Exchange-Traded Funds (ETFs) and mutual funds contain a mix of different assets and are a popular and easy way to diversify your investments. Investors need to be aware of where their ETF and mutual fund holdings are registered (regulated), because countries often treat domestic and foreign funds differently for tax purposes. Americans that are domiciled in the UK will want to consider whether their investments are registered both in the US and the UK. In this blog post, we talk about reporting and nonreporting funds, and what you can do to maximize the tax efficiency of your investments as an American living in the UK.
(Read Remittance Basis of Taxation in the UK to learn about general taxation of Americans in the UK).
What are reporting and nonreporting funds?
Many countries have regulating bodies that require funds to comply with certain disclosures and enforce rules to protect customers. In the US, this is done by the Securities and Exchange Commission (SEC), and in the UK this is done by His Majesty’s Revenue and Customs (HMRC).
In the US, ETFs and mutual funds that report the proper information to the SEC are considered registered (reporting) funds. Those that do not are considered unregistered foreign funds (nonreporting) and referred to as Passive Foreign Investment Corporations (PFICs).
In the UK, funds that report the proper information to the HMRC are called reporting, and those that do not are called nonreporting. Nonreporting funds have certain disadvantages for UK domiciled taxpayers.
How are reporting and nonreporting funds treated differently?
Reporting funds receive preferential tax treatment in the UK tax system:
- When a reporting fund is sold, a capital gain is recognized and taxed at the rate of 20%.
- When a nonreporting fund is sold, ordinary income is recognized and could be subject to the top tax rate of 45%.
Similarly, PFICs in the US are a tax reporting nightmare and are subject to less advantageous rates.
If I’m an American moving to the UK, how can I ensure my funds are compliant?
It is important to ensure that your current and any future ETF and mutual fund holdings are reporting funds in the US and the UK because the tax savings could be significant.
Should I buy UK funds?
There is really no reason to buy UK funds as an American taxpayer. They are all PFICs and will be subject to tedious tax reporting and unfavorable treatment in the US.
Are there US funds that are UK Reporting?
Luckily there are many high-quality, low-cost US registered ETFs and mutual funds that are reporting funds in the UK. This means that an American domiciled in the UK (who is subject to taxation in both countries) can hold investments that are tax advantaged on both sides of the pond. The HMRC maintains an Excel list that you can review to determine if your favorite funds are already in compliance in the UK. You can use Control F to find your holdings. All US funds on this list will have an ID number listed in the CUSIP column.
What should I do if some of my funds are nonreporting?
Let’s say you’ve reviewed your portfolio and determined that some of your ETFs and mutual funds are nonreporting. What now?
- If you’re moving to the UK: If you can easily switch out of nonreporting and into reporting funds at a low or no tax cost, you should consider it. However, if there are significant tax costs for switching, it probably doesn’t not make sense to sell existing holdings. Moving forward though, you should consider making all future investments into reporting funds that are US registered.
- If you’re already in the UK: Consider making all future investments into reporting funds that are US registered.
Before selling any mutual funds or ETFs in your non-retirement accounts, you should check to see if they are reporting or nonreporting. If possible, recognize gains in reporting funds first to receive the lower capital gains tax rate in the UK.
Does this apply to remittance basis taxpayers?
Nope! If you’re a non-domiciled resident in the UK you probably don’t need to worry about reporting and nonreporting securities. Your non-UK income, such as capital gains in your US brokerage account, is not subject to UK taxation if it isn’t remitted.
For other UK tax considerations, read my blogs on:
Do you have questions? Leave them in the comments below!
Resources and Tax Forms:
- HMRC List of Reporting Funds: https://www.gov.uk/government/publications/offshore-funds-list-of-reporting-funds
- HMRC Investment Funds Manual, Non-Reporting Funds: https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm12300
- HMRC Capital Gains Tax Rates: https://www.gov.uk/capital-gains-tax/rates
