The American fund you bought is taxed here at 45 per cent, not 24

Figures relate to tax year 2025-26 (UK) · 2025 (US)

Everybody knows that British funds cause trouble for Americans. The PFIC rules are notorious and most advisers raise them early.

Far fewer people know the problem runs the other way. A British investor who buys an American fund can find the eventual gain taxed as income rather than as a capital gain, at a materially higher rate.

What decides it is whether the fund has reporting fund status with HMRC. That status is a formality the fund either applied for or did not, and the consequence of the answer is substantial.

Key takeaways

• A fund outside the UK with reporting status gives capital gains treatment.
• Without it, the gain becomes an offshore income gain.
• Offshore income gains are taxed at income tax rates.
• The annual exempt amount does not apply to them.
• Capital losses cannot be set against them either.
• HMRC publishes a list of funds holding the status.
• Most large US ETFs are not on that list.

What is reporting fund status?

A designation a non-UK fund obtains by agreeing to report its income to HMRC each year, whether or not it distributes that income. According to GOV.UK guidance, HMRC maintains and publishes a list of the funds that currently hold it, updated regularly.

The point of the regime is to stop investors rolling up income inside an offshore fund and then converting it into a lower taxed capital gain on sale.

A fund with the status reports the income, you pay tax on it annually even if nothing is paid out, and the eventual disposal is an ordinary capital gain.

What happens without it?

The whole gain on disposal becomes an offshore income gain, taxed at your marginal income tax rate rather than at capital gains rates. For an additional rate taxpayer in 2025-26 that means 45 per cent instead of 24 per cent on residential-style rates or 24 per cent generally.

The annual exempt amount for capital gains does not apply. Neither do capital losses you hold elsewhere, which an ordinary disposal would have absorbed.

So the same economic profit produces a much larger bill purely because of the fund's administrative status.

A worked example

The figures below are illustrative. They use round numbers so you can follow each step and substitute your own.

Sarah lives in Manchester, pays tax at the higher rate and holds no American citizenship. She buys £50,000 of a large American exchange traded fund through a British platform.

She sells it years later for £80,000, giving a profit of £30,000. She assumes capital gains treatment and budgets accordingly.

The fund has no reporting fund status, so the entire £30,000 is an offshore income gain. At 40 per cent that is £12,000 rather than the £7,200 she expected at capital gains rates.

No annual exempt amount applies and the capital loss she holds elsewhere cannot offset any of it.

The two outcomes compared

The table shows what the status changes. The difference is entirely about the fund rather than about you.

Why are most US funds non-reporting?

Because applying for the status costs the fund manager money and administration, and American funds are generally marketed to American investors who care nothing about British tax treatment. There is simply no commercial reason to bother.

Irish and Luxembourg funds aimed at European investors routinely hold the status, because their target market needs it.

The result is a strong steer towards Irish domiciled products, which routinely carry reporting fund status for exactly this reason.

How do you check a fund?

Against the list HMRC publishes, which names every fund and share class currently holding the status. The check takes a minute and has to be done at share class level rather than fund level.

A fund can hold the status for some share classes and not others, which catches people who check the name and stop there.

Check before buying rather than before selling. By the time you are selling it is too late to do anything.

Does the status have to hold throughout?

For the whole of your holding period, yes. A fund that gained reporting status part way through your ownership does not cleanse the earlier years, and the gain apportioned to the non-reporting period remains an income gain.

The reverse is also true. A fund that loses the status taints your holding from that point onwards.

Check reporting fund status annually rather than once at purchase, particularly on positions you have held for years.

What about tax inside an ISA or pension?

Both wrappers solve the problem entirely, because there is no British tax on the gain in either. A non-reporting fund held inside an ISA produces no offshore income gain at all.

That makes the wrapper the simplest answer for a British investor who wants a specific American fund that lacks the status.

Platform availability is the practical constraint rather than the tax rules.

Does it affect Americans in Britain too?

Yes, and they face both regimes at once. An American living here holding an American fund escapes the PFIC problem on the American side but can still suffer an offshore income gain on the British side.

That combination surprises people who assumed holding American products solved everything. It solves the American half only.

Our guide to the ISA and PFIC problem covers the mirror image.

How is the annual income reported?

The fund reports its income per share to HMRC and makes the figures available to investors, usually on its website some months after the year end. You include the reported figure on your return whether or not any cash was distributed.

That excess reportable income is the price of the capital gains treatment. It is taxed annually and then added to your cost on disposal.

Forgetting to add it to cost means paying tax twice on the same amount.

What if you already hold a non-reporting fund?

Selling crystallises the income gain, so the question is timing rather than whether to accept the treatment. Spreading disposals across tax years can keep you below a higher rate band.

Transferring into an ISA is not possible directly, because an ISA takes cash rather than existing holdings. Selling and repurchasing inside the wrapper crystallises the gain first.

Take advice before selling a large position rather than afterwards.

Do US mutual funds and ETFs differ?

Not for this purpose. Both count as offshore funds from a British viewpoint, and both need reporting fund status to deliver capital gains treatment. The legal structure of the vehicle makes no difference at all to the answer.

The structure of the vehicle is irrelevant. What matters is whether somebody filed the application with HMRC.

A handful of American managers do maintain the status on specific share classes aimed at British investors.

Does it apply to individual shares?

No, and that distinction matters a great deal. Buying shares in an American company directly is an ordinary capital gains matter, with no offshore fund rules in sight and no reporting fund question to answer.

The regime catches collective investment vehicles rather than direct holdings. Somebody holding a portfolio of individual American shares avoids it entirely.

That is a real argument for direct holdings over funds where the amounts justify the administration.

What records do you need?

Purchase and sale contract notes, evidence of the fund's status for each year you held it, and the excess reportable income figures where the status applied. Those three let you compute the gain correctly.

The reportable income figures are published by the fund and are easy to miss. Platforms rarely supply them automatically.

Collect them each year rather than reconstructing a decade later.

What counts as an offshore fund?

Almost any pooled vehicle established outside Britain, whether it calls itself a fund, a company or a trust. The definition is deliberately wide, so labels offer no escape from the reporting fund question.

American mutual funds, exchange traded funds, Irish UCITS and Luxembourg SICAVs all sit inside it. So do many structures that do not look like funds at first glance.

If it pools money from several investors and sits abroad, assume the rules apply until you check.

Does it affect income distributions too?

Distributions are taxed as income either way, so the status changes nothing there. Dividends from the fund are dividend income and interest distributions are interest, exactly as you would expect.

What the status changes is the treatment of the eventual gain on disposal. That is where the whole difference sits.

People sometimes assume a fund paying dividends must be fine. Payment of income says nothing about the status.

Can a platform tell you the answer?

Some do and many do not. Larger British platforms often flag reporting fund status in the fund factsheet, while others leave it to you entirely and some simply do not stock non-reporting funds.

Treat any platform indication as a starting point rather than as authority. The HMRC list is the record that counts.

Where a platform offers a fund freely, that is not confirmation of its status.

What happens on death?

The usual capital gains uplift on death does not rescue a non-reporting holding, because the charge is on income rather than on gains. An offshore income gain can still arise for the estate.

That makes these holdings worth reviewing as part of any estate planning rather than leaving them to executors to discover.

Our guide to a US executor of a UK estate covers the wider administration.

Is there any relief at all?

Very little once the gain arises. There is no annual exempt amount, no loss relief and no lower rate, which is what makes the charge so unforgiving compared with an ordinary disposal.

The only genuine lever is timing. Realising across two tax years can keep part of the gain inside a lower band.

For 2025-26 the additional rate of 45% applies above the top threshold, so the spread between bands is worth planning around.

How does it interact with a bed and ISA?

Badly, because selling to fund the subscription crystallises the offshore income gain first. You cannot move an existing holding into the wrapper without making a disposal, and that disposal carries the full income charge.

The wrapper then protects everything afterwards, so the question is whether the one-off charge is worth paying to stop the problem growing.

On a small holding it usually is. On a large one the sums need running.

How to check before buying

1. Identify the exact share class you intend to buy.
2. Search the HMRC list for that specific class.
3. Confirm the status covers the current period.
4. Check whether an Irish domiciled equivalent exists.
5. Compare the total cost including any platform charges.
6. Decide whether an ISA or pension wrapper is available.
7. Record the status check with your purchase papers.
8. Recheck the status annually while you hold it.

Mistakes and penalties we see with reporting fund status

The first is assuming all funds are taxed alike. The difference between the two columns is the gap between income tax rates and capital gains rates.

The second is checking the fund name rather than the share class. Status attaches at class level and the two can differ.

The third is ignoring excess reportable income on a fund that does hold the status. It is taxable annually and adds to your cost.

The fourth is checking only at purchase. Status can be lost, and a long holding needs an annual look.

How US UK Tax Accountants helps

We check status at share class level across a portfolio and tell you where an offshore income gain is building up. Where it is, we model the timing of disposals against your rate bands.

For Americans in Britain we run both regimes together, because a product can be clean on one side and expensive on the other. Our PFIC reporting service covers the American half.

If you hold American funds through a British platform, get in touch before selling anything substantial.

Last reviewed 14 October 2026. This article is general information and not personal tax advice. Every portfolio turns on its own facts, so take advice on yours before dealing.