Investment income arising outside the UK

[bstrides2]

I gain a small amount of income, primarily in the form of dividends and interest, from two US mutual funds. The funds are held in dollars and any income gained is re-invested in them. I am UK a resident and domiciled here also (the funds date from when I was previously working in the US). What is my tax liability for the income from these? Should I declare it on my UK tax return or should I be paying US income tax instead?

[Lee Young]

I suspect there will some form of tax being withheld in the US in any event, but certainly they should be declared on your UK tax return. You will receive credit for the overseas tax, but may have to pay further UK income tax to discharge your liability to your marginal rate.

[tax me less!]

Lee Young is correct to assume that if you have told the mutual fund family that you are a non-resident alien that they may well withhold taxes in the US.

However, the UK will charge tax on the distributions (including capital gains distributions). The main drawback to holding this kind of investment is that the UK regards these as non-approved offshore funds so they are subject to the offshore income gain rules. These mean that any gains on sale are charged to income tax at your UK marginal rate with no taper relief and no annual capital gains tax exemption.