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Tax position on ETF seeking reporting status?

Tax | Income Tax Helpful? 5

Asked by mcecaro, submitted 15 March 2012.

Open Quote I hold SPRD ETF USDV and EMDV and I can see from their website that they are seeking "reporting " status.

How do I treat the dividends paid until they become reporting funds? Are they taxable? And what about gains?
End Quote

Answered by Justin on 07 September 2012

Whether or not an offshore fund (including ETFs) has reporting status doesn't affect how dividends are taxed. They're subject to income tax in exactly the same way as UK based funds and shares, i.e. they're deemed to have paid net of basic rate tax meaning higher and top rate taxpayers have an additional liability (unless held within an ISA or pension).

However, reporting status (or lack of) affects how gains are taxed. Gains from funds with reporting status are taxed under the capital gains tax regime, just like UK investments. Gains from funds without reporting status are taxed as income, generally far less attractive.

When a fund is seeking reporting status it's treated as non-reporting. According to the HMRC offshore funds manual the position for investors in your shoes seems to be covered by ‘Regulation 48’.

When a non-reporting fund becomes a reporting fund UK investors may make a ‘deemed disposal’ at the time of conversion. This means you can treat your tax position as if you sold and repurchased the fund on the conversion date. You’ll be liable to income tax on any gains up to the point of conversion, but gains thereafter will be subject to capital gains tax.

You’ll need to detail this via your tax return covering the tax year in which the conversion takes place. There’s no special section on the return for deemed disposals, so you should report the offshore income gain as you would normally and show your calculations in the relevant notes section.

By the same token, if you sell the fund before reporting status is granted then any gains will be subject to income tax.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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