HM Treasury made regulations on 9 February 2011 that introduce changes for authorised investment funds (“AIFs”) with holdings in non-reporting offshore funds (“NROFs”).

Investments by AIF’s in NROFs (unlike investments in reporting funds) can give rise to taxation on any capital gains arising from such investments. Accordingly, the tax position of some AIF’s (albeit probably a small number) will be improved as a result of a change brought in by these regulations to treat certain holdings that would otherwise be NROF’s as if they were reporting funds provided certain conditions are satisfied.

In addition, the regulations also increase the proportion of assets that an AIF can hold in NROF’s from 20% to 50% before their investors become automatically subject to a different and often less favourable income tax treatment. Hedge or alternative funds are quite often NROFs and so these changes will be of significance for AIFs that invest in such funds.

These changes should better align the competitive position of AIF’s with offshore funds.

The regulations concerned (the Authorised Investment Funds (Tax) (Amendment) Regulations 2011) are due to come in to force on 6 March 2011.