Capital or Income Tax on Foreign Shares?

I've just got stung by a huge UK tax bill on profit from the sale of U.S. mutual funds. 

If I buy shares in non-UK companies and later sell them at a profit is that profit treated as a capital gain or as income?  The difference in allowances and rate of tax is huge, so if foreign shares are treated as capital I'll be shares from now on.  I can't find anything that makes sense to me on the HMRC website, so I hope someone here knows the answer.

Gains on sales of non-UK shares are taxed by the UK as capital gains with a maximum 28% tax rate and an annual CGT exemption. Gains on the sales of most US mutual funds as taxed by the UK as offshore income gains at income tax rates of up to 50% with no annual exemption and no offset for losses on other mutual fund sales.

Generally speaking since the remittance basis changed on 6 April 2008 it has been prudent to either avoid US mutual funds entirely or only select from the few funds that are choosing to register with HMRC as reporting funds.

+1 to what Guya said, also are you taking credit for any taxes you paid in the US?

The US citizen resident in the UK is in a "Catch 22" situation when it comes to investing in mutual funds, unit trusts etc. The UK will tax any gains from the vast majority of offshore funds as income and the US taxes most UK funds using the draconian PFIC rules. Its a big burden for the regular investor.

FYI I came to the conclusion to either invest in individual shares or to hold mutual funds within a retirement account wrapper...of course eventual distribution from those will be treated as income in UK and US.

IMHO it's simplest to stick to savings accounts/CDs etc as investing vehicles for your after tax investments. Also the UK ISA, although taxable in the US, is a good way to save as is the US ROTH if you can arrange things so you have US earned income

Thanks for the responses.

I'm glad to hear that shares are treated as capital and not income by the UK.  In the UK I've definitely taken the keep-it-simple approach to investing.  Nothing other than savings bonds and pension funds.

The mutual funds I have in the U.S. are collection of funds I owned before I moved to the UK, plus some funds I invested in recently from money inherited  from my father in the U.S.  I'm at the stage of life where I am more concerned about generating a stream of income from the funds versus trading them.   I decided to trade a handful of funds I owned for a very long time for others that are better performing, not realizing there would be an issue. 

My financial advisor (aka salesguy from Wells Fargo) said I could set up a separate, managed fund of individual stocks.  Sort of a personal mutual fund, but it sounds a bit iffy from a UK tax perspective.   

In any case, I try to keep in mind that I'm paying tax on a profit and although it may be at a higher rate than I'd like it's still better than the inverse. Arghhh!

But if you sold 2 funds on the same day, both bought for $100 and one had gone up to $200 (so a gain of $100) and the down other to $1 (so a loss of $99) you would pay income tax on a gain of $100 even though your bank account would only have $1 in it more than when you first invested.

But if you sold 2 funds on the same day, both bought for $100 and one had gone up to $200 (so a gain of $100) and the down other to $1 (so a loss of $99) you would pay income tax on a gain of $100 even though your bank account would only have $1 in it more than when you first invested.

I understand that Guya, it's the fundamental problem with treating a capital investment in the same way as income. Great example.  There's nothing I can do about the mutual funds I already hold, other than be more aware in the future of how they are treated if sold from a UK tax perspective.  I will not be buying any more funds though, that's for sure.

Yes, Americans living abroad can wind up with major tax and compliance headaches with the IRS if they don't plan things well. 

Also the UK ISA, although taxable in the US, is a good way to save as is the US ROTH if you can arrange things so you have US earned income

This was recently discussed on a tax professional forum. Although the ISA is not taxable by HMRC earnings would be taxable by the IRS. There are other complexities discussed here.
http://britishexpats.com/forum/showthread.php?t=514993
I would recommend against a US citizen establishing an ISA. I I hope this helps.

This was recently discussed on a tax professional forum. Although the ISA is not taxable by HMRC earnings would be taxable by the IRS. There are other complexities discussed here.
http://britishexpats.com/forum/showthread.php?t=514993
I would recommend against a US citizen establishing an ISA. I I hope this helps.

I don't completely agree with this. I would recommend against a US citizen opening a stocks and shares ISA, but a cash ISA can be a good move as interest will be free of UK tax and excess tax credits can be used to offset US tax.

I don't completely agree with this. I would recommend against a US citizen opening a stocks and shares ISA, but a cash ISA can be a good move as interest will be free of UK tax and excess tax credits can be used to offset US tax.

I was just coming to post the same thing.  I wouldn't recommend a US citizen to have stock/shares ISA (PFIC problems abound) but a cash ISA is perfectly fine - it just isn't tax-free from a US perspective.  Though like you said, folks may be able to use excess tax credits to make it tax free from the US side as well.

This was recently discussed on a tax professional forum.  . . http://britishexpats.com/forum/showthread.php?t=514993]http://britishexpats.com/forum/showthread.php?t=514993[/url]

 

British Expats in no way is a tax professional forum and people reading your advice should be aware of that.  That site is equivalent to UK Yankee, just from the other perspective (UK to US).

For 2011/2012  the maximum contribution to a cash ISA is £5,340. Your argument does not make practical sense as the yield from a cash ISA would not be sufficient to offset the administrative time and cost for a US Citizen.
Based on my research so far, it appears that: (1) the UK ISA is viewed as a foreign trust; (2) the US "looks through" the ISA to the underlying investments; and (3) the income within the UK ISA is subject to current US income tax.   If so, the following forms are most likely required to be filed:
- Form 3520
- Form 3520A
- Form 8938
- Form TD F 90-22.1
- Schedule B

Not sure you are reading what we are writing. No one here recommends a stock and shares ISA but a cash ISA does not bring with it the issues you write about - it just generates interest income.

Also it is certainly arguable that a stock and shares ISA is just a uk mutual fund type vehicle, which has pfic not trust issues, but I hardly care to argue that point since us citizens are just best to stay away regardless.

Sara Smile, I was referring to your post "I wouldn't recommend a US citizen to have stock/shares ISA (PFIC problems abound) but a cash ISA is perfectly fine". It's not clear to me why you want to "shrug-off" the administrative cost associated with your recommendation and this type of investment for US citizens. 

But a cash ISA doesn't have those issues attached to it. It is just a savings account that pays a set amount of interest which doesn't get taxed by HMRC.

It's not clear to me why you want to "shrug-off" the administrative cost associated with your recommendation and this type of investment for US citizens. 

Perhaps you could explain what administrative cost you feel is associated with a cash ISA. It's similar to a standard UK savings account, so there is no administrative fees with the bank/building society. Just a fact check: you do agree that a stocks and shares ISA is an entirely different animal to a cash ISA, with the one common similarity that neither are tax free in the US?

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