tax on dividends for individual shares vs EFTs

[petronius]

This has probably been discussed ad nauseam, but do I understand right that dividend taxation in UK is more favourable for those holding individual shares than those holding ETFs (and other funds), as for ETFs and funds dividends are treated as income and not subject to dividend allowance and band-dependent rates of 7.5% (basic), 32.5% (higher), 38.1% (additional)?

Moderator Message:
Wrong board not for hyp practical. Moving to tax board. Raptor

[Alaric]

This has probably been discussed ad nauseam, but do I understand right that dividend taxation in UK is more favourable for those holding individual shares than those holding ETFs (and other funds), as for ETFs and funds dividends are treated as income and not subject to dividend allowance and band-dependent rates of 7.5% (basic), 32.5% (higher), 38.1% (additional)?

Depends on the fund, but an equities OIEC is taxed in exactly the same way as if you held the individual stocks. In your Tax Return you put them in a separate box, but that's as far as it differs. ETFs are probably taxed the same as individual shares, but their domicile in Ireland can introduce the odd complication.

You could read this
viewtopic.php?f=49&t=2361
for some of the reporting complications that may arise with Dublin based ETFs.

That was a fund which accumulated dividends into the price, rather than distributing them.

[petronius]

Thanks, but I am still a bit confused. It seems that, for ETFs, dividends are treated as income for tax purposes.

For instance, Vanguard UK (https://www.vanguardlearning.co.uk/docu ... fs-and-tax) says:

Dividend payments on ETFs will be taxed as income at the investor’s tax rate, just as with income from a traditional fund.

This seems to me rather different from how dividends from individual shares are treated.

From https://www.gov.uk/government/publicati ... -factsheet

You’ll pay tax on any dividends you receive over £5,000 at the following rates:

7.5% on dividend income within the basic rate band
32.5% on dividend income within the higher rate band
38.1% on dividend income within the additional rate band[/i]

[helfordpirate]

This seems to me rather different from how dividends from individual shares are treated.

That is a somewhat confusing statement in the Vanguard document! Probably because it is trying to encompass two different types of income - dividends and interest.

If your ETF is an equity fund i.e. it is invested in shares say in the UK or US, then income received from it is treated as a dividend. It is treated just like a dividend received from a single share at the rates you describe and is subject to the dividend allowance. The only complication is that most/all ETF are not UK-based, usually Ireland, so if you are completing a SA tax return you enter the dividend in the foreign pages. (There is also "excess reportable income" to check- see other threads.)

If your ETF is a fixed interest fund i.e. it is invested in say UK gilts, then income received from it is treated as interest just like interest from a bank. The interest is received gross. This is obviously not like a share but it is the same (nearly!) as income received from holding a bond.

In this respect ETF income is treated the same as income from normal funds which is the same as individual shares provided they are equity funds.

[petronius]

Thanks HP, this helps clarify the picture. So if the ETF is 100% in shares the total dividends are treated as those from an individual share - this makes sense.

I guess the situation gets more complicated for mixed-asset ETFs, such as Vanguard LifeStrategy...

[helfordpirate]

I guess the situation gets more complicated for mixed-asset ETFs, such as Vanguard LifeStrategy...

The rule for OEIC and ETF (generally) is that if the asset value of the fund is made up of 60% or more of interest producing assets then the distributions are taxed as interest otherwise dividends. There is no mixing of the two.

(The rules for ETF organised as FCP eg. some France or Lux based Lyxor ETF, are different I believe. The fund is treated as transparent and the interest and dividends received from the underlying assets are treated as being in the hands of the investor in the quarter they are received by the fund. A reporting nightmare!)