Isolating income/gains, "ring fencing"

I am moving to the UK in two weeks, and I have just learned of "arising" vs. "remitting" basis. I have investments at Vanguard in the US (mostly mutual funds and a money-market fund). Based on what I know now, I believe that I will want to use "remitting" basis.

My company paid for a tax consultation, who said: "we suggest that you ring fence any capital which you intend to bring to the UK and request that interest relating to this capital is paid into a separate bank account." So I guess "ring fence" means to put up a wall between the different assets (those from before my move date, and those earned after my move date). Is that right?

Based on my rudimentary understanding of interest, dividends, distributions, and capital gains, here's what I take from this:

First of all, her advice about "ring fence" mentioned interest from a bank account, but presumably I would want a similar strategy for my Vanguard investments. Currently, my mutual funds are set up to reinvest distributions. So is all I would need to do to set up some new fund, and have all distributions invested in that new fund?

My next question is, what about capital gains? Suppose I have a mutual fund that has increased in value since I bought it, and suppose that it continues to increase in value after I move to the UK. If I decide to sell it and move those assets to the UK, will I have to pay UK capital gains tax on some or all of the increase in value?

Thanks,
Alex

I am moving to the UK in two weeks, and I have just learned of "arising" vs. "remitting" basis. I have investments at Vanguard in the US (mostly mutual funds and a money-market fund). Based on what I know now, I believe that I will want to use "remitting" basis.

My company paid for a tax consultation, who said: "we suggest that you ring fence any capital which you intend to bring to the UK and request that interest relating to this capital is paid into a separate bank account." So I guess "ring fence" means to put up a wall between the different assets (those from before my move date, and those earned after my move date). Is that right?

The cleanest case is if you're moving to the U.K. For less than seven years and your U.K. salary will be enough for 100% of your onshore expenses - then simply keep U.K. And offshore separate and use remittance, go back to the us at the end of your assignment and all is easy.

Life gets more complicated if you fall in love with the U.K. And decide to stay. Or if you decide to buy property in the U.K. And need to move funds to the U.K. For the down payment. Etc. That's when, yes, you will have liability on the "offshore" gains once you move them "onshore to the U.K."  And if you have been using the remittance basis you won't be able to use any of your allowances so the potential exposure is great. Moreover, you need to check if the vanguard funds you have are on the "U.K. Reporting funds" list. Vanguard mutual funds  aren't but their ETFs are - I've switched all my mutual funds to ETFs through vanguard. Easy process but needs to be done. The difference is that "reporting funds" do get capital gains treatment in the U.K. - if they aren't on the list they get taxed as income.

The bottom line for me was I was glad to use remittance basis when I had a salary that took care of all my U.K. Expenses and then some; now that I'm semi retired even though I still have some years left when I could use remittance, I won't.


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You need to ask the financial institution if they can set up separate capital & income accounts with UK remittance basis reporting in mind. Very few domestic US banks could do this as the structure has no purpose in the US. Historically, everyone would go to Jersey, Guernsey or the Isle of Man; but seeing that the remittance basis is now only rarely helpful - even this is unusual.

Why do you want to claim the remittance basis? Does this save you any tax globally?

I would definitely convert the Vanguard mutual funds to Vanguard ETFs that are UK reporting. I would also make sure I had a ROTH account with Vanguard before I left for the UK.

Next I would see if there is any advantage in doing remittance vs arising basis given the UK's tax rates and tax free allowances on capital gains and dividends.

I would definitely convert the Vanguard mutual funds to Vanguard ETFs that are UK reporting. I would also make sure I had a ROTH account with Vanguard before I left for the UK.

Next I would see if there is any advantage in doing remittance vs arising basis given the UK's tax rates and tax free allowances on capital gains and dividends.

This is what we have done.  We are both dual UK/US citizens.  Won't complete tax returns until next year as we have only just moved back May of this year.

Thanks for your feedback so far.

While we are non-domiciled (i.e. the first seven years), we would still like to use some of our current investment money (which is in the US) to make purchases in the UK. Let's presume for this discussion that it's worthwhile for me to use remitting basis, despite losing my allowances.

I thought that there is no benefit of ETFs vs mutual funds, if I am using remitting basis. What am I missing? What advantage to ETFs have in my situation?

I'm hoping that the reinvestment strategy that I outlined would keep all my existing funds "pure". Specifically, I would set up a new fund, and then ensure that all dividends from my existing funds go into that new fund (rather than being reinvested). That way, the money in those existing funds should be non-taxable if I move them to the UK, right? Because they would have no income from after the date I move to the UK.

If you Google HMRC Reporting Funds you see a huge list of funds, many ETF's that HMRC recognize, such that an equities ETF paying dividends will get the very favorable tax treatment that stock dividends get.

HMRC Reporting funds are not treated as PFIC's.


https://www.gov.uk/government/publications/offshore-funds-list-of-reporting-funds

I thought that there is no benefit of ETFs vs mutual funds, if I am using remitting basis. What am I missing? What advantage to ETFs have in my situation?

The distinction is not between generic mutual funds and ETFs it's between Vanguard mutual funds and Vanguard ETFs as the ETFs are UK reporting. If you invest in non-reporting funds and remit capital gains or dividends they will be taxed as ordinary income.

If you are only remitting capital then there should be no issue. So if you claim the remittance basis I would get Vanguard to distribute all your capital gains and dividends into a money market account and invest those separately. That way your original accounts won't have any nasty US reinvested income, just clean US capital. In that case there would be no advantage to the Vanguard ETF over the mutual fund, but that assumes you don't end up staying in the UK. So doing the mutual fund to ETF transfer just makes sure you have tax efficient access to all your US money if you ever end up being taxed on an arising basis.

The distinction is not between generic mutual funds and ETFs it's between Vanguard mutual funds and Vanguard ETFs and the ETFs are UK reporting. If you invest in non-reporting funds and remit capital gains or dividends they will be taxed as ordinary income. If you are only remitting capital then there should be no issue. So if you claim the remittance basis I would get Vanguard to distribute all your capital gains and dividends into a money market account and invest those separately. That way your original accounts won't have any nasty US reinvested income, just clean US capital.


I'm hoping that the reinvestment strategy that I outlined would keep all my existing funds "pure". Specifically, I would set up a new fund, and then ensure that all dividends from my existing funds go into that new fund (rather than being reinvested). That way, the money in those existing funds should be non-taxable if I move them to the UK, right? Because they would have no income from after the date I move to the UK.

I am doubtful whether Vanguard have the systems to pay out income and capital gains distributions to a separate fund; without touching the original fund. 

I am unclear why your domicile will change in 7 years. If you think today that you will stay in one of the countries of the United Kingdom for the rest of your life your domicile would already have changed.

It is unusual for a US citizen to elect to claim the remittance basis; expect for the ultra high net worth person with complex offshore structures.

Basic tax planning has always made it most important to shed things that are not UK "tax friendly" before becoming UK resident. The remittance basis is possibly a nice thing, but hampers your opportunity to spend money in the UK should you stay longer.

I am doubtful whether Vanguard have the systems to pay out income and capital gains distributions to a separate fund; without touching the original fund. 

It's easy to do that with US based Vanguard funds, you just choose to distribute all capital gains and dividends rather than reinvesting...however that does not get over the capital gains that you might get when you sell the fund. You'd have to make sure those were also not remitted to the UK and all you bring in is the capital. I don't know what documentation HMRC would need for that.

I am doubtful whether Vanguard have the systems to pay out income and capital gains distributions to a separate fund; without touching the original fund. 

I have done this for many years with both Vanguard mutual funds and ETFs.  If you let the dividends and capital gain distributions reinvest then it makes the selling of shares much more difficult as you end up with dozens of small purchases to track otherwise you have you use average cost basis accounting as opposed to specific ID when selling shares to minimize taxes.  I prefer to let distributions go into a money market fund and choose to make my own decisions on what to do with them.

So when you sell I assume you also place any capital gain into the money market fund before you move the money to the UK. How do you calculate that capital gain?

So when you sell I assume you also place any capital gain into the money market fund before you move the money to the UK. How do you calculate that capital gain?

From a US perspective typically just use the 1099. From a UK perspective, spot exchange rates for each purchase & sale. A share pool calculation will be needed, if taxed by the UK as a capital gain.

From a US perspective typically just use the 1099. From a UK perspective, spot exchange rates for each purchase & sale. A share pool calculation will be needed, if taxed by the UK as a capital gain.

So if the OP were to take a balance in a Vanguard mutual fund and convert that to a Vanguard ETF just before leaving for the UK then there'd be a single buy price and a single exchange rate for all the shares in the ETF. Now if the OP distributes all income from the fund to a separate fund (ie does not reinvest) the number of shares in the ETF will stay the same. When they sell they just need the share price and exchanged rate for that day and the capital gain calculation is pretty simple.

So if the OP were to take a balance in a Vanguard mutual fund and convert that to a Vanguard ETF just before leaving for the UK then there'd be a single buy price and a single exchange rate for all the shares in the ETF. Now if the OP distributes all income from the fund to a separate fund (ie does not reinvest) the number of shares in the ETF will stay the same. When they sell they just need the share price and exchanged rate for that day and the capital gain calculation is pretty simple.

I think that's right, but it seems like there is a catch/trade-off. Vanguard says that you can convert to an ETF tax-free. Presumably that means that capital gains don't "start over" from zero. So even if I sequester the new income into another fund, when I sell the ETF, I'll have to pay capital gains starting from before my move, and it'll be really complex to figure out.

Alternatively, I could incur the tax now and "start over" from zero. Presumably I could sell of the mutual fund and buy the ETF (keeping in mind the rules for "wash sales"). But the downside is that I'd have to pay any capital gains taxes now, which is disadvantageous (e.g. due to compounding and the time value of money). I'm pretty sure I want to avoid that, especially since I don't know how much of my investments I'm going to want to sell in the future while I'm in the UK. (We're not sure if we're going to be there for a long time or not.)

Does that sound right?