Non-domiciled UK citizen?

A final idea of how to finance the purchase of a home in the UK from funds in the US without incurring a huge tax bill:
What if we mortgaged our (jointly owned) home in the US?  Husband has claimed the RB.  Would the funds freed up by mortgaging our home in the US be considered clean capital for him to remit to the UK?

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.

As VTSMX is a non-reporting fund I think you will have to use every transaction and the price at that point to work out the gains on the fund. If you have been reinvesting dividends or making regular small purchases this gets very tedious, even if you have kept detailed records. But let's say you have that information and work out the capital gain. It looks like Guya is saying that the conversion from VTSMX to VTI will trigger a UK tax event even though the underlying investments are exactly the same. If that's the case you will pay tax on the gains at your marginal income tax rate.

If you did the conversion before being subject to UK taxation and then sold VTI while a UK resident you would have a capital gain and Vanguard would send you a 1099 to show that. I tell Vanguard to use the average cost basis when calculating gains because it's simple and if you do that you can use those numbers on your HMRC tax bill. As VTI is a reporting fund you can use the capital gains tax free allowance and pay at capital tax gains tax rates.

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.

Returning to the topic of conversion from a non-reporting mutual fund to the equivalent ETF and the fact that the non-taxable conversion in the US would be deemed a sale and therefore taxable in the UK: If I convert my Vanguard Total Stock Market to the ETF VTI, as an Arising Basis taxpayer I will pay taxes in the year of conversion in the UK. Then say 5 years later I sell the ETF shares, I will pay taxes both in the US and the UK on the sale, but the capital gain will (almost certainly) be much higher in the US because my cost basis goes back to the original mutual fund shares, whereas on this actual sale the UK cost basis is from the year of conversion to the ETF shares. How then does dual tax relief work? Do I completely lose out on dual tax relief of the capital gain charged in the UK at the time of conversion?

No - any excess UK tax paid to HMRC would either be carried forward in the general or passive basket Form 1116.

Is there any time limit on the carry forward?

Is there any time limit on the carry forward?

Excess foreign tax credits from 1116 may be carried forward for up to 10 years. After that, they are lost.

Thank you both guya and theOAP for your clear and quick replies.  I am so grateful for all the help I've received on this forum.