Non Reporting Fund hell

I am an American (not UK citizen) living in London for the past 14 years.

Between 2008 and 2012, I bought some shares of Vanguard Total Stock Market ETF (ticker symbol: VTI) in a US account with US Dollar.

I sold some shares of this fund in Jan 2017 and the money was not brought into UK.

For UK tax reporting purpose, I match the sold shares with the oldest purchased shares.  It's a typical practice called FIFO (first in first out).

My UK tax accountant told me that I owe HMRC a big chunk of tax because (1) VTI is not a reporting fund, so any gain is taxed as ordinary income (tax rate 40% instead of 20% for capital gains) and (2) the gain is exaggerated due to the steep drop of Sterling post Brexit (my gain measured in USD is moderate, but gain measured in Sterling is significant, but everything in UK tax filing is calculated in Sterling).

I looked into this a bit further.  VTI is actually a reporting fund, it's on the official list of reporting funds from HMRC.  But it gained reporting fund status on 1/1/2011.

Because I bought the shares in 2008 (before 1/1/2011), my sold shares don't qualify as from a reporting fund.

Now I plan to correlate the sold shares with the those purchased shares after 1/1/2011.  This would be called LIFO (last in first out) and it's hopefully allowed.

Is the above the only thing I could do to reduce my tax liability?

I imagine many Americans living in UK owe mutual funds/ETFs back home in an US account.  Now Sterling has tanked, does that mean they could not sell funds they've invested in for a long time due to punitive tax treatment?

If I move back to the US (even as a UK citizen), I suppose I won't have to deal with HMRC anymore.  Capital gains would be taxed much better in the US because (1) gain is measured in USD (2) all long-term capital gain is taxed at 20%.

Is there any way I could change my domicile status so I don't have to report global income to the UK tax authority?  For example, if I move back to the US for 1 year and then come back to UK, would it help?

I also understand the option of remittance basis.  It would not make sense for me in most year.  But if I plan to dispose a big chunk of shares in one year, could I get on the remittance basis just for the 1 year and then come off it?

Thank you!  Any ideas, tips would be welcome.

So sorry to hear that you are having such issues. My wife holds VTI and VYM shares but only in recent years so they are reporting funds. She sold a lot this last couple of years after our move back and house purchase etc. I know just what you mean about the large £ gain due to the fall in the £ since she bought the older shares. Vanguard allows “specific id” selection rather FIFO or LIFO so when selling shares I try to minimize the tax hit as best as I can by selecting exactly which shares to sell.

Because I knew my pensions were going to have me in the 40% bracket we removed my name from our Vanguard joint accounts so that she can maximize her tax allowance, plus the first £11k of gains are tax free.

If you can’t do spec id then other than moving back for a while to sell the oldest ones I’m not sure what other options you have.

According to newcomer link: http://www.ey.com/Publication/vwLUAssets/ey-uk-reporting-fund-status/ [nonactive] $FILE/ey-uk-reporting-fund-status.pdf

"In the event that an investor’s holding is standing at a loss on the date
of conversion to a reporting fund, no such election is necessary or available, and the investor is treated as though the shares had always had reporting fund status."

This is hopeful for the cases when you bought the shares before the fund gained reporting status.  Of course, the "loss" must be measured in Sterling.

I concur that LIFO (as against a Section 104 share pool) is what UK law says. This is indeed what HMRC say as well: https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg51565

It is incidentally different from the basis for US purposes, where the cost basis reported for US purposes will typically use a US average cost for domestic US mutual funds.

Thanks for the input.

In US tax filing, you can use FIFO or LIFO or even specific-lot-selection for capital gain tax
reporting purpose.  See newcomer link: https://www.investopedia.com/terms/l/lifo.asp [nonactive]

In UK, must you use LIFO?

LIFO is fine for the purpose of qualifying sold shares from a reporting fund.

Thanks for the input.

In US tax filing, you can use FIFO or LIFO or even specific-lot-selection for capital gain tax
reporting purpose.  See https://www.investopedia.com/terms/l/lifo.asp

In UK, must you use FIFO?   

Last year I used specific lot selection, and used the exchange rate $ to £ for the date of purchase and sale of each lot of shares sold. For Reporting Funds I don't see why HMRC would have a different set of rules for selecting shares in a reporting fund to selecting shares to sell from those you own in a particular company.

Here are some points that may assist with an understanding of the available options.

The use of the remittance basis can be claimed for a year without any condition that it is used in later years. However, the normal consequences of the remittance basis should be understood, including the loss of both the personal allowance and the capital gains tax annual exemption for the relevant tax year.

Departing from the UK, making a sale while non-resident and later resuming residence would not succeed in avoiding the OIG charge. The rules on temporary non-residents apply to OIGs; see reg 23 of the Offshore Funds rules, as amended.

I agree that the normal pooling rules do not apply to OIG securities, but instead the LIFO rules apply.

Overall, the painful lesson is that there should not be an expectation that UK rules will dovetail with those in the US. They do not, and the main areas of discrepancy are not hard to find. In the other direction, US beneficiaries of UK trusts can face ruinous rates of tax on trust distributions. So it is not just US citizens in the UK who feel hard done by.

And if you think non-reporting fund treatment is bad, the US equivalent is a PFIC which is probably the most evil thing known to man. Forms costing upwards of $600 each to file, the most arcane set of punitive rules, tax that can run over 55%. I had to do 96 PFIC forms over the last 6 months and it almost killed me.

And if you think non-reporting fund treatment is bad, the US equivalent is a PFIC which is probably the most evil thing known to man. Forms costing upwards of $600 each to file, the most arcane set of punitive rules, tax that can run over 55%. I had to do 96 PFIC forms over the last 6 months and it almost killed me.

Ouch, that sounds like a truly awful experience. I am just so thankful to the members of this forum warning me ahead of time about this, among loads of other good advice.

And if you think non-reporting fund treatment is bad, the US equivalent is a PFIC which is probably the most evil thing known to man. Forms costing upwards of $600 each to file, the most arcane set of punitive rules, tax that can run over 55%. I had to do 96 PFIC forms over the last 6 months and it almost killed me.

Nightmare.

Not to hijack the thread, but I actually got into a position where I was unable to comply with my filing requirements because I couldn't afford it. In the end this tool saved me as I could crank them out myself. It was still time consuming but at least it didn't break the bank with accountancy fees. Of course, the PFIC taxes were another matter...

https://www.form8621.com/pfic-calculator/ [nofollow]

Moral of the story: Americans in the UK or Brits in US... watch what you invest in. It's a mine field.

Not to hijack the thread, but I actually got into a position where I was unable to comply with my filing requirements because I couldn't afford it. In the end this tool saved me as I could crank them out myself. It was still time consuming but at least it didn't break the bank with accountancy fees. Of course, the PFIC taxes were another matter...

https://www.form8621.com/pfic-calculator/

Moral of the story: Americans in the UK or Brits in US... watch what you invest in. It's a mine field.

I have tried that calculator; but it had too many faults for my taste; so I do PFIC calculations in Excel.  That way I get to choose the optimum exchange rates, handle foreign sourcing in accordance with US law and taking into account UK rates ... and I understand what I'm doing too...

but it had too many faults for my taste;

I actually did come across a few bugs as I was going and alerted them - they fixed them in less than 24 hours every time. Not sure when you used the tool but it has certainly matured. And it may not give as optimum result as doing them by hand but the cost saving in my case of doing them myself was well worth it.