Busting some common myths about HMRC non-reporting funds

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?

For a US citizen who wants sterling portfolio exposure and wants to stick to core asset classes, there are some options that won't cause major tax issues. You can invest directly (not through mutual funds) in shares of UK companies, or buy individual UK government or corporate bonds.

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.

Only those with incomes over $200k a year will pay the extra 3.8%. If you have dividends in the US won't the US want 15% before any resourcing is done? If you have capital gains you can resource to the UK and use FTC against any US CGT due. I assume you'll pay tax on both the dividends and capital gains resourced to the UK at your UK marginal income tax rate if the funds are not UK reporting.

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.

PFIC rules and the high fees of UK investment firms make owning funds based in the UK bad ideas for US citizens. Therefore, owning UK reporting funds in the US is tax efficient in both the US and the UK for the US citizen who pays tax on an arising basis in the UK. Exchange rate variations are an issue, but if these are a worry you can invest in US mutual funds with a strong UK or European company component.

If you want to invest in individual stocks you could do that in the UK without too much tax trouble, but you'd have to be comfortable with the lower diversity than with a broad based mutual fund....and there are still the fees to think about.

Aside from tax, this is a 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 don't think it's a weird portfolio! I inherited it from someone who was interested in income, and so am I. As well as the mutual funds, I have US and municipal bonds and Exxon stock, all of which give me a much higher return than any investment I could make in the UK.

If I did sell the mutual funds, I'd incur capital gains in the US and capital gains (or income tax!) in the UK. Then I'd have to exchange dollars to sterling to invest here, and I would need a substantial amount to invest to make it worthwhile investing so I'd have to exchange a lot of dollars, at what might not be an advantageous exchange rate.

I'd then have to figure out what to invest in here, set up an investment account with a broker and pay him/her to manage it for me. And then I'd have overseas investments as far as the IRS is concerned.

As it is, I can keep everything in one brokerage account at HSBC, which also allows me to have a Premier account, which is very convenient, to say the least!

I have no UK-sourced income, so I just exchange my dollars when the exchange rate is (more) favourable and transfer my money directly to my HSBC accounts here and in France with no fee. The Premier account also gives me a better bank exchange rate.

The only fly in the ointment is HMRC (possibly) classifying one of the most common investment options in the US, the mutual fund, as some sort of underhanded tax-avoidance scheme.

Of course almost all these issues arise because the US taxes its citizens everywhere, but I don't think that will ever change. The most we can hope is that transparent investments in the US are eventually considered to be transparent in the UK and vice versa to limit the tax implications and associated paperwork!

janet

I have no UK-sourced income, so I just exchange my dollars when the exchange rate is (more) favourable and transfer my money directly to my HSBC accounts here and in France with no fee. The Premier account also gives me a better bank exchange rate.

Be careful! If you are taxed on an arising basis in the UK (or if you remit funds to the UK) the UK will have primary taxation authority on any capital gains from your US funds. You should resource your US capital gains (apart from sales of real property) to the UK, so those become UK source income. Also after you've paid the IRS 15% tax on US dividends you must resource that income to the UK to cover any UK tax above the 15% level.

Be careful! If you are taxed on an arising basis in the UK (or if you remit funds to the UK) the UK will have primary taxation authority on any capital gains from your US funds. You should resource your US capital gains (apart from sales of real property) to the UK, so those become UK source income. Also after you've paid the IRS 15% tax on US dividends you must resource that income to the UK to cover any UK tax above the 15% level.

Sorry to sound dumb here, but what does resourcing US capital gains to the UK mean?  Does it mean transferring the proceeds of any stock sales I make immediately to the UK?

Sorry to sound dumb here, but what does resourcing US capital gains to the UK mean?  Does it mean transferring the proceeds of any stock sales I make immediately to the UK?

The treaty gives either the UK or the US the primary taxation authority (first bite of the cherry) on various types of income depending on a tax payer's circumstances. Resourcing (Article 24) is just a bit of accounting, there's no actual moving of money, but for tax purposes the money is treated as if it was in the other country.

Capital gains (other than from sale of a house) are a good example of resourcing. The UK will not give a tax credit for any US CGT paid to a UK resident as the treaty gives the UK primary taxation authority over those. So the pax payer "resources" those capital gains to the UK and pays tax on them as if they were generated in the UK. Now the tax payer would claim a US FTC using form 1116 and the category "certain income resourced by treaty".

The treaty gives either the UK or the US the primary taxation authority (first bite of the cherry) on various types of income depending on a tax payer's circumstances. Resourcing (Article 24) is just a bit of accounting, there's no actual moving of money, but for tax purposes the money is treated as if it was in the other country.

Capital gains (other than from sale of a house) are a good example of resourcing. The UK will not give a tax credit for any US CGT paid to a UK resident as the treaty gives the UK primary taxation authority over those. So the pax payer "resources" those capital gains to the UK and pays tax on them as if they were generated in the UK. Now the tax payer would claim a US FTC using form 1116 and the category "certain income resourced by treaty".

Got it - thanks.

Sorry, this is my first time to this blog.  I was wondering if HMRC ever challenged you on your stance that the US funds not being UK reporting funds didn't matter since their reporting met the HMRC standards already?

Sorry, this is my first time to this blog.  I was wondering if HMRC ever challenged you on your stance that the US funds not being UK reporting funds didn't matter since their reporting met the HMRC standards already?

I have not been challenged on that position. Fingers crossed.

I should've asked when you filed.  In other words, how many years has it been since you filed?  Thanks.

I should've asked when you filed.  In other words, how many years has it been since you filed?  Thanks.

This was for the 2012-13 tax year.

Thanks.