Category: Capital Gains Tax

Taxation of UK Mutual funds

A simplified guide to HMRC rules for individual investors.

The tax rules aim to put the investor broadly in the same position as if they had invested in the fund’s assets directly (rather than investing in the fund)2.

Income

Investors may receive dividend distributions and/or interest distributions3:

  1. Dividend distributions are treated in the same manner as any other UK company dividend.

  2. From 6th April 2017 interest distributions are paid gross and taxed in the same way as interest income from a bank4. 

In case of an accumulating fund (instead of distributing dividends or interests it re-invests them in the fund) amounts reinvested are taxed as income (dividend or interest) accruing to investors in the same way as if they had been distributed. Remember to deduct these on sale when computing capital gains tax5.

Disposal

A sale will give rise to capital gain6.

Units are treated as shares in a company and capital gains tax is computed in a similar way7.

Bonus

  • In India tax rates for equity and debt funds differ, its not the case in UK.

Source:

  1. Tolly Tax Guide: 37.27 to 37.28
  2. IFM01000
  3. IFM03110
  4. IFM03350
  5. IFM03120 and CG57707
  6. CG57680P
  7. CG57682 and CG57751.
  8. Detailed information given in Investment Funds Manual.
  9. To know about offshore/Indian Mutual funds [click]

Foreign capital losses – remittance basis

When to make the foreign capital losses election and is it beneficial to make this election.

Foreign capital losses – remittance basis

Remittance basis is basically a deferral of UK tax. If foreign income and gains remain offshore and are never regarded as remitted to the UK, the tax charge is effectively deferred indefinitely.[RDRM31030]

Foreign income or gains not covered by remittance basis

Gains under a policy of life assurance are always taxable on the full amount on the arising basis, irrespective of your domicile or residency status.[RDRM31110]

Foreign capital losses election

Non-domiciled remittance basis users are required to make an election under TCGA1992/s16ZA if they want their overseas losses to be offset against foreign chargeable gains.

The election should be made for the first year for which the remittance basis is claimed, irrespective of whether the individual has any foreign chargeable gains or overseas losses in that year. The election will usually be expected to be made within the white space in the Capital Gains supplementary pages of the same SA Return as the first remittance basis claim is made. The election is irrevocable.

The usual time limits for claims/elections at TMA70/s42 and 43 apply.

If the individual does not make an election, relief cannot be allowed in respect of any foreign losses accruing to them in that year, or any future tax year in which they remain not domiciled in the United Kingdom (whether or not they claim or use the remittance basis in those later years).[RDRM31170]

Capital Gains Manual
Rules for foreign capital losses for remittance basis users are given in 5 pages from CG25330 to CG25330D.

CG25330D contains an example, I made an Excel sheet to demonstrate it better.

Foreign-Losses-Excel Example CG25330DDownload

Main point to remember is:

Effect of the election is that losses (UK and foreign) are first adjusted against foreign gains not remitted (thus not taxable) before UK taxable gains. This will make tax payer pay higher taxes if their UK losses are adjusted against their foreign gains which they do not plan to remit to the UK.

Thus, it is important to make the capital Gains election in the first year of making remittance basis claim and secondly it may not be always beneficial to make this claim.

How Capital Allowance interact with Capital Gains Tax

This article explains how capital allowance effects capital gains calculations.

A common occurrence in trading businesses is sale of plant & machinery or vehicles used in the business. Rules shown below are applicable both in moveable and fixed plant & machinery.

Two scenarios could happen:

  1. Disposal proceeds are less than purchase cost – a loss (usual case)
  2. Disposal proceeds are less than purchase cost – gain

We will try to explain these scenarios, by way of an example.

We need to prepare two calculations – one for capital allowance (CA) and other for capital gains.

X is an individual trader for many years. He brings forward main pool expenditure of £40k. In year 1, he buys a van for £20k and a computer for £5k. He claims AIA on all expenditure. In year 2, he sells the van for £12k and the computer for £8k.

We have illustrated below, how these transactions will affect the Capital Allowance and Capital Gains calculations.

Capital Allowance calculation

Year 1                                                                          Main pool                                        
WDV b/fwd                                                                  40,000
Additions                                                                     25,000
AIA                                        25,000                                                              
                                                                                         40,000
WDV 18%                                                                       7,200                                                              
WDV c/fwd                                                                   32,800

Year 2
WDV b/fwd                                                                   32,800
Disposal value                                                             17,000 a
                                                                                          15,800
WDV 18%                                                                      2,844                                                              
WDV c/fwd                                                                   12,956

a. Disposal value = £12k (van) plus £5k (computer), as disposal value is restricted to original purchase cost.

Capital Gains Calculation

Capital gains is only applied on assets if sold above its original purchase price. Thus, van is ignored for Capital Gains.

                                                                                   Computer b         
Disposal proceeds                                                 8,000
Purchase cost c                                                        5,000
Unindexed Gain                                                      3,000
Indexation allowance (estimated)                 (500)
Indexed Gain                                                             2,500

Note:

b. Gain or loss is computed on each asset individually.
c. Capital allowance taken on assets are completely ignored. TCGA 1992 sec 41

Practice notes:

  1. We should keep note of each item added to the pool – date added/purchased and amount added. Date is important as companies get indexation allowance for items purchased before 31st December 2017. Usually, commercial tax filing software will have the facility to record assets individually and calculate indexation allowance.

Source:

  1. Book – Taxation by Alan Melville
  2. Book – Tolley’s Tax Guide para 22.19, 22.46 and 38.4

Bonus:
1. In case X sells a table to his friend for £1k (market value £2k). Disposal value will be £1k if his friend runs a trading business where he can claim Capital Allowances . In case his friend does not run a trading business and cannot claim Capital allowances disposal value will be £2k.

2. In case X gifts the table to his employee, disposal value will be nil. But tax maybe payable by employee under ITEPA 2003.

3. In case X gifts the table to his brother, disposal value will be £2k (market value).

See HMRC Manual CA23250 on disposal values.

Private residence relief in case of inherited property

PPR Relief on inherited property

In a recent case an individual died, say in 2016. His home was inherited by his two daughters Alice and Beatrice. In 2018, Alice moved in the house and started living there as her main residence.

In 2020 Alice bought the share of Beatrice to own the house fully. House was finally sold in 2022.

Question 1. Since which date will Alice get the private residence relief.

Answer: Alice will get the relief from 2018 when she moved in the house’ see Hector and Miss Kitka example on Tax café website. see also HS283 – section `Who qualifies for relief ` it states You’re also entitled to relief if you jointly own the freehold or lease with someone else.

Question 2. What will be the period of ownership for Alice.

Answer: It will be 2016. As under s222(7) TCGA92, where different interests are held at different times the period of ownership begins at the date of the first acquisition on which expenditure is incurred which would have been deductible in computing any gain. see CG64930