Tax hit for UK investors in offshore funds

Interesting article on Citywire today covering the tax position of offshore funds for UK investors:

Wealth managers who unwittingly put their clients into the wrong type of offshore fund, structured product or ETF risk saddling them with a tax hit of up to 50% on their investments, accountants have warned.

Small boutique funds and new products coming to market that are based offshore may not have reporting funds status (RFS), or could still be in the process of seeking it. Many investors also view ETFs as shares rather than funds, exacerbating a lack of understanding on the issue.

Investors who redeem holdings in funds that do not have RFS could face punitive income tax rates of up to 50%, rather than capital gains tax of either 18% or 28%.

This is a topic I’ve covered on the site before: Avoid the tax trap on foreign funds. Unfortunately, it is no surprise to come across individual investors falling foul of this, since the rule is completely counter-intuitive at first – why would you expect that capital gains would be taxed as income?

However, it is a little more surprising if any significant amount of wealth manager clients are having this problem – as the accountants in the article are suggesting – since the issue is not exactly obscure and one would expect it to be well-recognised among any advisers who are putting clients into offshore funds.

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