Offshore Income Gains

In the UK, it used to be possible to convert income into a capital gain by investing in an offshore fund that accumulated the income. When the holding was sold, a gain would arise and be subject to CGT, but this gain might be covered by the annual exemption to CGT and so escape tax completely.

This was blocked in 1984 and a complicated mechanism introduced for taxing these ‘offshore income gains’. Broadly, the gain is calculated according to the CGT rules but without indexation. This gain is then subject to Income Tax. The gain is not completely exempt from CGT. However, any income gain that arose can be deducted from the proceeds. So, it usually works out that they are exempt. The Inland Revenue publishes a list of the funds that do not distribute enough of their income (Non-Distributor Funds) and need to be treated in this way.

Trust Accounts does not attempt to handle these (and other) rules covering offshore income gains. The main issue is to spot the income gains so that they can be processed manually. Also, they should be posted as an exempt disposal, but an operator can easily forget this.

To handle these:

• The security should have the attribute ticked for Non-distributor status. This attribute can only be ticked for overseas securities, i.e. those with Overseas Income ticked.
• When a disposal is entered the application checks that it is posted as an exempt disposal, i.e. one using a D2 or D6 CGT rule code. If not, then a warning appears. CCH Software recommends that a movement code is created for these disposals:

When the Capital History is run, the message ‘Exempt’ usually appears against exempt disposals. However, for income gains, the message ‘Inc. Gains’ appears. This is also true if there was a loss. This message makes it easy to identify the transactions and to post the appropriate income, gain or loss manually through CCH Personal Tax.