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Do you owe tax on excess reportable income?

The danger with DIY investing is that you might miss something that gets you into trouble. Something you never knew you didn’t know. Ever heard of excess reportable income? Me neither. But you may well have earned it and owe tax on it.

If you hold offshore funds or ETFs (I’m just going to refer to funds from now on) outside of an ISA or a SIPP then you need to stay behind for some extra homework. Otherwise you can go and play outside.

154. Excess reportable income

Excess reportable income is the amount an offshore fund earns beyond income declared as distributions – whether that be dividends or interest.

This is additional income that can accumulate in your fund throughout the year and the taxman wants his slice.

You must ‘fess up to excess reportable income on your tax return, but it’s an easy one to miss because:

  • It’s an obscure tax hit that’s little discussed.
  • The information you need is tucked away in dusty corners of your fund manager’s website.
  • Basic-rate taxpayers may think it doesn’t apply to them.
  • You may not know where your funds are domiciled.

If your fund isn’t domiciled in the UK (the info should be on the factsheet) then it counts as offshore. This will affect many Monevator readers as most ETFs and a fair number of index funds are domiciled in Ireland.

If you own an offshore fund then you should make sure it has Reporting Fund tax status. If it doesn’t then your funds gains are taxed at income tax rates of 20%, 40%, or 45% rather than cuddly capital gains rates of 18% or 28% (not to mention you’ll miss the chance to use your capital gains allowance and reliefs).

Reporting Funds must produce an income report at the end of their accounting year. This report will show you:

  • The income distributed per share (i.e. dividends or interest payments made) and on which dates.
  • The excess of reportable income over distributions – this is the amount in question. It is the amount that the fund actually brought in per share over and above the distributions you’ve already received.

If the excess reportable income is £1 per share and you own 1,000 shares then tax may be due on £1,000.

How much tax?

You’ll pay income tax at your standard rate if your fund is invested more than 60% in fixed income securities (e.g. bonds and cash).

That’s because distributions count as interest (and are therefore liable to income tax) if the fund breaks the 60% fixed income threshold at any time during its accounting year.

But you’ll pay a gentler, Fairy Liquid rate of tax if your fund pays dividends – in other words if it’s largely an equity fund.

  • Basic rate taxpayers will owe 20% tax on excess reportable income from bond funds. However, they won’t have anything to pay on equity funds because the effective basic rate tax on dividends is 0%, once the tax credit is taken into account.
  • Higher rate taxpayers owe 40% tax on bond fund excess reportable income and a 25% effective tax rate on equity funds.

Note, it’s the amount of shares you owned on the last day of the fund’s accounting year that counts. Multiply that number by the excess of reportable income per share to discover your taxable amount. If you didn’t own any shares at that point, then you’re clean away.

Helpful hints

You count as receiving the excess income on the fund distribution date, which occurs six months after the fund’s accounting year-end date. If the account period ended 31 December 2012 then you notionally took delivery of the swag on June 30 2013 and should note it on your tax return for 2013/14.

Google your fund provider along with search terms like ‘Reportable Income’ or ‘Income Report’ or ‘Reporting Fund Status’ or ‘Investor Tax Report’ to find the information you need.

Not every fund will earn excess reportable income but do check each investment you own every year.

It’s important to remember that excess reportable income applies to accumulation / capitalising funds, too.

In this case all fund income will fall into the excess reportable column as actual distributions are zero. This will be shown in your fund’s report.

The bright spots

You can at least deduct the value of excess reportable income from any declarable capital gains you make in any particular year from selling some or all your fund. (Otherwise you’ll suffer a double tax charge.)

Moreover, if your fund operates what’s known as a full equalisation policy then you can reduce tax due on the excess reportable income of shares you’ve bought in the current accounting year.

Normally a fund’s share price will include a bulge for the income accumulating inside the fund. Later on you’ll be taxed on the fund’s full income distributions including the accumulated portion you had to pay for when you bought in.

Full equalisation funds enable you to deduct an amount per share from your excess reported income or distribution obligations, so that you’re not taxed on income you didn’t benefit from in the first place but actually had to expend capital on.

If this policy applies to your fund then you’ll find an equalisation rate on your contract note or buried on your fund manager’s website.

I haven’t found any index trackers that operate full equalisation.

Consult a tax expert

At this late stage, we should point out that we’re not tax experts here at Monevator and we can’t provide tax advice. We’re DIY investors combing through information in the public domain. We heartily recommend you take advice from a tax professional if you’re in any doubt about what you’re doing.

BlackRock provides some additional Reporting Fund guidance, too.

Frankly, excess reportable income is another wasp’s nest of issues that I never wished to run into, so it’s worth reiterating you can avoid the whole shebang if any of the following apply to you:

  • Your funds are UK domiciled.
  • Are tucked up in a SIPP or ISA.
  • You’re a basic rate tax-payer whose only funds outside of tax shelters are equity funds.

My co-blogger The Investor can’t resist adding, “Anyone who doesn’t use their ISA allowance because someone told them they won’t immediately save tax on dividends as a basic rate payer has been egregiously blindsided: Part 54,758. The benefits of tax-sheltering your money are myriad, and they compound over the years!”

Take it steady,

The Accumulator

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{ 50 comments… add one and remember nothing here is personal advice }
  • 1 Under The Money Tree April 22, 2014, 9:44 am

    Tax sucks.

    I seem to be spending more and more of my time trying to minimise it’s impact on mine and my family’s life. What annoys me most is that it is usually so complex with so many obscure exemptions, reliefs etc that tax planning turns into a nightmare!

  • 2 vanguardfan April 22, 2014, 9:56 am

    Gah. just when I thought I’d got rid of this kind of issue by ditching accumulation units outside of tax shelters.
    Will my accountant pick up on this I wonder?
    And, is this information not required to be on the consolidated tax certificate at year end? (at least with acc units you get the notional dividend on the CTC)…

  • 3 vanguardfan April 22, 2014, 10:09 am

    Ok, so I’ve just had a closer look at last year’s tax certificates. Both have a column called ‘equalisation’. One (from Youinvest) which held shares in overseas registered investment trusts does not have any figures in the equalisation column. The other (from Alliance Trust) held accumulation units in a UK registered OEIC (VG lifestrategy) – this does have a figure in the equalisation column, which I’m darned if I know why it is there or what it means!
    But I am more confident that its something the accountant will know what to do with even if I don’t 😉

  • 4 dearieme April 22, 2014, 12:55 pm

    “You’re a basic rate tax-payer who only owns equity funds outside of tax shelters.” I take it you mean ‘You’re a basic rate tax-payer whose only funds outside tax shelters are equity funds’ ?

  • 5 Cowboy April 22, 2014, 1:28 pm

    @dearieme It works both ways, but without the emphasis on “equity funds” in the spoken word it does look wrong the first way.

    I am looking at these kinds of issues at the moment as for the first time in my life I have enough to think about investing outside ISA and pension wrappers. Without a significant amount to invest it may cost more to hire an accountant than I get back from it. I had already figured out that the income funds would be easier to track and manage outside of tax shelters, but I hadn’t fully appreciated the fixed income implications. Must keep that in mind… along with everything else 🙂

  • 6 The Accumulator April 22, 2014, 1:31 pm

    Nice edit dearime. I’ve updated as you suggest. Cheers!

  • 7 Ric April 22, 2014, 2:09 pm

    Thankfully the more generous ISA allowance coming our way soon will be one more barrier to zero non-tax-sheltered investment out of the way.
    (That is an awful sentence to read, sorry)

  • 8 Jon April 22, 2014, 2:20 pm

    AAAggghh !!! more stuff to grapple with.

    I think I’m OK though, my wife (basic rate tax payer) holds multiple dividend ETFs outside of a tax shelter – I assume we are OK then ?

    I always put the fixed income assets in an ISA because otherwise, outside of a tax wrapper coupons are taxed even if your a basic rate taxpayer whilst dividends are not.

  • 9 BeatTheSeasons April 22, 2014, 2:37 pm

    When I saw the title of this article I thought it was going to be about higher rate taxpayers being required to pay extra tax on ‘income’ earned from cashback websites or from incentives for switching financial products.

  • 10 PC April 22, 2014, 2:41 pm

    Argh .. just when I thought I’d got it ..

    So I think that means a higher rate tax payer looking to use accumulating equity ETFs to make use of the CGT allowance is somehow going to have to find ETFs domiciled in the UK ..

  • 11 vanguardfan April 22, 2014, 3:03 pm

    @Pete – not exactly. First, using accumulating ETFs gives you the same issues as using accumulation units of OEICs – you are still taxed separately on the distributions and the capital gain, its just that the distributions aren’t paid out. This much I was aware of before this article. So, you won’t be making any more capital gain on accumulating ETFs than on their distributing equivalents, aiui.
    What this article seems to be saying is that even distributing ETFs (which are not UK domiciled) may have excess reportable income. That’s the bit I wasn’t aware of. But I think it should end up on your tax certificate from your broker (can anyone confirm this?)

  • 12 Matt April 22, 2014, 3:15 pm

    What if you contribute more into your ISA than the limit allows in a given year? As far as I’m aware, banks at least do not have controls to stop this. I know really the additional amount contributed over the limit should have that portion of income taxed as per a normal (non-ISA) savings account… But in reality how can anyone tell this?

  • 13 PC April 22, 2014, 4:16 pm

    Thanks @vanguardfan – I had misunderstood that point (that you’re still liable to income tax on accumulation funds) – and I’ve now found an earlier Monevator article covering that http://monevator.com/income-tax-on-accumulation-unit/

  • 14 vanguardfan April 22, 2014, 4:21 pm

    @PC (don’t know where I got Pete from, sorry!) – yes I had initially thought that accumulation units would be a good way to reduce income and maximise capital gain, but sadly no. Although its a widespread misconception – I’ve seen articles in the financial press get this wrong and also my broker’s customer service (although fortunately the tax certificates are automated and correctly identify distributions).

  • 15 PC April 22, 2014, 4:29 pm

    So to make full use of the CGT allowance by getting income treated as capital gains, I guess you need to find zero coupon bonds, or shares that pay no dividends ..

  • 16 SteveB April 22, 2014, 8:31 pm

    I was already looking at this for tax year 13/14. Checked with both Hargreaves Lansdown and TD Direct and excess reporting income details do not appear on their annual tax certificates. They both say you need to go to the ETF suppliers website. It is not always easy to find the information. I contacted the suppliers by email who either sent me a PDF document or website link to find the information.

    Hope this helps.

  • 17 L April 22, 2014, 10:12 pm

    Very interesting article and comments.

    Thank you all.

  • 18 Snowman April 23, 2014, 9:51 am

    I’ll just show my sums for a Vanguard ETF holding for 2013/2014 in case it helps

    Purchased 321 shares in VWRL in January 2013

    Total amount actually paid (distributed) in 2013/2014 is 296.64 = 102.35 (28th June 2013) + 66.01 (4th October 2013) + 43.06 (31st December 2013) + 85.22 (28th March 2014)

    As ETF was held on the fund distribution date of 31st December 2013, excess reportable income needs to be allowed. This equals

    0.1011 x 321 x 0.606 = 19.67

    – Where 0.606 is the average dollar pound exchange rate
    – 0.1011 is the per share dollar excess reportable income shown on Vanguard’s website for the accounting year to 30th June 2013

    Total amount to be declared before tax credit = 296.64 + 19.67 = 316.31

    Allowing for 10% tax credit the gross amount is 316.31/0.9 = 351.45

    As first dividend received was on 4th April 2013 (i.e. the previous tax year) there is no equalisation to deduct from this amount in 2013/2014.

  • 19 helfordpirate April 23, 2014, 10:16 am

    Would that it was that easy!

    Some ETFs, especially from Lyxor, are offshore funds but because they are organised as FCP (essentially partnerships) they are treated as “tax transparent” for income. That means the underlying assets in the fund are treated as being owned by the investor rather than rolled up in the fund. As these assets generate income (dividend, interest or property income) it is treated as income on the share holder. The funds have to provide quarterly reports so you can get all the income on your tax return of the right type and right time! (Very similar to how some US funds are taxed in the US)

    The fund may also apply for Reporting Fund Status to make sure that any sale of shares falls under CGT (Lyxor ones do). Alternatively, transparent funds can be exempt from the income tax treatment of offshore funds and be non-reporting if they meet other conditions (I won’t bore you!)

    In practise this is just more digging on Lyxor’s (dreadful) web site …

    Again more reason to use ISA and SIPP…. or avoid FCP

  • 20 Andrew April 23, 2014, 12:58 pm

    Snowman, where did you find this information on the Vanguard website as I looked everywhere and couldn’t find it.

  • 21 Snowman April 23, 2014, 3:37 pm

    Hi Andrew

    https://www.vanguard.co.uk/institutional/mvc/investments/etf#disttab

    The pdfs at the bottom of the page (titled additional distribution information) have the info you need.

  • 22 ivanopinion April 23, 2014, 4:43 pm

    @TA

    Kudos to you for an excellent summary of the situation and the research to build on the discussion on another thread a while back. I’m still astonished that there is so little publicity on this issue, but thankfully you have now put that right!

    AIUI, UK domiciled ETFs no longer pay stamp duty, which is intended to encourage ETFs to be UK domiciled. Let’s hope we see the likes of Vanguard and BlackRock redomiciling their ETFs, so this is no longer an issue.

  • 23 ivanopinion April 23, 2014, 5:13 pm

    What I don’t think I had previously realised is that this issue applies not just to ETFs but also to any funds that happen to be non-UK domiciled (but UK reporting) such as most of the Vanguard funds, other than those investing in UK or US shares or bonds. Sure enough, if you look hard enough, there’s the excess reportable income data, at the bottom of this page: https://www.vanguard.co.uk/institutional/mvc/investments/mutualfunds#mf_distributiontab

    The BlackRock index funds seem to be UK domiciled, judging by a quick sample of a few of them. That would be a significant advantage over Vanguard funds, to my mind.

  • 24 L April 23, 2014, 8:12 pm

    @Snowman

    Thank you for the calculation.

    One quick thing. Are you sure you have the correct exchange rate? There is a different rate (0.6312) on the HMRC website: http://www.hmrc.gov.uk/exrate/usa.htm

    As a studying accountant, all I can say is that tax is painful…

  • 25 The Accumulator April 23, 2014, 9:20 pm

    Ivan, yes my thanks to you and Snowman for putting me on the right track on the other thread. All I had to do was follow the money, so to speak.

    And my thanks to all for making this a really useful thread. Am following with interest.

  • 26 Snowman April 23, 2014, 9:34 pm

    Hi L

    The excess reportable income is deemed to be paid on 31 December 2013 for VWRL, so I used a currency rate at 31st December 2013 of 0.606 (slightly differs from the HMRC 31st December 2013 figure at that date). No idea if that is correct logic but it seemed simple and logical.

  • 27 L April 23, 2014, 9:43 pm

    Thanks Snowman.

    Seems reasonable. I don’t really know what rate would be applied so thought I would ask.

  • 28 Andy April 26, 2015, 6:01 pm

    A very useful article. This is quite an arcane area which a number of web articles have misled me over. I’m puzzled though by the distinction made here between offshore and UK domiciled funds:

    “you can avoid the whole shebang if any of the following apply to you: Your funds are UK domiciled.”

    So if I want to roll up all my gain as capital gain and pay (lower rate) capital gains tax instead of income tax, all I need to find is a UK domiciled accumulation fund? Sounds too good to be true. What am I missing?

  • 29 PC April 26, 2015, 6:16 pm

    @Andy I think what you’re missing is
    – it doesn’t matter if it’s an accumulation or distribution fund (I made the same mistake)
    – the difficulty in finding a UK based fund

  • 30 Andy April 26, 2015, 6:28 pm

    PC: in this context surely it does matter because if it is a distribution fund, you are receiving the distribution, which is income and on which you must pay income tax. Also, there must be more to it than it being hard to find a fund – Ivanopinion, a few posts up says that the BlackRock Index Funds are UK domiciled. If he’s right, that would be job done. If he’s wrong, and there are no funds, there is probably some more fundamental reason why there aren’t – surely there would be great demand and someone would create one?

  • 31 PC April 26, 2015, 6:39 pm

    @Andy – my understanding (I’m not a tax expert) is that it doesn’t matter if the income is distributed or accumulated it’s still income and therefore is taxed as income not as a capital gain.

  • 32 The Accumulator April 27, 2015, 6:41 pm

    @ Andy – if you want to avoid paying capital gain at income tax rates then just choose a fund that has reporting fund status.

    UK domiciled funds don’t have to worry about their status and most offshore trackers have secured reporting status – though it can be lost.

    Distributions will be taxed as dividends or interest at standard rates of income tax (if the fund holds 60%+ fixed income/cash) no matter what you do bar using your tax shelters.

  • 33 Andy April 27, 2015, 8:55 pm

    I am not worried about paying income tax on capital gains. This is the point that always seems to come up in threads on etf tax. Like I said above, this only occurs if you invest in an offshore fund without reporting status. HMRC have clearly established this system so that people will pay income tax on what is effectively income, whether this is distributed or accumulated within the fund. Either thay have to pay income tax on everything (non-reporting status fund) or on “reported” income (whether distributed or not).

    What I was getting at is whether it is possible to pay capital gains tax on income. Someone suggested that a UK domiciled fund would not have to have reporting status and therefore, in theory, a UK domiciled fund could accumulate its income and the fund-holder would not have to pay income tax on it. However, apparently suitable UK domiciled funds cannot be found. I don’t believe this can be correct; there must be some fundamental reason why a UK domiciled fund cannot after all offer this tax advantage, I just haven’t worked out what it is yet. Btw, I looked up the Black Rock (ie iShares) funds – they are all incorporated in Ireland, therefore not UK domiciled – red herring that one.

  • 34 The Accumulator April 27, 2015, 9:19 pm

    As mentioned above, there’s no exception that enables you to pay capital gains on income. The suggestion is wrong. Neither UK domicile nor accumulation funds change the game.

  • 35 ivanopinion April 28, 2015, 8:49 am
  • 36 ivanopinion April 28, 2015, 9:25 am

    The iShares ETFs are mainly Irish domiciled. The BlackRock index funds (UCITS) are mainly UK domiciled.

  • 37 Andy April 30, 2015, 7:59 pm

    Thank you “The Accumulator” for the clarification. Perhaps your article should be amended because the bit that says

    “so it’s worth reiterating you can avoid the whole shebang if any of the following apply to you:

    Your funds are UK domiciled.”

    is just wrong then.

    Ivanopinion: thanks for pointing out the UK domiciled Blackrock funds, though it would now appear that a UK domicile offers no advantage after all.

  • 38 The Accumulator May 1, 2015, 10:31 am

    Andy, I think you’ve interpreted what I wrote differently from how I intended it. I’m saying that you avoid excess reportable income by choosing UK dom funds or investing in a SIPP / ISA or by being a basic rate tax payer investing in equity funds. All that is correct.

  • 39 Andy May 2, 2015, 6:56 pm

    Well then I have to say I am still confused by your article. If I invest in a UK domiciled accumulation fund – lets a FTSE tracker to make it simple – surely every so often there is a notional dividend which I don’t receive in cash but have to pay income tax on. I really don’t see why the domicile should make a difference. How are HMRC going to look at it? I’d be earning what is effectively income but not paying tax at all until I sold the units and even then paying tax at (lower) CGT rates instead of my marginal rate of income tax. There’s no way this can be correct. It’s simply not common sense. There is apparently this enormous tax loophole available to us all? I think not.

  • 40 The Accumulator May 2, 2015, 7:07 pm

    That’s right. There isn’t an enormous tax loophole as you’ve described it. You pay tax on dividends rolled up by accumulation funds in exactly the same way that you pay tax on income fund dividends.

    Here’s a piece all about it: http://monevator.com/income-tax-on-accumulation-unit/

    As near as I can tell, you seem to be mixing up excess reportable income with the entire notion of paying tax on interest and dividends. They are not one and the same.

    Excess reportable income is purely an artefact of investing in offshore funds. But you still pay tax on interest and dividends paid by UK domiciled funds too. You just don’t have to worry about the excess reportable income lag.

  • 41 Andy May 3, 2015, 4:18 pm

    No I’m not mixing these 2 things up. You pay tax on all income, both actual and notional. Interest and dividends paid in cash are liable to income tax. The excess of the income within the fund over what it pays out is also subject to income tax – this is the excess reportable income. The article you refer to gives 2 exceptions whereby the problem of excess reportable income can be avoided – being a basic rate tax payer only or investing within an ISA wrapper. It does not, as this article does, suggest that investing through a UK domiciled fund is a third exception.

    Of course you still pay tax on interest and dividends PAID by UK domiciled funds. But that’s irrelevant to this discussion, which has been about UK domiciled accumulation funds and the treatment of their accumulated income, not of the income paid out by them in cash. I still don’t see why you think there is a difference between UK domiciled and offshore funds in this respect or why you think investing in UK domiciled funds is a way of avoiding the problem of excess reportable income. A UK domiciled fund’s dividend (if it is paying one) comes with a tax credit, that’s the only difference I am aware of. If a UK domiciled fund accumulates its income rather than paying it out, you will still be liable to tax on it.

  • 42 The Accumulator May 3, 2015, 4:50 pm

    From Vanguard:
    Under HMRC’s “reporting funds” regime, you pay tax each year on your share of an offshore fund’s reportable income, whether in a distributing share class or an accumulating share class and irrespective of distributions made.

    Why doesn’t the schedule include Vanguard’s UK-domiciled funds?
    The “reporting funds” regime applies only to funds domiciled outside the UK. This regime generally aims to make your tax costs in respect of an investment in an offshore fund comparable to those you would incur by investing in a corresponding UK-domiciled fund.

    From BlackRock (as linked to in the article)
    http://www.blackrock.com/uk/individual/literature/income-equalisation/uk-reporting-fund-status-flyer.pdf

    The ‘Reporting Funds’ regime was introduced for accounting
    periods beginning on or after 1 December 2009. It replaces
    the UK Distributor Status regime which is being phased out
    as the transitional period expires. Both regimes form part of
    the offshore funds legislation which was introduced by the UK
    Government in response to what HMRC perceived to be the
    potential for avoidance of UK tax by UK investors through the
    use of offshore funds to roll up investment income. In these
    funds, income may be accumulated within the fund and added
    to the capital value of the shares in the fund. In the absence
    of the offshore funds legislation, investors would be able to
    convert income receipts into capital and would be subject to
    capital gains tax (the capital gains tax rate may be lower than
    the rate of income tax).

    From HMRC:
    http://www.hmrc.gov.uk/manuals/ofmanual/OFM24100.htm
    This manual explains how UK resident investors in offshore funds are treated for tax purposes.

  • 43 Andy May 3, 2015, 5:44 pm

    Yes all this is true, but look at what it says – the offshore “reporting” regime is aimed at making the tax position of the investor THE SAME as it is in a UK domiciled fund. So how is this? The answer to this conundrum (which in the end I have had to research and find for myself) is that a UK domiciled fund is required to distribute all of its income. So there are no UK domiciled accumulation funds. As I said, there must be some more fundamental reason why such funds can not be found (because otherwise someone would create one). And the fundamental reason is that they are not allowed. The problem of excess reportable income is only avoided therefore in UK domiciled funds because they are not allowed to have any excess income to report. So you are not avoiding any shebang by investing in a UK domiciled fund (except the admin) – you are having 100% of the income paid out to you and paying income tax on it.

  • 44 The Accumulator May 3, 2015, 6:02 pm

    Hey Andy, there are UK domiciled accumulation funds. For example, Vanguard FTSE UK All Share Index Unit Trust. Here’s the ISIN of the acc version: GB00B3X7QG63

    I agree that the position is tax neutral. I’ve been agreeing with you on that since the start. But the issue of excess reportable income is one that’s restricted to offshore funds. That doesn’t mean UK funds have a tax advantage, it just means different mechanisms for recovery of tax apply.

  • 45 Andy May 3, 2015, 7:23 pm

    It’s called an “accumulation” fund but it’s really just a distribution fund with an automatic (and compulsary) dividend reinvestment mechanism, Its prospectus (and UK tax law) require it to distribute all of its income. Each accounting period, it pays all of its income out as a dividend distribution which is automatically retained within the fund, and sends you a dividend notification upon which you are liable for tax (there is a further complication – in your first year of ownership, part of the declared dividend doesn’t relate to your period of ownership and this is reported to you as “equalisation” – you deduct it from the dividend declared and make a corresponding adjustment to your purchase cost for CGT purposes). The tax regime to which it is subject is called “UK Reporting” and the notional dividend it is declaring is just the same as excess reportable income in the offshore Reporting fund tax regime.

  • 46 The Accumulator May 3, 2015, 7:42 pm

    Good stuff, cheers Andy.

  • 47 ivanopinion May 3, 2015, 8:04 pm

    Whilst there is no way to be taxed on underlying income as a capital gain, there are several “shebangs” that you avoid, by using UK domiciled funds:

    1 The hassle of having to track down the right excess reportable income and sticking it on your tax return. With UK domiciled funds, the fund or the platform will give you a tax certificate, telling you what notional dividends to recognise as your income.

    2 The risk that if you forget to do this (or were unaware that it was necessary), you get into trouble with HMRC.

    3 The hassle of keeping a record of the cumulative notional dividends for every year that you hold the fund, so you can reduce any eventual capital gain by the amount that has already been taxed as income.

  • 48 andy May 6, 2015, 6:03 pm

    Not really

    (1) You need to put the figure from the tax certificate on your tax return AND make the correction for equalisation. Perhaps I’m being picky.

    (2) If you forget to do this, and they spot it, you WILL get into trouble with HMRC. Yes this is a bit picky of me too.

    (3) You DO need to keep track of the cumulative notional dividends (and equalisation from the first year) so as to get your CGT calculations right – otherwise you could be be paying too much. THIS IS REALLY IMPORTANT.

    It’s taken me a while, my curiosity having been pricked, to track down the fundamental reason why all UK domiciled funds pay out 100% of their income, whether they call themselves “accumulating” or not. The basic principle is that this is a quid quo pro for the tax treatment of the fund – not paying CGT on gains itself, the treatment of dividends it receives etc. etc. The effect is to make the fund tax transparent – receipts by the fund are not taxed but the regime makes sure that those same receipts are taxed in the investor’s hands.

    This is stipulated by Taxes Act 1988 Section 468I(i). You have to look at the “as amended” version rather than that originally enacted to see the exact current position.

    Almost every article I’ve looked at has been preoccupied with the details of the offshore reporting regime and this most basic aspect of onshore funds, though obvious when you come to think about it, is seldom mentioned.

  • 49 tom September 28, 2015, 1:04 pm

    What a great article, thank you.

    One point of clarification on Capital Gains treatment. I read your section on this as saying that you could only deduct the Excess Reportable Income (ERI) from Chargeable Gains. But looking at the HMRC website (I haven’t read the Act proper, yet) it reads to me that ERI is treated as a Capital Expenditure, and so also applies if you have a Capital Loss.

    Sorry, very minor unless you’re a tax geek, but it just means that it will increase your Loss if you have one, which may be useful for offsetting against other chargeable gains.

    It’s ridiculous that so many people are not made aware of ERI. I recently tried to get details from two major online brokers, and although it’s reporting that they really should be doing, they pointed me to a tax adviser (I imagine they just didn’t know what I was talking about).

  • 50 Haphazard July 15, 2017, 10:11 pm

    Not sure if anyone ever looks at this page any more, but just in case:
    – is it the number of shares you have at the end of their accounting period that matters? Or the number you have at the notional distribution date?
    – where do you report this to HMRC – foreign pages?
    – presumably equity funds’ excess reportable income is subject to the dividend allowance (e.g. £5000 for 2016-17)? And bond funds’ excess reportable income would be subject to the £1000 savings allowance?

    Another question on bond funds. My understanding is that for 2016-17 they are still subject to basic rate tax deduction at source. What about Irish domiciled bond funds (e.g. Vanguard)? None of my broker statements mention any income from them.

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