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22 November 2000
Our client, a United Kingdom resident, holds an investment in a United States mutual fund which is represented in the form of shares. The investment is Gabelli Global Growth Fund.
The annual statement for 1999 shows that additional shares have been purchased through the full reinvestment of distributions arising in the year. The distributions comprise dividends, short term gains (both with tax deducted at approximately 17.8 per cent) and long term gains (no tax deducted).
Can readers please help with the following:
The annual statement for 1999 shows that additional shares have been purchased through the full reinvestment of distributions arising in the year. The distributions comprise dividends, short term gains (both with tax deducted at approximately 17.8 per cent) and long term gains (no tax deducted).
Can readers please help with the following:
Our client, a United Kingdom resident, holds an investment in a United States mutual fund which is represented in the form of shares. The investment is Gabelli Global Growth Fund.
The annual statement for 1999 shows that additional shares have been purchased through the full reinvestment of distributions arising in the year. The distributions comprise dividends, short term gains (both with tax deducted at approximately 17.8 per cent) and long term gains (no tax deducted).
Can readers please help with the following:
(1) How should the gains and income be taxed in the United Kingdom?
(2) How should the base cost be calculated for the shares?
(3) What, if any, formalities are required for United States tax purposes?
(Query T15,713) – Couch Potato.
A mutual fund is what we would call a unit trust, in this case an accumulator. The investment is one holding of mutual fund units, not several holdings of shares. Reference to the United Kingdom/United States of America double taxation treaty will give some pointers. The relevant Articles are 2 (Non-United Kingdom Gains and Personal Income), 3 (Definitions), 4 (Residence and Domicile), 10 (Dividends), 13 (Capital Gains), 23 (Elimination of Double Taxation) and 26 (Exchange of Information).
(1) United States tax withheld is a credit against the United Kingdom liability. The distributions, for which vouchers should have been received, could be split between income and gains, reported in their respective parts of the return. However, it is more practical, and in keeping with the fact that the fund itself is the actual investment, to treat all distributions as income, and return them as overseas dividends, taking credit for the tax withheld.
(2) The capital gains tax cost is the amount first paid for the units plus the additions year by year, the cost of which is the net distribution (otherwise receivable in cash) that is reinvested.
(3) A telephone call to the Internal Revenue Service inquiry centre at the American Embassy will elicit whether a United States tax return is necessary. One would expect that a United Kingdom taxpayer would not be assessable in the United States. But, if he is, the United States personal exemption will probably result in a refund of United States tax being due. The telephone call will speed up research on the point. – Barham.
The quality of information desirable to meet such an enquiry is illustrated by the expert replies to Query T15,678 which appeared in Taxation, 21 September 2000 at pages 655 and 656.
As regards United States Federal income tax, the client might have no obligations unless he also has business interests or substantial investments there, or is a Lloyd's underwriter or United States citizen. If so, both 'Couch Potato' and his client would do well to seek specialist assistance before attempting the complexities attendant on the submission of a Federal tax return.
In the United Kingdom, unless the client is domiciled elsewhere, the distributions should be reported as Case V income. However, both short and long term gains are reportable unless they (with other gains) fall short of the client's annual exemption (£7,100 in 2000-01) and so escape the need for inclusion in his return. Since the client's holding in the mutual fund remains intact, no reduction in the reported gains for original base cost appears appropriate.
However, the amounts which have been subjected to tax under Schedule D, Case V will go to enhance base costs on the future disposal of the mutual fund holding. Such enhancements would be related back to the original acquisition date for taper relief purposes.
Double taxation relief is authorised by section 277, Taxation of Chargeable Gains Act 1992 and Article 23 of the (amended) treaty with the United States (SI 1980 No 568). – Lane.
Editorial note. In due course, it will be necessary to establish whether this is a non-qualifying offshore fund, or a distributor fund. For present purposes, however, I would suggest that, on the authority of Commissioners of Inland Revenue v Reid's Trustees 30 TC 431, all the distributions described in the query are received as income.
The annual statement for 1999 shows that additional shares have been purchased through the full reinvestment of distributions arising in the year. The distributions comprise dividends, short term gains (both with tax deducted at approximately 17.8 per cent) and long term gains (no tax deducted).
Can readers please help with the following:
(1) How should the gains and income be taxed in the United Kingdom?
(2) How should the base cost be calculated for the shares?
(3) What, if any, formalities are required for United States tax purposes?
(Query T15,713) – Couch Potato.
A mutual fund is what we would call a unit trust, in this case an accumulator. The investment is one holding of mutual fund units, not several holdings of shares. Reference to the United Kingdom/United States of America double taxation treaty will give some pointers. The relevant Articles are 2 (Non-United Kingdom Gains and Personal Income), 3 (Definitions), 4 (Residence and Domicile), 10 (Dividends), 13 (Capital Gains), 23 (Elimination of Double Taxation) and 26 (Exchange of Information).
(1) United States tax withheld is a credit against the United Kingdom liability. The distributions, for which vouchers should have been received, could be split between income and gains, reported in their respective parts of the return. However, it is more practical, and in keeping with the fact that the fund itself is the actual investment, to treat all distributions as income, and return them as overseas dividends, taking credit for the tax withheld.
(2) The capital gains tax cost is the amount first paid for the units plus the additions year by year, the cost of which is the net distribution (otherwise receivable in cash) that is reinvested.
(3) A telephone call to the Internal Revenue Service inquiry centre at the American Embassy will elicit whether a United States tax return is necessary. One would expect that a United Kingdom taxpayer would not be assessable in the United States. But, if he is, the United States personal exemption will probably result in a refund of United States tax being due. The telephone call will speed up research on the point. – Barham.
The quality of information desirable to meet such an enquiry is illustrated by the expert replies to Query T15,678 which appeared in Taxation, 21 September 2000 at pages 655 and 656.
As regards United States Federal income tax, the client might have no obligations unless he also has business interests or substantial investments there, or is a Lloyd's underwriter or United States citizen. If so, both 'Couch Potato' and his client would do well to seek specialist assistance before attempting the complexities attendant on the submission of a Federal tax return.
In the United Kingdom, unless the client is domiciled elsewhere, the distributions should be reported as Case V income. However, both short and long term gains are reportable unless they (with other gains) fall short of the client's annual exemption (£7,100 in 2000-01) and so escape the need for inclusion in his return. Since the client's holding in the mutual fund remains intact, no reduction in the reported gains for original base cost appears appropriate.
However, the amounts which have been subjected to tax under Schedule D, Case V will go to enhance base costs on the future disposal of the mutual fund holding. Such enhancements would be related back to the original acquisition date for taper relief purposes.
Double taxation relief is authorised by section 277, Taxation of Chargeable Gains Act 1992 and Article 23 of the (amended) treaty with the United States (SI 1980 No 568). – Lane.
Editorial note. In due course, it will be necessary to establish whether this is a non-qualifying offshore fund, or a distributor fund. For present purposes, however, I would suggest that, on the authority of Commissioners of Inland Revenue v Reid's Trustees 30 TC 431, all the distributions described in the query are received as income.
