The content contained in this article is for information purposes only and does not constitute as financial or investment advice. If you are unsure of the treatment of a transaction, we encourage you to seek the appropriate advice.
With more and more investors having a holding in offshore funds, excess reportable income (ERI) is becoming an increasingly pressing issue for taxpayers, advisers and wealth managers alike. ERI can be a challenging area of tax and there are significant consequences for those who fail to get it right.
HMRC will fine investors up to 200% of the tax due, plus interest and potential late payment penalties, if their ERI information is missing or recorded incorrectly on a tax return. But finding the right information isn’t always easy.
Funds aren’t required to provide ERI data in a standardised way and the information that is there isn’t always accessible or up to date. At Raw Knowledge, we make reporting ERI easier by arming the financial services industry with high-quality, traceable data and helping them determine their taxable income and gains.
Below we’ve used our 25 years of experience in the financial services industry to explain some of the trickier areas of ERI to get right.
Click to jump to a specific question:
In which tax year should I report ERI?
UK investors are subject to tax on ERI if they hold the investment on the last day of the fund’s reporting period. Generally, a fund’s reporting period corresponds with its accounting period, which can be found on its financial statements, but every fund is different so it’s important to check.
ERI is deemed to have been distributed to investors six months after the end of the fund’s reporting period. This ‘deemed disposal’ date is when ERI is treated as being earned for UK tax purposes.
So, if the end of a fund’s reporting period was 31 December 2024. An investor with a holding in the fund would receive an ERI distribution on 30 June 2025 and would therefore record this in their 2025/26 tax return.
What if I sold shares on the same day as the reporting period end-date?
The key thing to understand here is that an investor’s ERI obligation is calculated by reference to their holding at the end of the day, not at the start of the day.
This means that an investor would not necessarily be obliged to report ERI if they had sold all their shares in a fund on the last day of the fund’s reporting period. Likewise, an investor would be obliged to report ERI for a fund’s full period even if they had only acquired their holding on the last day of the reporting period.
What if I sold my shares then bought them back around the reporting period end-date?
If you sold shares but then bought them back within a 30-day period around the reporting period end-date, you will need to calculate ERI as if you continued to hold the shares at the reporting period end-date.
This is because the capital gains tax (CGT) 30-day rule states that units bought within 30 days after units in the same fund were sold are treated as if they were the same units.
The rule – known as share matching – was introduced by HMRC back in 1998 to stop investors from resetting the base value of their assets in order to reduce their CGT liability. This strategy is known as ‘bed and breakfast’ share dealing.
So, if on 29 December an investor were to sell units in a fund whose period ends 31 December and then buy units in the fund again on 5 January, their ERI would be calculated as if they had never sold those reacquired units.
Why is there ERI on this fund when it has already paid out cash?
Let’s take a look at a simplified ERI calculation: a fund’s ERI figure is its gross income received minus any expenses and income paid.
If there is a non-zero ERI rate, then an investor will have to pay ERI. They can work out the amount they owe by multiplying the fund’s ERI figure by the number of shares they held at the end of the last day of the fund’s reporting period.
Even if a fund has paid cash out to investors, if it publishes a document saying there is ERI on top of that then a UK investor will have to report both the cash paid and the ERI on their tax return.
It’s also important to remember that what one jurisdiction calls income and expenses is not necessarily the same thing as under the UK reporting fund regime.
This means that it is possible to see an incredibly low ERI rate for a fund because, according to its governing country’s law, it has paid all its income but, according to UK law, it hasn’t. As a result, an investor could be left with an ERI rate of 0.00001 per share which, though small, would still need to be paid and reported on a UK tax return.
Is ERI applicable to foreign taxpayers?
ERI is specific to UK tax regulation, therefore if a taxpayer is resident abroad and never lives in the UK, they do not need to worry about ERI.
When it comes to UK taxpayers who are non-UK domiciled, ERI is called ‘relevant foreign income’. If this relevant foreign income is not remitted by the non-UK domiciled taxpayer, then there will be no UK tax due. However, if the taxpayer does remit amounts derived from the fund to the UK, then it will come under the usual tax rules.
The new, residence-based regime for foreign income and gains
It is important to note that from April 2025, a residence-based regime will apply to the 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.
A Temporary Repatriation Facility will be available for individuals who have previously been taxed on the remittance basis. This will allow individuals to designate amounts derived from previously untaxed and unremitted FIG that arose prior to 6 April 2025, and pay a reduced tax rate. Past remittance basis users will also – for disposals on or after 6 April 2025 – be entitled to rebase a personally held foreign asset for capital gains tax (CGT) purposes.
Our sister company, Financial Software Ltd (FSL), has further detail about the new regime, if you’re looking for more information.
What is income equalisation and how does it work?
When an investor buys units in a fund between its dividend payment dates, they will generally pay a higher price. This is because the fund will still hold the income generated by its investments that it will eventually use to make a payout.
If a fund elects to operate on an income equalisation arrangement, when the dividend payment date rolls around, all investors will receive the same dividend per unit.
For investors who bought units before the previous dividend payment, they will receive a dividend made up of income earned by the fund. For investors who bought units afterwards, the dividend payment will be generated from two different sources.
New investors’ dividends will be partly made up of income generated by the fund’s investments and partly by an equalisation payment. This equalisation payment is a return of the investor’s higher purchase price.
Equalisation aims to ensure fairness to investors who were invested in the fund long before the new investor came in. It is considered a return on an investment and not income. Therefore, investors that receive an equalisation payment need not worry about taking it into account when reporting ERI.
However, taxpayers can choose to deduct an equalisation payment from actual distributions paid in the period or from the ERI calculated in that period.
