What on Earth is excess reportable income? We’re glad you asked because this little-known aspect of an investor’s tax obligations is easy to miss or get wrong.
In the following guide, we’ll explain what excess reportable income is, how to use it to calculate income tax due on your investments, how to ensure you’re not overpaying, and where it goes on your tax form.
Sounds like a chore? Yeah, we can think of better ways to spend an evening too.
So let’s start with a reminder that if all your affected funds are tucked inside a tax shelter – an ISA or a pension (SIPP) – then you don’t need to worry about filling in tax forms on this score at all. The whole concept is moot for you.
But please do read on anyway – if only to learn what you’re getting out of!
What is excess reportable income?
Excess reportable income is the amount of dividends and interest earned by an offshore reporting fund that isn’t otherwise distributed to investors.
This is additional income that can accumulate in your fund. And the taxman wants his slice.
Fund and ETF providers1 publish excess reportable income in annual documents that you can use to calculate your tax liability.
Offshore accumulation funds store up such reportable income instead of distributing it – but vanilla income funds can do so too.
(Incidentally, some people don’t think they owe tax on accumulated dividends and interest. That’s flat wrong.)
What is an offshore reporting fund?
Most funds that reside outside of the UK are designated ‘offshore’.
For example, Irish domiciled funds and ETFs, naturally enough, count as offshore.
A fund usually lists its domicile on its webpage or factsheet. You can also tell its home base by eyeballing its ISIN number. If that code doesn’t start with ‘GB’ then you’re almost certainly looking at an offshore fund.
Our piece on fund names explains more.
There are some obscure exceptions to the ‘non-UK fund = offshore’ rule. It’s a non-issue if you stick to index trackers but ask your fund manager if you want absolute reassurance.
Meanwhile, a reporting fund is an offshore fund that reports its income to HMRC (and presumably complies with a laundry list of other infernal demands).
HMRC maintains an approved list of offshore reporting funds.
Most offshore index trackers have reporting fund status. This is a good thing because without that you’d be stiffed for capital gains tax at income tax rates. Shudder.
Reporting fund status should be mentioned on your fund’s web page or factsheet. If it’s not, take that as a bad sign and a prompt to investigate further.
Using excess reportable income to calculate your tax
Fund providers typically compile excess reportable income figures on one large and fearsome document per year.
Find your fund on your provider’s list and note its:
- Excess reportable income amount per unit / share
- Fund distribution date
- Last day of the reporting / account period
- Equalisation amount / adjustment (if any)
The amount of income you potentially owe tax on is:
Excess reportable income per share multiplied by the number of shares you own on the last day of the reporting period.
For example:
- Excess Reported Income per share = 0.237 GBP
- No of shares owned = 100
So 0.237 x 100 = £23.70 – the total excess reportable income to be included on your tax return.
But wait! This figure may yet be affected by any equalisation payments you were entitled to.
Reduce tax with an equalisation adjustment
Some funds report an equalisation amount / adjustment. You can use this to reduce the amount of tax payable if you acquired new units or shares during the reporting period.
You apply the equalisation amount to any shares you bought between ex-dividend dates.
This equalisation amount may be listed in different ways.
For example, you may see a single figure listed for a particular reporting period. This is especially likely for accumulation funds.
Other times, a series of equalisation amounts may be recorded for every distribution date that an income fund declared during its reporting period.
In this instance, look for the equalisation amount entered for the first distribution date (or ex-dividend date) after each shares purchase you made during the reporting period.
Your total equalisation adjustment is:
The equalisation amount multiplied by the number of shares you purchased during the relevant period.
Tot up any applicable equalisation adjustments and deduct them from the taxable income you owe for that fund during the reporting period.
You can subtract your total equalisation adjustment from your excess reportable income first, then any distributions received, or vice versa.
It doesn’t matter if your excess reportable income and distributions fall into different tax years.
Capital concerns
Equalisation payments may also make a difference to your capital gains tax.
Equalisation adjustments are essentially a non-taxable return of capital. They arise because you bought fund units for an asking price inflated by accrued dividends.
Effectively, the equalisation adjustment reclassifies the accrued dividend (that you have not benefited from) as a return of capital so that you don’t pay income tax on it.
Note, some funds do not provide equalisation payments.
Yes, there’s more
Excess reportable income is payable even if you bought your fund shares on the final day of the reporting period.
Your excess reportable income counts as being received on the fund distribution date. That date also determines the tax year that any tax liability falls due.
The fund distribution date may be different from other dividend distribution dates. This way, different tax years can apply to excess reportable income versus income paid directly as cash.
- For income funds, you’ll owe tax on excess reportable income plus any cash distributions that are paid directly to you.
- For accumulation funds, your excess reportable income amounts to your entire taxable income. That’s because actual cash distributions are zero.
The information you derive from an excess reportable income document should correspond to the numbers in your dividend statements for the same period. You don’t pay excess reportable income on top.
If your fund provides figures in a foreign currency then you can use any reasonable exchange rate to convert excess reportable income into GBP.
How excess reportable income is treated on your tax return
Excess reportable income should be entered on the foreign pages of HMRC’s SA106 tax return form. Other fund income is also entered here.
Your excess reportable income is returned as either a dividend distribution or an interest distribution – the latter applying to bond funds.
The fund provider will note whether your fund qualifies as a bond fund in its excess reportable income document.
In short, any vehicle counts as a bond fund if more than 60% of its assets generate interest.
- Bond fund distributions are returned on the SA106 as interest in the section ‘Interest and other income from overseas savings’.
- Equity fund distributions are returned on the SA106 as dividends in the section ‘Dividends from foreign companies’.
Dividends are taxed at dividend income tax rates.
Interest is taxed at your normal income tax rate.
HMRC advises entering an estimate of your excess reported income, if a fund manager hasn’t provided its income report before you file your tax return.
Excess reportable income and capital gains tax
Excess reportable income reduces your capital gains tax bill when you sell shares – just so long as you remember to subtract it from your proceeds.
Remember that you earn excess reportable income for any shares held on the last day of the fund’s reporting period.
Here’s an example of how to apply it to disposals:
- Net proceeds: £20,000
- Less acquisition cost: £10,000
- Less excess reportable income: £500
- Capital gain: £9,500
If you don’t subtract excess reportable income from a disposal then you’ll suffer a double tax charge: once at income tax rates and again as a capital gain.
Helpful hints
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.
Consult a tax expert
At this 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.
And again, there’s no need to muck around with excess reportable income if all your offshore reporting funds are safely sheltered in your stocks and shares ISAs or a SIPP.
You can also duck the whole palaver by only investing in UK domiciled index funds.
Take it steady,
The Accumulator
- We’ll refer to funds throughout the rest of the article as a generic term that also includes ETFs. [↩]
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!
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)…
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 😉
“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’ ?
@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 🙂
Nice edit dearime. I’ve updated as you suggest. Cheers!
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)
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.
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.
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 ..
@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?)
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?
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/
@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).
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 ..
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.
Very interesting article and comments.
Thank you all.
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.
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
Snowman, where did you find this information on the Vanguard website as I looked everywhere and couldn’t find it.
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.
@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.
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.
@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…
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.
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.
Thanks Snowman.
Seems reasonable. I don’t really know what rate would be applied so thought I would ask.
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?
@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
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?
@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.
@ 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.
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.
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.
Some BlackRock index funds that are domiciled in UK:
https://www.blackrock.com/uk/individual/products/229430/blackrock-continental-european-equity-tracker-fund-a-acc-fund
https://www.blackrock.com/uk/individual/products/229439/blackrock-emerging-markets-equity-tracker-fund-class-a-acc-fund
https://www.blackrock.com/uk/individual/products/229509/blackrock-north-american-equity-tracker-fund-a-acc-fund
https://www.blackrock.com/uk/individual/products/229514/blackrock-pacific-ex-japan-equity-tracker-fund-a-acc-fund
https://www.blackrock.com/uk/individual/products/228681/blackrock-overseas-corporate-bond-tracker-fund-a-acc-fund
The iShares ETFs are mainly Irish domiciled. The BlackRock index funds (UCITS) are mainly UK domiciled.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Good stuff, cheers Andy.
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.
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.
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).
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.
This incredibly helpful site explains offshore “reporting funds” with worked examples for a lot of different scenarios:
https://www.kpmgreportingfunds.co.uk/guidance
If you register it allows you to seach for the relevant info ( if the fund manager has uploaded it which seems to be the case for vanguard and ishares)
The tax calculations are very very scary if your Irish(etc) ETFs are not in an ISA or SIPP!
I am curious to know, but cannot find the answer readily on the web, the reason *why* excess reportable income exists. Why doesn’t a distributing ETF pay out all its income? What is, and why is, this extra income which is retained? Perhaps someone can explain.
It is a real nuisance to have to find, calculate, and include this amount in tax returns, as well as make adjustments to the capital gains tax basis. The data for Vanguard ETFs is buried deep within their web site as
https://www.vanguardinvestor.co.uk/content/documents/legal/etf-uk-reporting-fund-status.pdf
However, they only have a link to data relevant to the 2016-17 UK tax year. So you have to make a copy before it is replaced by the pdf for the following tax year. I know no way to find the information for previous tax years.
I wasn’t even aware of this issue. I thought it only applied to accumulation funds. Top google search result on this is
http://monevator.com/excess-reportable-income/
PC: As mentioned above, the pages of https://www.kpmgreportingfunds.co.uk/are helpful. You might enjoy reading https://www.accountingweb.co.uk/any-answers/excess-income-on-offshore-funds, where accountants are discussing the difficulty, and costs, of collecting the necessary information.
There is also the issue of what shares to count. I have made for myself the following note, as I am inclined to forget from year to year:
“You count as receiving the excess reportable income on the fund distribution date, which occurs six months after the fund’s accounting year-end date. For Vanguard funds the accounting year ends 30 June, and the distribution date is 31 December 2016. It applies to shares owned 16 June 2016. So this amount should be reported on my 2016/17 tax return.”
HMRC pages include the amusing note that as regards: “EQUALITIES IMPACT: This measure is expected to only impact high net worth individuals. Such individuals are more likely to be older males.” (This is in regard to a change that fund-manager performance fees may no longer be set against the excess reportable income.)
Dire Wolf and Richard – thank you for those incredibly helpful links. So sorry it’s taken so long to tip my hat to you. Things have been… hectic.
Probably a stupid question here – but in case anyone still looks at this thread – have I understood this right?
A fund has excess reportable income, which is deemed to be distributed in May 2017.
However, the accounting period in question is 1.12.2015-30.11.2016.
If I first bought the fund in January 2017, I don’t need to include this on a 2017-18 tax return – because the “distribution” relates to funds owned in 2016.
The “deemed distribution” for that period would have been May 2018, so it’s relevant to the tax return for 2018-19. Correct?
I feel like we should have a medal for tracking down these figures. For anyone who is looking at the moment, some useful links:
Vanguard: https://global.vanguard.com/portal/site/portal/ucits-documentation
iShares: https://www.ishares.com/uk/individual/en/education/library?materialType=tax+information&productGroup=IR-ISH%7EIR-ISHII%7EIR-ISHIII%7EIR-ISHIV%7EIR-ISHV%7EIR-ISHVI%7EIR-ISHVII&glsLanguage=en
Finding out which “product group” your iShares fund is in – it’s on the Prospectus
I’ve just found this really useful article after noticing that my fund platform (Transact) has begun to include data on Excess Income for offshore funds in their latest tax report. In common with, I suspect, many I didn’t have a clue what this was. If anyone is still following this thread I’d be interested in answers to a few queries:
1. How does this unallocated income get given back to the holder of the fund. Does it get reflected some way in the price?
2. Does it accumulate? i.e. Is is it a ‘pot’ in the fund that can grow or shrink each year so that in reporting for tax we should be reporting the growth or reduction of the unallocated income. Or does it ‘disappear’ each year end.
3. Who knows enough about the tax paid to make sure when the security is sold the CGT reflects the tax already paid? It seems to me the only people who can reliably do this is the platform.
Think this issue is a bit of a slow burner! Once platforms start reporting it, even though they claim not to be comprehensive, it will be something HMRC can’t ignore, much as I suspect they would like to given the work involved in chasing it up. Also from my experience it is not trivial – just one of my Vanguard funds reported £400 of excess income that is taxable.
Hi,
I was hoping that the Excess Reported Income ERI is prompted in the “Investor Report” of the fund platform, however I am not sure this is the case.
For example using Vanguard DIY platform non-Isa account one can only get “CTC” report which apparently does not contain the ERI report. The Fund platform make you search their pdf to pick the ERI per uni and figure out the total ERI distribution.
Is anyone aware whether DIY investment platforms (HL, ii, Fidelity etc.) provide Income Report containing ERI calculations?
Many thanks
Hi tellme. Happy to be corrected, but I think it’s very unlikely any DIY platforms will provide the income report.
The reason for this is that the calculation is essentially based on the annual accounts. The ERI being the dividend/share income that the fund/ETF holds at year end but hasn’t distributed yet. As a unit holder, you are entitled to a share of that income and thus it’s deemed taxable by HMRC. That means it comes down to the fund manager to prepare the accounts and the subsequent calculations and something the platform is neither able or willing to do. Thankfully it’s not too tricky to find the information once you know where to look. And once you’ve done it one year it’s not too difficult to replicate on an ongoing basis.
The Blackrock link appears to be broken. Related current links could be https://www.blackrock.com/uk/individual/education/adviser-resources/tax-information or https://www.blackrock.com/uk/individual/education/adviser-resources/reporting-fund-status .
Just getting started on 2019-20 tax returns. First time I’ve owned ETFs.
I’ve got 4 ETFs in total, two global equities HMWO and VWRL and two gilts IGLT and VGOV
I’m guessing these are probably pretty common choices so people probably have 1st hand experience of reporting these in their tax returns.
They’re all UK reporting and domiciled in Ireland I believe.
My initial thought was that the gilt ETF income would be reported as interest, in same way I would report say for a bank savings account, and the equities ETF income as UK dividends.
But now I’m not so sure it is so simple! This ERI looks horrific! I’m hoping it is still reasonably simple otherwise I’m sort of amazed anyone is buying ETFs at all? Or are they only doing it in ISAs/SIPPs or are they all employing tax accountants?
There is a real dearth of info on reporting ETF income for hmrc – no surprise the best stuff gets you back to Monevator!
Really what I’m hoping someone is going to say is don’t panic, its actually not too bad… or have I shot myself in the foot going down the ETF route?
I’m a little bit late, but I wanted to thank Andy in the comments section to finally explain this discrepancy about excess reportable income tax. I was not able to figure out why this only applies to offshore funds, and I also didn’t understand if this is an extra tax or not – now it all makes sense. Thank you Andy!
And of course, thank you Accumulator to write the article in the first place – very useful.
Article perhaps needs a health warning added up top about how tax regime changes have made some parts out of date. Still useful except for the bits about dividend taxation essentially being 0% after tax credits 🙁
Yet another superb informative, thanks so much guys. I shudder at the prospect of unsheltered investment in our gratuitously over complicated personal finance and taxation regime, doubly so with political change looming large. Even as a bit of a spreadsheet nerd, my decumulation strategy has fingers firmly crossed that partial SIPP crystalisation with ISA-able TFLSs remains a thing. This world of pain is surely more trouble than it’s worth, literally, unless the upside covers off your own tax manager!
There is a general assumption that, whenever there is anything to report to HMRC, that it can be included on your tax return. Unfortunately the criteria that HMRC impose before allowing you to register for self-assessment are quite restrictive. They include self-employment, higher-rate taxpayer, rental income, dividend or interest over £10k (separately, not combined). None of these applies to me.
Even having only modest unsheltered dividend and interest to report is the stuff of nightmares involving several phone calls a year to HMRC. The interest information they collect from the banks is invariably incomplete or wrong. The online Personal Tax Account is restricted to the current year (hence estimates). Even when they eventually get your tax code correct, as soon as there is a need to change your code such as for a new tax year they invariably revert to old information. Typically, as in my recent experience, this is up to two years old and was wrong even then.
I sincerely hope that this excess reporting income issue does not apply to me. I have kept to funds in my unsheltered account but I had a slight panic when I read in earlier comments that Vanguard funds were not all UK-domiciled. I have just checked and all my current and recently held funds have an ISIN beginning with GB. Phew!
AJ Bell produce an ERI report if you have taxable accounts in September each year. Their main client tax report is in June but doesn’t include ERI, so you need both. I don’t think the ERI report includes investments you have sold in the year, so you still may have to hunt down the details yourself. I know there are bigger problems in the world, but it’s a bit of a pain.
With bearing in mind that;
Excess reported income is treated as being received on the ‘fund distribution date’.
The fund distribution date for a reporting fund is 6 months following the last day of the reporting period.
I used to find it difficult to lookup the ERI for some funds I own. However, I recently discovered that the information can be found at this website, for all funds.
https://www.kpmgreportingfunds.co.uk/Home/PublicInvestor
Great comments all!
@ Richard – That looks like an awesome site. Though I just looked at VWRL and they haven’t updated the info since 2021. Am I missing something?
VWRL has a record there for fund distribution date of 31/12/22. There was 0 ERI.
The info for 31/12/23 is probably yet to appear. It is not yet needed now, as the tax return on which it would be entered is not due until 31/01/25.
I have noticed that many Vanguard funds are now reporting 0 ERI, whereas they did in years past. I wonder if there is something in the way they are now structured that this is. occurring.
The HMRC threshold for reporting ‘Foreign Income’ is £300. So even if you have no tax to pay and you are below the personal allowance, ERI of £300 in your GIA can force you into completing Self Assessment.
It’s also worth checking for ERI on Distributing ETFs as they sometimes report ERI in addition to the distributions.
@HowDry (71) That may well be the case. However, having ERI over £300 is, as far as I understand, not a condition that alone qualifies you to register for self-assessment. Therefore, if it applies, and you do not otherwise qualify for self-assessment you would be reduced to reporting to HMRC by letter or phone. (As I am for reporting dividends and interest.)
For those like me who prefer to keep it simple & don’t want investing & tax issues to be their whole life – like some on here saying about all the hassle (though I know some comments go back to 2014) but also seen the same groans on some of Monevator’s other tax related articles – then why not organise your investments to keep the amount of tax reporting to a minimum which is what I now try to do.
(1) Obvs, if you possibly can hold all investments in non-taxable accounts (ISA’s/pensions) as TA says in this article, then no tax issues to really worry you. This can often be feasible for younger investors/those with smaller amounts to invest.
(2) Where got larger amounts and must be in a taxable general trading account then use just FUNDS (UT’s/OEICS – UK domiciled as get some FSCS as well) not ETFs and make sure you Bed & ISA them as soon as you can – although this can trigger paying CGT -be aware of the now reducing CGT exemption limit/allowance – only £3K next tax year which is peanuts.
(3) Keep ETFs in non-taxable accounts then won’t have the hassle of finding out about UK Reporting/Non-Uk Reporting funds or the bother of finding what ERI has been paid and calculating it.
Okay so I get it’s easily doable and not beyond most, but with some of these tax articles I’ve seen on Monevator alone, I’ve seen a few say they do, or will, have to employ an accountant to do it?? I’d never do that just for investments (although I had to when I had a company as is the law to have an audit) but they charge for doing nothing much for investments. You provide them with all the relevant figures and they then just stick em on a form which you can do and keep their highly exorbitant fees in your pocket. I now reorganise investments to make it as simple and least time consuming for me as I can. I don’t particularly want to spend any of my time dealing with tax but we have to so I’ll keep it to a minimum because if you have a lot of funds/ETFs over many brokers (for safety’s sake) then it is a hassle and that “it’s only once a year” comes around very fast – you know think of “Christmas” yet again, and time seems to go faster the older you get.
I also personally now do keep my GIA account funds in income units just for simplicity and get it paid out to my bank – again it’s not difficult with ACC units but just less bother to me. If broker doesn’t send a consolidated tax statement one year, I still know what I’ve had without having to chase and don’t have to remember about the extra CGT equalisation palaver with ACC in a trading account. Some brokers reinvest dividends free anyway – but if not you can do it yourself easily anyhow.
I know you will say “dealing charges” with some brokers but if you don’t want the income to use, but save piddly amounts until you have a decent lump sum to invest along with other monies/when rebalance and it can then easily be done at minimal cost.
I know there are sometimes other things to consider and if already invested, selling out larger amounts in GIA accounts to reorganise holdings may trigger paying CGT, so need to be mindful of that, but note that if you sell out of a fund and buy back in that same fund but just change the income treatment (i.e. share class/units from ACC to INC or vice-versa) then THIS DOES NOT COUNT AS A DISPOSAL FOR CGT PURPOSES. It is simply a reorganisation of capital and you can switch between units whenever you like – it has no tax or reporting implications in that it will not count for CGT at all or require you to report it on your tax return as it isn’t included as part of the reporting threshold.
I had read comments in some Monevator articles (and other investment/accountancy websites) that doing this may affect your CGT liability. It doesn’t. I was fed up of it and of asking brokers about it and them fobbing me off saying “we can’t give personal advice – do your own due diligence” which is what many of them say – when they just know nothing and many are pretty useless I have found in this respect with stuff they should know – it’s part of their game and applies equally the same to everybody. It does not depend on your personal tax position/circumstances as some have said – absolute rubbish!
So I rang the tax office just recently (2024) CGT Dept and had to hold for a while to be put through and I asked this question. I did not give my personal details – but asked them to give me a definitive answer due to what I had read. They told me categorically that if just switching units in the SAME exact fund but from ACC to INC or whatever, then no CGT liability would arise as not classed as a disposal for CGT purposes. Not required to report it/not part of reporting threshold (50K at present) so no CG tax implications whatsoever. I asked them if they were totally sure on this as I have to do tax returns and she said “absolutely” and have taken the HMRC persons name and time/date of call. She also confirmed that this obvs applies equally to everyone and not dependant on personal circumstances – it is the regulations or the law which frankly professionals/brokers and others should know and should not be telling investors they may be liable to CGT if doing this. I also asked if it applies equally the same to FUNDS (UT’s etc.) as well as ETFs and said said yes exactly the same. I find organisations who should know these things and obviously don’t, hide behind – “We can’t give personal advice/do your own due diligence/depends on your own circumstances/tax position” which is absolute drivel for many things such as this. Annoying at best!
Just wanted to clarify – after reading my comments back after posting – that when I said that “I had read comments in some Monevator articles (and other investment/accountancy websites) that doing this may affect your CGT liability” with respect to Monevator I was talking about reader comments after the article and obvs not any digs at the fantastic blogs written on this website. However have seen on some other websites where they don’t appear to know or say doing this may affect your CGT liability.
DavidV (72) The £300 threshold has been raised on the HMRC community forums and HMRC have responded that such Foreign Income is a requirement for Self Assessment.
e.g.: https://community.hmrc.gov.uk/customerforums/sa/2d7fc272-c80c-ed11-b5cf-00155d9c6b71#72a13f6c-5a4f-ee11-be6f-00224841f0d0
In fact – if you go to register for Self-Assessment, one of the checkbox reasons for registration is: “I’m getting taxable foreign income of £300 or more”.
Confuzed (73) My understanding is that ‘switching’ units applies where no consideration is given and Units are directly exchanged by the manager, as per a share reorganisation: https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg51700 ).
You choosing to sell Accumulation units, receiving cash and repurchasing Income units is not a switch but a disposal for CGT. See: https://community.hmrc.gov.uk/customerforums/cgt/ed7bd8b0-2b10-ee11-a81c-000d3a8751e3?page=1
If you have something in writing that would be great!
@HowDry (71) Following my comment at (72) I rechecked the self-assessment eligibility tool on gov.uk. One of the categories that qualifies is ‘Income from outside the UK (including pensions)’. I wonder if income from an Ireland- or Luxembourg-domiciled ETF, as many are, even if GBP-denominated would qualify? If so, I’m tempted to buy some VWRL in my unsheltered account just so I can get rid of the chaos of ad hoc reporting to HMRC and collection of interest/dividend tax solely via my (usually incorrect) tax code. I think it would be worth any ERI complication just for this. Does anyone have a view on whether VWRL would satisfy this HMRC self-assessment criterion?
@75DavidV I always list my Ireland and Luxembourg domiciled ETFs as foreign source dividends, despite them being denominated in GBP. Seems like a good idea that you have.
@HowDy is right that selling the acc version of a fund and buying the inc version is a disposal for CGT purposes, but I think that it would count as repurchasing the same fund, so the 30 day anti-bed and breakfast rules would apply.
@HowDy I disagree. Inc and Acc are different financial instruments, different ISIN, (so could not get pooled in a S104 pool or have the 30 day rule apply). The distinction is made in the HMRC gains manual:
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg57709
If Inc is sold for cash and an equal cash value of Acc is purchased then there can be CGT due on the Inc sale gain. As I understand it, “Share reorganisation”, with no CGT chargeable event, would take place only if the switch were handled by the issuer or a platform, with no intermediate of cash involvement. But it hard to find anything in the HMRC manual that is 100% clear on this issue. I think you could reasonably treat a sale of Inc and repurchase of Acc via cash either way. Just wait and see if HMRC raises any query with you.
@Richard Weber (78) Thanks for that information, it’s very helpful. I’ll look into that further. I imagine the HMRC notes on completing the self-assessment form will be a good place to start. I see that VWRL has a dividend payment on 30 March and does not go ex-dividend until 17 March, so I have a chance of qualifying for self-assessment as soon as this April if I buy VWRL soon.
Any further views or experience from anyone else are still welcome.
@HowDy, @IvanOpinion – Yes I see what you are saying. No I don’t have it in writing as I rang the CGT Dept at HMRC (Customer Services put me through and had to hold a while) but I do have name and time/date of call and assume they may record calls (or maybe not)? I have been on the HMRC Community Forums in the past but have not always found them to be very helpful or even given correct info sometimes via the Admin Team so feel you cannot rely on that too much either.
The woman I spoke to at HMRC seemed very certain and didn’t dither over the answer – straight to the point and was certain it would not count for CGT purposes. I did mention sale/repurchase as well in switching (she didn’t even mention anything about the 30 day B&B Rules) and she said it was a reorganisation of capital like I have read myself here and there but obviously now wondering if she has got it wrong? But if she doesn’t even give the correct guidance – working in the CGT Dept. of those that impose the rules then how the hell are we supposed to get it right? The correct guidance and information should be available.
Even @TA in his post here (updated May 2022):
https://monevator.com/income-units-versus-accumulation-units-difference/
says this :
“Does switching from accumulation to income funds trigger capital gains tax?
Switching between accumulation and income share classes within the same fund may not trigger capital gains tax – but it depends on how the tax rules are interpreted.
Snippets from HMRC tax manuals in circulation appear to suggest that such a switch doesn’t trigger a capital gains tax event.
But much depends on gnomic HMRC guidance that’s laced with technical terms and depends on opaque interactions between different pieces of tax legislation.
The tax manuals are also silent on what happens if you trade between an accumulating and distributing ETF.
The bottom line: get expert tax advice beforehand if you’re concerned about the capital gains tax consequences of a switch.”
So even @TA says it’s a matter of interpretation and cannot give a definitive answer really. Not blaming him – he doesn’t make the “woolly” rules but it’s just another example of an authority responsible for implementing them not giving clear information that can be interpreted in more ways than one and expecting us to come up with the right answer (in their view) at the end of the day. If it’s not because they are ambiguous/not that clear then we get fined.
@IvanOpinion – how do you know this is the case, I mean where did you find that information as I agree with TA that the HMRC CGT rules do seem vague and open to much misinterpretation ?
Also the 30 day rule – so you are saying that even if it was considered a disposal for CGT, that it would not be considered as such as the 3o day rule would apply and so in basic terms means where shares are repurchased soon after disposal, the sale is treated as not having happened for tax purposes – so if this does apply then we would be back in the position as if the sale didn’t happen, so no sale/no CGT liability? Which is what we want, if just by another route? Surely if as you say the switch does count as a disposal – so CGT rules would apply then I can see that the 30 day rule should then also apply so cancelling it out? (or maybe they’ve invented some other rule to get around this no doubt!) A case of whatever suits (them) I think.
I don’t fancy calling HMRC again as who do I actually trust? The first twice I called lately the Customer Services said CGT Dept was too busy to take call and to ring back and had been holding a while already, then 3rd time put me through to them but holding a fair time again. Even when you do get through, from this, you still don’t know if they are divulging the correct information or not, apparently!
As I said I’ve read much conflicting information online and brokers don’t seem to have a clue and quite frankly, do you trust them anyway as they seem to get a lot of simple stuff incorrect I have found? Even 2 members of staff in HL Transfers Dept (who are usually better than most I’ve found) just recently didn’t even know the terms of their own latest cashback offer (relating to a transfer) – until I pointed it out to them and they had to find out and come back to me and then agreed I had been given the wrong information – on 2 previous occasions!
Cheers for your thoughts (or anybody else’s) on it.
HowDy (75) Apologies, I missed your reply (75) when I wrote my comment (77). Thank you for that further information. If I do proceed with the plan of buying some unsheltered VWRL, it seems I should buy sufficient to ensure I receive at least £300 dividend in March to be sure of succeeding in registering for self-assessment.
@Richard Weber
Some parts of my comment 79 I’m sure of and some I’m not.
If you sell and then buy the same share (which would include a unit trust), this is not a share reorganisation, because that would require the conversion by the fund manager. So there is a disposal for CGT purposes. But disposals don’t necessarily trigger material amounts of gain, if you repurchase the same share within 30 days. The acquisition cost is deemed to be the price paid for the reacquisition (even if it took place later than the disposal, as long as within 30 days), so any gain is likely to be negligible. The original acquisition cost is effectively carried forward to any future disposal of the shares.
Where I’m not sure is whether the acc and inc versions of the same unit trust are the same share.
@Richard Webber (80) – That’s the same as I posted in (76). I agree with you.
@Confuzed (82) – Try posting on your query on the HMRC Community Forum. HMRC generally respond within a couple of days and you can keep the thread going with follow-up questions. https://community.hmrc.gov.uk/customerforums/
This answer is helpful to the above discussion.
https://forums.moneysavingexpert.com/discussion/5860818/accumulation-and-income-funds-cgt
So – perhaps someone’s mentioned this but I can’t find it.
If I sell the day before the reporting date, and buy back the day after, do I avoid the “income” from a tax POV?
@Finumus Yes. So long as you do not hold units at the reporting date you will not incur tax liability for ERI. One would think that this might show up in a change of price around that date. But this does not always seem to happen. Two examples: Wise run a cash savings jar based on BlackRock ICS Sterling Government Liquidity Fund. This is an accumulation fund. Similar is Lyxor Smart Overnight Return ETF, CSH2, also an accumulation fund. Owning these funds – but avoiding holding at the reporting date – is a way to obtain around 5% return and have it charged to Capital Gains Tax (10% or 20%) rather than to Income Tax (20%, 40% or 45%). If you buy back a couple days after selling this will be at a slightly higher price and you will actually book a loss – until such day that you eventually sell completely and have a capital gain to report. In the case of CSH2 there is a bid/offer spread to consider, about 0.02%. It can still be worth incurring that cost for the tax advantage. In fact, for the last two years CSH2 has reported nil ERI. So it would not have been necessary to cash out over the reporting date.
I note that equalisation applies to UK domiciled funds too which isn’t clear from the article.
For Vanguard funds equalisation only seems to apply to UK domiciled funds and not to ETFs. According to their guide linked here https://www.vanguardinvestor.co.uk/investing-explained/general-account-tax-information
Equalisation also appears on your tax certificate when ERI doesn’t. Though that’s a bit late when you are trying to work out how much gains to harvest in the tax year before you get the tax cert.
@Finimus according to the Vanguard GA reporting guide:
“Note: If you sell your shares and buy them back within a 30-day period (and this activity straddles the reporting period end) you’ll still need to calculate ERI for your holding, as if you continued to hold the shares at the reporting period end.”
Vanguard GA reporting guide linked from here: https://www.vanguardinvestor.co.uk/investing-explained/general-account-tax-information
I would be interested to know if Vanguard can back up that opinion with a reference to something in the HMRC manual or web pages. I have not been able to find anything to support what Vanguard are saying about 30 days rule application.
@Richard W
The problem with ERI is that you only know the amount in retrospect, so I think you have to “cash out” before the reporting date regardless to avoid being caught out.
Vanguard are correct. Confirmed in HMRC’s manual: https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm13222
“If a participant disposes of an interest in a reporting period and S106A TCGA 1992 (Identification of securities: capital gains tax) applies to identify the whole or part of that interest with an interest acquired in the next reporting period, then the disposal is ignored and the participant is treated as having held that interest at the end of the earlier period. (regulation 94(3A)).”
When I retired I spent weeks (seemed like months) working out the capital gains on the company shares I sold. Share schemes where shares were purchased every month led to nearly 200 transactions. As one scheme was not tax sheltered, shares were automatically sold to pax tax, and there were many instances of the 30 day rule applying. Fortunately I had been careful to keep all the documentation. But it was a nightmare.
I then made it my goal to get all investments in to an ISA and finally achieved it ( thanks spouse).
Last year I had to work out the CGT on my relative’s investments, 20+ funds over 10 years, again the 30 day poped up because investments were sold to pay fees. Hours and hours of slaving over spreadsheets. No way would I be wanting to do this when I get in to my 70s or 80s.
As for tax advisers, maybe I got the wrong ones, but of the two personal tax advisers I used, one used the wrong method for a calculation and the other had no knowledge of the reporting requirement if total annual sales proceeds more than x4 of annual allowance.
@Gareth Green Thank you very much for that tax regulations reference. It is very helpful to know this.
@Richard Weber & @John K
So – taking a combination of what you both said…. if I just switch between _different_ funds to avoid reporting date, I’m fine? This is really cool.
I guess this is what people are talking about when they complain that we need higher CGT rates because people are incentivised to turn income into gains….
Is it possible to take a larger amount as a tax free lump sum from a SIPP, if the tax free lump sum on a DB pension isn’t taken? ( because the DB pension will increase with RPI ). The max Tax free cash is 25% of LTA ( £268,275 ) but I can’t see anything that says each scheme is treated individually or whether all my pension schemes can be pooled and I can take the 25% purely from the most advantageous scheme. Any pointers would be useful. Thanks.
@MickJ (97) I think you will find that the 25% tax-free cash applies to each scheme individually (subject to an overall cap of £268,275). This applies to different DC schemes also, let alone your hope of being able to pool a DB and DC scheme. The one exception to this is where the DC scheme is an AVC attached to the DB scheme. Then the overall tax-free cash can usually be taken from the AVC.
@Finimus Don’t you want both the dividend and gains allowance to reduce your overall tax burden?
With a 6 figure GIA, a few years average growth and the new £3,000 gains allowance you wont even be able to bed and ISA £20,000 each year without paying CGT.
The effect of the £3,000 CGT allowance has not yet filtered through for its full impact I suspect. Folks who could before expect to never pay significant CGT are now going to have to look again at options.
Thanks for the great article and discussion. Does anyone have a (good) spreadsheet for tracking ERI over multiple years to ensure a correct offset against the gain when calculating CGT at disposal.
Yuk, this is pretty horrid.
In addition to the sources already mentioned, I found this helpful as a simple guide:
https://www.vanguardinvestor.co.uk/content/dam/intl/uk-retail-direct/general/uk-reporting-fund-faq.pdf
It appears that I don’t need to make any equalisation adjustment on my Vanguard VUKE ETF. The document says:
“Vanguard Funds Plc do not provide ‘Investor average equalisation adjustment’ rates for the purposes of the UK Reporting Funds Regime. No further action is required.”
Also the ERI statement I received from AJ Bell (how I became aware of this whole issue!) shows an amount Equalisation = 0 for VUKE…
Comments welcome if anyone wants to correct any of the above!
@Southbank Yup. Vanguard ETFs don’t have equalisation. Just their UK based OEICs.
For income ETFs the ERI is usually tiny or even zero.
For accumulation ETFs the ERI contains the dividends.
With the Wise fund, I had fun and games when I got the tax certificate last year. They sent one and then some time later sent an “updated” one showing ERI (which of course transforms the tax position). Glad I didn’t do my self-assessment early.
The other problem with Wise is that their assets statements (which is what they call the statement reporting on fund transactions) does not show the exchange rate which applies to transactions. When you hold their funds, there are transactions all the time (monthly fees, any spend you do, any conversions etc).
The best you can do is to use another source of exchange rates for the day to estimate gains/losses on those transactions if you want to track when in the tax year. The CTC does show all transactions with applicable exchange rates.
After a lot of work I built a sheet to track an estimate of the s106 pool. But as said above, ERI can only be guesstimated if you want to know where you stand before the 30 September date for staying in/getting out of the fund (depending on whether you’re trying to slant towards CGT or income tax).
I confess I haven’t got it working 100% for all 30 day transactions (partially matched escaping me at the moment), but it does give me a rough idea of where things are.
What about this real life situation?
Invested in Vanguard Irish OEIC accumulation units May 2024
Sold all the units March 2025 for a capital gain
Fund accounting year end is 31 December 2024 and fund distribution date is 30 June 2025
I gather from the above that ERI less equalisation is taxable income for 2025/26
Is it deductible from the capital gain that was realised in 2024/25?
Further to my comment just now … The Vanguard document at @Southbank’s helpful link says this on p9:
“Disposing of a Reporting Fund — Provided your holding is a Reporting Fund throughout the entire period you’ve held it, any gain upon disposal should be subject to capital gains tax (at rates of up to 20%) rather than income tax (at rates of up to 45%). Any calculation of the gain or loss on disposal should take into account any ERI, equalisation and reinvested distributions. It’s important for you to check that any ERI is not missed even if the Fund Distribution Date is after the date of disposal.”
So I think the answer is Yes: ERI less equalisation (taxable in 2025/26) is deducted from the gain on disposal (realised in 2024/25).
Now I just need Vanguard to publish the ERI and equalisation per share. They say they will do that in June.