CSH2: taxation and performance

MeteredOut

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.

You can try again on Monday; I hear she has a bit more time on her hands.

LateGenXer

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. 

If you invest in an accumulation UK fund, some of the return will be taxed as income (e.g. reinvested dividends/interest), some as capital gains.  The income portion should be appear in the funds reports, and quite often on the consolidated tax statement from the investment platform (which makes the whole tax declaration much more painless.)

If you invest in an offshore fund with UK reporting status, some return will be taxed as income (the ERI), some as capital gains. Same thing!

ERI seldom appears in consolidate tax statements, which is why the process is so more explicit and painful.  But besides it, it's analogous. 

Now, how come CSH2 had zero reportable income, I'm not sure, but one theory I see circulated is that the collateral basket of securities it held didn't pay any dividends, or something like that.  It really depends on the financial mechanics of the fund, and what/how HMRC define income vs capital gain.

aroominyork

MeteredOut said:

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.

You can try again on Monday; I hear she has a bit more time on her hands.

I'll hop over and knock on her door (I never got round to re-naming myself aroomeastofbrighton). The media have published plenty of photos of her building and there's a great ice cream place round the corner. 

LateGenXer said:

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. 

If you invest in an accumulation UK fund, some of the return will be taxed as income (e.g. reinvested dividends/interest), some as capital gains.  The income portion should be appear in the funds reports, and quite often on the consolidated tax statement from the investment platform (which makes the whole tax declaration much more painless.)

If you invest in an offshore fund with UK reporting status, some return will be taxed as income (the ERI), some as capital gains. Same thing!

ERI seldom appears in consolidate tax statements, which is why the process is so more explicit and painful.  But besides it, it's analogous. 

Now, how come CSH2 had zero reportable income, I'm not sure, but one theory I see circulated is that the collateral basket of securities it held didn't pay any dividends, or something like that.  It really depends on the financial mechanics of the fund, and what/how HMRC define income vs capital gain.

But CSH2 is supposedly 100% (swapped) income, so there is no "income portion". 

Re. my apples/pears response to masonic a few moments ago, does CSH2 hide behind its collateral basket of securities to say it is nominally liable for CGT and not income tax... though why would it do that?

masonic

aroominyork said:

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? 

No, I'm saying that HMRC decided that foreign gains should all be taxed as income, but funds could own up to how much was actually income and they'd be allowed to have their investors' capital gains and income taxed at the appropriate rates.

slinger2

But what seems odd to me is that the situation that's developed seems to say that the whole of the ERI falls on those who own the ETF on a specific date.

masonic

slinger2 said:

But what seems odd to me is that the situation that's developed seems to say that the whole of the ERI falls on those who own the ETF on a specific date.

That's not true of all funds, just exchange traded ones. Same is true for dividends/interest distributed by UK domiciled exchange traded investments.

OEICs or equivalent offshore structures may have equalisation.

aroominyork

masonic said:

aroominyork said:

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? 

No, I'm saying that HMRC decided that foreign gains should all be taxed as income, but funds could own up to how much was actually income and they'd be allowed to have their investors' capital gains and income taxed at the appropriate rates.

I have a feeling your answer will begin 'No', but does that mean ETFs have the option of i) being liable for income tax, with the option to declare ERI for the component liable for CGT, or ii) being liable for CGT, with the requirement to declare ERI for the component liable for income tax?

masonic

aroominyork said:

masonic said:

aroominyork said:

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? 

No, I'm saying that HMRC decided that foreign gains should all be taxed as income, but funds could own up to how much was actually income and they'd be allowed to have their investors' capital gains and income taxed at the appropriate rates.

I have a feeling your answer will begin 'No', but does that mean ETFs have the option of i) being liable for income tax, with the option to declare ERI for the component liable for CGT, or ii) being liable for CGT, with the requirement to declare ERI for the component liable for income tax?

If they do not sign up to the rules associated with UK reporting status, then they have no option to influence how their gains are taxed in the UK. In that case all of the gain will be taxed at earned income rates (20/40/45%). If they do sign up, then presumably they have to declare truthfully.

aroominyork

So an ETF like CSH2 should declare all its gains (small 'g') as income, subject to...

LateGenXer said:

Now, how come CSH2 had zero reportable income, I'm not sure, but one theory I see circulated is that the collateral basket of securities it held didn't pay any dividends, or something like that.  It really depends on the financial mechanics of the fund, and what/how HMRC define income vs capital gain.

... before HMRC maybe had a word in their ear?

LateGenXer

aroominyork said:

But CSH2 is supposedly 100% (swapped) income, so there is no "income portion". 

Look at the "Unfunded swap" diagram on https://www.justetf.com/uk/academy/synthetic-replication-of-etfs.html . There are two income streams: the swap contract, and the collateral basket income (which may include dividends.)  It's certainly possible that the collateral basket income is considered income by HMRC, if the basket is owned by the fund, and the income stream is owed to (not owned by) the counterparty.

See also for example https://www.reddit.com/r/UKInvesting/comments/lfyr5m/comment/gnylbfo/ thread which I recently stumbled across, where reverse engineering by a forumite found that I500 (another total return swap ETF) does (or at least used) keep change the assets in the basket to avoid receiving any dividend from the collateral basket.

I certainly don't know this as a fact. But for a layman like me, it seems a possible explanation.