The Lemon Fool

Are the payments from bond ETFs and bond funds (OEICs) treated differently? It would appear that the dividends from ETFs are treated as dividends and subject to dividend taxation but that the payments from funds are treated as interest and taxed as such. Is my understanding correct?

I wish it was simple, it is not.
https://techzone.abrdn.com/public/inves ... ollectives

https://techzone.abrdn.com/public/investment/Guide-Taxation-of-Collectives#:~:text=Where%20the%20market%20value%20of%20the%20fund%20is%C2%A0made%20up%20of%C2%A0more%20than%2060%25%20of%20cash%20or%20fixed%20interest%20securities%20such%20as%C2%A0gilts%20or%20corporate%20bonds%2C%20the%20fund%20will%C2%A0be%20classed%20as%20a%20non%2Dequity%20fund%20and%20income%20is%20treated%20as%20interest.

https://techzone.abrdn.com/public/investment/Guide-Taxation-of-Collectives#:~:text=Where%20the%20fund%27s%20market%20value%C2%A0derives%20from%C2%A060%25%20or%20less%20in%20cash%20or%20fixed%20interest%2C%20the%20fund%20will%20be%20classed%20as%20an%20equity%20fund%20and%20income%20will%20be%20treated%20as%20a%20dividend%20distribution.

AshleyW wrote:Are the payments from bond ETFs and bond funds (OEICs) treated differently? It would appear that the dividends from ETFs are treated as dividends and subject to dividend taxation but that the payments from funds are treated as interest and taxed as such. Is my understanding correct?

No. They are taxed in much the same way, but the full story is very complicated, and depends on the domicile and reporting status of the funds. Here are some of the details:

https://monevator.com/bonds-and-bond-funds-taxed/

https://www.vanguardinvestor.co.uk/inve ... nformation

Further to the answers given, income from funds that primarily hold bonds is interest.

Excess Reportable Income( ERI) from ETFs may arise in an ETF that pays dividends or interest income , ie it's an extra thing to report. Clearly ERI is going to occur in an Accumulation ETF where income is reinvested.

There is a twist with ETFs that the income is deemed to have been paid 6 months after the last day of the reporting period of the ETF, Vanguard are easy as the reporting period is the last day of June and is deemed to be paid last day of December, both are in the same tax year. However some ETFs have a reporting period that ends in February and thus the payment is deemed to have been paid in August, in a different tax year !

The income for the year is all or nothing, it is based on how many units you hold on the reporting date, not how many you held over the period or for how long.

If you bought a Vanguard Accumulation ETF on 29 th June and sold it first July then you would be liable to tax for a whole years dividends, if you bought it 1st July and then sold the following June 29th , you would have held it for almost a year and pay no tax on the reinvested income.

Given the above and the complications of ETFs that do not hold Reporting Status ( capital gains taxed as income) if at all possible hold ETFS in a tax free ISA or SIPP for a simpler life.

Thanks for everyone’s replies. I am still confused because in 2022/3 I had a general account holding (IWeb) of Ishares Global Aggregate Bond ETF Income (not accumulation).

I was expecting the dividends to be put under “Overseas Interest” as the ETF is 100% bond but on the annual Composite Tax Certificate they are categorised as Overseas Dividends and therefor I assume that’s how they will be reported to HMRC. As I haven’t used up the £1000 interest tax allowance I would obviously prefer to report the income as interest as I have exceeded the £2k annual dividend allowance.

AshleyW wrote:Thanks for everyone’s replies. I am still confused because in 2022/3 I had a general account holding (IWeb) of Ishares Global Aggregate Bond ETF Income (not accumulation).

I was expecting the dividends to be put under “Overseas Interest” as the ETF is 100% bond but on the annual Composite Tax Certificate they are categorised as Overseas Dividends and therefor I assume that’s how they will be reported to HMRC. As I haven’t used up the £1000 interest tax allowance I would obviously prefer to report the income as interest as I have exceeded the £2k annual dividend allowance.

My understanding is that the distributions and ERI of that fund are taxed as interest. It does not matter if iWeb calls the interest a dividend. They are inclined to do that. They should send the tax certificate to HMRC, who should be able to use that to check your numbers.

AshleyW wrote:Thanks for everyone’s replies. I am still confused because in 2022/3 I had a general account holding (IWeb) of Ishares Global Aggregate Bond ETF Income (not accumulation).

I was expecting the dividends to be put under “Overseas Interest” as the ETF is 100% bond but on the annual Composite Tax Certificate they are categorised as Overseas Dividends and therefor I assume that’s how they will be reported to HMRC. As I haven’t used up the £1000 interest tax allowance I would obviously prefer to report the income as interest as I have exceeded the £2k annual dividend allowance.

https://www.justetf.com/uk/news/passive ... he-uk.html
It should all be interest income as it is a Bond ETF.

air04 wrote:

AshleyW wrote:Thanks for everyone’s replies. I am still confused because in 2022/3 I had a general account holding (IWeb) of Ishares Global Aggregate Bond ETF Income (not accumulation).

I was expecting the dividends to be put under “Overseas Interest” as the ETF is 100% bond but on the annual Composite Tax Certificate they are categorised as Overseas Dividends and therefor I assume that’s how they will be reported to HMRC. As I haven’t used up the £1000 interest tax allowance I would obviously prefer to report the income as interest as I have exceeded the £2k annual dividend allowance.

https://www.justetf.com/uk/news/passive ... he-uk.html
It should all be interest income as it is a Bond ETF.

If the fund did not have reporting status distributions and capital gains would be taxed as income. In this case, it does have reporting status:

https://www.ishares.com/uk/individual/e ... rough=true

(Assuming that is the OP's fund.)

I believe the income should be reported as "foreign " based on the ISIN. If the fund's ISIN starts with the letters 'IE' it is domiciled in Ireland....thus, foreign ("overseas")



ISIN
https://en.wikipedia.org/wiki/Internati ... ion_Number

monabri wrote:I believe the income should be reported as "foreign " based on the ISIN. If the fund's ISIN starts with the letters 'IE' it is domiciled in Ireland....thus, foreign ("overseas")

ISIN
https://en.wikipedia.org/wiki/Internati ... ion_Number

Foreign dividends up to £2,000 can be reported as UK dividends on your tax return.