Busting some common myths about HMRC non-reporting funds

Thanks for the info Nun.  Since retiring 4 years ago Wellesley has been providing all the funds we need to top up my non-COLA pension.  This year almost half the distributions were long term gains so if it was in an IRA all the withdrawals would be taxed as regular income.  (Prior to retiring we sold our house and put the proceeds into Wellesley since we wanted a retirement with lots of travel and a "lock and leave" apartment, which has worked out great as each year we have traveled for 6 months of the year).  Also, we still aren't eligible yet to withdraw from IRA's without penalty or arranging a 72(t).

With the apparent certainty of ETF's being on HMRC's approved list then I'll plan on liquidating over the next few years and buying a mix of index ETF's.  I wanted to keep things simple for easy handover to DW who doesn't want anything to do with managing an AA of a mix of funds, and there are no balanced or target VG ETF's I can see. (Unlike VG Funds where there are plenty to choose from).

ETA
The after tax funds will be all owned by DW who doesn't have any other income so come the dual residency situation, her filing with HMRC will keep her well within the 20% tax band. At least this is the plan.

Owning Wellesley outside of a retirement plan as a UK tax resident could greatly complicate your taxes. If HMRC were to apply the offshore funds rules the tax rate hit would not be too bad if your marginal income tax rate is 20%, but the nasty thing is you would lose your UK capital gains exemption.

You could stay with Wellesley and hope that HMRC don't come after you and if they do that you can argue that Wellesley distributes all its income. Or you can avoid all issues and just come up with a couch potato portfolio of ETFs or one that mimics Wellesley consisting of Vanguard Dividend Appreciation ETF and Intermediate Bond Index, although it might not be the best time to have a large percentage of bonds in your AA.

Merry Christmas Nun, and thanks again for the advice.

Over the next 3 years I think I'll build a set of index ETFs to replace Wellesley Income. No worries then with HMRC.

While I am not averse to selling my Vanguard funds in favor of their ETF's I would prefer not to as that will mean a substantial CG

Bear in mind that Vanguard allows you to convert any mutual fund shares to ETFs of the same fund, free of charge. This is a change in share class and will not subject you to capital gains tax since you are not selling your shares.

The main requirements are that 1) your mutual fund must offer ETF shares (not all do) and 2) you must open a Vanguard brokerage account to hold your ETFs if you don't have one already.

Bear in mind that Vanguard allows you to convert any mutual fund shares to ETFs of the same fund, free of charge. This is a change in share class and will not subject you to capital gains tax since you are not selling your shares.

The main requirements are that 1) your mutual fund must offer ETF shares (not all do) and 2) you must open a Vanguard brokerage account to hold your ETFs if you don't have one already.

Thanks for the info, but there is no equivalent balanced ETF to the Vanguard Wellesley Income fund otherwise I would do just that.

Thanks for the info, but there is no equivalent balanced ETF to the Vanguard Wellesley Income fund otherwise I would do just that.

My bad, I hadn't noticed your mention of the Wellesley fund.

Over the next 3 years I think I'll build a set of index ETFs to replace Wellesley Income. No worries then with HMRC.

If you ever want to move from Wellesley into the ETF classes of other Vanguard funds, rather than buying the ETFs directly, you could consider buying the corresponding mutual funds and then convert them to ETFs right afterwards. The benefits of this approach are that you invest at NAV, with no spread, and you can buy fractional shares. Of course this only helps when buying, not selling.

If you ever want to move from Wellesley into the ETF classes of other Vanguard funds, rather than buying the ETFs directly, you could consider buying the corresponding mutual funds and then convert them to ETFs right afterwards. The benefits of this approach are that you invest at NAV, with no spread, and you can buy fractional shares. Of course this only helps when buying, not selling.

Nice tip, I will definitely look into this. 

I have no ETF's at present but do have a Total Stock Market Fund, VTSAX, and will immediately try moving it to the equivalent ETF, VTI without realizing any gains.  Should be good practice.

Hi there,

I have just come across this very helpful thread. I am a dual US-UK citizen and have been resident in the UK for 17 years. I still own some mutual funds in the US from my short time living there. They are with Vanguard and Schwab. I would like to sell them and invest the proceeds into Vanguard ETFs to simplify my life. Two of the Vanguard I own are actively managed and have no ETF equivalent. I have held them for 10 years. If I sell I am going to be liable for a whopping tax bill out of my gains.
What is the consensus view on this based on this thread? Can I reasonably make the case that they are transparent funds and calculate my tax liability based on the capital gains rules? It seems that the guys from Maseco are saying that it is naive to think that one can argue that a certain US mutual fund is transparent, in order to be taxed under the capital gains rules.  I really am stuck with what to do on this.

Any advice/thoughts? What would you do?

Many thanks.

Hi there,

I have just come across this very helpful thread. I am a dual US-UK citizen and have been resident in the UK for 17 years. I still own some mutual funds in the US from my short time living there. They are with Vanguard and Schwab. I would like to sell them and invest the proceeds into Vanguard ETFs to simplify my life. Two of the Vanguard I own are actively managed and have no ETF equivalent. I have held them for 10 years. If I sell I am going to be liable for a whopping tax bill out of my gains.
What is the consensus view on this based on this thread? Can I reasonably make the case that they are transparent funds and calculate my tax liability based on the capital gains rules? It seems that the guys from Maseco are saying that it is naive to think that one can argue that a certain US mutual fund is transparent, in order to be taxed under the capital gains rules.  I really am stuck with what to do on this.

Any advice/thoughts? What would you do?

Many thanks.

You can always argue, whether or not you'll win is the question.

The first issue is how have you been dealing with these funds for UK tax purposes. You might not have had any UK tax liability on dividends and capital gains in past years if you were taxed on a remittance basis or if you were below the thresholds. I assume you are up to date with any US tax on them..........

I'd probably seek some professional advice on this and get the money into UK reporting funds as soon as is convenient.

Thank you for your reply.
Yes I am up to date on all of my returns and reporting requirements. I have been reporting the dividends from these funds on my UK tax return and paying UK tax on them as a result. The dividends haven't been large so the tax implication has been modest. I haven't traded at all in years, which is why I need to overhaul my portfolio.

I guess I do need advice. Last time I used a US/UK accountant I was quite underwhelmed by the service and the cost couldn't be justified given my modest income and modest portfolio.

Thank you for your reply.
Yes I am up to date on all of my returns and reporting requirements. I have been reporting the dividends from these funds on my UK tax return and paying UK tax on them as a result. The dividends haven't been large so the tax implication has been modest. I haven't traded at all in years, which is why I need to overhaul my portfolio.

I guess I do need advice. Last time I used a US/UK accountant I was quite underwhelmed by the service and the cost couldn't be justified given my modest income and modest portfolio.

Are you up to date with your US tax on these funds? This sounds like a situation where the complexity of getting things completely correct is disproportionate to the amount of money involved.

Thank you for your reply.
Yes I am up to date on all of my returns and reporting requirements. I have been reporting the dividends from these funds on my UK tax return and paying UK tax on them as a result. The dividends haven't been large so the tax implication has been modest. I haven't traded at all in years, which is why I need to overhaul my portfolio.

I guess I do need advice. Last time I used a US/UK accountant I was quite underwhelmed by the service and the cost couldn't be justified given my modest income and modest portfolio.

That's great to know.  You have some Vanguard and Schwab mutual funds and you have been paying taxes on the dividends so the only disadvantage that you have seen is that you can't get a lower tax rate on capital gains distributions?

I am greatly interested in this particular subject, as I inherited a substantial US investment portfolio from an aunt in 2012. Everything is now in a brokerage account at HSBC USA in New York.

The account includes US government bonds, municipal bonds, some stock, and several mutual funds (which provide tax-free income in the US).

Right now I just take the interest/dividends from these accounts, but in the future I may need to sell my shares in the mutual funds, and would like to think I can avoid paying UK income tax on the proceeds!

I have joint US/UK citizenship but I am domiciled in the UK for UK tax purposes. I am completely up to date regarding US tax returns and FBARs.

Selling the funds now to invest in UK funds is not an option, as I doubt I could receive the same returns and I would also have a substantial US capital gains bill to pay (as well as UK capital gains or taxes).

Does anyone know the HMRC rules on inherited mutual funds?

janet

Does anyone know the HMRC rules on inherited mutual funds?

janet

It sounds as if you are taxed in the UK on an arising basis, therefore, you are liable to UK tax on gains, interest, dividends etc from these mutual funds. If they are not UK reporting funds you will pay tax on those gains at your marginal income tax rate and lose you capital gains allowance.

The basis from a UK perspective will be the probate value at death; even if the death was in 2010 and you chose not to have a step-up in basis for US purposes that year.

Your maximum US rate on the gains is 23.8%. The maximum UK rate is 45% (as you are domiciled within the UK; but you should owe just 3.8% to the IRS as you'd resource the gains as foreign on your US return. You could gift some to a spouse or civil partner and have him/her sell if the partner has a lower UK income tax rate than you.

Aside from tax, this is weird portfolio. Why would someone hold dollars if the liabilities are all in pounds and the owner is domiciled here?  I think you might benefit from speaking with an investment adviser about hedging against any possible collapse in the dollar which could really hurt your pocket.

I have joint US/UK citizenship but I am domiciled in the UK for UK tax purposes. I am completely up to date regarding US tax returns and FBARs.

Selling the funds now to invest in UK funds is not an option, as I doubt I could receive the same returns and I would also have a substantial US capital gains bill to pay (as well as UK capital gains or taxes).

janet

Aside from tax, this is weird portfolio. Why would someone hold dollars if the liabilities are all in pounds and the owner is domiciled here?  I think you might benefit from speaking with an investment adviser about hedging against any possible collapse in the dollar which could really hurt your pocket.

I'm going to be in a similar position, dual US/UK citizen, domiciled in the UK, filing tax returns in both the USA and UK. (we'll be spending the winters in the USA so do need $ for spending as well as £)

Why is it weird to hold only US funds instead of UK funds?  Plenty of advice given here to avoid UK equity funds because they are expensive and difficult to deal with foreign funds on a US return?

Not being critical here, I just want to understand.  Currently we plan to only have HMRC reporting funds, and I realize the danger of adverse exchange rates.