funds with reporting status

What you need to know about UK reporting fund status

Alex seeley.

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How can UK reporting fund status benefit UK investors?

The UK’s tax reporting regime for offshore funds, known as UK Reporting Fund Status (UK RFS), can dramatically reduce a UK investor’s tax bill.

UK individuals pay up to 45% on their investment gains if an offshore fund has not registered for UK RFS, reducing to just 20% if it has.

For this reason, UK investors have a very strong preference for funds that have registered for UK RFS. The UK tax authority, HMRC, maintains a public list of registered funds, so investors can screen out non-reporting funds before they invest.

This document introduces the UK RFS regime, explains how we can help you register, and answers many of the common questions that fund managers and investors ask us.

Our team is market-leading in the UK RFS space, and would be delighted to discuss any of this with you in more detail. For funds structured as limited partnerships, separate rules apply, and the document explains how to find out more.

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Reporting fund status regime, the reporting fund regime - attractiveness to uk investors, reporting fund status overview, what does an offshore fund need to do, what are the differences between a reporting and a non-reporting fund, how can we help, frequently asked questions about reporting funds, how can an offshore fund become a reporting fund, what are the ongoing obligations for a reporting fund, how can uk investors benefit from the reporting fund regime and what is the uk tax treatment, can an existing non-reporting fund become a reporting fund, what about uk tax-transparent funds, request a call back, book an appointment.

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Guidance for investors on the Reporting Fund Regime

Mark Eade takes a look at the Reporting Fund Regime and provides guidance on what UK investors and individuals need to be aware of

Mark Eade (Partner, Financial Services Tax) takes a look at the Reporting Fund Regime and provides guidance on what UK investors and individuals need to be aware of.

What is the reporting fund regime.

In summary, the Reporting Fund Regime allows UK investors to treat realised gains in qualifying offshore funds as capital disposals. Such gains are taxed at Capital Gains Tax rates rather than the higher Income Tax rates payable on disposals of interests in non-reporting funds. In return for this beneficial tax treatment the investor is required to pay Income Tax on their share of the annual ‘reportable’ income of the fund, whether this is received or not.

Background to the regime?

The wider offshore fund regime was introduced to broadly counter arrangements that enabled UK investors to accumulate income in an offshore fund free of tax and maintain capital gains tax treatment on exit.

In general, UK investors realising gains in respect of an offshore fund are subject to Income Tax rates unless the fund has joined the Reporting Fund Regime.  UK investors realising gains in an offshore reporting fund will be subject to Capital Gains Tax rates.UK reporting fund status can therefore be attractive to UK-resident investors due to the disparity between the top rates of Capital Gains Tax and Income Tax.

How does a fund join the regime?

Funds that qualify and wish to join the regime are required to make an application to HM Revenue & Customs (HMRC). This application should, in general, be made before the end of the first period for which the fund wishes reporting status to apply. Advance applications are also possible.

What are the ongoing requirements?

A qualifying fund should perform a calculation of reportable income on an annual basis and provide this to both HMRC and investors within six months of the fund year end. UK investors report this income on their personal tax returns and pay Income Tax on it accordingly.

The calculation of reportable income requires the fund’s accounting profit to be split between sub-funds, share classes and series (as appropriate). This is typically adjusted to remove any capital gains and to include any relevant income, such as effective interest, which is not recognised in the fund accounts.

The reportable income is also adjusted for any distributions made by the fund in respect of the year.  The UK investor will pay Income Tax on dividends received in the year, and any undistributed Excess Reportable Income (ERI). To the extent that a UK investor is paying tax on ERI, this can correspond to a dry tax charge.

What about funds of funds?

For multi-tiered funds, further adjustments are required to reflect the income of the underlying funds in which they invest. The methodology for achieving this depends on the reporting fund status of the underlying fund investment, and the level of access the fund has to appropriate information.

What about fund converting?

For a UK investor in a fund that changes from being a non-reporting fund to a reporting fund, this may not automatically change the treatment on disposal from Income Tax to Capital Gains Tax.

It can be necessary for the individual to make an election to be taxed on a deemed gain up to the date of change in status. This can trigger a dry tax charge on the individual.

Where you are a participator in a fund which changes status, we would be able to discuss the tax implications and the best way to protect your tax status going forward.

How we can help

We have been preparing applications and calculations of reportable income from the start of the regime. We have experience of dealing with a broad range of fund structures and work effectively with fund administrators to ensure funds remain compliant with the regime with the minimum of disruption to your business.

We can help you with:

• Application for reporting fund status, including reviewing the status of the fund.
• Provision of advice on the implication of reporting fund status to the fund’s investors
• Preparation of the annual reporting fund calculation and the report to participators
• Provision of compliance advice on the merger or closure of funds
• Advising on wider UK tax matters, including wording in the prospectus and fund structuring.

Would you like to know more?

If you would like to discuss your specific circumstances or if you have any further questions on the Reporting Fund Regime, please contact Mark Eade using the form below.

Contact Mark

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Offshore Reporting Funds

In this article:

• Background to offshore investment funds and their tax treatment

Reporting Fund Status

Compliance requirements for offshore reporting funds.

• The application process

Ongoing requirements

Transitional arrangements, b ackground.

The UK has a large number of authorised investment funds and these are common investment choices for UK tax residents. As with holdings in equity stocks, capital gains tax is payable on realised gains (i.e. a gain made when the investment is sold) on these securities. Capital gains are currently taxed at 20%.

The rules however are different for investments in offshore investment funds. UK funds have certain tax obligations with HMRC; whereas offshore funds aren’t subject to the same rules. HMRC’s position is as a result of the fact that they can’t always be certain whether a gain is of an income or capital nature.

The result of this is that any capital gains on offshore investment funds are taxable to UK investors as income rather than capital gains. This makes a big difference as the higher rate for income tax is 40% compared with 20% for capital gains.

For the reason above, many offshore funds with UK investors apply for ‘ Offshore Reporting Fund ’ status with HMRC. This confirms that the fund will comply with certain rules to essentially bring it in line with the rules for UK funds.

Funds which have this status can be treated as if they are onshore UK funds for UK tax payers. Any realised gains are therefore taxed as capital gains rather than income.

The offshore fund must comply with a number of rules, including the requirement to have an independent audit.

A key requirement of UK funds is they have to pay out any excess income at least annually to investors. Funds generate income from their holdings in underlying securities and have expenses such as the annal management charge and depositary fee. Any net income has to be distributed and this is taxed as income for UK investors.

As offshore funds don’t have to make distributions in accordance with UK rules, this creates a mismatch between the offshore and UK requirements. As a result offshore reporting funds have to make a ‘deemed distribution’ for the purposes of retaining reporting fund status.

This deemed distribution starts with the calculation of ‘Reportable Income’ each year. This is a calculation aimed at mirroring what a distribution would have been had the fund been a UK onshore fund. The reportable income per share class is calculated and UK investors receive a report of this ‘deemed distribution’ which is used for their tax return.

UK investors have to pay income tax on the deemed distribution, even where they haven’t received any actual distribution from the fund. However the tax effect of this is generally small, compared to the savings made by treating the holding in the fund in line with capital gains tax rules.

Application process

In order to apply for reporting fund status, funds have to make an application to HMRC and send certain documents to them.

Applications must be made:

• the latter of 3 months after shares are available to UK investors, and
• end of the financial period for which the fund is to be treated as a reporting fund.

UK funds are prepared in accordance with UK GAAP or International Financial Reporting Standards. Offshore funds using other country accounting standards have to explain to HMRC on the application how they will convert the figures to be compliant.

Once approved the fund classes will appear on a public list maintained by HMRC of all offshore reporting funds.

Each year a submission is required within 6 months of the year-end with a calculation of reportable income and other disclosures to HMRC. This is needed to maintain offshore reporting fund status. UK investors must receive a report of their reportable income per share as they require this for their tax return.

If a fund wishes to add additional classes, it is required to complete a further application to add these classes to the list reporting fund classes maintained by HMRC.

The exception to this is a fund issuing Series classes. For funds which issue these, they have to confirm certain items to HMRC on their initial application. As long as the fund complies in this way, it can add the additional series classes to the annual submission each year without the need to undertake a fresh application each time.

For share classes which are converted from non-reporting to reporting fund classes, there are implications for UK investors. As non-reporting funds are subject to income tax and reporting funds are subject to capital gains tax, transitional rules are required.

UK investors holding an investment in a fund which converts from non-reporting to reporting have two options in this event:

• They can make an election to make a deemed disposal of their non-reporting fund shares. The effect of this is they have to pay income tax on any gains to date. If they haven’t actually sold their holding, then this could mean finding cash to pay tax on a gain which they haven’t yet crystalised in cash terms. However if they do this, any gains made after the election are subject to capital gains rather than income – so there are long-term benefits.
• If no election is made then there is no tax to pay at the point of conversion. However when the UK investor ultimately sells their shares in the fund, all the gain is subject to income tax rather than capital gains tax, even though the fund is now a reporting fund. So long-term, this option is less attractive.

The transitional rules are not particularly generous so if a fund has UK investors it is much better to have offshore reporting fund status from the start, rather than obtaining further down the line.

CAN WE HELP?

Shipleys helps a large number of offshore funds with both initial applications and ongoing reporting requirements. Please get in touch with our specialist Finance Services team if you would like further information or assistance.

Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.

Copyright © Shipleys LLP 2022

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• Personal tax
• Self Assessment
• Offshore funds (Self Assessment helpsheet HS265)
• HM Revenue & Customs

HS265 Offshore funds

Published 6 April 2023

© Crown copyright 2023

This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: [email protected] .

Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.

This publication is available at https://www.gov.uk/government/publications/offshore-funds-self-assessment-helpsheet-hs265/hs265-offshore-funds

This help sheet is intended to provide guidance to UK investors with an interest in an offshore fund when completing their Self-Assessment return. It covers (i) what an offshore fund is and (ii) how gains and income arising to UK investors from an interest in an offshore fund are taxed.

Please be aware this helpsheet is a guide only and may not cover all aspects of your tax obligations relating to offshore funds. This help sheet also does not apply to UK investors who pay Corporation Tax. For further guidance on the taxation of offshore funds, please refer to the Offshore Funds sections of the Investment Funds Manual .

What is an offshore fund?

The UK has a specific tax regime which applies to UK investors in offshore funds.

The term ‘offshore fund’ has a specific meaning. Broadly, an offshore fund is an investment fund which is based outside the United Kingdom and meets certain conditions.

An investment fund may be an umbrella fund with several distinct sub funds or compartments. Where that is the case, each sub-fund is treated as a separate offshore fund. Where a fund or sub-fund has more than one class of interest, each class of interest is treated as a separate offshore fund.

Examples of non-UK investment funds which could be an offshore fund if they meet the conditions are:

• non-UK unit trusts, such as a Jersey Property Unit Trust (JPUT) or Guernsey Property Unit Trust (GPUT)
• non-UK corporate funds, such as a Société d’investissement à Capital Variable (SICAV) or Irish Collective Asset-management Vehicle (ICAV)
• non-UK co-ownership arrangements, such as Fonds Commun du Placement (FCP) or Common Contractual Fund (CCF)

However, not all non-UK investment funds will fall within the definition of an offshore fund. For example, a non-UK partnership fund is not an offshore fund.

If you are not sure whether you have an interest in an offshore fund, then you should ask the fund manager who should be able to tell you.

Do I have an interest in a reporting offshore fund?

Offshore funds can be ‘reporting’ or ‘non-reporting’.

A reporting offshore fund is an offshore fund that has applied to HMRC, been approved and maintains its status as a reporting fund. A list of reporting funds can be found here .

The fund manager will be able to tell you whether the fund has applied to HMRC to become a reporting fund.

What does it mean if I have an interest in a reporting offshore fund?

A reporting offshore fund is required to report its income to HMRC and to its UK investors for each reporting period. Income which is reported in this way is known as ‘reportable income’.

Reportable income is given as an amount per unit, so for each reporting period you will need to multiply the amount of reportable income per unit by the total amount of units you hold at the end of the reporting period.

UK investors are taxed on their full share of reportable income, even if it has not been distributed. The difference per unit between your reportable income and the income that is distributed to you is known as ‘excess reported income’.

The fund may operate equalisation arrangements in which adjustments are required in the calculation of reportable income. Consult your fund manager and the Investment Fund Manual for further information.

How do I report my income from a reporting offshore fund?

You should report any income from reporting funds, including any excess reported income, on your Self-Assessment return.

The type of income you are treated as receiving depends on the type of offshore fund you hold an interest in:

• if the offshore fund is a company and more than 60% of its investments are in interest bearing assets, then you should report the income as interest — this type of fund is commonly referred to as a ‘bond fund’
• if the offshore fund is a company but is not a ‘bond fund’, then you should report the income as a dividend
• if the offshore fund is ‘transparent’, then income arising from the offshore fund retains its original character — this could be a mixture of different types of income (for example, property income, dividends, or interest) which you should report separately.
• if the offshore fund is a unit trust which is non-transparent, then you should report the income as miscellaneous income

If you are unsure about which of these categories applies to you, you should contact the fund manager to seek advice.

Where in my Self-Assessment return do I report my income?

Income from a fund, including excess reported income, should be returned in the Foreign Pages (SA106) tax return in the following areas:

• if the income is treated as interest, then you should report it on pages 2 and 3 under ‘Interest and other income from overseas savings’
• if the income is treated as a dividend, then you should report it on pages 2 and 3 under ‘Dividends from foreign companies’
• if the income is treated as property income, then you should report it on pages 4 and 5 under ‘Income from land and property abroad’
• if the income is treated as miscellaneous income, then you should report it on pages 2 and 3 under ‘Interest and other income from overseas savings’

If you do not know which category the income from your offshore fund falls into then you should contact the fund manager to seek advice or speak to a tax advisor.

What information will a reporting offshore fund provide to me?

Reporting funds are required to provide you with a report so that you can determine your share of the reportable income.

This report will normally be issued electronically (for example, as a PDF document attached to an email) or on a publicly available website. The report will provide the information you need to determine your excess reported income from the fund.

When do I need to declare my income from a reporting offshore fund?

The normal tax rules apply to income which is distributed by the offshore fund. You would normally need to report income in the tax year in which it is received.

Excess reported income is treated as being received on the ‘fund distribution date’. The fund distribution date for a reporting fund is 6 months following the last day of the reporting period.

For example, if the reporting period ends on the 31 July 2021, then the fund distribution date is 31 January 2022. The excess reported income for that period will need to be reported in the Self-Assessment return for the 2021/2022 tax year.

If you have not received a report from the fund manager by the time you need to file a Self-Assessment return, then you should include your best estimate of the excess reported income. You may then need to file amended returns when the report is finally received.

What happens when I dispose of my shares/units in a reporting offshore fund?

If you dispose of your shares/units in a reporting offshore fund, you will be subject to capital gains tax on any gain you realise.

Any excess reported income which arose to you during the period in which you owned the shares/units can be deducted when calculating your capital gain. This ensures you are not subject to double tax on the excess reported income.

Do I have an interest in a non-reporting offshore fund?

A non-reporting offshore fund is a fund that has not obtained reporting status (or has left or has been excluded from the reporting fund regime). The fund does not report its income to HMRC.

What does it mean if I have an interest in a non-reporting offshore fund?

For non-reporting funds, there is no equivalent excess reported income. That means you will only be taxed on income which is distributed to you.

When income from a non-reporting offshore fund is distributed to you, the type of income you are treated as receiving for UK tax purposes depends on the type of offshore fund you hold an interest in.

The four different types of offshore fund explained above under ‘How do I report my income from a reporting offshore fund?’ also applies to non-reporting offshore funds. If you are unsure about which of these categories applies to you, please contact the fund manager to seek advice.

What happens when I dispose of my shares/units in a non-reporting offshore fund?

If you dispose of your shares/units in a non-reporting offshore fund, any gain you realise will normally be treated as an ‘offshore income gain’ unless an exception applies in which case consult the Investment Funds Manual .

You will be subject to income tax, rather than capital gains tax, on any offshore income gain you realise.

Where in my Self-Assessment return do I report my offshore income gain?

Report your offshore income gain in the Foreign Pages (SA106) on page 6 ‘Other overseas income and gains’.

What do I need to declare if I hold my investment in an offshore fund through an ISA ?

Investments in non-reporting and reporting offshore funds can be held within the ISA wrapper.

If your investment in the fund is held through an ISA , then you do not need to declare the income or gains from these funds.

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The UK’s offshore funds regime and reporting fund status (‘RFS’)

UK tax resident and domiciled individual investors with interests in an Offshore Fund will be taxed under income tax rules at rates of up to 45% when they dispose of their investment, crystallising an ‘Offshore Income Gain’. Such investors are only able to benefit from preferential capital gains tax rates of up to 20% when they redeem, if the class of interest for which they subscribed has been certified as a reporting fund throughout the duration of their investment.

In order to comply with the regime, once a share class or series has successfully applied to HMRC for certification and obtained RFS, annually within six months of the year end of the fund, a reportable income calculation (net of relevant expenses) is required to be computed, with reports being made available to both investors and HMRC. To the extent any ‘Excess Reportable Income’ arises, investors are required to pay tax on their share. Often there is nil Excess Reportable Income due to allowable expenses (e.g. management fees) that offset against income of the fund.

Obtaining RFS and remaining compliant with the regime is particularly advantageous for funds with investment strategies that give rise to significant capital returns.

Changes made to the UK’s ‘non-dom’ regime for income tax and capital gains tax purposes (becoming deemed UK-dom), means that long term UK tax resident individual investors are no longer able to benefit from the UK’s remittance basis of taxation. Historically, such classes of investors in an Offshore Fund would have been less concerned with crystallising an Offshore Income Gain, as they would not have remitted sums to the UK. Obtaining RFS and remaining compliant with the regime, will be particularly attractive for deemed UK-doms to enable them to access lower rates of capital gains tax.

Other investors who may benefit from the regime include funds of funds with RFS in their own right and UK companies.

What should I do? 

For funds with a year end of 31 December 2021, the reporting deadline to both investors and HMRC is 30 June 2022. If you need assistance with your reporting requirements, please contact us as soon as possible via the form below. 

Please also speak to us about applying for RFS. We would be delighted to assist you with a staged process. 

• Consideration of whether your fund is structured appropriately and eligible to access the regime.
• Consideration of whether obtaining RFS for your fund’s particular investment strategy is beneficial. 
• Initial application to HMRC for relevant share classes and series to become reporting funds.
• Annual compliance with the regime within six months of the fund’s year end, including the reportable income calculations and making reports available to investors and HMRC.

Get in touch

About the author

Antoine Housden

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Blogs and Insights

The importance of u.s.-listed and u.k. reporting funds for u.s. taxpayers in the united kingdom.

Frederic Behrens

December 14, 2022

Key Takeaways

U.S. taxpayers living in the United Kingdom must carefully understand the impact of U.S. and U.K. tax laws on their investment portfolio. From a U.S. tax perspective, it is essential to invest using U.S. listed investments to avoid the complicated and tax-costly U.S. passive foreign investment companies (PFIC) tax regime. On the U.K. tax side, the HM Revenue & Customs (HMRC) reporting fund regulations further restricts tax-efficient options for U.S. taxpayers who are also U.K. tax residents.

Not understanding both sides of the equation and using the wrong investment vehicles may lead to permanent double taxation. It is vital for American expats living in the United Kingdom, British nationals returning home after obtaining U.S. citizenship/green cards, and other individuals subject to both U.S./U.K. tax regimes to organize their balance sheet efficiently to ensure optimal after-tax returns.

Why U.S.-Listed Investments Are Essential for U.S. Taxpayers in the United Kingdom

A common investment-related income tax issue encountered by U.S. taxpayers living abroad is ownership of foreign investment funds. Non-U.S.-listed investment funds are classified as PFICs by the Internal Revenue Service (IRS). The PFIC tax regime aims to discourage U.S. persons from shifting income out of U.S. taxation. Funds classified as PFICs require complicated U.S. tax reporting and are often subject to higher U.S. tax rates than U.S.-domiciled funds.

Almost any non-U.S. registered investment product, other than direct ownership of stocks and bonds, is likely classified as a PFIC by the IRS. PFICs are simply “pooled investments” registered outside of the United States. Pooled investments include foreign mutual funds, exchange-traded funds (ETFs), money market funds, hedge funds and investments within non-U.S. insurance products.

Understanding PFIC tax rules is essential for U.S. expats, green card holders and other U.S. taxable persons. The IRS, through the Foreign Account Tax Compliance Act, is receiving more information on foreign accounts owned by U.S. citizens, which may start to include information about unreported PFICs held by Americans living in the United Kingdom. Thus, it is becoming increasingly important for U.S. taxpayers to ensure all foreign investments are reported properly on a U.S. tax return to avoid unnecessary fines and penalties later.

An important aspect of the U.S. PFIC regulations for U.K. investors is that investments held within tax qualified retirement accounts (under the U.S.-U.K. double tax treaty) such as a U.K. company pension or U.S. 401(k) do not require PFIC reporting. However, some U.K.-based savings schemes such as individual savings accounts (ISAs) do not enjoy tax-deferred status in the eyes of the IRS, as they are not qualified foreign pension accounts. If investing in mutual funds or ETFs in a U.K. ISA, there may be PFIC reporting requirements, which may negate any perceived benefit to using an ISA in the first place to obtain U.K. tax relief.

Avoiding PFICs Is Great, but Not All U.S. Investments Are U.K. Tax-Optimized: What Are HMRC Reporting Funds?

In a similar fashion to the U.S. PFIC rules, the United Kingdom has its own set of tax rules aimed at discouraging the use of opaque offshore funds by U.K. tax residents to defer income. The HMRC offshore funds regulations impose extra taxation on U.K. tax residents who own certain, non-U.K.-listed offshore funds. Navigating these HMRC offshore reporting funds rules is essential for long-term U.K. resident investors to benefit from tax-optimal returns.

The difference in taxation may be quite significant between U.K. reporting and non-reporting funds. If an investor is a U.K. tax resident and owns an investment that is classified as a non-reporting fund, any gain upon sale will be taxed as offshore income gains (OIG) rather than a capital gain by the HMRC. The offshore income gain rate may be as high as 45% for some U.K. taxpayers. When possible, investing through funds that are not subject to OIG is ideal.

To obtain a more favorable U.K. tax rate, investors should use registered U.K. reporting funds. When selling an offshore fund classified as an HMRC reporting fund, any gain upon sale will be subject to tax as a capital gain (10% or 20%) rather than income. Most U.S. mutual funds and ETFs are without U.K. reporting fund status and subject to the highest tax rates upon sale.

Which U.S. Listed Funds Are HMRC Reporting Funds?

Fortunately, there are many suitable U.S.-based funds that comply with the HMRC reporting fund regulations that are efficient for U.S. taxpayers living in the United Kingdom to own. The HMRC maintains a list of approved offshore reporting funds . However, cross-border investors must remain selective with their investments as most funds on the HMRC reporting fund list would be considered PFICs by the IRS and lead to punitive taxation.

In general, there is a limited selection of mostly ETFs that investors will want to use when building a long-term U.S. taxpayer-compliant investment portfolio. The good news is that most major asset classes may be efficiently owned through U.S. ETFs classified as U.K. HMRC reporting funds. Exposure to asset classes not available through a U.K. reporting fund may be obtained through retirement accounts such as IRAs, Roth IRAs, 401(k)s and U.K. pensions. As these tax-advantaged accounts are not taxed on an ongoing basis, the HMRC is not concerned about the fund status and compliance with income distributions rules. Tax will be owed when cash leaves the pension wrapper.

To add another wrinkle to the U.S. taxpayer investment dilemma, recent European Union restrictions on packaged retail and insurance-based investment products (PRIIPs) further curtails available investment options in the European Union and United Kingdom. PRIIPs regulations came into effect in January 2018 and impose special requirements on investment products across the European Union. Investment funds purchased before the EU PRIIPs regulation came into effect can be kept and sold, but EU residents can generally no longer buy new shares of these funds after PRIIPS (2018). Even though the United Kingdom is leaving the EU, a similar PRIIPs rule has been adopted that continues to limit the available investment options through U.S. and U.K. investment custodians.

Lastly, note that that there are no adverse tax consequences to owning individual stocks or bonds. U.S., U.K. or even stocks listed on another foreign stock exchange present no complex reporting requirements with the IRS or HMRC. However, there are certainly some challenges to implementing a portfolio compromised of only individual securities such as achieving optimal diversification to different asset classes.

Structuring an Investment Portfolio to Be U.S./U.K. Compliant

To remain U.S. and U.K. tax compliant, U.S. taxable investors should focus on building a portfolio with U.S. registered funds (not PFICs) that have U.K. reporting fund status. Advanced planning is the best solution to structuring a U.S./U.K.-compliant investment portfolio. Individuals moving to the United Kingdom should review their investment holdings beforehand for compliance with HMRC reporting fund regulations. Restructuring a portfolio to minimize taxes is usually most efficient prior to moving to the United Kingdom.

However, liquidating all investments before a move and often realizing significant capital gains may not always be the best decision before U.K. immigration. For U.S. citizens not planning to reside in the United Kingdom permanently, the U.K. tax inefficiencies from non-reporting fund investments may largely be avoided by not selling these funds while taxable in the United Kingdom. In contrast to the U.S. PFIC tax regime, the United Kingdom does not assess an annual tax charge on non-reporting funds. If an investor is happy with their portfolio, they may just keep it. Additional investments that are U.K.-compliant may be integrated into the portfolio to give options down the road (sales subject to U.K. capital gains tax).

For individuals who can no longer avoid U.K. taxation, a different analysis must occur. In most cases, acting sooner than later is the best course of action to maximize long-term wealth accumulation before the taxation becomes a larger problem (assuming positive investment returns). This is especially true for British nationals who may be moving back to the United Kingdom for retirement (unable to employ resident, nondomiciled remittance basis of taxation) and likely requiring an investment portfolio to support their standard of living.

Regardless of the situation, a careful analysis of current tax liabilities and goals is required. There are many nuances and strategies that must be considered to avoid adverse taxation and ensure the best investment results.

The next section reviews several important considerations when structuring an investment portfolio to be U.S./U.K. tax-compliant.

What Is the Arising Basis vs. Remittance Basis of U.K. Taxation?

The United Kingdom has a preferential tax regime that may be very advantageous for non-U.K.-domiciled individuals moving to the United Kingdom. A U.K. resident investor may have the option of being taxed on all worldwide income and gains (called the “arising basis”) or only be taxed on U.K. source income and gains and certain assets brought into the United Kingdom (called the “remittance basis”). Understanding these tax regimes is important for U.S./U.K. investors looking to minimize their net global tax exposure.

Many Americans living in the United Kingdom elect to pay tax on an arising basis and incur U.K. taxation on their global portfolios. In this case, it is important to ensure that investment funds are approved HMRC reporting funds. Any transaction or investment strategy must consider both U.S. and U.K. tax consequences to be efficient.

Electing the remittance basis of U.K. taxation may be very beneficial for certain U.S./U.K. investors. This means that for an annual remittance fee, investors are only taxed on income and gains that they bring into the United Kingdom (remittance of funds). The remittance basis has no charge for the first seven years and then costs between £30,000–£60,000 (2020–2021) per year between years 8–15. Paying this remittance charge to shelter non-U.K. funds from taxation allows U.S./U.K. investors to focus almost exclusively on the U.S. tax efficiency of their portfolio.

Is There a Difference Between USD and GBP gains?

Transactions must be examined closely under both tax systems as currency movements may have a dramatic impact on the net taxes an investor pays. These exchange rate swings may be particularly acute with U.S. fixed income and other U.S.-focused investments given the current strength of the U.S. dollar (USD). The below example demonstrates the tax consequences of large currency movements:

Purchased on June 27, 2014:

The investor appears to have no gain in USD, but the actual Great Britain pound (GBP) gain is quite significant. This analysis must be completed with all transactions to ensure optimal U.S./U.K. tax efficiency and is particularly important when restructuring a portfolio into U.K. reporting funds. Commonly, managed accounts or active trading strategies with a focus on only one tax jurisdiction may create large tax bills when reconciled at year-end.

What to Do With Alternative or Private Investments?

More sophisticated investors may own interests in private equity, hedge funds or other nonpublic investments. From a U.S. tax perspective, these investments tend to be relatively tax-inefficient and complicated to start with. Bringing the U.K. tax system into the mix will compound this tax complexity greatly.

With different private fund investment structures, there may be timing differences between the realization and distribution of income to investors. These timing differences may lead to double taxation for a U.S. taxpayer who is taxable in the United Kingdom on the arising basis. A U.S. private equity fund may structure itself to be compliant with the HMRC for reporting fund status. However, this option may only be available to larger investors and pursuing it could come at considerable cost to the fund. Other planning structures exist that may make these investments more U.S./U.K. tax-friendly and expert tax advice is required from the beginning.

Donating Non-U.K. Reporting Funds to Charity

For charitably inclined investors, an easy and tax-efficient way to remove non-U.K. reporting funds from an investment portfolio is to make a charitable donation. Non-U.K. reporting funds may be gifted to charities or U.S./U.K. dual-qualified donor advised funds. In both the United States and the United Kingdom, no gain will be recognized on a gift to a charity and the fair market value may be used to offset other tax liabilities. Careful attention must be paid to the organization that the donation is made to ensure qualified tax treatment in both the U.S. and U.K. tax systems. Fortunately, there are special U.S./U.K. dual-qualified donor advised funds that can make a gift tax-efficient and easy to accomplish in both jurisdictions.

U.S./U.K. Share Matching: What Is Deemed to Be Sold?

The U.S. tax code offers investors several different options for deciding which exact shares or tax lots of a security are sold. This includes using a specific identification method that gives greater certainty and control for investors to optimize capital gains by selecting the most tax-optimal shares.

The United Kingdom has different ordering rules that specify which tax lots of an investment are sold. Generally, an average share pool is used to calculate capital gains. This can create incongruencies between what the United States views as sold and the United Kingdom views as sold. Cross-border investors must be certain on the tax reporting method to avoid surprises at tax time.

Tax-Efficient Investing for U.S. Citizens Who Become a Long-Term Resident in the United Kingdom

Understanding both the HMRC and IRS rules related to U.S./U.K. investment funds is essential, but only one part of building a comprehensive cross-border financial plan. As some of the examples illustrate, failing to take both U.S. and U.K. laws into account may have dramatic financial planning ramifications. Other important U.S./U.K. financial planning issues include:

• U.K. inheritance tax / U.S. estate tax
• Long-term currency management
• Management of clean capital accounts
• Offshore trust management (excludes property trusts and other U.S./U.K. structures)
• Cross-border life insurance

Being cognizant of these key situations and seeking the right advice at the right time, can save U.S. expat investors taxes and accountancy bills down the road. Cerity Partners specializes in implementing investment strategies that are tax-efficient and compliant for U.S.-U.K. investors and helping clients navigate the many other financial planning issues that can arise when U.S. citizens live abroad.

Cerity Partners LLC (“Cerity Partners”) is an SEC-registered investment adviser with office locations throughout the United States. Registration of an Investment Advisor does not imply any level of skill or training. The foregoing is limited to general information about Cerity Partners’ financial market outlook. You should not construe the information contained herein as personalized investment, tax, or legal advice. There is no guarantee that the views and opinions expressed in this commentary will come to pass. The information presented is subject to change without notice and should not be considered as an offer to sell or a solicitation of an offer to buy any security. Material economic conditions and/or events may affect future results.  Before making any decision or taking any action that may affect your finances or your company’s finances, you should consult a qualified professional adviser. For information pertaining to the registration status of Cerity Partners, please contact us or refer to the Investment Adviser Public Disclosure website ( www.adviserinfo.sec.gov ). For additional information about Cerity Partners, including fees, conflicts of interest, and services, send for our disclosure statement as set forth on Form CRS and ADV Part 2 using the contact information herein. Please read the disclosure statement carefully before you invest or send money.

Please read important disclosures here.

Frederic Behrens is a Partner in the New York office, where he provides investment management and financial advisory services for high-net-worth individuals and international families....

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Tax information for U.S.-domiciled ETFs with U.K. Reporting Fund Status

There are a small number of U.S.-domiciled ETFs with U.K. Reporting Fund Status. If you have holdings in these funds, you may need to declare something called “excess reportable income.”

The excess reportable income can be found in our annual Report to Participants below.

Report to participants

Excess Reportable Income - 2023

Excess Reportable Income - 2022

Excess Reportable Income - 2021

Excess Reportable Income - 2020

Excess Reportable Income - 2019

Excess Reportable Income - 2018

Excess Reportable Income - 2017

Excess Reportable Income - 2016

Disclosures and footnotes

This information is intended for investors outside the United States and should not be provided to individual investors in the United States. The information contained herein does not constitute an offer or solicitation and may not be treated as such in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. Broker-dealers, advisors, and other intermediaries must determine whether their clients are eligible for investment in the products discussed herein.

US domiciled ETFs that are UK HMRC reporting funds

US domiciled ETFs that are UK HMRC reporting funds lists a selection of US domiciled exchange-traded funds (ETFs) that meet UK HMRC reporting fund [1] requirements.

US citizens and US permanent residents (green card holders) living in the UK can hold the funds listed below without running into problems with the US's harsh Passive foreign investment company (PFIC) tax regime, and also without running into higher UK tax because they hold HMRC non-reporting funds. The information in this article is specific to US citizens and US permanent residents who are UK residents .

Introduction

If you are a US citizen or US permanent resident (green card holder) living in the UK, then because of the way the US's citizenship-based taxation and harsh Passive foreign investment company (PFIC) tax regime intersect, you cannot use the normal range of UCITS funds and ETFs offered to other UK and EU residents. For you, holding US domiciled funds or ETFs is one of very few viable routes to index investing.

However, the UK also has rules that discourage some "offshore" fund holdings. You would pay tax on gains in a non-UCITS fund or ETF that lacks HMRC reporting status [1] at higher income rates, instead of lower and more beneficial capital gains rates.

Many US domiciled funds and ETFs will not have HMRC reporting status. However, some US domiciled ETFs - including most Vanguard and Dimensional ETFs - are HMRC reporting funds. This means that you can invest through these ETFs without running into either country's unpleasant tax regime for "offshore" funds.

US domiciled ETFs with HMRC reporting status

The following tables [note 1] show a selection of US domiciled ETFs that you can safely use in taxable accounts. These are also safe to use in a UK Individual Savings Account (ISA), although for you the ISA wrapper only provides protection from UK taxes, not from any US taxes. The US will tax your ISA gains annually as if it is a normal taxable account.

The tables show data from HMRC's approved offshore reporting funds list, as of 22 April 2024. This list shows funds by CUSIP . The mapping from CUSIP to fund exchange ticker uses data from OpenFIGI , as of 22 April 2024.

If you are going to rely on the information in the tables, please first check these sources to ensure that the table data remains accurate. These tables are not an exhaustive list of all US domiciled ETFs that are HMRC reporting funds.

Equities: global/non-US

Equities: united states, fixed income: global/non-us, fixed income: united states, real estate, problems caused by fatca and priips.

After FATCA in 2010, many UK financial institutions and brokerages started to refuse accounts for US citizens and green card holders, even those living in the UK. [2] At the same time, some US brokerages began shutting off access for US citizens and green card holders living outside the US. [3]

In 2018, the European PRIIPs ( Packaged Retail and Insurance-based Investment Products ) regulation became effective. As a result it is now difficult or even impossible for EU residents to purchase US domiciled funds directly (although indirect purchases potentially remain possible [note 2] ). Shares purchased before the regulation came into effect can be kept and sold, but EU residents can generally no longer buy new shares of these funds or ETFs. The UK left the EU in January 2020, but created its own 'UK PRIIPs' regime that is fully aligned with the EU PRIIPs, so PRIIPs restrictions continue to apply in the UK. [4]

If you are a US citizen or green card holder living in the UK, the way these restrictions combine severely limits your options for holding US domiciled ETFs with HMRC reporting fund status. You can use US brokerage accounts to access US domiciled ETFs, but getting access to a suitable account may be difficult; for example, you may have to open it using a US address.

Effects of ETFs gaining or losing HMRC reporting status

You need to pay close attention to the " HMRC reporting since " column in the table above. HMRC has different tax rules where you hold an ETF or other "offshore" fund outside of any period in which it is an HMRC reporting fund. [5] [6]

PFICs in UK pensions

Under regulations issued by the IRS in 2016, there is an exemption to PFIC reporting for any funds you hold in UK pensions . [7] Here, the US/UK tax treaty protects you from PFIC rules, so that you can hold any funds you like in a UK pension, without being affected by these rules.

Non-reporting funds in US pensions

Symmetrically with the above, the UK's HMRC reporting funds regime only applies to funds you hold outside of UK tax-sheltered accounts. Holding non-reporting funds in a US pension, including Roth accounts, causes no tax problems. (Also, no problems in a UK pension or ISA, to the extent that PRIIPs does not prevent you from using them at all inside UK based accounts.)

• ↑ These tables are built using a script to extract data from HMRC's reporting funds spreadsheet. You can find the details for this in the discussion page associated with this page.
• ↑ Forum member "finrod_2002" provides details of how an investor might use options trades to work around PRIIPs restrictions, in Bogleheads forum post: "Re: European, dutch investor here: Is investing in VTI and VXUS still a good choice?" . February 17, 2019. Viewed October 28, 2019.
• Investing from the UK for US citizens and US permanent residents
• Taxation as a US person living abroad
• Passive foreign investment company
• UK Individual Savings Accounts
• UK personal pensions
• ↑ "Why expat Americans are giving up their passports" . BBC . Retrieved July 18, 2019 .
• ↑ "Why US Brokerage Accounts of American Expats are Being Closed" . Creative Planning. Archived from the original on August 20, 2022 . Retrieved June 11, 2023 .
• ↑ "Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit)" . GOV.UK . Retrieved February 1, 2020 . Regulations 2019: explanatory information
• ↑ "IFM13360 - Offshore Funds: income and distributions from non-reporting funds" . HMRC . Retrieved March 1, 2023 . Conversion of a non-reporting fund to a reporting fund - Regulation 48.
• ↑ "IFM13340 - Offshore Funds: reporting funds that become non-reporting funds" . HMRC . Retrieved March 1, 2023 . Deemed disposal election - Regulation 100.
• ↑ "United States – IRS Issues Final PFIC Regulations" (PDF) . KPMG Global . Retrieved October 3, 2023 .

External links

• Undertakings for Collective Investment in Transferable Securities (UCITS)
• Offshore funds: distributing and reporting funds , from the UK Government
• Approved offshore reporting funds , from the UK Government
• Exchange-traded funds (ETF) chart , from DTCC.
• Packaged Retail and Insurance-based Investment Products (PRIIPs)
• Foreign Account Tax Compliance Act (FATCA)
• Tax considerations
• United Kingdom
• Pages not intended for non-US investors

Please select your interests

The rise of the reporting fund regime

Recent legislative changes to the broader UK tax code are causing a surge of interest in reporting fund status amongst investors and encouraging managers to re-consider the potential benefits of the regime.

Many UK investors in non-UK funds are already keen to ensure that the shares they acquire have UK “reporting fund” status. However, two changes to the wider UK tax code mean that 2016 has seen a surge of interest from investors (including fund of funds targeting the UK market) who haven’t previously been focused on this point.

Below we take the opportunity to review the rules and explore why managers may see an upswing in investor queries on this topic.

Let’s re-cap: what’s an offshore fund for UK tax purposes?

The UK has specific tax rules which apply to investments in offshore (ie non-UK) funds. The definition of an offshore fund is complex and characteristics based, but it usually safe to assume that a typical open-ended offshore corporate fund will be an offshore fund for these purposes.

A fund or sub-fund (in respect of an umbrella fund) if it has a single class of shares, or each class of shares where a fund or sub-fund has multiple share classes, is treated as a separate “offshore fund” if it falls within the definition.

So what’s the impact of the offshore funds rules on UK resident investors?

The key feature of the offshore fund rules is that a UK resident individual investor who disposes of an interest in an offshore fund without reporting fund status and realises a gain will not be subject to UK capital gains tax, but will instead be treated as realising an “offshore income gain”, which is subject to income tax at rates of up to 45%. In short, gains from offshore non-reporting funds are taxed at a higher rate.

For reasons explored further below, it’s important to note that UK tax resident but non-UK domiciled investors claiming the remittance basis of taxation should not suffer UK tax on either capital gains or offshore income gains unless and until these amounts are remitted to the UK.

Reporting fund status sounds good, but surely there’s a downside?

If a fund has reporting fund status, gains realised on disposals by UK investors of their shares are subject to capital gains tax.

The quid pro quo for access to the lower capital gains tax rates on disposals is an annual income tax charge for investors on the fund's "reportable income" (an amount computed by reference to the fund's accounts that includes interest, dividends and trading income), whether or not such amounts are actually distributed. (By contrast, UK investors in funds without reporting fund status only pay income tax on amounts actually distributed to them, as opposed to income accumulated in the fund.)

Why the likelihood of increased investor appetite now?

There are two reasons why reporting fund status might currently be moving up the UK investor agenda.

The applicable rate of capital gains tax has just dropped

As of 06 April 2016, the highest rate of UK capital gains tax payable on gains realised from share disposals dropped from 28% to 20%. As a result there is now a full 25% differential between the tax payable on disposals of interests in offshore funds with and without reporting fund status.

As of April 2017, more UK investors may be subject to UK tax on their worldwide income and gains

As a group, UK resident but non-domiciled investors claiming the remittance basis of taxation may currently be neutral on the question of reporting fund status, on the basis that such investors should pay no UK tax on gains realised from offshore fund investments (assuming any amounts representing such gains are retained offshore and not remitted to the UK).

However, as of April 2017 changes to the UK’s rules on domicile, in particular the introduction of a general “deemed domicile” concept, will result in some long-term UK tax resident individuals coming fully within the UK tax net for the first time. It would be surprising if the potential for an increase in tax on gains from disposals in offshore funds from effectively zero to 45% did not focus the minds of these investors on the potential savings offered by investments in reporting funds that can access the 20% capital gains tax rate.

Fund managers would therefore be wise to ensure they are positioned to respond to queries and requests for access to reporting fund share classes from this population of investors in the run up to and following April 2017.

How do I go about making sure existing investors in non-reporting funds can get the benefit of reporting fund status?

It is possible for an application to be made to the UK's HM Revenue & Customs (HMRC) for recognition of an existing offshore fund (or sub-fund/share class) as a reporting fund for the current and future accounting periods. If granted, reporting fund status will generally apply from the beginning of the accounting period of the offshore fund in which the application is made, or a specified future date – it’s not possible to obtain reporting fund status for earlier periods.

In these circumstances, interests acquired by a UK investor before the fund entered the reporting fund regime are outside the regime, so that on a disposal any gain will still be taxed as an offshore income gain. However, reportable income arising after the date of entry into the regime is nonetheless subject to an annual income tax charge, even if not distributed. Interests acquired after the fund entered the reporting fund regime are within the regime (so new investors or additional shares issued to existing investors don’t have this problem).

However, it is possible to extend the benefits of reporting fund status to existing investors - at the time an existing offshore fund enters the regime an investor can elect to be treated as having sold and reacquired their interests at market value on that date - with any resulting gain taxed at income tax rates (or in the case of a non-domiciled investor, no tax on the resulting gain unless the proceeds are remitted to the UK). The "reacquired" interests are within the reporting fund regime.

What’s the exact timing I need to bear in mind in relation to the changes to the domicile rules?

In the case of investors who are currently non-domiciled but who are expecting to become UK deemed domiciled from 06 April 2017 it’s expected that a market valuation re-basing option should be available for all relevant assets, meaning that reporting fund status would only be needed for gains arising from 06 April 2017. However, many investors may prefer to ensure that they are already holding reporting fund shares at the date they become UK domiciled or deemed domiciled.

To address this, managers may wish to consider undertaking the conversion of relevant existing non-reporting funds to reporting funds prior to 06 April 2017, at a time when any gain realised by a non-UK domiciled investor claiming the remittance basis and making the election referred to at Q5 above for a deemed market value disposal of their shares should be free from UK tax.

In practical terms this means that the manager of a fund with a 31 December accounting reference date should apply during 2016 for the relevant fund(s)/share class(es) to have reporting fund status from 01 January 2017 (or 01 January 2016, if preferred).

What about investors who are already UK domiciled, are there downsides for them?

UK resident investors who are already UK domiciled may also benefit from an existing sub-fund / share class obtaining recognition as a reporting fund if they make the election for a deemed market value disposal. However, for this group access to the lower capital gains tax rate needs to be weighed up against the potential income tax charge arising on reportable income prior to eventual disposal. Crucially, any investor who chooses not to make the election will nonetheless suffer potential income liabilities annually on reportable income for the remaining duration of the investment, which may be unpopular (depending on the level of income that is expected to arise). Managers may therefore prefer to establish a new share class for those investors who opt for the benefit of future reporting fund status, so that investors have a choice between reporting and non-reporting treatment.

What are the tax consequences of switching investors into a new reporting fund share class?

A new share class can be an attractive option, as an application can be made for such a class to have reporting fund status from inception.

If existing UK resident investors are switched into a new class of shares which has reporting fund status, the exchange of the old non-reporting share class will constitute a disposal for UK tax purposes, and income tax will be payable on any offshore income gain realised.

However, for the non-UK domiciled investors, as long as this is done before non-domicile tax treatment is lost, no UK tax charge should arise.

That’s clear in relation to investors - what are the compliance burdens for the fund and the manager?

The principal obligations on reporting funds include requirements to:

• prepare annual accounts
• prepare an annual computation of reportable income
• provide reports to investors, and
• provide certain information to HMRC.

Reporting funds must make a report available to investors within six months of the end of each reporting period (usually the accounting period) to enable UK investors to include their share of the reportable income on their UK tax return - publication on a website is sufficient. Typically the fund engages its administrator or accountants to prepare the reportable income calculation.

Anything else to bear in mind?

It is important to appreciate that reporting fund status will not be suitable for every fund. For example, certain funds with strategies that are viewed as trading for UK tax purposes may result in such high levels of reportable income that (i) the annual income tax burden on investors is unacceptably high and (ii) the complexity of the reportable income calculation makes the exercise administratively impossible or too costly to undertake. In practice, whilst we have not yet seem HMRC challenge the reportable income calculations of funds in any meaningful fashion, a failure to compute reportable income correctly could result in a loss of reporting fund status.

I’m convinced - how do I actually apply for reporting fund status?

Applications for reporting fund status are made on a relatively simple HMRC form that can generally be completed without too much difficulty (though complexities can arise where the fund does not account under IFRS, or where the fund wishes to operate equalisation arrangements or make equalisation adjustments). It is possible to make an application in respect of multiple share classes or sub-funds in the same fund on one form. The form should be submitted to HMRC by the fund’s investment manager (or an adviser acting on its behalf) together with the fund’s prospectus or other offering document.

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This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.

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Please bookmark this page to review the latest Reporting Fund status information. A list of share classes which currently have "Reporting Fund" status is published on the  HMRC website .

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Reportable Income information

UK taxable investors who hold shares in the fund as at the last day of the fund’s accounting period are required to look up the reportable income on this website and include it in their UK tax return.

The reportable income calculation includes the dates and amounts per share of all distributions paid during the fund’s accounting period. To the extent that the fund’s reportable income exceeds the amount actually distributed, there will be an additional deemed distribution of income (called “excess reportable income”). For accumulating share classes the fund’s reportable income will be the “excess reportable income”. The date this distribution of income is deemed to have been received by the investor is called the “fund distribution date” and is always six months after the fund’s accounting year end.

Thus, if the fund year end is 31 May 2024, an investor holding shares at 31 May 2024 should refer to this website for their reportable income information. This reportable income is deemed to be received on 30 November 2024 ie six months after the year end, and should be included in the investor’s tax return for 2024/2025.

‘Equalisation’ refers to arrangements that enable the income that existing investors receive (or have allocated to them) from a fund to be unaffected by new investors purchasing shares in a fund. Such arrangements will affect the calculation of reportable income to be reported to investors at the end of the period in which the new shares are issued. Most BlackRock funds operate ‘equalisation arrangements’ for the purposes of reportable income, which ensures that the reportable income of the share class is adjusted for incoming and outgoing investors during the accounting period. The amount is included in the reportable income calculation and no further information is reported to investors.

Reportable Income example

• Investor bought 1,000 shares in the fund on 20 April 2024.
• Excess reportable income per share for the fund year ended 31 May 2024: 0.5341
• The taxable income to be included on the investor’s 2024/25 tax return will be: 0.5341 x 1,000 shares = 534.10

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UK Taxation of Reporting and Non-Reporting Funds

Reporting and Non-Reporting Funds are taxed differently in the UK so it is important for investors to understand the distinctions and the potential impact on UK tax liabilities.  Broadly, a non-reporting fund is any offshore fund that does not have HMRC reporting fund status.  Offshore fund administrators can apply to HMRC for reporting fund status provided certain criteria are satisfied.  HMRC publish a list of funds that have reporting fund status on their website.

Investors who are considering offshore funds should seek UK tax advice to ensure that investment decisions do not inadvertently give rise to higher tax liabilities in the UK.  This is particularly important for non-UK domiciled individuals who claim the remittance basis of taxation.

Where an individual holding offshore collective investment funds moves to the UK, UK tax advice should be sought at the earliest opportunity to determine whether changes should be made to the investor’s portfolio to optimise his UK tax position once he has become UK resident.

Reporting Funds

A fund that has been approved by HMRC as a reporting fund is required to report to the investor and HMRC details of the income that has arisen within the fund, whether or not the income has been distributed.

A UK resident investor must declare the income (whether or not distributed) in their UK tax return for the year, and pay tax on that income at their marginal rate of income tax (up to 45%, or up to 38.1% for dividends).  Gains arising on the disposal of units are subject to capital gains tax (CGT) at a top rate of 20%.

Non-domiciled individuals who claim the remittance basis are only liable to UK tax on foreign income or gains to the extent they are remitted to the UK, and therefore only need to report income and gains that have been remitted to the UK.

Where the investor is a non-UK domiciled remittance basis user, reporting funds that accumulate income may be tax inefficient because the fund will be regarded as a ‘mixed fund’ (containing a mix of original capital, income and/or gains).  This means that when units are sold, it is not possible to segregate the income from the original capital invested or from any gains that arise on the disposal of the units.  If a remittance is made from the mixed fund to the UK, income is deemed to be remitted first, before gains and any clean capital, and will give rise to an income tax charge at rates of up to 45%.

For non-domiciled individuals, reporting funds that distribute the income are likely to be more tax efficient than accumulating funds, since income can be mandated directly to an overseas income account.  Gains can then be realised and held in a separate account.  This allows for segregation of the income and gains so that if funds are required in the UK, the taxpayer can choose to remit from the capital gains account in preference to the income account, since remittances of gains are charged to CGT at a top rate of 20%, compared to income tax of up to 45%.

Note that distributing units may not be available in all funds, particularly funds that allow access to a particular market or asset class.

Non-domiciled individuals resident in the UK should ensure that the fund does not invest in UK situs investments since income and gains arising on UK investments is subject to UK tax on the arising basis, and cannot benefit from the remittance basis.

Non-Reporting Funds

Non-Reporting funds have no obligation to report the accumulated income to HMRC.  The investor will therefore be liable to UK tax only on income that has been distributed to him.  Remittance basis taxpayers are only taxable on distributed income if it is remitted to the UK.

The disadvantage to non-reporting funds is that gains are regarded as ‘offshore income gains’ and are subject to income tax, at rates of up to 45%, rather than capital gains tax at up to 20%.  This is to prevent investors accumulating income free of tax in an offshore fund and then claiming capital gains tax treatment on disposal of the units.

For this reason, non-reporting funds can be tax disadvantageous for non-domiciled taxpayers who intend to remit the income or disposal proceeds to the UK, since remittance of either the distributed income or the ‘offshore income gain’ will give rise to an income tax charge in the UK of up to 45%.

It may still be beneficial for the fund to distribute (rather than accumulate) the income, provided the income is mandated into a separate overseas income account so as not to taint an existing clean capital or capital gains account.  This is because, should a loss be realised on the disposal of units, the proceeds can be remitted to the UK free of tax, since the income will have been segregated.

Becoming Deemed Domiciled in the UK

Non-UK domiciled individuals who become deemed domiciled in the UK (e.g. after 15 years of UK residence) no longer have the ability to claim the remittance basis of taxation.  Such individuals should therefore seek advice on how becoming deemed domiciled will affect their UK tax liabilities on their offshore funds, and also their UK tax position in general.

Individuals who are considering investing in offshore funds should ensure they understand the UK tax implications before an investment decision is made.  Non-domiciled individuals who are eligible to claim the remittance basis of taxation are likely to find that reporting funds are preferable to non-reporting funds, and distributing units preferable to accumulating units, although this will depend on the individual’s precise circumstances, including how long they expect to stay in the UK, whether funds are required for UK expenditure, and the extent of clean capital the individual has.

Verfides can assist with all aspects of UK tax advice in relation to offshore funds, including UK inheritance tax implications.  Verfides also specialises in advising individuals moving to the UK and non-UK domiciled individuals already resident in the UK.  For further assistance and advice, please contact our tax team on 0207 930 7111.

London, May 2020

This document has been prepared as a general guide and is based on the latest legislation and case law.  Whilst every care has been taken in its preparation, Verfides cannot accept any responsibility for any person relying on this publication.  Professional advice should be obtained before undertaking transactions and Verfides will be pleased to provide such advice where appropriate.

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Watch CBS News

Social Security projected to cut benefits in 2035 barring a fix

By Aimee Picchi

Edited By Alain Sherter

Updated on: May 7, 2024 / 11:28 AM EDT / CBS News

The timeline to replenish Social Security is being extended. The federal retirement program said Monday it may not need to cut benefits until 2035, one year later than previously forecast, because of stronger performance by the U.S. 

The new projection, from the Social Security Board of Trustees' annual report,  amounts to "good news" for the program's 70 million beneficiaries, said Martin O'Malley, Commissioner of Social Security, in a statement. Even so, he urged Congress to take steps to shore up the program to ensure it can pay full benefits "into the foreseeable future."

Social Security relies on its trust funds to provide monthly checks to beneficiaries, with the funds primarily financed through the payroll taxes that workers and businesses provide with each paycheck. But the funds' reserves are drawing down because spending is outpacing income, partly due to the wave of baby boomer retirements and an aging U.S. population. 

Experts underscore that if the trust funds are depleted, benefits won't suddenly disappear. Instead, Social Security beneficiaries will face a cut to their monthly checks, with the agency on Monday projecting that recipients would lose 17% of their current benefits.

That would be painful for millions of retired and disabled Americans, but it represents a modest improvement from last year, when the Social Security Administration projected that benefits could be slashed by 23% if the trust funds reached the point of depletion.

Advocates for older Americans praised the improved outlook, while pressing Congress to take action on shoring up the program. 

"Congress owes it to the American people to reach a bipartisan solution, ensuring people's hard-earned Social Security benefits will be there in full for the decades ahead," AARP CEO Jo Ann Jenkins said in a statement. "The stakes are simply too high to do nothing."

Lawmakers have yet to take action despite being aware of the looming funding crisis, noted Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a think tank that focuses on the federal fiscal policies, in a statement.

"Every year we get closer to the deadline, we seem to get further away from the solutions," she said. Without a fix, "Social Security's retirement trust fund will be insolvent when today's 58-year-olds reach the normal retirement age and today's youngest retirees turn 71."

Economic boost

O'Malley attributed the improved Social Security forecast to the stronger economy, pointing to what he called "impressive wage growth, historic job creation, and a steady, low unemployment rate." In other words, a healthy job market is resulting in more Social Security taxes going into the funds' coffers.

The report comes as Social Security's financial outlook has become a political lightning rod, with Republicans proposing that the retirement age be raised — effectively cutting benefits for millions of current workers — and former President Donald Trump indicating he would be open to cuts to Social Security and Medicare. 

Democrats argue that there are other ways to fix the program without cutting benefits, such as raising the cap on payroll taxes. Currently, individual income over $168,600 is exempt from the Social Security payroll tax. 

Medicare's "go broke" date

Meanwhile, Medicare's go-broke date for its hospital insurance trust fund was pushed back five years to 2036 in the latest report, thanks in part to higher payroll tax income and lower-than-projected expenses. Medicare is the federal government's health insurance program that covers people age 65 and older and those with severe disabilities or illnesses. It covered more than 66 million people last year, with most being 65 and older.

Once the fund's reserves become depleted, Medicare would be able to cover only 89% of costs for patients' hospital visits, hospice care and nursing home stays or home health care that follow hospital visits.

In a statement on Monday, President Joe Biden credited his administration's economic policies for Social Security and Medicare's stronger outlook. 

"Since I took office, my economic plan and strong recovery from the pandemic have helped extend Medicare solvency by a decade, with today's report showing a full five years of additional solvency," he said. "I am committed to extending Social Security solvency by asking the highest-income Americans to pay their fair share without cutting benefits or privatizing Social Security."

—With reporting by the Associated Press.

• Social Security

Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports.

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Social Security

The 2024 oasdi trustees report.

The 2024 OASDI Trustees Report, officially called " The 2024 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds ," presents the current and projected financial status of the trust funds.

The Trustees Report includes many tables containing historical data and projections. For convenience, we provide the reader with links to view all of these tables in one place, without the accompanying text of the report. Note that the tables in the report generally present results only for every fifth year. Therefore, we also provide links to supplemental tables by single year for readers requiring more detail. Reference should always be made to the published report for context and explanation of terminology.

Documentation of Key Assumptions

• Demographic assumptions used in the projections that determine the actuarial status of the trust funds
• Long-range economic assumptions used in the projections that determine the actuarial status of the trust funds
• Long-range disability assumptions used in the projections that determine the actuarial status of the trust funds

See model documentation for a description of all assumptions and methods used in the projections.

Model Documentation

• Description of the methods used in the long-range projections that determine the actuarial status of the trust funds
• Description of the methods used in the short-range projections of trust fund operations

Related reports

• Summary of the latest report for the Social Security and Medicare programs (also available in printer-friendly PDF )
• Trustees Report on the financial status of the Medicare program

Special reports on OASI or DI Trust Fund assets dropping below 20 percent of annual cost within 10 years:

• Letter to the President of the Senate
• Letter to the Speaker of the House of Representatives

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The $230 billion donor-advised fund industry gets an IRS hearing

FILE - A sign outside the Internal Revenue Service building is seen, May 4, 2021, in Washington. Congress and the Biden administration are considering what, if anything, should be done to tighten restrictions on donor-advised funds, an increasingly popular way for donors to set aside money to spend on charitable causes. This week, the Internal Revenue Service held a public hearing to discuss plans to regulate DAFs. (AP Photo/Patrick Semansky, File)

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WASHINGTON (AP) — Congress and the Biden administration are considering what, if anything, should be done to tighten restrictions on donor-advised funds, an increasingly popular way for donors to set aside money to spend on charitable causes.

Driving the debates are questions about whether the country’s ultrawealthy are abusing the immediate tax deductions they receive from tucking money into DAFs, where the dollars can sit indefinitely or, more often, until donors decide which nonprofits to support. Many in the nonprofit world have opposed that characterization, arguing the accounts allow for an easy, no-frills style of giving that appeals to both wealthy and average American donors.

This week, the Internal Revenue Service held a public hearing to discuss its plan to regulate DAFs. The proposals include: altering the definition of what constitutes a donor-advised fund so that it applies to a broader swath of accounts; expanding the definition of donor advisers to include personal investment advisers who help manage assets in DAFs; and imposing new penalties on those who abuse the funds. If approved, the IRS would impose a 20% excise tax on donations that provide significant benefit to the donor, among other changes.

In question is the IRS’s interpretation of a 2006 law signed by President George W. Bush, which laid out the first comprehensive set of policies for donor-advised funds.

The IRS seems to be concerned that “there are abuses out there and there’s money going places it probably shouldn’t,” said Lloyd Hitoshi Mayer, a law professor at the University of Notre Dame.

DAF supporters urged the IRS to revise its plan, with some arguing that the proposed restrictions would make donor-advised funds less attractive when charitable giving is already on the decline . The proposed regulations are just a start; they don’t really touch on the third-rail issue of whether to require payout to nonprofits on a timeline.

The IRS proposal comes amid mounting concerns about money piling up in DAFs, with some calling for tighter regulations. Nearly $230 billion has been stashed into DAFs, which have surpassed private foundations in popularity among a new generation of donors. There are now almost 2 million accounts, nearly double the number that existed in 2018, according to the National Philanthropic Trust, a leading sponsor of the funds, which also publishes an annual report on their growth. Donors can create accounts at any nonprofit “sponsoring organization,” including community foundations.

DAF enthusiasts include philanthropist MacKenzie Scott, who was previously married to Amazon founder Jeff Bezos and has a net worth of roughly $34 billion . In recent years, she has distributed billions of dollars to nonprofits through DAFs at Fidelity Charitable, the National Philanthropic Trust, and Chicago Community Trust, Puck reported . Fidelity Charitable, which was created by financial services firm Fidelity Investments, is the nation’s largest grant maker. It gave $11.8 billion to charity in 2023, with more than 322,000 donors making grants through its DAF arm.

In January, Netflix co-founder Reed Hastings donated $1.1 billion in company stock to the Silicon Valley Community Foundation, a favorite donor-advised fund sponsor within the tech sector. SVCF holds 1,060 donor-advised funds and roughly $10.1 billion in net assets.

The easy-to-open accounts are also gaining preference with the less wealthy. Nearly half of all DAFs held assets valued at less than $50,000.

More than 70 people lined up outside of the IRS’s Washington headquarters Monday morning as part of the federal agency’s public hearing on proposed DAF regulations. Thirty-four people representing community foundations, fundraisers, lawyer associations, and public accountants, among others, spoke about the potential impact of the proposed regulations on Monday. Nearly a dozen more spoke during the virtual session on Tuesday. Many expressed dissatisfaction with the IRS plan.

Applying new restrictions and “compliance burden” on donors and DAF-sponsoring organizations could cause a further decline in charitable giving, warned Lisa Chmiola, who spoke on behalf of the Association of Fundraising Professionals. Charitable giving dropped 3.4% in 2022 to $499.3 billion. But Fidelity Charitable’s DAF distributions went up more than 5% in 2023 to $11.8 billion.

“In our estimation, the proposed regulations, if implemented, would lead to fewer dollars swiftly reaching nonprofits we care about, and we respectfully ask the Department of Treasury to reconsider its approach,” added Andrea Sáenz, CEO of Chicago Community Trust, one of the nation’s largest community foundations. The IRS is part of the Treasury Department.

The push to include investment advisers within the definition of donor advisers subject to enforcement action related to DAFs also was raised several times. Unlike investment advisers, donor advisers are not allowed to benefit directly from the account transactions they oversee.

The language should be stricken from the proposal, said Kevin Carroll, deputy general counsel at the Securities Industry and Financial Markets Association, which represents investment banks and asset managers.

A recent public letter signed by a bipartisan group of 33 House tax committee members also called the IRS proposal “overly broad” and warned of the possible “chilling effect” that would take place if investment advisers also became donor advisers and if the definition of DAFs was broadened to include certain funds held by public charities, such as those that have advisory committees that include donors.

It’s a shift from 2021, when another group of House and Senate members introduced a bill, the Accelerating Charitable Efforts Act, which would have offered immediate tax breaks to those who disburse money quickly from their donor-advised funds. The proposal was supported by some big names, including billionaire philanthropist John Arnold, when it was unveiled in 2020 .

To the dismay of DAF critics, the IRS proposal doesn’t touch on whether donors should be required to pay out of their funds within a certain time frame to receive immediate tax breaks.

“That is a really big issue, the warehousing of wealth that people have gotten deductions today for and actually aren’t helping people for who knows how long into the future,” Hitoshi Mayer said.

But that isn’t something that the IRS and the Treasury Department would be able to address without congressional intervention because payout requirements weren’t included in current law, he said.

Stephanie Beasley is a senior writer at the Chronicle of Philanthropy, where you can read the full article . This article was provided to The Associated Press by the Chronicle of Philanthropy as part of a partnership to cover philanthropy and nonprofits supported by the Lilly Endowment. The Chronicle is solely responsible for the content. For all of AP’s philanthropy coverage, visit https://apnews.com/hub/philanthropy .

IRS considers cracking down on $230 billion charitable sector that critics call ‘warehousing of wealth’

Congress and the Biden administration are considering what, if anything, should be done to tighten restrictions on donor-advised funds , an increasingly popular way for donors to set aside money to spend on charitable causes.

Driving the debates are questions about whether the country’s ultrawealthy are abusing the immediate tax deductions they receive from tucking money into DAFs, where the dollars can sit indefinitely or, more often, until donors decide which nonprofits to support . Many in the nonprofit world have opposed that characterization, arguing the accounts allow for an easy, no-frills style of giving that appeals to both wealthy and average American donors.

This week, the Internal Revenue Service held a public hearing to discuss its plan to regulate DAFs. The proposals include: altering the definition of what constitutes a donor-advised fund so that it applies to a broader swath of accounts; expanding the definition of donor advisers to include personal investment advisers who help manage assets in DAFs; and imposing new penalties on those who abuse the funds. If approved, the IRS would impose a 20% excise tax on donations that provide significant benefit to the donor, among other changes.

In question is the IRS’s interpretation of a 2006 law signed by President George W. Bush, which laid out the first comprehensive set of policies for donor-advised funds.

The IRS seems to be concerned that “there are abuses out there and there’s money going places it probably shouldn’t,” said Lloyd Hitoshi Mayer, a law professor at the University of Notre Dame.

DAF supporters urged the IRS to revise its plan, with some arguing that the proposed restrictions would make donor-advised funds less attractive when charitable giving is already on the decline . The proposed regulations are just a start; they don’t really touch on the third-rail issue of whether to require payout to nonprofits on a timeline.

Money piles in

The IRS proposal comes amid mounting concerns about money piling up in DAFs, with some calling for tighter regulations. Nearly $230 billion has been stashed into DAFs, which have surpassed private foundations in popularity among a new generation of donors. There are now almost 2 million accounts, nearly double the number that existed in 2018, according to the National Philanthropic Trust, a leading sponsor of the funds, which also publishes an annual report on their growth. Donors can create accounts at any nonprofit “sponsoring organization,” including community foundations.

DAF enthusiasts include philanthropist MacKenzie Scott, who was previously married to Amazon founder Jeff Bezos and has a net worth of roughly $34 billion . In recent years, she has distributed billions of dollars to nonprofits through DAFs at Fidelity Charitable, the National Philanthropic Trust, and Chicago Community Trust, Puck reported . Fidelity Charitable, which was created by financial services firm Fidelity Investments , is the nation’s largest grant maker. It gave $11.8 billion to charity in 2023, with more than 322,000 donors making grants through its DAF arm.

In January, Netflix co-founder Reed Hastings donated $1.1 billion in company stock to the Silicon Valley Community Foundation, a favorite donor-advised fund sponsor within the tech sector. SVCF holds 1,060 donor-advised funds and roughly $10.1 billion in net assets.

The easy-to-open accounts are also gaining preference with the less wealthy. Nearly half of all DAFs held assets valued at less than $50,000.

More than 70 people lined up outside of the IRS’s Washington headquarters Monday morning as part of the federal agency’s public hearing on proposed DAF regulations. Thirty-four people representing community foundations, fundraisers, lawyer associations, and public accountants, among others, spoke about the potential impact of the proposed regulations on Monday. Nearly a dozen more spoke during the virtual session on Tuesday. Many expressed dissatisfaction with the IRS plan.

Applying new restrictions and “compliance burden” on donors and DAF-sponsoring organizations could cause a further decline in charitable giving, warned Lisa Chmiola, who spoke on behalf of the Association of Fundraising Professionals. Charitable giving dropped 3.4% in 2022 to $499.3 billion. But Fidelity Charitable’s DAF distributions went up more than 5% in 2023 to $11.8 billion.

“In our estimation, the proposed regulations, if implemented, would lead to fewer dollars swiftly reaching nonprofits we care about, and we respectfully ask the Department of Treasury to reconsider its approach,” added Andrea Sáenz, CEO of Chicago Community Trust, one of the nation’s largest community foundations. The IRS is part of the Treasury Department.

The push to include investment advisers within the definition of donor advisers subject to enforcement action related to DAFs also was raised several times. Unlike investment advisers, donor advisers are not allowed to benefit directly from the account transactions they oversee.

The language should be stricken from the proposal, said Kevin Carroll, deputy general counsel at the Securities Industry and Financial Markets Association, which represents investment banks and asset managers.

Will new rules chill charitable giving?

A recent public letter signed by a bipartisan group of 33 House tax committee members also called the IRS proposal “overly broad” and warned of the possible “chilling effect” that would take place if investment advisers also became donor advisers and if the definition of DAFs was broadened to include certain funds held by public charities, such as those that have advisory committees that include donors.

It’s a shift from 2021, when another group of House and Senate members introduced a bill, the Accelerating Charitable Efforts Act, which would have offered immediate tax breaks to those who disburse money quickly from their donor-advised funds. The proposal was supported by some big names, including billionaire philanthropist John Arnold, when it was unveiled in 2020 .

To the dismay of DAF critics, the IRS proposal doesn’t touch on whether donors should be required to pay out of their funds within a certain time frame to receive immediate tax breaks.

“That is a really big issue, the warehousing of wealth that people have gotten deductions today for and actually aren’t helping people for who knows how long into the future,” Hitoshi Mayer said.

But that isn’t something that the IRS and the Treasury Department would be able to address without congressional intervention because payout requirements weren’t included in current law, he said.

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‘Housing has hit rock bottom’: Top real estate CEO says high home prices are shutting people out of the market

Apple is finalizing a deal with OpenAI to put ChatGPT on the iPhone, while talks with Google to use Gemini are ongoing