Non-domiciled UK citizen?

That would not be a taxable event according to Vanguard and the IRS because the mutual fund and it's equivalent ETF are invested identically.....it's just changing a label. You will have to have a US brokerage account to do this.

Now I wonder what HMRC's stance is on this as you are going from a non-reporting fund to a reporting one.....they might see it differently from the IRS.

Good point.  However there is no step up in basis during the conversion. Before conversion you have $x worth of a PFIC with unrealized gains of $y, and after conversion you have $x worth of an HMRC Reporting fund and $y of unrealized gains.

I made sure I did my conversions before I returned to England.

Good point.  However there is no step up in basis during the conversion. Before conversion you have $x worth of a PFIC with unrealized gains of $y, and after conversion you have $x worth of an HMRC Reporting fund and $y of unrealized gains.

I made sure I did my conversions before I returned to England.

US Vanguard funds are not PFIC.

Would HMRC say that the conversion is taxed as the sale of a non-reporting fund and the acquisition of a reporting fund......so income tax gets charged on the sale of the non-reporting fund rather than CGT on the sale of the reporting fund. This would be an enormous difference. Or maybe you can argue that because the ETF is reporting then the mutual fund must also be reporting even if it isn't on the list....I've seen that suggested on this forum.

Maybe I'm being a bit paranoid, but describing the transaction on the self assessment could be tricky.

This points out that your strategy of doing the transfer before becoming a UK resident removes a lot of uncertainty and underlines the importance of cross border tax optimization before a move is made.

US Vanguard funds are not PFIC.

Would HMRC say that the conversion is taxed as the sale of a non-reporting fund and the acquisition of a reporting fund......so income tax gets charged on the sale of the non-reporting fund rather than CGT on the sale of the reporting fund. This would be an enormous difference. Or maybe you can argue that because the ETF is reporting then the mutual fund must also be reporting even if it isn't on the list....I've seen that suggested on this forum.

Maybe I'm being a bit paranoid, but describing the transaction on the self assessment could be tricky.

This points out that your strategy of doing the transfer before becoming a UK resident removes a lot of uncertainty and underlines the importance of cross border tax optimization before a move is made.

Why would the conversion have to be reported on a self assessment? When I did my conversions they were not reported on my IRS return because there was no income generated. Vanguard did not issue any tax forms for the transactions, and you could argue the same when doing an HMRC return.

Why would the conversion have to be reported on a self assessment? When I did my conversions they were not reported on my IRS return because there was no income generated. Vanguard did not issue any tax forms for the transactions, and you could argue the same when doing an HMRC return.

Well that's really the whole point....would a conversion from a Vanguard mutual fund that does not appear on HMRC's list of reporting funds to it's corresponding ETF that is on the list have to be reported to HMRC....I don't know.

For UK tax purposes, one asset is being disposed of and a different asset acquired. There are provisions for “paper for paper” transactions where for tax purposes it is deemed that there is no disposal of the original asset. It does not matter how the transactions are treated for US purposes nor whether Vanguard issue any paperwork. The disposal is likely to give rise to an income gain within the UK Offshore Income Gains rules.

For UK tax purposes, one asset is being disposed of and a different asset acquired. There are provisions for “paper for paper” transactions where for tax purposes it is deemed that there is no disposal of the original asset. It does not matter how the transactions are treated for US purposes nor whether Vanguard issue any paperwork. The disposal is likely to give rise to an income gain within the UK Offshore Income Gains rules.

That is what I was thinking. The mutual fund and the ETF are identical as far as the IRS is concerned, but I fear they are different for UK tax purposes.......unless you can make the argument that the mutual fund is the same as the ETF and point to the way Vanguard does the label change.

My gains if taxed at my marginal rate would quickly push me from the basic rate to the higher rate and I have very substantial gains because I was an over-zealous tax-loss-harvester in December 2008.

I haven't yet done a self-assessment, but wondering how it would even come up that the conversion took place. Wouldn't only the sale of the ETF be reported on the self-assessment?

I haven't yet done a self-assessment, but wondering how it would even come up that the conversion took place. Wouldn't only the sale of the ETF be reported on the self-assessment?

That is my thought exactly.  I think it is more a re-characterization than a sale and purchase. All the underlying  companies in both funds are the same.

Maybe I should start a new thread, since this one has veered off in a different direction, but now (to explore the worst case scenario) I need to know how gains are calculated on a non-HMRC reporting fund.  Do I simply need to look at my US Capital Gains and use the exchange rate on the date of the sale to calculate my UK Capital Gains?  Or, as I fear, do I need to do the detailed accounting of each purchase with the exchange rate on the date of each purchase.  If so, the capital gain will be much higher because of the rise in value of the US dollar and the fall in value of sterling.

UK case law requires using spot rates for the dates of acquisition & sale.

It is unusual to move to the UK without tax planning prior to the move. Was there advice received before moving to the UK? If not, why not?

UK case law requires using spot rates for the dates of acquisition & sale.

It is unusual to move to the UK without tax planning prior to the move. Was there advice received before moving to the UK? If not, why not?

There was a meeting prior to husband taking up his post here, but the only thing that was emphasised was that we shouldn't remit money from the US here during his assignment. We never thought we would have any need to, and had no intention at the time of remaining here beyond his assignment. But we also had no clue that beyond his assignment here, there would be such severe restrictions on our staying here and bringing money in from the US.  I guess his advisor hadn't caught onto the fact that his spouse was British because maybe then he would have given more detailed information. Anyway, that is water under the bridge now and I just need to find the best way to deal with our situation going forward as I am quite intent upon staying here during retirement. This feels much more like home to me, and fortunately husband loves it here too, so one way or another we are going to make it happen.

Also, perhaps it is just as well the company tax advisor has neglected to deal with my taxes, because surely if he had he would have claimed RB for me too. At least I can make sure that doesn't happen for me, and with luck the conversion to ETF will not trigger a sale, and I can then sell the ETF and just pay capital gains.

Luck will not be on your side. The conversions will trigger gains but if plan these into 2 or more different UK tax years, the tax may not be too bad.

Luck will not be on your side. The conversions will trigger gains but if plan these into 2 or more different UK tax years, the tax may not be too bad.

I'm really curious how the gains are calculated now and into the future.

Suppose for example I owned 1,000 shares of the index mutual fund VTSMX at $60/share, with a cost basis per share of $50/share giving unrealized gains of $10/share ($10,000). I now convert it to the ETF equivalent, VTI.

Vanguard do this with no US tax implications and now I own 500 shares at $120/share, with cost basis of $100/share, (these are the approximate current prices) with unrealized gains of $20/share ($10,000).

Will HMRC consider that I have actually sold the VTSMX shares and owe tax on a capital gain of $10,000?  If so then I will need to keep my own records and know that my cost basis on date of conversion is $120/share. Ongoing the cost basis of my VTI shares is going to be different for the IRS and HMRC. 

ETA
If this is the case then it would be better to actually sell the VTSMX shares and then buy the VTI shares.  That way the HMRC tax can used as a credit against the US taxes and ongoing the accounting will be much easier.

Basis is always different for US and UK purposes; so this adds nothing new...the UK uses a version of average cost...but for OIGs a whole different set of rules. These are super complicated; which is why I challenged the OP to ask the tax adviser why the existing toxic structure exists at all.

Basis is always different for US and UK purposes; so this adds nothing new...the UK uses a version of average cost...but for OIGs a whole different set of rules. These are super complicated; which is why I challenged the OP to ask the tax adviser why the existing toxic structure exists at all.

Thanks.

I am SO grateful to the folks on this forum that I was able to restructure our finances before we moved back to the UK.