What on Earth is excess reportable income? We’re glad you asked because this little-known aspect of an investor’s tax obligations is easy to miss or get wrong.
In the following guide, we’ll explain what excess reportable income is, how to use it to calculate income tax due on your investments, how to ensure you’re not overpaying, and where it goes on your tax form.
Sounds like a chore? Yeah, we can think of better ways to spend an evening too.
So let’s start with a reminder that if all your affected funds are tucked inside a tax shelter – an ISA or a pension (SIPP) – then you don’t need to worry about filling in tax forms on this score at all. The whole concept is moot for you.
But please do read on anyway – if only to learn what you’re getting out of!
What is excess reportable income?
Excess reportable income is the amount of dividends and interest earned by an offshore reporting fund that isn’t otherwise distributed to investors.
This is additional income that can accumulate in your fund. And the taxman wants his slice.
Fund and ETF providers publish excess reportable income in annual documents that you can use to calculate your tax liability.
Offshore accumulation funds store up such reportable income instead of distributing it – but vanilla income funds can do so too.
(Incidentally, some people don’t think they owe tax on accumulated dividends and interest. That’s flat wrong.)
What is an offshore reporting fund?
Most funds that reside outside of the UK are designated ‘offshore’.
For example, Irish domiciled funds and ETFs, naturally enough, count as offshore.
A fund usually lists its domicile on its webpage or factsheet. You can also tell its home base by eyeballing its ISIN number. If that code doesn’t start with ‘GB’ then you’re almost certainly looking at an offshore fund.
Our piece on fund names explains more.
There are some obscure exceptions to the ‘non-UK fund = offshore’ rule. It’s a non-issue if you stick to index trackers but ask your fund manager if you want absolute reassurance.
Meanwhile, a reporting fund is an offshore fund that reports its income to HMRC (and presumably complies with a laundry list of other infernal demands).
HMRC maintains an approved list of offshore reporting funds.
Most offshore index trackers have reporting fund status. This is a good thing because without that you’d be stiffed for capital gains tax at income tax rates. Shudder.
Reporting fund status should be mentioned on your fund’s web page or factsheet. If it’s not, take that as a bad sign and a prompt to investigate further.
Using excess reportable income to calculate your tax
Fund providers typically compile excess reportable income figures on one large and fearsome document per year.
Find your fund on your provider’s list and note its:
Excess reportable income amount per unit / share
Fund distribution date
Last day of the reporting / account period
Equalisation amount / adjustment (if any)
The amount of income you potentially owe tax on is:
Excess reportable income per share multiplied by the number of shares you own on the last day of the reporting period.
Excess Reported Income per share = 0.237 GBP
No of shares owned = 100
So 0.237 x 100 = £23.70 – the total excess reportable income to be included on your tax return.
But wait! This figure may yet be affected by any equalisation payments you were entitled to.
Reduce tax with an equalisation adjustment
Some funds report an equalisation amount / adjustment. You can use this to reduce the amount of tax payable if you acquired new units or shares during the reporting period.
You apply the equalisation amount to any shares you bought between ex-dividend dates.
This equalisation amount may be listed in different ways.
For example, you may see a single figure listed for a particular reporting period. This is especially likely for accumulation funds.
Other times, a series of equalisation amounts may be recorded for every distribution date that an income fund declared during its reporting period.
In this instance, look for the equalisation amount entered for the first distribution date (or ex-dividend date) after each shares purchase you made during the reporting period.
Your total equalisation adjustment is:
The equalisation amount multiplied by the number of shares you purchased during the relevant period.
Tot up any applicable equalisation adjustments and deduct them from the taxable income you owe for that fund during the reporting period.
You can subtract your total equalisation adjustment from your excess reportable income first, then any distributions received, or vice versa.
It doesn’t matter if your excess reportable income and distributions fall into different tax years.
Equalisation payments may also make a difference to your capital gains tax.
Equalisation adjustments are essentially a non-taxable return of capital. They arise because you bought fund units for an asking price inflated by accrued dividends.
Effectively, the equalisation adjustment reclassifies the accrued dividend (that you have not benefited from) as a return of capital so that you don’t pay income tax on it.
Note, some funds do not provide equalisation payments.
Yes, there’s more
Excess reportable income is payable even if you bought your fund shares on the final day of the reporting period.
Your excess reportable income counts as being received on the fund distribution date. That date also determines the tax year that any tax liability falls due.
The fund distribution date may be different from other dividend distribution dates. This way, different tax years can apply to excess reportable income versus income paid directly as cash.
For income funds, you’ll owe tax on excess reportable income plus any cash distributions that are paid directly to you.
For accumulation funds, your excess reportable income amounts to your entire taxable income. That’s because actual cash distributions are zero.
The information you derive from an excess reportable income document should correspond to the numbers in your dividend statements for the same period. You don’t pay excess reportable income on top.
If your fund provides figures in a foreign currency then you can use any reasonable exchange rate to convert excess reportable income into GBP.
How excess reportable income is treated on your tax return
Excess reportable income should be entered on the foreign pages of HMRC’s SA106 tax return form. Other fund income is also entered here.
Your excess reportable income is returned as either a dividend distribution or an interest distribution – the latter applying to bond funds.
The fund provider will note whether your fund qualifies as a bond fund in its excess reportable income document.
In short, any vehicle counts as a bond fund if more than 60% of its assets generate interest.
Bond fund distributions are returned on the SA106 as interest in the section ‘Interest and other income from overseas savings’.
Equity fund distributions are returned on the SA106 as dividends in the section ‘Dividends from foreign companies’.
Dividends are taxed at dividend income tax rates.
Interest is taxed at your normal income tax rate.
HMRC advises entering an estimate of your excess reported income, if a fund manager hasn’t provided its income report before you file your tax return.
Excess reportable income and capital gains tax
Excess reportable income reduces your capital gains tax bill when you sell shares – just so long as you remember to subtract it from your proceeds.
Remember that you earn excess reportable income for any shares held on the last day of the fund’s reporting period.
Here’s an example of how to apply it to disposals:
Net proceeds: £20,000
Less acquisition cost: £10,000
Less excess reportable income: £500
Capital gain: £9,500
If you don’t subtract excess reportable income from a disposal then you’ll suffer a double tax charge: once at income tax rates and again as a capital gain.
Google your fund provider along with search terms like ‘Reportable Income’ or ‘Income Report’ or ‘Reporting Fund Status’ or ‘Investor Tax Report’ to find the information you need.
Not every fund will earn excess reportable income. But do check each investment you own every year.
Consult a tax expert
At this late stage, we should point out that we’re not tax experts here at Monevator and we can’t provide tax advice. We’re DIY investors combing through information in the public domain.
We heartily recommend you take advice from a tax professional if you’re in any doubt about what you’re doing.
And again, there’s no need to muck around with excess reportable income if all your offshore reporting funds are safely sheltered in your stocks and shares ISAs or a SIPP.
You can also duck the whole palaver by only investing in UK domiciled index funds.
Take it steady,
We’ll refer to funds throughout the rest of the article as a generic term that also includes ETFs.
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