Excess Reportable Income (ERI)

Excess Reportable Income, or ERI, is taxable income you may need to declare even if a fund you invest in did not pay you a cash distribution.

Many semi-liquid funds on the Wealth Club platform are HMRC-approved offshore reporting funds. If these funds earn more income during the fund’s reporting year than they distribute to investors, that undistributed income is ERI. This undistributed income is normally retained and reinvested within the fund and can be reflected in the fund’s net asset value (NAV).

Each reporting fund calculates its ERI annually and publishes the figures after the end of its reporting year. Investors then need to report ERI on their self-assessment tax return for the relevant tax year (see example timeframes below).

HMRC treats ERI as if it has been received by the investor for tax purposes. Thus, if you invest in an offshore reporting fund, you may be liable to UK income tax on ERI, even if you have not received distributions.

The type of income depends on the fund:

• Dividend income for equity-type funds (broadly, those that invest less than 60% of their assets in cash or interest-bearing investments, such as bonds)
• Interest for bond or debt-type funds (broadly, those that invest more than 60% of their assets in cash or interest-bearing investments, such as bonds)

ERI from offshore reporting funds is usually reported as foreign income or interest and is subject to your marginal rate of tax, after any applicable allowances (such as the dividend allowance or personal savings allowance).

To help avoid a double tax charge, investors can generally add any ERI that has been subject to income tax to the base cost of their holding when calculating any capital gain on disposal, reducing the gain on which CGT may be payable.

The ERI is treated as arising on the fund’s distribution date, six months after the end of its reporting year. The figures are usually published by the fund within four months of the distribution date. You are responsible for reporting ERI on your tax return for the relevant tax year.

ERI is published as an amount per unit/share. You generally work out the ERI you need to declare by multiplying the ERI per unit by the number of units you held at the end of the reporting year.

Here’s how this applies based on when you bought the units/shares:

• If you bought the fund in a previous reporting year: you may have ERI for each reporting year where you hold units at the end of that reporting year. Each reporting year is assessed separately.
• If you buy part way through the reporting year: you can still have ERI for that year, because the calculation uses the units you hold at the year-end (even if you did not hold them for the full year).
• If you sell part way through the reporting year: you generally only have ERI based on the units you still hold at year-end. If you sell all your units before the year end, you would not usually have ERI for that reporting year (because you hold zero units at the end date).
• If you sell after the reporting year end but before the fund distribution date: you can still have ERI for that year, because ERI is worked out by reference to holdings at the year end, and then treated as received on the fund distribution date (6 months after the year end).

To enter the total ERI you have received on your tax return, you need to know:

• The ERI amount per unit or share
• The number of units you held at the end of the reporting year

If you invest via the Wealth Club platform, we will confirm the fund’s published figures to you in time for your self-assessment tax return.

To avoid double taxation, in many cases, any ERI that has already been taxed should be added to your acquisition cost when calculating capital gains tax on disposal. This reduces the taxable capital gain (or increases any allowable loss).

If you invest in an offshore reporting fund via a SIPP, there is not normally any UK income tax to pay on the ERI and you would not normally need to declare it on your tax return.

A non-reporting fund is an offshore fund that does not have reporting fund status for a particular period of account. This is more likely to be the case for bond funds.

The main difference – compared to reporting funds – is that on disposal of their holding there is no ERI to report. You will be liable to tax on any gain arising as if it were income (that is, an offshore income gain, or ‘OIG’) instead of as a capital gain.