• Capital losses are available to offset capital gains
• The net gain is reduced by the annual exemption (currently £3,000 (2024/25))
• Any residual gain is subject to capital gains tax rates (18%, or 24% if a higher rate taxpayer).

Non-Reporting funds – Punitive tax treatment
• Capital gains and losses must be separated. The gains are treated as “offshore income gains (OIG)” and losses remain as capital losses. They cannot offset one another.
• The annual exemption cannot be used to reduce the OIG.
• OIGs are subject to income tax rates (up to 45% for additional rate taxpayers)

 

All of this can have a dramatic effect, certainly if an individual has made a series of losses and would be looking for some reprieve by offsetting their gains.

In our experience, these are most commonly found in a portfolio of a recent arrival to the UK. They would have a foreign investment portfolio and have not received advice prior to arrival. So, for those approaching their 8th tax year of residence or affected by the new FIG regime from April 2025 mentioned above, then they may benefit from looking at the List of Approved Funds to make their investments as tax efficient as possible before it’s too late.

The 2024/25 tax year may be the final year where the remittance basis is available for some individuals. This could be the ideal opportunity to dispose of these “toxic” investments before the UK has the opportunity to apply their punitive tax treatment. There are also various options for remitting this money to the UK in the future at a reduced rate under the Temporary Repatriation Facility. We strongly recommend that you speak with an investment professional about whether this is the best option for you.

If you would like to discuss this further, please do not hesitate to contact one of our tax consultants for more information.