The importance of using UK Reporting Funds in an investment portfolio
Academic evidence shows that building highly diversified portfolios can help reduce overall portfolio risk. For example, investing in mutual funds can be one way to achieve broad diversification of stocks, industry sectors and geographic areas for some types of investor.
HMRC classifies funds located outside the UK as “offshore funds”. There are two types of offshore funds; Reporting Funds and Non-Reporting Funds. To achieve Reporting Fund status, a fund has to apply to HMRC. As a Reporting Fund, income details are provided to both HMRC and the investors in the fund. HMRC maintains a list of approved Reporting Funds on its website. Offshore funds that do not apply are classified as non-Reporting Funds.
Broadly, there are two main benefits to investing in Reporting Funds for UK tax payers. Gains are subject to the generally more favourable Capital Gains Tax (CGT) regime and their UK Inheritance Tax (IHT) treatment. Reporting Funds are treated like UK onshore funds and gains are subject to CGT rates (maximum rate of 28% and capital losses can offset gains). Any gains realised in Non-Reporting funds are subject to income tax (not CGT) at a tax payer’s marginal income tax rate, currently up to a maximum rate of 45%. This means a differential of 17% for additional rate tax payers.
For investors subject to UK IHT, there can be a second tax charge on death1. We understand that when an individual holds Non-Reporting funds at death, there is a deemed disposal with any gains subject to an income tax charge. Additionally, the value of those Non-Reporting funds (minus the income tax paid on the deemed disposal) is included in the value of the UK estate for calculating IHT. We understand that this potential second tax charge on death does not apply to Reporting Funds.
As logical as the case for diversification, is the case for reaping the tax benefits of investing in funds that have Reporting Fund status in the UK.
Barry Brosnan ATT, MBA
1 Reporting v Non-Reports Funds article in the Charles Russell Speechlys September 2015 Briefing to Financial services Institutions.
Risk Warnings and Important Information
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.