US mutual funds - plain english advice please

Hello

Please could I have some very easy to understand advice on how to report US mutual funds (American Funds) to HMRC. Here is my situation:

- Dual UK-US citizen. Never lived in the US. UK tax resident. Was given mutual funds as a child by a well meaning relative. Don't really understand what they are or how they work. I'm a UK basic rate tax payer.
 
- I now realise I need to report my American Funds dividends to HMRC even though they just get reinvested into the funds and have not been paid to me directly/transferred to the UK. (I have been reporting them to the IRS). We are not talking much - less than £500 per year. I'm perfectly happy to pay whatever back taxes are due, plus penalties and interest of course.

- For the purposes of the normal dividend distributions I receive (i.e. not capital gains) do I record these as 'foreign dividends' to HMRC? Or do I need to put them in a different category of foreign income? I've looked up some old threads on this but they just seem so complicated, talking about non reporting funds etc. It all goes over my head. Please can someone just tell me what box to declare them in in my UK self assessment return and I will do (and correct all my previous tax returns in the process).

- How do I calculate the conversion rate for these dividends? I was just going to use the March 31st year end average on the HMRC website for all the dividends in a given UK tax year, as it seems like a total waste of time and energy to look up exchange rates for the dates of each dividend in a year. (In any case, how would I find daily rates that HMRC would approve?) Am I over simplifying things by using the yearly average?

- I assume capital gains are capital gains pure and simple, or is that another can of worms? All my capital gains from these funds would have been below the UK capital gains annual allowances.

Any help much appreciated! Please try to keep at simple as possible - this is all giving me a major headache!

Thank you

Both the dividends and capital gains distributions are reportable as foreign dividend income on the foreign pages of your UK self-assessment tax returns. Most folks would use HMRCs official average exchange rates to convert the figures into pounds. As you are basic rate taxpayer it seems unlikely you would owe HMRC a penny until whenever you sell the investments. You should nonetheless be declaring the income.

Fantastic, thank you. That sounds fairly straightforward.

The funds have been in my name since 2010 so I guess I will have to write to HMRC and declare all the missing information since then. In some years the capital gain was quite big by my standards ($2000) but as I say, I'm happy to pay any tax due plus interest and penalties. I hope I don't get into too much trouble. 

Why do you think you owe any tax to HMRC at all?  As a basic rate taxpayer you had a notional tax credit until 5 April 2016. For 2016-17 and 2017-18 you have a £5,000 dividend allowance.  I cannot see why you would owe any tax to HMRC.

You're right, I probably don't owe any tax, but I just don't feel comfortable that I haven't correctly declared these dividends/gains and I want to be on the safe side. I'm one of life's worriers! Also I'm aware that this income could affect my tax code/tax bracket (though I don't think it necessarily will in my case).

I also have some other very minor omissions to report to HMRC (bank interest of less than £150 in two years) and some UK dividends I didn't realise I was receiving (less than £90 per year for the last 8 years).

At the same time, I've also spotted that HMRC have actually over charged me £700 of tax on something else, so it's good to know that we all make mistakes, even the experts!

Both the dividends and capital gains distributions are reportable as foreign dividend income on the foreign pages of your UK self-assessment tax returns.

Thanks Guya. I had been thinking that capital gains distributions, especially from a overseas nonreporting fund, would need to be charged to income tax by an entry in the "Other overseas income and gains" box of the foreign pages. Clearly, it is advantageous if such distributions can be taxed as dividends instead.

I have searched the HMRC pages looking for advice about this. Can you point me to the page that covers this point?

Yes it would be really helpful to see the precise guidance on this. I tried to call HMRC but their technical advice line is closed today.

I tried to call HMRC but their technical advice line is closed today.

They also have a web chat service now. If you try that tomorrow, you'll get the answers to your questions in writing which is always a good idea to have.

Thanks Guya. I had been thinking that capital gains distributions, especially from a overseas nonreporting fund, would need to be charged to income tax by an entry in the "Other overseas income and gains" box of the foreign pages. Clearly, it is advantageous if such distributions can be taxed as dividends instead.

I have searched the HMRC pages looking for advice about this. Can you point me to the page that covers this point?

John - do you classify your normal dividends as foreign dividends then?

Are the dividend distributions from the mutual fund 100% qualified? Many mutual funds are a mix of stocks and bonds, the bond dividends are taxed in the US as ordinary income and the stock dividends are taxed as “qualified” dividends at a much lower rate. The 1099-DIV statement will show the split of stock and bond dividends, if the fund is 100% stocks then the “qualified” dividends will equal the total dividends reported.

Gosh ive no idea. I will have to check my paperwork later. What difference does it make to how they are reported on a uk self assessment tax return?

John - do you classify your normal dividends as foreign dividends then?

My non-reporting US mutual fund does not pay dividends, only capital gains distributions, so I have not thought about that.

Gosh ive no idea. I will have to check my paperwork later. What difference does it make to how they are reported on a uk self assessment tax return?

Before I returned I converted my mutual funds to reporting funds and the 100% equity funds are reported as foreign equity dividends and are treated just like UK equity dividends and get the favorable treatment and lower tax rate, but the 100% bond fund is treated as a foreign bond dividend fund and is treated as regular income.

I have not had any capital gain distributions from the equity fund and if/when I do I’m not sure how to report them as the only capital gain sheets on the HMRC forms I see require a purchase date and sale date. I have only been through 1 UK tax year so far.

The above makes sense because if you buy an individual bond the dividends it pays are treated as regular income then when it is sold there is a capital gain or loss.

Thanks that's very interesting. I have checked my last few 1099-DIVs and they only show qualified dividends. So am I correct in assuming I can list these as 'foreign dividends' on my UK tax return?

Thanks that's very interesting. I have checked my last few 1099-DIVs and they only show qualified dividends. So am I correct in assuming I can list these as 'foreign dividends' on my UK tax return?

Probably.

If the fund is not an HMRC reporting fund then how does HMRC know it is 100% equities and pays out all of its dividends and capital gains in the current tax year? That would be my concern over a possible HMRC audit. You may like to look into the fund’s prospectus and see what it says about the payment of dividends in case HMRC come back with questions as to why you believe the fund is following HMRC rules.

I had mutual funds that were 100% equities and the fund company had an etf version that was HMRC reporting so I converted the mutual funds to their etf equivalents. There is no tax consequence in doing so.