CSH2: taxation and performance

masonic

aroominyork said:

masonic said:

Like I said before, treating as interest categorically will not result in an underpayment of tax in your case. Treating as a dividend might, and definitely seems an odd thing to do for the asset class.

Understood, but I would like i) to know the correct way to declare the income, and ii) not to overpay - rather than just avoid underpaying.

The cost of a definitive answer is likely to be more costly (either in money or time) than any overpayment, and even a paid for answer may not be the correct one (ask Ms Rayner).

aroominyork

Ange isn't taking my calls this week. 

I'll be putting it as interest because that seems most logical (unless Amundi advise otherwise), but if dividend seemed most logical I would declare it as such with a note in the free text section. I am just frustrated the fund manager cannot guide on this, though I assume it is precisely because, as LateGenXer said, it could be argued either way and they do not want to be held responsible for the vagaries of HMRC.

masonic

aroominyork said:

Ange isn't taking my calls this week. 

I'll be putting it as interest because that seems most logical (unless Amundi advise otherwise), but if dividend seemed most logical I would declare it as such with a note in the free text section. I am just frustrated the fund manager cannot guide on this, though I assume it is precisely because, as LateGenXer said, it could be argued either way and they do not want to be held responsible for the vagaries of HMRC.

Undoubtedly. HL found out what happens when you think you know better than HMRC.

LateGenXer

Classing as interest doesn't guarantee a lower tax bill, than dividends, unless it doesn't fall in the £1000 Personal Savings Allowance.  I couldn't find conclusive evidence either way (does anybody know?)

However, this can be checked by simulating on HMRC Self assessment online calculations.

masonic

LateGenXer said:

Classing as interest doesn't guarantee a lower tax bill, than dividends, unless it doesn't fall in the £1000 Personal Savings Allowance.  I couldn't find conclusive evidence either way (does anybody know?)

However, this can be checked by simulating on HMRC Self assessment online calculations.

The only case in which classing as interest would result in a lower tax bill would be where the dividend allowance and personal allowance had been used up, but the personal savings allowance (and starter rate for savings if applicable) had not. In all other scenarios either the tax would be zero in both cases, zero for dividends only, or the lower rate of tax on dividends would make them the more attractive classification.

LateGenXer

LateGenXer said:

https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm13320#bond-funds states "Where an offshore fund holds more than 60% of assets in interest-bearing (or economically similar) form, any distribution or excess of reported income is treated as a payment of yearly interest (section 378A ITTOIA 2005 / regulation 95(3))."   

Whether the swap contract is considered a holding, and whether it is "economically similar" to an interest-bearing asset, could be argued either way...

 For completeness here's a monevator thread discussing this where the general thinking is also that this is considered interest, https://monevator.com/money-market-funds/#comment-1619165



Also, if one follows the legislation references, they seem to corroborate this.

https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm13320#bond-funds states:

"Bond funds

Where an offshore fund holds more than 60% of assets in interest-bearing (or economically similar) form, any distribution or excess of reported income is treated as a payment of yearly interest (section 378A ITTOIA 2005 / regulation 95(3))."

https://www.legislation.gov.uk/ukpga/2005/5/part/4/chapter/2/crossheading/other-income-taxed-as-interest#section-378A

"This section applies where [..] the offshore fund fails to meet the qualifying investments test at any time in the relevant period."

"For the purposes of this section, an offshore fund fails to meet the qualifying investments test if the market value of the fund's qualifying investments exceeds 60% of the market value of all of the assets of the fund (excluding cash awaiting investment).

“qualifying investments” has the meaning given in section 494 of CTA 2009."

https://www.legislation.gov.uk/ukpga/2009/4/section/494 states

"[...] “qualifying investments”, in relation to an open-ended investment company, a unit trust scheme or an offshore fund, means investments of the company, scheme or fund of any of the following descriptions—"

(a) money placed at interest,

[...]

(f) derivative contracts whose underlying subject matter consists wholly of any one or more of

   (i) the matters referred to in paragraphs (a) to (e)

   [...]


I hope this helps giving some reassurance.  It does at least to me.

aroominyork

Very helpful, LGX. Should HMRC challenge me for declaring the income as interest, I will say I took specialist forum advice! 

I'll let you all know if Amundi reply on this point and on whether the reporting date has been brought forward a month, resulting in two ERI distribution dates in this financial year.

aroominyork

Now that we've solved the interest/dividend question (good work, team!) I'd really like to understand what ERI actually is, because I just cannot get my head around it. Definitions tend to be like Monevator's: "Excess reportable income is the amount of dividends and interest earned by an offshore reporting fund that isn’t otherwise distributed to investors." As much as I stare at that I cannot fathom it. CSH2 is an accumulation fund so the money it generates - paid by Société Générale at SONIA(ish) rate through swaps - is what leads to the SONIA(ish) increase in CSH2's share price. So what is this ERI about, and how would it be €0 for several years and then become €60, about 4% of the share price?

masonic

aroominyork said:

Now that we've solved the interest/dividend question (good work, team!) I'd really like to understand what ERI actually is, because I just cannot get my head around it. Definitions tend to be like Monevator's: "Excess reportable income is the amount of dividends and interest earned by an offshore reporting fund that isn’t otherwise distributed to investors." As much as I stare at that I cannot fathom it. CSH2 is an accumulation fund so the money it generates - paid by Société Générale at SONIA(ish) rate through swaps - is what leads to the SONIA(ish) increase in CSH2's share price. So what is this ERI about, and how would it be €0 for several years and then become €60, about 4% of the share price?

The short answer is that offshore funds have at some point in the past been a good way for those wishing to a/evoid tax to disguise income. So HMRC decided that enough was enough and started treating capital gains as income for these funds. But there is a way for funds to avoid that fate, which is to register with HMRC to report their income to HMRC as a "reporting fund". This means that they publish how much should be treated as income based on whatever rules are in place to differentiate, and taxpayers then have to declare this as income rather than capital gain. Since non-UK-domiciled funds do not have to distribute all of the income they receive, there can be ERI even in distributing funds if they deliberately hold some back, or if part of their gain is considered income by HMRC but not those running the fund.

The question of why CSH2 was able to get away with nil ERI for several years, then not, is an interesting one. The most likely answer in my view is that HMRC had a word. Although it is plausible that in the ultra-low interest rate days there was some mechanism for tracking SONIA that fell outside of the scope of the reporting rules - perhaps it still exists today which is why the ERI is closer to 4% than 5%.

aroominyork

Are you saying HMRC decided that income should be taxed as income and capital gains should be taxed as capital gains, but funds could continue to say that an income-generating fund is nominally liable for CGT so long as it reverses out the income and reports it as ERI? And if so, why doesn't HMRC just make the fund call an apple and apple and a pear a pear, and not let CSH2 be nominally liable for CGT?