# How to record US mutual funds on UK tax return



## madeamistake (Jan 16, 2018)

I would welcome some (plain English!) advice on how to report US mutual funds (American Funds - investment company of america) to HMRC. Here is my situation:

- Dual UK-US citizen. Never lived in the US. UK tax resident. Was given mutual funds as a child by a well meaning relative. Don't really understand what they are or how they work. I'm a UK basic rate tax payer. 

- I now realise I need to report my American Funds dividends to HMRC even though they just get reinvested into the funds and have not been paid to me directly/transferred to the UK. (I have been reporting them to the IRS). We are not talking much - less than £500 per year in dividend distributions. I'm perfectly happy to pay whatever back taxes are due, plus penalties and interest of course. 

- For the purposes of the normal dividend distributions I receive (i.e. not capital gains) do I record these as 'foreign dividends' to HMRC? Or do I need to put them in a different category of foreign income? 

- I assume capital gains distributions (which in some years are as much as $2000) are capital gains pure and simple, or is that another can of worms? All my capital gains from these funds would have been below the UK capital gains annual allowances so I assumed all was fine. 

I will need to write to HMRC to correct my last 8 years of tax returns with the dividend info - I don't personally think it's necessary to go through any kind of disclosure procedure given the small amounts we're talking about. Does anyone disagree with me on that? 

Thank you. Any help much appreciated.


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## JustLurking (Mar 25, 2015)

madeamistake said:


> - I now realise I need to report my American Funds dividends to HMRC even though they just get reinvested into the funds and have not been paid to me directly/transferred to the UK. (I have been reporting them to the IRS). We are not talking much - less than £500 per year in dividend distributions. I'm perfectly happy to pay whatever back taxes are due, plus penalties and interest of course.


The _normal_ situation with dividends from US shares is fiddly. Under the US/UK treaty the US can take a maximum 15% of dividends paid from US shares to UK residents (and of course, it does). The dividends are then taxable to the UK with a tax credit for the 15%.

As a US citizen though, things are of course worse than that. The US has specially arranged for you get only limited treaty benefit, if any at all (it's a sneaky thing called the treaty 'saving clause'). Your dividends are taxable to both the US and the UK, and you may have to 'resource' some of the US income to the UK to get credits for UK tax against the US. You should be able to find some examples online of 'resourcing' using forms 1116 and 8833. It's a pain.

(Sorry, "plain English" is simply impossible in this area -- the IRS does not believe it exists.)



madeamistake said:


> - For the purposes of the normal dividend distributions I receive (i.e. not capital gains) do I record these as 'foreign dividends' to HMRC? Or do I need to put them in a different category of foreign income?


Normal 'foreign dividends'. No traps or difficulties as far as I know.



madeamistake said:


> - I assume capital gains distributions (which in some years are as much as $2000) are capital gains pure and simple, or is that another can of worms? All my capital gains from these funds would have been below the UK capital gains annual allowances so I assumed all was fine.


Probably another can of worms, I'm afraid.

The US has a truly evil tax regime for 'offshore' (to them) holdings, the PFIC rules. The UK has something similar, and although _nowhere near_ as harsh it is still unpleasant. To qualify for capital gains rates and allowances, a non-UK (actually, non-UCITS) unit trust or fund must meet UK 'reporting status' rules. For those that do not, capital gains are taxed as income.

A few Vanguard funds/ETFs do meet these requirements, but most US mutual funds probably do not.


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