On November 12, 2009, the new Offshore Funds (Tax) Regulations 2009 were enacted in the United Kingdom (U.K.).  At a general level, the new U.K. tax regime may have a profound effect on the tax rate paid by U.K.-based investors in offshore hedge funds.  Specifically, the new regime has the potential to narrow the circumstances in which U.K.-based investors in offshore hedge funds are required to pay tax on most returns at higher income tax rates, as opposed to lower capital gains tax rates.  Next year, the highest marginal income tax rate in the U.K. may rise to 50 percent, while the capital gains rate for individuals is likely to remain at 18 percent.  While the new regulations remain subject to final legal and technical checks, they will be effective for accounting periods beginning on or after December 1, 2009.  For several years, the U.K. government has been working on replacing the “distributing funds” tax regime with a “reporting funds” regime; the new regulations embody a “reporting funds” regime.  Although the general purpose of both regimes is the same – to prevent investors from rolling up income offshore and paying tax at a lower capital gains rate when the relevant investment is sold – the change in regime may affect the type of fund that may generate returns subject to capital gains treatment for U.K. investors.  This article outlines the mechanics of the new regulations and examines their likely effect on U.K. and global hedge fund managers and investors.  In particular, this article details: the definition of “offshore fund” under the new regulations; reporting versus distributing funds; the new rules with respect to investments by offshore funds in other offshore funds; transitional arrangements; cross investments; the white list of qualifying transactions that will be treated for tax purposes as investment activities as opposed to trading activities; and administrative and legal consequences of the new tax regime.