Gift to spouse of non-reporting funds

If you have read any of my other questions you will know that my husband and I have a toxic mix of assets because of ignorance when we came to live in the U.K. and failure, therefore, to plan.

Re-cap of our situation.
- My husband was seconded here in 2011, tax-equalized by his company so we were responsible solely for US taxes.
- My husband's taxes in the UK have been filed each year on the Remittance Basis.
- In the US we each own mutual funds (non-reporting).
- I discovered this year that I should have been filing taxes in the UK because of investment income from the mutual funds.
- I also discovered that as a UK born citizen HMRC would most likely consider me to be domiciled here despite having lived outside the UK for over 30 years.
- I am now up-to-date and fully compliant with my UK taxes as an Arising Basis, domiciled taxpayer.
- After living here on secondment for 6 years, and husband having retired this year, we would prefer to settle in the UK rather than the US.


- I have a large capital gain on my non-reporting mutual funds.
- In addition my funds are tainted with income from my husband during the years he has been taxed on the RB in the UK.
- We have decided to ring-fence these funds outside the UK. We plan not to remit any money from these funds to the UK.

Two Questions:

1) Can I, as an Arising Basis taxpayer, gift my funds to my husband? The plan would be for him to convert the non-reporting funds to ETFs (as a RB taxpayer he would not have to pay UK taxes for the conversion).

and, if so

2) Can he, at a later date, gift the ETFs back to me so that I can make use of my allowances for Capital Gains and Dividends?

In your re-cap, one point you haven't mentioned: after your husband's 7th year in the UK, will he continue/remain on the Remittance Basis and pay the Remittance Basis Charge? Or, will he also change to Arising Basis?

(Warning: this is not an area I'm sufficiently familiar with and shouldn't be commenting on.)

In your re-cap, one point you haven't mentioned: after your husband's 7th year in the UK, will he continue/remain on the Remittance Basis and pay the Remittance Basis Charge? Or, will he also change to Arising Basis?

He will be taxed on the Arising Basis from April 2018.

Any thoughts? 

Surely the answer to the first question is yes, I can gift my funds to my husband since there is no restriction on gifts to one's spouse in either the US or the UK.  I realise the trickier question is the second one, but I can't find a clear answer on the internet.  I don't think it would qualify as a remittance unless I were to bring or use the funds in the UK, which I wouldn't intend to do.

Just to muddy the waters more, what happens when he converts the funds to ETFs?  If I were to convert to ETFs, though non-taxable in the US, it would be deemed a sale in the UK, so I would pay taxes on the gains, and my cost basis would be re-set.  If he converts to ETFs whilst on the Remittance Basis, he won't be taxed either in the US or the UK.  If he later sells the ETFs as an Arising Basis taxpayer, what does HMRC deem to be his cost basis?  Is it his original cost basis from the mutual funds as it will be in the US, or did the conversion to ETFs re-base his cost?

The following comment deals only with one aspect of the questions posed by Angeline.

Firstly, by way of background, the source of the UK tax rules on Offshore Income Gains is a statutory instrument,
Offshore Funds (Tax) Regulations 2009. These rules can be seen here-
https://www.legislation.gov.uk/uksi/2009/3001/contents/made
HMRC’s guidance on Offshore Funds can be accessed from
https://www.gov.uk/hmrc-internal-manuals/offshore-funds-manual

One part of Angeline’s plans involves “swapping” interests in non-reporting funds for equivalent interest in reporting funds. I would be interested to know how this is done. Does the manager simply allow this?

For tax purposes, Angeline hopes that this swap is a tax non-event. However, this is not the case. For general capital gains tax purposes, swapping one interest for another in the same entity is normally ignored. This rule is specifically disapplied for OIG purposes, under regulation 37. The swap will be treated as a disposal for OIG purposes, with the consequences that follow.

The following comment deals only with one aspect of the questions posed by Angeline.

Firstly, by way of background, the source of the UK tax rules on Offshore Income Gains is a statutory instrument,
Offshore Funds (Tax) Regulations 2009. These rules can be seen here-
https://www.legislation.gov.uk/uksi/2009/3001/contents/made
HMRC’s guidance on Offshore Funds can be accessed from
https://www.gov.uk/hmrc-internal-manuals/offshore-funds-manual

One part of Angeline’s plans involves “swapping” interests in non-reporting funds for equivalent interest in reporting funds. I would be interested to know how this is done. Does the manager simply allow this?

Thanks for the reply, though I'm struggling to understand the technical language and the rules in the link are way over my head.

The conversion from mutual fund to ETF is allowed at Vanguard as a non-taxable event in the US since the investment is identical, and all that changes is the class of shares.

For tax purposes, Angeline hopes that this swap is a tax non-event. However, this is not the case. For general capital gains tax purposes, swapping one interest for another in the same entity is normally ignored. This rule is specifically disapplied for OIG purposes, under regulation 37. The swap will be treated as a disposal for OIG purposes, with the consequences that follow.

Although the swap is deemed a taxable event by HMRC, he would owe no taxes since he is a RB taxpayer. So the following year from the UK standpoint when he is paying taxes on the AB, if he then sells the ETF his capital gain (or loss) would be the difference between the sale price and the price of the ETF on the date of the swap. Can this be right? This sounds too good to be true to me. What am I missing?