Tax on Bond Funds

Fed

A number of years ago I switched all my GIA investments to income units for ease of tracking dividends/equalisation for my tax return. But rather concerningly i've completely overlooked the Vanguard Global Bond Index Fund - GBP Hedged Acc which I have bought into over the last few years. For some reason I just assumed it wasn't paying out any distributions. No reference was made to it on my CTV with II. I wondered if it was because it was an accumulation unit but I have looked at an old CTV and my the Lifestrategy Acc funds are included on the CTV showing the dividend. I have contacted II and will HMRC informing then. Thankfully I think it's only 1 year where i will owe additional tax.

1) Are accumulation units typically left off CTVs, does it vary by provider?
2) Am I right in assuming that the fund pays out dividends but since it is a fund with less than 40% equities then these are regarded as Savings Income on a tax return?
3) Further it is domiciled in Ireland so it would actually come under foreign income?
4) I understand I can ignore Equalisation and just add the dividend reinvested to my cost base for my Section 104 holding for CGT. But in the Vanguard annual report I can't see anywhere that sets out the distributions like in the lifestrategy reports. I can get historical dividends from other sites but nothing shows Group1/Group2.  If II can provide a report then i can survive without this but I always like to cross check their calculations as they've been wrong in the past.   I can try Vanguard directly but im confused why that wouldn't be in an annual report?

Thanks

masonic

1) It depends on the platform and what information they receive. It is unlikely they'd receive information on offshore funds.

2) The fund retains income in the form of interest.

3) Yes, it is foreign income.

4) There are no distributions. For offshore funds, you have Excess Reportable Income. This can be found in a separate report. For Vanguard, you can find it here: https://www.vanguard.co.uk/uk-fund-directory/documents/ie-domiciled-funds/tax-reporting

You may also benefit from reading this: https://monevator.com/excess-reportable-income/

Note that if you need to pay tax on income from outside the UK, this would normally require you to complete a tax return for that year. Hopefully this is for 2023/24 so you haven't missed the deadline.

(don't worry, this fund has UK reporting status)

Fed

masonic said:

1) It depends on the platform and what information they receive. It is unlikely they'd receive information on offshore funds.

2) The fund retains income in the form of interest.

3) Yes, it is foreign income.

4) There are no distributions. For offshore funds, you have Excess Reportable Income. This can be found in a separate report. For Vanguard, you can find it here: https://www.vanguard.co.uk/uk-fund-directory/documents/ie-domiciled-funds/tax-reporting

You may also benefit from reading this: https://monevator.com/excess-reportable-income/

Note that if you need to pay tax on income from outside the UK, this would normally require you to complete a tax return for that year. Hopefully this is for 2023/24 so you haven't missed the deadline.

(don't worry, this fund has UK reporting status)

Many thanks, I will try to get my head round that.  In that case my SA will be incorrect for last 4 tax years.  Due to remaining allowances I think the 2020-2021, 2021-2022 will not change tax owed and i can still alter 2022-2023 so hopefully it's not a big problem

masonic

At least you were already filing returns. It could have been a stickier situation if you were not on SA.

EthicsGradient

Maybe a silly question, but was it shown under the separate "foreign" section of the ii CTC? I don't have a foreign bond fund, but my Ireland-domiciled stock fund does appear under "Schedule of foreign dividends and interest" in my ii CTC, after the UK ones. If so, you may have it for all the needed years since ii last changed their system (about 2017?)

Fed

masonic said:

1) It depends on the platform and what information they receive. It is unlikely they'd receive information on offshore funds.

2) The fund retains income in the form of interest.

3) Yes, it is foreign income.

4) There are no distributions. For offshore funds, you have Excess Reportable Income. This can be found in a separate report. For Vanguard, you can find it here: https://www.vanguard.co.uk/uk-fund-directory/documents/ie-domiciled-funds/tax-reporting

You may also benefit from reading this: https://monevator.com/excess-reportable-income/

Note that if you need to pay tax on income from outside the UK, this would normally require you to complete a tax return for that year. Hopefully this is for 2023/24 so you haven't missed the deadline.

(don't worry, this fund has UK reporting status)

EthicsGradient said:

Maybe a silly question, but was it shown under the separate "foreign" section of the ii CTC? I don't have a foreign bond fund, but my Ireland-domiciled stock fund does appear under "Schedule of foreign dividends and interest" in my ii CTC, after the UK ones. If so, you may have it for all the needed years since ii last changed their system (about 2017?)

I have just double checked the CTC and it mentions at the bottom

"Reportable Offshore Funds: Please be aware that any excess income earned by a Reportable Offshore Fund but not distributed to its investors is not shown on your tax certificate. Excess income needs to be considered for UK self-assessment. Further information is available via our online FAQs" so that answers that

Thanks for the links masonic, i've done some reading and think I grasp the concept.  As far as I can tell it operates in exactly the same way as UK domiciled funds, that is units purchased before the reporting period (before the previous ex-div date (Group 1)) "receive" the full ERI (dividend), units purchased during the reporting period(before next ex-div date (Group 2)) "receive" a partial ERI (dividend) and equalisation (return of capital).   Total of the full ERI (dividends) + partial ERI(dividends) declared as foreign income on SA

For CGT purposes for Accumulation units the ERI (dividend) "received" needs to be added to the base cost of the whole holding whilst equalisation is ignored, for distributing units the ERI (dividend) is ignored and equalisation needs to be deducted from the base cost.   

My only question is now is why do other sites show 4 dividend dates per year (https://www.trustnet.com/factsheets/O/FPD9/vanguard-global-bond-index-hedged-acc-gbp) for this fund where as the reporting period is a year with only one "distribution"?  Is that the nature of a UK "reporting" fund when it comes to accumulation units, it aims to simplify it for tax purposes?  

masonic

Fed said:
My only question is now is why do other sites show 4 dividend dates per year (https://www.trustnet.com/factsheets/O/FPD9/vanguard-global-bond-index-hedged-acc-gbp) for this fund where as the reporting period is a year with only one "distribution"?  Is that the nature of a UK "reporting" fund when it comes to accumulation units, it aims to simplify it for tax purposes?  

There's a simple answer to the first question. ERI is not a dividend. It does not align with the distribution period of the fund, it aligns with the accounting period. Companies, including investment companies, tend to file accounts once per year. The taxman sees that this is received income hidden away within the fund and wants his slice of it, to paraphrase Monevator. A different mechanism applies to UK funds where a notional dividend is declared for the Acc unit class (and this can happen annually, semi-annually, quarterly or monthly).

The "UK reporting" bit has nothing to do with ERI. If the fund were not UK reporting, you would find yourself paying income tax on your capital gains instead of capital gains tax.

poseidon1

masonic said:

Fed said:
My only question is now is why do other sites show 4 dividend dates per year (https://www.trustnet.com/factsheets/O/FPD9/vanguard-global-bond-index-hedged-acc-gbp) for this fund where as the reporting period is a year with only one "distribution"?  Is that the nature of a UK "reporting" fund when it comes to accumulation units, it aims to simplify it for tax purposes?  

There's a simple answer to the first question. ERI is not a dividend. It does not align with the distribution period of the fund, it aligns with the accounting period. Companies, including investment companies, tend to file accounts once per year. The taxman sees that this is received income hidden away within the fund and wants his slice of it, to paraphrase Monevator. A different mechanism applies to UK funds where a notional dividend is declared for the Acc unit class (and this can happen annually, semi-annually, quarterly or monthly).

The "UK reporting" bit has nothing to do with ERI. If the fund were not UK reporting, you would find yourself paying income tax on your capital gains instead of capital gains tax.

Excellent summary masonic!

The moral of this tale is if inclined to invest in Reportable Offshore Funds, do so via ISAs and Sipps only.

I can attest, they were the bane of my life professionally when trustees of offshore family settlements  invested in them in the erroneous belief they would have no tax effect on the UK based beneficiaries and settlors.