Indian Mutual Funds

A common question our Tax Investigations & Disputes team are regularly asked: how are clients’ Indian mutual funds investments taxed in the UK?

The mutual fund industry in India is sizeable and this has resulted in exponential interest from investors around the world. As a result the funds industry in India and internationally is booming. But with HMRC’s offshore reporting funds list not featuring a single Indian fund, it has left many advisers struggling to identify the type of product their clients have for UK tax purposes.

Size of the Indian Mutual Funds market

As of the 30^th September 2021, the total number of Indian Mutual Fund Accounts stood at a huge 111.7m! With the assets under management (AUM) having increased to the equivalent of around £350bn by the same time.

Learn More

Here in his latest article for Taxation Magazine, our own Amit Puri, who leads our Tax Investigations & Disputes team, takes an in-depth look at the issue. Amit shares his own knowledge and experiences from dealing with different types of offshore funds to provide this insightful article which is a must read for anyone involved with offshore or mutual funds.

Read the full article here, or here and Taxation Magazine

What are Offshore / Mutual Funds?

The definition of an ‘offshore fund’ is limited to ‘mutual funds’ so in effect they are the same for UK resident investors where the funds are based in a territory outside the UK. The statutory definition of the term ‘mutual fund’ is provided by TIOPA 2010, s356.

Broadly, the mutual fund definition applies to a company (s 355(1)(a)), a trust (s 355(1)(b)) or any other vehicle or arrangement (s 355(1)(c)) that has the following characteristics:

it is not UK tax-resident;
it exists to enable participants to take part in the benefits arising from the acquisition, holding, managing, or disposing of assets of any description;
the participants do not have day-to-day control of the management of the property, whether or not they have the right to be consulted or give directions; and
a ‘reasonable investor’ would expect to be able to realise any investment based entirely or almost entirely by reference to the NAV of the assets under management or, alternatively, by reference to an index of any description.

The legislation is drawn widely and encompasses any arrangements with respect to property of any description, including money, so it does not matter what the underlying investments are. Whether arrangements amount to a mutual fund depends on three conditions (conditions A to C), all of which must apply to the ‘participants’ of the arrangements that broadly have the characteristics of pooled investments.

Condition A requires that the purpose or effect of the arrangements is to facilitate pooled investments which enable the participants to ‘participate in the acquisition, holding, management or disposal of the property, or to receive profits or income from those transactions or sums paid out of such profits or income’.

Condition B is that the participants do not have day-to-day control of the management of the property.

Condition C requires that a ‘reasonable investor’ would, as a participant in the arrangements, expect to be able to realise all or part of an investment in the arrangements on a basis calculated entirely or almost entirely by reference to either:

the net asset value (NAV) of the scheme property; or
an index of any description.

‘Participants are the beneficial owners’ of interests in the arrangements or the property underlying the arrangements, whether or not they have legal ownership of their interests.

‘Realisation’ of an investment has a wide meaning, and so it may be by redemption, by sale to a third party, or by distribution of assets on the termination of a fund. For example, if a fund has a limited life, it would not matter that an investor may not be able to sell their shares or units on the open market for a sum representing NAV or close to NAV, as there would be an expectation that the investment could be realised at or close to NAV when the fund terminated.

A ‘reasonable investor’ is not defined in the legislation. So it is assumed that such an investor (whether an individual, corporate investor, or otherwise) would have read the investment documentation and taken account of all additional material and communications of any nature whatsoever provided by the mutual fund before investing.

Indian Mutual Funds & UK Taxation – A Little Known Problem!