CSH2: taxation and performance

GeoffTF

aroominyork said:

Ciprico said:

I stand corrected !

And I am glad you are! Under the current CGT rates (...carefully avoiding political debate...) CSH2 seems to be a uniquely useful instrument.

I would be reluctant to hold CSH2 outside a tax shelter. I would fear that HMRC would decide that the ERI had not be declared correctly, or remove the Reporting Status. That may not be possible retrospectively, but I be concerned nonetheless. Parliament did not intend that tax should be avoided in this way.

aroominyork

So long as holding CSH2 would count as tax avoidance rather than tax evasion - and I have no idea nor any real interest in whether the Treasury would consider it to be avoidance - I have no qualms about continuing to hold it unwrapped.

GeoffTF

aroominyork said:

So long as holding CSH2 would count as tax avoidance rather than tax evasion - and I have no idea nor any real interest in whether the Treasury would consider it to be avoidance - I have no qualms about continuing to hold it unwrapped.

What the law calls "Tax Avoidance" is illegal nowadays:

https://www.gov.uk/guidance/tax-avoidance-an-introduction

I do not expect that is applicable here. I expect that the worst that could happen is that your capital gains get taxed as income, but I am not a tax expert.

aroominyork

There was a lot of comment when the new Chancellor talked about cracking down on tax avoidance and whether she was intentionally blurring the line with tax evasion. The article to which you link says tax avoidance "involves operating within the letter, but not the spirit, of the law." Whichever way you cut it, you cannot be prosecuted for not obeying the spirit of a law. I think the link purposefully conflates tax avoidance and tax evasion for two reasons. First, to scare people into not using tax avoidance schemes because they cost the Treasury lost income. Second, and quite fairly, to warn people they might be wading into murkier waters than they intend.

GeoffTF

aroominyork said:

The article to which you link says tax avoidance "involves operating within the letter, but not the spirit, of the law." Whichever way you cut it, you cannot be prosecuted for not obeying the spirit of a law.

The whole purpose of the anti tax avoidance legislation is to make that possible. HMRC certainly makes use of these powers on a regular basis. As I have said, I fear they will force changes in the way that the ERI is calculated or remove the Reporting Status, rather than accuse investors in the fund of illegal tax avoidance.

easysaver

For the benefit of those who hold CSH2 outside of tax shelters the Excess Reported Income (ERI) for the last reporting period (1/11/22 - 31/10/23) was 34.5541 EUR, equivalent to approx 2.5% if my calcs are correct. Interest rates rose from 3% on 3/11/22 to 5.25% on 3/8/23.

aroominyork

easysaver said:

For the benefit of those who hold CSH2 outside of tax shelters the Excess Reported Income (ERI) for the last reporting period (1/11/22 - 31/10/23) was 34.5541 EUR, equivalent to approx 2.5% if my calcs are correct. Interest rates rose from 3% on 3/11/22 to 5.25% on 3/8/23.

After zero ERI for the previous two years that is annoying - and doubly so with CGT now increased. I bought CSH2 in June 2024 so I have to wait and see whether it declares ERI for my (ongoing) holding period. But a starting question before I work through Monevator's explanation of ERI - would people who held CSH2 during 2022-23 essentially see their returns reduced by their marginal tax - or CGT? - rate on the c.2.5% ERI?

masonic

Assuming the ERI is interest, then it will be treated as foreign interest. But it still looks like about half of the gain is unaccounted for in ERI and will remain a capital gain.

aroominyork

Monevator explains: “Excess reportable income is the amount of dividends and interest earned by an offshore reporting fund that isn’t otherwise distributed to investors… Offshore accumulation funds store up such reportable income instead of distributing it…”. I don’t understand this. An accumulation fund never distributes dividends or interest, so what is the difference between reinvested dividends and interest, and ERI?

masonic

aroominyork said:

Monevator explains: “Excess reportable income is the amount of dividends and interest earned by an offshore reporting fund that isn’t otherwise distributed to investors… Offshore accumulation funds store up such reportable income instead of distributing it…”. I don’t understand this. An accumulation fund never distributes dividends or interest, so what is the difference between reinvested dividends and interest, and ERI?

For an accumulation fund they should be the same. However for CSH2 we have seen that for some reason ERI understates the reinvested income, probably related to the synthetic nature of the ETF.