US capital gains dividends

How does the UK tax capital gains dividends paid on US funds.  I don't think they are taxed as income because they are demonstrably not income, but HMRC often takes a perverse view of such things.  Or are they taxed as capital gains, which implies a part disposal and hence a simultaneous reduction in the basis of the remaining funds.  Or what ?

By the way - is there a search facility on this forum - I cannot find it ?

I did a Google search using "talk.uk-yankee" & "capital gain distributions" and found this thread from last year.

http://talk.uk-yankee.com/index.php?topic=83998.0

If you are invested in UK non-reporting funds you don't get to apply the allowances for capital gains and dividends. You pay tax on them as if they were income.

If the funds are UK reporting then you can use all the tax free allowances and rates. The status of US fund capital gains distributions is a bit ambiguous as far as UK tax goes, but you can minimize those worries by using US reporting funds that seldom (if ever) pay capital gains distributions....an example would be the Vanguard Total Stock Market ETF.

Capital dividends
The following comments may assist in an understanding of the UK tax position on capital dividends.

For distributions from UK resident companies, all dividends are taxed in the hands of recipients as income. It is irrelevant whether the source of the payment is a capital gain or how the payment is described.

The position for distributions from non UK companies (or non UK collective investment schemes) is more complex. It is different for payments received by companies and payments received by individuals.

For distributions received by companies, all distributions are considered in the same way. They are then either taxed as income or exempt, depending on whether they meet the conditions under which many but not all of the foreign dividends of UK companies are exempt from tax.

For capital dividends received by individuals, the payments can be either income or capital. There is case law on this matter. The following link to HMRC manuals has some relevant comments towards the foot of the page.
http://www.hmrc.gov.uk/manuals/saimmanual/saim5210.htm

If the payment is income, it is taxed in the same way as dividend income. If the payment is capital, then the usual rules for part disposals and small part disposals would apply.

Capital dividends


For capital dividends received by individuals, the payments can be either income or capital. There is case law on this matter. The following link to HMRC manuals has some relevant comments towards the foot of the page.
http://www.hmrc.gov.uk/manuals/saimmanual/saim5210.htm

If the payment is income, it is taxed in the same way as dividend income. If the payment is capital, then the usual rules for part disposals and small part disposals would apply.

US fund capital gains distributions are paid once or twice a year. The fund owner does not sell any shares, however, the capital gain distribution comes from trading by the fund itself over the year. After receiving the capital gains distribution the owner will have the same number of shares, but they will have dropped slightly in price.....so do we go with the "corpus" of the shares underlying the fund....or the "corpus" of the owners shares of the fund that have not been traded at all? Local law in the US distinguishes between dividends and capital gains as it traces them back to the actual source within the fund, is that what we should do for HMRC reporting too?

Personally, if I owned a US mutual fund that was UK reporting I would declare dividends as dividends and capital gains distributions as capital gains, even if I had not personally sold any shares.