With effect from 1 December 2009, the definition of what constitutes an "offshore fund" for UK tax purposes was amended and new regulations were made introducing a "reporting fund" regime, which replaced the old "distributing fund" regime. It is important for UK investors to know if they are investing in an offshore fund, as gains on disposals of investments in an offshore fund will be taxed as income, not capital, unless that fund is certified as a "reporting fund".

The main aim of the offshore fund rules is therefore to prevent UK investors from rolling up income offshore. The new definition states that an "offshore fund" is any non-UK company, trust or other vehicle created to enable investors to participate in the acquisition, holding or management of property (or to receive profits from such activities) where the investors do not have day to day control of the management of the property and a reasonable investor would expect to be able to realise all, or part, of their investment by reference to the net asset value of the property or an index of any description. This new definition no longer includes the reference to the realisation of an asset within seven years (which was key to the definition of distributing fund), and as a result, a number of "limited life" funds may now fall within the definition of an offshore fund for investors who acquire an interest in the fund on or after 1 December 2009.

A UK investor who disposes of an interest in a reporting fund will be taxed on a capital basis, but will also be subject to UK income tax on its share of the underlying income generated by the fund, regardless of whether that income is distributed or not. Unlike the old regime, where applications were made on a retrospective basis at the end of each accounting period, the new regime is a "one-off" prospective application and the reporting status will be maintained until either the fund gives notice to HM Revenue & Customs that it wishes to leave the regime or it is forced to leave the regime as a result of repeated breaches of the regulations. The new rules aimed to bring clarity and simplicity to the offshore fund regime; one year on, the aim of simplifying the regime seems to have been achieved, but there still remain some areas of uncertainty