ETFs outside of wrappers - "excess reportable income"

[Aminatidi]

First world problem but I have too much cash so as well as holding in ISA wrappers I have some IT and OEIC holdings unwrapped with Hargreaves Lansdown.

Around £50K as I expect the amount is relevant.

I've read mixed opinions and articles around how wise or foolish it is to hold ETFs in unwrapped accounts as many seem to have "Excess reportable income" as a possible issue.

I'm normal PAYE with normal savings in the bank and only started investing last year so have never had to think about things like tax returns.

Is "Excess reportable income" something that I need to be concerned with at this point, or does it only come into play if/when I go over the £2K dividend allowance in a tax year?

Very few platforms mention this which is frustrating.

[Alaric]

Is "Excess reportable income" something that I need to be concerned with at this point, or does it only come into play if/when I go over the £2K dividend allowance in a tax year?

Very few platforms mention this which is frustrating.

I believe it's only taxable if you exceed the dividend limit. The problem is that unlike dividends, very few, if any, Brokers actually report it, whilst on dividends they are required by law to send an annual statement. It's also quite elusive on ETF websites. I'm not sure when and why it arises. I think I tracked it down on my one and only taxable ETF, but it said it was zero.

[Aminatidi]

Is "Excess reportable income" something that I need to be concerned with at this point, or does it only come into play if/when I go over the £2K dividend allowance in a tax year?

Very few platforms mention this which is frustrating.

I believe it's only taxable if you exceed the dividend limit. The problem is that unlike dividends, very few, if any, Brokers actually report it, whilst on dividends they are required by law to send an annual statement. It's also quite elusive on ETF websites. I'm not sure when and why it arises. I think I tracked it down on my one and only taxable ETF, but it said it was zero.

Tell me about it.

There is a site here which lists funds that suffer from this https://www.kpmgreportingfunds.co.uk/Ho ... icInvestor

You try to do the right thing and then you find that as a normal Joe it's pretty much impossible to understand

[Hariseldon58]

In taxable accounts ensure the ETF has reportable status, if not gains are taxed as income. ( Holding these in a tax sheltered account is sensible)

Some ETFs do not distribute income and are thus like accumulation units in an OEIC/unit trust.

The regular distributions/dividends are taxed as foreign income but are otherwise like regular dividends.

Excess reportable income (ERI) is shown on the website of the provider but may not be that easy to find, but it is getting better.

The ERI may be substantial if it is the accumulating version of an index like the FTSE or it may be trivial / zero.

Even ETFs that hand out regular dividends may also pay out some ERI but the amounts are often very small and one might be tempted to ignore it !

The biggest wrinkle is that the ERI is deemed to be paid six months after the end of the accounting period. ERI applies if you hold the shares on the accounting date, if you bought the ETF the day after and sold it the day before the end of the next accounting year then you have no ERI despite holding it for nearly 12 months, on the other hand buy the day before the accounting period and sell the day after , you report a years income on a holding you had for a couple of days.

The next wrinkle is that if the accounting date is less than 6 months before the tax year end, the income is deemed to fall in the following tax year ! So you might sell a holding and have to remember to report income for it in the following tax year.

Not strictly an ETF only problem but those that contain REITs declare different types of income...( best held in a tax sheltered account)

I would suggest that accumulation ETFs are best held in a tax sheltered account... in particular those that have accounting dates of March 31st ( State Street do this) when the income appears in a different tax year. Vanguard and iShares are much simpler, reporting and deemed distribution date is in the same tax year and calendar year.

This all sounds dreadful but it’s not that bad, for your taxable account avoid one holding REITs, accumulation shares and make sure it has reporting status. The ERI in these cases is often very small and if you ignored it on smaller holdings then I think you would not be alone....

[JoyofBrex8889]

Thank you Hariseldon for such a well written explanation of a complex area. Much appreciated!

[Villa]

Would anyone be able to clarify why a distributing ETF would have excess reportable income. Why would it not have distributed it all?
An explanation would be appreciated.

[Alaric]

Would anyone be able to clarify why a distributing ETF would have excess reportable income. Why would it not have distributed it all?
An explanation would be appreciated.

I dug this footnote out of a Vanguard document.

Excess of reportable income over distributions is the amount of income reported per share in excess of cash distributions paid to shareholders in respect of the profits of the period.

It doesn't say why they don't just distribute the lot. Being offshore funds (ETFs are usually domiciled in Ireland) I suspect they aren't allowed to just add it to capital without falling foul of UK tax law in some other way. Using the words "profits of the period", could this relate to profits from stock lending?

[mc2fool]

Would anyone be able to clarify why a distributing ETF would have excess reportable income. Why would it not have distributed it all?
An explanation would be appreciated.

I dug this footnote out of a Vanguard document.

Excess of reportable income over distributions is the amount of income reported per share in excess of cash distributions paid to shareholders in respect of the profits of the period.

It doesn't say why they don't just distribute the lot. Being offshore funds (ETFs are usually domiciled in Ireland) I suspect they aren't allowed to just add it to capital without falling foul of UK tax law in some other way. Using the words "profits of the period", could this relate to profits from stock lending?

Ok, but then what happens to it (the "excess" income)? Is it then rolled into the capital value of the ETF and you add it into the base cost for CGT purposes, as one does with the nominal income from accumulation units? Or .... ?

[Hariseldon58]

The income arises in a period of 12 months, income is distributed over a 12 month period but there is a question of monies coming in from potentially thousands of holdings, these accumulate and will sent out as dividends every 6 months, 3 months and even monthly, there will be taxes paid, fee expenses etc.

The question is of timing, the dividends are typically lagging the current flow of income and the ERI represents the settling of the books over the accounting period, thus the amount is typically small. For the average small investor, not holding accumulation shares, it's not a big issue.

I do not understand why the brokers are permitted not to send this information out as a matter of course, conventional accumulation unit trusts in a taxable account lead to complexities but brokers provide this information.

I should have added in my earlier post that, for accumulating ETFs, the ERI adds to your base cost for CGT purposes.

[Alaric]

I do not understand why the brokers are permitted not to send this information out as a matter of course, conventional accumulation unit trusts in a taxable account lead to complexities but brokers provide this information.

Why do ETFs suffer this problem and not OEICs or Unit Trusts? Is there some tax concession from long ago that applies to domestic funds but not international ones? ITs for example have their special tax rule that they only need to distribute 85% of their income to avoid any tax consequences to holders on the excess.

[Hariseldon58]

On the size of ERI for an ETF that distributes income in a taxable account, I took a look at my tax info for last year and my largest amount of ERI was £45 on a £90k holding that distributes about £2,000 in regular dividends, so about 0.05% or around 2% of the actual dividend.

The accumulation ETFs that I hold were paying ERI of over a £1,000 a different order of magnitude but I would not be surprised if ERI is under reported on a huge scale !

In respect of the question why not OEICs or Unit Trusts, ETFs are almost invariably foreign income and they started from a low base and I suspect the revenue has been slow to catch up, I read this time last year that the revenue was going to get tough on this and compel brokers to provide the information but I suspect the B word has distracted them...

[mc2fool]

The income arises in a period of 12 months, income is distributed over a 12 month period but there is a question of monies coming in from potentially thousands of holdings, these accumulate and will sent out as dividends every 6 months, 3 months and even monthly, there will be taxes paid, fee expenses etc.

The question is of timing, the dividends are typically lagging the current flow of income and the ERI represents the settling of the books over the accounting period, thus the amount is typically small. For the average small investor, not holding accumulation shares, it's not a big issue.

Uh? Are you saying the the amount of the ERI in, say, this year will be distributed by being added onto a dividend the next year?

[Hariseldon58]

Uh? Are you saying the the amount of the ERI in, say, this year will be distribute d by being added onto a dividend the next year?[quote="

My understanding is that the fund has an amount of income in a fund tax year and if that exceeds the distribution then that income is reported.

I suspect that the excess is carried forward and perhaps added to the capital or used against costs, clearly it won’t be taxed again. It is an unruly structure at this level...

Some ETFs have no ERI and clearly can handle the matter with less complication. I personally would avoid any without reporting status , holding REITs or accumulation units in a taxable account for an easy life.

[EthicsGradient]

The biggest wrinkle is that the ERI is deemed to be paid six months after the end of the accounting period. ERI applies if you hold the shares on the accounting date, if you bought the ETF the day after and sold it the day before the end of the next accounting year then you have no ERI despite holding it for nearly 12 months, on the other hand buy the day before the accounting period and sell the day after , you report a years income on a holding you had for a couple of days.

The next wrinkle is that if the accounting date is less than 6 months before the tax year end, the income is deemed to fall in the following tax year ! So you might sell a holding and have to remember to report income for it in the following tax year.

If the ERI is in a foreign currency, do you use the exchange rate for the accounting date (when you held the shares), or at the 'fund distribution date', 6 months later?

I half wish I'd never seen this topic, and would then try to plead ignorance if HMRC never noticed. There was me thinking ETFs that paid out income would make a capital gains return easy. Now I find out I have to include this in both an income return (though my broker gives me no help in working it out), and (if I want to use my full allowance) on a capital gains return too.

[scrumpyjack]

There is as I recall an old maxim - 'de minimis non curat Lex' = The law does not concern itself with trivia.

If reputable brokers like Hargreaves Lansdown have not put this on your tax certificate as something to be reported to HMRC, I think the chances of HMRC querying your return on this issue are about as close to zero as is possible!

[EthicsGradient]

There is as I recall an old maxim - 'de minimis non curat Lex' = The law does not concern itself with trivia.

If reputable brokers like Hargreaves Lansdown have not put this on your tax certificate as something to be reported to HMRC, I think the chances of HMRC querying your return on this issue are about as close to zero as is possible!

So when I've used the KPMG site linked to above, I do find the potential tax for 3 Vanguard ETFs I hold is tiny - under a pound, and zero for an iShares ETF. However, I also have the Xtrackers MSCI Emerging Markets Index ETF, and it turns out to have about 1.5% excess reported income a year, so effectively it's an accumulation ETF. Buried in the prospectus I can find a warning, applying to all Xtracker ETFs, that they might have excess income, but nothing in the annual report of what it was, or in the key documents for the ETF that it's something to look out for with this particular fund.

I've held it for 8 years, so probably should have been reporting this "income" all that time. I hold it in Interactive Investor, who note in the small print of their annual consolidated tax voucher, that it doesn't include excess income like this, and that I'm on my own for finding out if there is any. Emerging markets having not done brilliantly over the past 8 years, it turns out a significant part of the capital gain I thought I had for it was actually income, but I should have paid income tax on it, I suppose (this goes back into the earlier notional tax credit days, but I'd guess, being offshore, that didn't apply).

[Lootman]

There is as I recall an old maxim - 'de minimis non curat Lex' = The law does not concern itself with trivia.

If reputable brokers like Hargreaves Lansdown have not put this on your tax certificate as something to be reported to HMRC, I think the chances of HMRC querying your return on this issue are about as close to zero as is possible!

I've held it for 8 years, so probably should have been reporting this "income" all that time. I hold it in Interactive Investor, who note in the small print of their annual consolidated tax voucher, that it doesn't include excess income like this, and that I'm on my own for finding out if there is any. Emerging markets having not done brilliantly over the past 8 years, it turns out a significant part of the capital gain I thought I had for it was actually income, but I should have paid income tax on it, I suppose (this goes back into the earlier notional tax credit days, but I'd guess, being offshore, that didn't apply).

But presumably that income was still paid out - just not in the tax year that it should have been. In year two, the deferred income from year one was paid out, whilst income due for that year was partly deferred into year three. And so on.

In other words the only real tax you failed to pay was for the first year of ownership. So any "phantom" capital gain you are seeing is just the amount of deferred income from the last tax year.

I agree with Scrumpyjack that HMRC are unlikely to care about this, partly because the amounts involved are generally small. And also because it's really more a question of paying that tax in a later year anyway. The phenomenon defers just some of the tax on some of the income.

All that said I prefer to put any securities that are "messy" into a tax-sheltered account. This includes not just ETFs but also REITs and foreign holdings.

[EthicsGradient]

But presumably that income was still paid out - just not in the tax year that it should have been. In year two, the deferred income from year one was paid out, whilst income due for that year was partly deferred into year three. And so on.

In other words the only real tax you failed to pay was for the first year of ownership. So any "phantom" capital gain you are seeing is just the amount of deferred income from the last tax year.

I agree with Scrumpyjack that HMRC are unlikely to care about this, partly because the amounts involved are generally small. And also because it's really more a question of paying that tax in a later year anyway. The phenomenon defers just some of the tax on some of the income.

All that said I prefer to put any securities that are "messy" into a tax-sheltered account. This includes not just ETFs but also REITs and foreign holdings.

No, that ETF hasn't paid any income out; it's all been retained, every year. They run it, effectively, as an accumulation fund, but the amounts liable to tax aren't widely reported At 1.5% each year, I suspect HMRC would rather have known about it. Once you know what to look for, you can find a PDF from DWS saying what, if anything, the excess income is for each of their ETFs, but I would have had no idea without this thread. It reads like something they send to customers who get paper reports ("If you are not subject to UK taxation, you may ignore this notice..."), but I haven't been able to find anything saying "check here".

Yes, if I'd known about this 8 years ago, I probably would have put this in an ISA, rather than 'naked', as I started doing around then with accumulation OEICs, when I realised capital gains had become significant for me, and the hassle of working out those out.

[hiriskpaul]

I have always added excess reportable income into my costs for the CGT calculation. In other words I have assumed it is not paid out at a later date. For income paying ETFs, the amount is immaterial, but there are accumulating ETFs for which the excess reportable income certainly is not immaterial.

I hold a couple of US listed Vanguard ETFs outside tax wrappers, which have UK reporting status, and I cannot ever remember the excess reportable income being anything other than zero. I think this is because the US authorities insist on ETFs paying out all income, which makes things nice and easy. The UK authorities allow this excess reportable income regime instead, which is more flexible as it allows for accumulating ETFs, but that flexibility comes at the price of annoying complexity.

[hiriskpaul]

The biggest wrinkle is that the ERI is deemed to be paid six months after the end of the accounting period. ERI applies if you hold the shares on the accounting date, if you bought the ETF the day after and sold it the day before the end of the next accounting year then you have no ERI despite holding it for nearly 12 months, on the other hand buy the day before the accounting period and sell the day after , you report a years income on a holding you had for a couple of days.

The next wrinkle is that if the accounting date is less than 6 months before the tax year end, the income is deemed to fall in the following tax year ! So you might sell a holding and have to remember to report income for it in the following tax year.

If the ERI is in a foreign currency, do you use the exchange rate for the accounting date (when you held the shares), or at the 'fund distribution date', 6 months later?

I half wish I'd never seen this topic, and would then try to plead ignorance if HMRC never noticed. There was me thinking ETFs that paid out income would make a capital gains return easy. Now I find out I have to include this in both an income return (though my broker gives me no help in working it out), and (if I want to use my full allowance) on a capital gains return too.

I have always used the fund distribution date to do the FX conversion. I don't recall checking this with HMRC, but they have never questioned it.