Income from offshore fund

TooMuchSloeGin

(I am posting this for a friend who has registered here but still, after four days, waits for approval so she can't post yet.)

My friend has a Germany-based open-ended property/real estate fund (the ISIN is DE0009809566) in an offshore account and received some income in the tax year 2020-21... and she's doing the tax return now. She knows she has to put this income into the foreign pages but is not sure about which box would be the right one. So she has posted a question in the HMRC forums but the answer she received has not helped her much. So perhaps some knowledgeable person in the MSE community has an idea about how this type of income should be classified?

Thanks for any hints or help.

sarahTT

(I am the friend T was referring to and after a long delay I can actually post here myself :-/ THX T for helping me out.)

OK. I have tried really hard (and still try) to get something useful out of the HMRC community forum but so far the HMRC people are going round in circles and not getting anywhere (look for the thread by Sarah29 if you're curious).

From what they have told me I understand that the income from this open-ended real estate fund is either interest or dividend. Now at the moment my whole income is from a chunk of UK savings (plus some ISA stuff which is not relevant here) and various funds and bonds I hold with a German brokerage. The total sum of all these incoming payments is well below my personal allowance plus the savings allowance.

So in effect *I think* this question is not of such great importance for the time being: however I classify these real estate fund payments I won't have to pay tax anyway. However... this may change in the future so it would still be a good idea to find out where these payments go in my tax returns (if they are dividends there is a dividend allowance for instance). So again, if anyone has some ideas as to how this might work I'd love to hear about it.

Failing that, perhaps somebody knows where I can go to find a definite answer (apparently NOT to HMRC though I really thought they should know). Thanks a lot.

El_Torro

I'm not familiar with the HMRC forum, but are you getting responses from people who work for HMRC or just forum users? If it's just forum users it might be worth phoning HMRC. Never done it myself but from what I hear they tend to be helpful, or at least try to be.

There may be someone on this forum who can help you, failing that maybe try ringing HMRC on Monday.

masonic

Presumably it is this fund: https://www.teletrader.com/DataSheet.aspx?id=FU_980956

The fact sheet indicates that it is making distributions as dividends. You do not need to use the foreign pages to declare these if the income is less than £2000, you can add to the foreign dividends section of the Income pages.

Do you know if the fund has UK reporting status? If so, there may be excess reportable income to declare. If not, then any capital gains must be taxed as income (with no CGT allowance). This might result in you having to use the foreign pages after all if there is something here to declare.

sarahTT

@El_Torro Well, the answers came from various "HMRC Admin <number>" addresses, so I assume these are indeed HMRC people (or perhaps some are even bots, I dunno).

@masonic Thanks a lot for that... I have googled my fingers off but I had not seen this. How did you find it?

As to reporting status (RS), no this fund does not have that so if I ever sell them and there's a gain then yes, I'll have to pay up :-/ I am not planning to do that though.

I do have an ETF in the same portfolio with RS and this has reported ERI but that's already in my return. However, I do have a question re this... I know that I can deduct the ERI sums paid over the years from any capital gains I make when selling that ETF (assuming it keeps RS). I assume if the CG is below the exemption or even a loss then the ERI money I paid is HMRC's to keep?!

Again, thanks for helping me out!

masonic

sarahTT said:

@masonic Thanks a lot for that... I have googled my fingers off but I had not seen this. How did you find it?

It was not easy to find. A combination of ISIN and "factsheet" brought up the site linking it, about halfway down the first page of search results.

sarahTT said:

I do have an ETF in the same portfolio with RS and this has reported ERI but that's already in my return. However, I do have a question re this... I know that I can deduct the ERI sums paid over the years from any capital gains I make when selling that ETF (assuming it keeps RS). I assume if the CG is below the exemption or even a loss then the ERI money I paid is HMRC's to keep?!

Yes if you are declaring ERI then you have already paid income tax on that part of your gain, so to avoid double taxation the total ERI declared can be deducted when calculating for CGT. It's a loss either way as the income tax rate is normally higher than the CGT rate. In practice most people are able to manage their capital gains below the annual allowance.

wmb194

What does the fund own? You have to be careful with foreign domiciled funds and companies because if they hold >60% in "interest bearing assets" - usually this means bonds - then even if the fund/company declares them as dividends income should be classed as interest in your return.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/973733/sa106-notes_2021.pdf

"An ‘offshore fund’ is defined in UK tax legislation. Broadly such a fund is an investment scheme of which the trustees or operators are not resident in the UK (for example, unit trusts operated under Jersey laws and Belgian SICAVs)."

https://www.gov.uk/guidance/offshore-funds-distributing-and-reporting-funds

masonic

wmb194 said:

What does the fund own? You have to be careful with foreign domiciled funds and companies because if they hold >60% in "interest bearing assets" - usually this means bonds - then even if the fund/company declares them as dividends income should be classed as interest in your return.

It's a Real Estate Investment Fund. According to the annual report, the fund holds a mixture of bricks and mortar property and shares in property investment companies in a 64:36 ratio. The income section suggests the fund is receiving rental income from the properties it owns and dividends from the property investment companies it holds shares in. The real question would therefore be whether or not this fund is distributing untaxed property income in the same way as a UK PAIF (which it probably wouldn't meet the criteria for over here), or whether the fund is paying German taxes on its property rental income and paying a dividend out of its after-tax profits to investors. The answer to that question is probably in the same annual report, but my German is not quite up to that task, so perhaps it would be better for sarahTT to check on this herself.

sarahTT

@masonic The actual distribution notes for that fund carry two numbers for income: the actual amount being paid into my account (say 400EUR) and the amount that is actually taxable and has to be put into line XYZ of the GERMAN tax return (say 160EUR). There is no withholding tax or similar mentioned in the note.

So my understanding has always been that HMRC has no truck with that second number (alas) and that I have to give 400EUR as dividend/income from that fund in my UK return. I may be wrong though as perhaps the Germany/UK DTA has some provisions for that... I have never looked into this but perhaps I should do so now, with many long and cold and dark winter nights approaching :-)

@wmb194 I had seen this as well but was not sure how to interpret this. One interpretation would be that everything that is either outright interest (ie from savings, company bonds or gilts) or generated by an investment that's >60% in interest bearing assets is put into the interest field... and the rest goes into the dividend box. Nice and simple but probably too simple :-/

A more general question still on my mind is what I mentioned above: my total income is from a chunk of UK savings and those offshore funds and bonds and the total of these payments is well below my personal allowance plus the savings allowances... meaning I have no tax to pay (ignoring, for the time being, CGT or income from the sale of a non-reporting fund). So for these narrow circumstances does it matter much if I mis-classify one of those funds as interest bearing when it is dividend or the other way round? The end result is the same, no tax is due. Yes, so HMRC would probably admonish me but then again I would know for sure what to put where :-)

And once again, thanks for the support and help, I really appreciate this!

(I gotta say that untangling these things is almost fun in its very own peculiar way (perhaps I should've trained as an accountant...) but the fact that I got better advice (and quicker) here than from HMRC's own forum (where, I suppose, HMRC staff is posting) leaves me a bit... underwhelmed. I am sure there will be other interesting questions to be discussed...)

masonic

sarahTT said:

@masonic The actual distribution notes for that fund carry two numbers for income: the actual amount being paid into my account (say 400EUR) and the amount that is actually taxable and has to be put into line XYZ of the GERMAN tax return (say 160EUR). There is no withholding tax or similar mentioned in the note.

So my understanding has always been that HMRC has no truck with that second number (alas) and that I have to give 400EUR as dividend/income from that fund in my UK return. I may be wrong though as perhaps the Germany/UK DTA has some provisions for that... I have never looked into this but perhaps I should do so now, with many long and cold and dark winter nights approaching :-)

The question here is not whether any of the dividend is tax exempt (it isn't), it's whether it subject to income tax or dividend tax. That in turn depends on whether the fund has paid tax on the rental income it has received before distributing the dividend out of its profits, or the fund has a tax exemption and passes on this liability to investors. Details of that may be in the annual report, or could be requested from the fund house that operates the fund.

Normal dividends are paid after the deduction of corporation tax and are then subject to dividend tax (7.5%/32.5%/38.1%)

In the UK, qualifying funds can make property income distributions exempt from corporation tax and are then subject to income tax (20%/40%/45%)

Based on the note relating to German tax, it seems that some of the income is not taxable (the majority) and this could represent the rental income, whereas some is taxable and might represent the company dividends received by the fund. I'm not familiar with the tax laws in Germany, but presumably rental income is not tax exempt, suggesting the fund has paid tax on it already? I'm just speculating here, the figures that would back up this reasoning will be in the annual report.

sarahTT said:

A more general question still on my mind is what I mentioned above: my total income is from a chunk of UK savings and those offshore funds and bonds and the total of these payments is well below my personal allowance plus the savings allowances... meaning I have no tax to pay (ignoring, for the time being, CGT or income from the sale of a non-reporting fund). So for these narrow circumstances does it matter much if I mis-classify one of those funds as interest bearing when it is dividend or the other way round? The end result is the same, no tax is due. Yes, so HMRC would probably admonish me but then again I would know for sure what to put where :-)

You wouldn't run the risk of paying a penalty for an undeclared tax liability, but it would be unwise to misclassify this income now because you may have a tax liability in future years and need to be consistent in the way you report the income.

sarahTT

masonic said:

sarahTT said:

@masonic The actual distribution notes for that fund carry two numbers for income: the actual amount being paid into my account (say 400EUR) and the amount that is actually taxable and has to be put into line XYZ of the GERMAN tax return (say 160EUR). There is no withholding tax or similar mentioned in the note.

So my understanding has always been that HMRC has no truck with that second number (alas) and that I have to give 400EUR as dividend/income from that fund in my UK return. I may be wrong though as perhaps the Germany/UK DTA has some provisions for that... I have never looked into this but perhaps I should do so now, with many long and cold and dark winter nights approaching :-)

The question here is not whether any of the dividend is tax exempt (it isn't), it's whether it subject to income tax or dividend tax. That in turn depends on whether the fund has paid tax on the rental income it has received before distributing the dividend out of its profits, or the fund has a tax exemption and passes on this liability to investors. Details of that may be in the annual report, or could be requested from the fund house that operates the fund.

So in effect it's not enough that a fund states it's paying dividends as this fund does... it also depends on the way the distributions have been taxed. I will try to find further information re this specific fund but failing that I think it would probably wise to assume this income is not dividend income but interest (as the tax rate for this is higher than for dividends so I would perhaps overpay but I won't underpay). Anyway, as you rightly said if all of sudden I do change the classification... HMRC will certainly want to have a closer look.

This will become more of a problem when I start taking my various pensions which is (fortunately or not!) another ten years in the future... but then my income will definitely top the allowances :-/ Then again, there's every chance I have long sold this fund because it's just not worth the trouble.

Thank you @masonic, this has been very informative and I've learned a lot!