HMRC has classified overseas funds as `reporting` and `non-reporting`.
Reporting means funds which provided certain data to HMRC on periodic basis. HMRC publishes a list of these funds monthly. In case your mutual fund is such a fund your gain will be taxed as Capital Gains.
Non-reporting means any funds which do not comply with these requirements.
Recent article in taxation magazine states that not a single fund from India is a reporting fund.
When you dispose offshore non-reporting funds
Any gain on disposal of investments in Offshore non-reporting Mutual funds (i.e., any fund based outside UK) will be taxed at the highest marginal rate of tax and not as capital gains.
Double whammy – in case of loss, the loss is only allowed to be set-off against capital losses and not against `income gains`.
Lastly, annual capital exemption is also not available to such gains.
Conclusion: From a tax perspective, if you wish to invest in Indian stock market better invest directly in stock and shares and not via a Mutual fund.
Bonus:
- An article with an example.
- This is a complex area of law; further information can be seen at HMRC Investment Funds Manual – IFM12000 and IFM13000.
- Offshore gain is treated for tax purposes as miscellaneous income – [see Tolley Income tax annual 50.3] to be mentioned in SA106 2023 in Box 41.
Further reading:
1. HS265 Offshore Funds
2. Visit our Worldwide Disclosure blog.
3. To know about taxation of UK mutual funds.