NEWS & VIEWS
Tax Talk is a regular series written by FSL’s Tax Reporting Analyst, Alex Ranahan. Alex has nearly ten years’ experience as a tax adviser and analyst. He is accredited by The Association of Taxation Technicians and was recently elected co-chair of the Tax Committee for The Investing and Saving Alliance.
Alex’s Tax Talks are on general topics and are not tax or financial advice. If you are unsure of the treatment of a transaction, we encourage you to seek the appropriate advice.
In this edition of Tax Talk, I wanted to explore some of the trickier, more technical questions we receive from our clients about excess reportable income (ERI). But before I dive in, let’s do a quick refresher on how it all works in the first place.
Offshore funds can either be ‘reporting’ or ‘non-reporting’. ERI is the income earned by a reporting offshore fund that isn’t distributed to investors, whether as dividends or interest. Reporting funds are required to publish an ERI rate for all the income recorded in the fund, confirming the amount that would have been paid if the fund had paid out. This undistributed income is calculated each year, and investors must pay income tax as if they had received it. As a result, any gains on reporting funds are taxed as capital gains while any gains on non-reporting funds (which haven’t declared income for investors) are taxed as income.
Now, on to the tricky stuff…
Foreign taxpayers and ERI
Is ERI applicable to a foreign taxpayer or a non-UK domiciled taxpayer? How should ERI payment be treated for this taxpayer?
The first thing to remember is that although ERI represents the income received by the fund that is not distributed, what we call ERI is specific to UK tax regulation. Therefore, if it is a taxpayer that is resident abroad and never lives in the UK then they do not need to consider the UK’s ERI regime.
When it comes to UK taxpayers who are non-UK domiciled, ERI is called ‘relevant foreign income’. This means that if it is not remitted by the non-dom then there is no UK tax due. If the taxpayer does remit amounts derived from the fund to the UK, then it comes under the usual tax rules.
Wait, aren’t the rules for non-doms changing soon?
Absolutely. From April 2025, a residence-based regime will apply to tax treatment of foreign income and gains (FIG).
Under the new rules, for the first four tax years of UK residence, new arrivals to the UK will be able to claim 100% relief on eligible FIG, provided they have not been UK tax resident in the ten years immediately prior to their arrival. Then, from the fifth tax year of UK residence, they will be subject to UK tax on their worldwide income and gains.
Meanwhile, all former remittance basis users who are not eligible for the four-year FIG regime will pay tax at the same rates as other UK resident individuals on any newly arising FIG.
But it is important to bear in mind that the remittance basis has not been fully abolished. If a taxpayer had claimed the remittance basis for a tax year and then, from 2025, remits an amount to the UK that originally came from income or gains in the year they claimed the remittance basis, then they are treated as making a new taxable remittance. This is why, in order to encourage former remittance basis taxpayers not to fall foul of a potentially large tax charge on a future remittance, a Temporary Repatriation Facility will be available for the first three years of the new FIG regime.
Past remittance basis users will – for disposals on or after 6 April 2025 – be entitled to rebase a personally held foreign asset for capital gains tax (CGT) purposes.
You can read the full detail of these changes on our blog.
Reporting Period End dates and ERI
I sold shares in an ETF on the exact same day as the Reporting Period End date. Should I include or exclude the ERI for this ETF in my Self Assessment return? Does the ERI count as received or distributed in this situation?
With ERI, the entitlement comes at the end of the reporting period.
So, let’s say an accounting period comes on 31 December. This means that an investor’s entitlement is calculated by reference of their holding at the end of the day on 31 December, not the start of the day. It is the number of shares or units held at that point that determines the ERI to be paid.
Actual distributions
XYZ Fund has already paid actual distributions this year, why does it still have ERI?
To explain this, let’s run through a very simplified ERI computation: start with a fund’s gross income received, take away any deductible expenses and any income paid out. This will give you your ERI figure which can then be apportioned to a rate per unit.
One thing to bear in mind, however, is that amounts called ‘income’ or ‘expenses’ in one jurisdiction are not necessarily the same thing as they would be under the UK reporting fund regime. It is not uncommon to see an ERI rate of 0.0001 for an income fund because it had distributed all its income according to its governing country’s law but not quite according to UK reporting fund regulations.