Excess Reportable Income on an ETF based overseas

Roy1234

ETFs are very popular ways to trade funds, and for tax reasons are almost always domiciled overseas, e.g. Ireland, Luxembourg etc. Apart from the Capital Gains Tax aspect when selling any share for a profit, I have become aware of HMRC's 'Excess reportable Income' rules for overseas funds.

Although the fund I want is Accumulating, so will not pay me any annual dividends, HMRC consider the automatically reinvested dividends (within the fund) as still liable to ERI taxation. I've read some accounts on how to calculate this for Self-Assessment purposes.

However, everyone is entitled to £500 of annual dividend income. My planned investment is modest, and will use only a fraction of that dividend allowance. The fund in question is on HMRC's list of approved overseas ones which do report dividends to them.

So my question is, do I still need to contact HMRC and go through a tax return to show the modest dividend income is well within my exempt limits? Or can I safely ignore the matter unless contacted? I'm wary of any 'failing to report' type fines.

DRS1

Although the fund I want is Accumulating, so will not pay me any annual dividends, HMRC consider the automatically reinvested dividends (within the fund) as still liable to ERI taxation. I've read some accounts on how to calculate this for Self-Assessment purposes.

I think you may be talking about two different things here. Yes there are "dividends" on accumulating funds which need to be reported for income tax and taken into account for CGT. But that is separate from ERI which you can get on distributing funds as well. ERI is not usually reported on your consolidated tax certificate so you have to hunt for the figure. Personally I would avoid investing in something that generated ERI just to avoid the hassle (or keep it in an ISA).

Roy1234

https://forums.moneysavingexpert.com/discussion/comment/82012158#Comment_82012158

I agree it would be better to shelter gains in an ISA where possible and avoid tax admin, but these are funds beyond the used ISA allowance. Maybe my terminology is wrong, but you seem to concur that accumulating ETF funds generate ERI. ETF funds are significantly more popular than daily priced funds nowadays, and always based abroad (for historic tax reasons) so this must be a problem for the many who have used their £20k allowance and want investment returns. You are correct that you have to go digging for the info.

So does it need declaring if under the £500 allowance?

DRS1

If you are doing a self assessment then yes it needs to be declared. They apply the £500 allowance at the tax calculation stage.

wmb194

https://forums.moneysavingexpert.com/discussion/comment/82012247#Comment_82012247

Are you aware of KPMG's ERI database? It's free to sign up and access. It isn't fully comprehensive but it can save a lot of time and effort when your ETF is on there.

https://www.kpmgreportingfunds.co.uk/

Roy1234

https://forums.moneysavingexpert.com/discussion/comment/82012428#Comment_82012428

No I'm not aware of that one, but I imagine it's just a version of the government's own one here, which must be gospel on the matter:

https://www.gov.uk/government/publications/approved-offshore-reporting-funds

I did find the funds of interest in it, so HMRC will be told of dividends paid by these offshore entities, and I assume the dividends hidden as reinvested in accumulating funds hence ERI. So they ought to know if I earned too much?

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82012942#Comment_82012942

No they do not necessarily know of your particular ERI entitlement since not all investment platforms include it on their year end tax certificate, and even where they do not all platforms necessarily submit the certificate to HMRC - see example below

https://www.halifax.co.uk/investing/help-and-guidance/existing-customer/uk-reporting-funds.html

Frankly, outside of holding such funds in a Sipp or ISA, ERI reporting funds should be avoided in a taxable GIA accounts.

Professionally, they were a time consuming irritant when collating investment income data for client tax returns.

wmb194

https://forums.moneysavingexpert.com/discussion/comment/82012942#Comment_82012942

No, the KPMG database actually gives you the ERI figure. At the moment these dividend/interest and ERI data are not reported to HMRC by brokers or the funds, you need to do this yourself.

This is why using ISAs is so great: you don’t need to worry about these reporting requirements at all.

dales1

As DRS1 says, if you're already in self assessment, then you simply declare all your dividends on the form.

Otherwise (as you implied) dividends up to £500 do not need to be declared to HMRC and no action is required.

Dividends £500 to £10,000 must be declared to HMRC (perhaps send them a letter when your figures are final).

Dividends over £10,000 mean you have to register for self-assessment and fill out the forms.

It's true - collating your ERI figures is a little time-consuming. But once you have done it correctly the first time, it becomes simply a matter of following your past procedures. If you are set on this investment and don't mind a little admin, don't let ERI put you off. It's easy, really ! I've done it for years.

Roy1234

https://forums.moneysavingexpert.com/discussion/comment/82013877#Comment_82013877

Thanks, I guess like doing tax returns themselves, they're a pain for the first year, but thereafter a well-trodden path to repeat. We have to balance the nuisance factor of declaring ERI with the potential financial gains of being in an ETF (well this is a Money Saving site) for anyone who has exhausted their £20k ISA allowance. Such as gains of 10% per year for the last decade on simple index trackers.

Such investments outside ISAs/Pensions are not necessarily just for the rich, but ordinary people entering retirement, collecting pension lumps sums, maybe an inheritance from a relative in their later years, ordinary folk who must find the best home for large sums they've had for the first time in their working lives. Yes you can just about get 4.6% bank interest by switching your savings to the latest MSE Best Buy deal, and moving each year, which gets you growth slightly above inflation.

But if you want real growth, that means investing in funds of some kind, with ETFs (always domiciled abroad) now more popular than OEIC type funds based in the UK. I don't think avoidance of unsheltered ETFs is a valid direction for many.

wmb194

https://forums.moneysavingexpert.com/discussion/comment/82014088#Comment_82014088

You might consider Investment Trusts as another option. These closed end funds are PLCs and the accounting for them is far simpler i.e. no ERI and no accumulation dividends to keep track of.

https://www.theaic.co.uk/aic/find-compare-investment-companies?sortid=Name&desc=false