Excess Reportable Income on Accumulation ETFs

[Ilikebeer]

Hi,
I've just started investing in vanguard S&P 500 acc through invest engine. This is for any additional funds on top of ISA allowance which I max out. The plan is to invest for the next 12 years or so and sell down to be able to retire a year or so before taking Pension at 57 / 58 (under current rules).

I've just seen some older posts about Excess Reportable Income. I don't want any extra admin as I don't currently fill out a tax return. Would I be better off putting any excess money in an investment trust that doesn't pay dividends? The amounts won't be huge, a few k a year..

Thanks

Nick

[GeoffF100]

If your dividend income is less than £2,000, you do not have to fill in a tax return (unless you have to for some other reason).

[swill453]

Notional dividends in accumulation ETFs form taxable income when not protected in an ISA or SIPP. This makes the admin harder than the non-accumulation version.

This is not "Excess Reportable Income" though, that's something different.

Scott.

[GeoffF100]

Notional dividends in accumulation ETFs form taxable income when not protected in an ISA or SIPP. This makes the admin harder than the non-accumulation version.

That is true for OEICs and Unit Trusts, but not for ETFs. With ETFs you have to declare any Excess Reportable Income for both the distributing and the accumulating versions. With the distributing version, you also have to declare the distributed income. You do not have to do that with the accumulating version, which makes the admin for the accumulating version slightly easier. Nonetheless, as I have said, you do not have to declare anything if your total dividend income is less than £2,000.

[kempiejon]

If your dividend income is less than £2,000, you do not have to fill in a tax return (unless you have to for some other reason).

If your dividend income is above £2000 you do not have to fill in a tax return. You can contact HMRC to adjust your tax code or pay the bill.
This year is the first tax year when I will not have a dividend tax liability. I've paid by debit card using their online chat facility or by an adjustment to my tax code.

[Ilikebeer]

Thanks for your replies. Divi income unlikely to be above 2 k I will leave as is ☺️

[JohnB]

Outside a tax shelter like an ISA or SIPP, you need to worry about income and capital gains tax. ACC units make this more complicated. For income you need to delve into the fund report for dividend figures. For capital gains you can't just look at the initial and final values to define your gain, as its muddled by the dividends.

Be wary of investing too frequently, as it makes the admin harder. Buy the INC version of the fund, and when it pays out its dividend quarterly, reinvest it adding in your extra contribution. For capital gains, record the number of units and the price each time. When you come to sell half the fund 10 years later, you will need to calculate the "average purchase price" for those 40 transactions, and apply it to the half holding you dispose of. You can't argue you are selling shares purchased in years 1-4 to make the calculation easier, they are all pooled.

What I've done is invest in one tracker of an index for a few years, and when the gain is about £12k, sell it all and reinvest in a different tracker of the same index. Different trackers avoid the "Bed and Breakfast" rule, which the OP should be aware of. (Well actually I've got £70k of gains which will take years to sort out, damn rising markets)

Brokers offer automated contributions and automatic dividend reinvesting at a reduced rate. This is fine for SIPP or ISA, but an an accounting nightmare for unsheltered holdings

[Hariseldon58]

An accumulation ETF is not an Accumulation fund. Income is treated as foreign dividend income on your tax return, the income will show up as Excess Reportable Income, the income is reported once a year at the end of the accounting period, your yearly income depends on the number of shares you hold on that day and you are deemed to receive it six months later.

So its only one event per year, you knock the income off your cost basis and report /not report depending on upper overall dividend income. Vanguard make it fairly easy to find the tables of figures relevant to your holding. The good news with Vanguard is that they keep the reporting year end towards the beginning of the tax year, so reporting date and payment date fall in the same tax year. ( Some others have the reporting date in March, such that your holding at a date in one tax year is then deemed to receive taxable income in a following tax year)

It’s a bit of a faff but shouldn’t put you off. The above is my understanding over quite a few years and I believe it to be correct, I have checked it numerous times but happy to be corrected.

[GeoffF100]

Outside a tax shelter like an ISA or SIPP, you need to worry about income and capital gains tax. ACC units make this more complicated. For income you need to delve into the fund report for dividend figures. For capital gains you can't just look at the initial and final values to define your gain, as its muddled by the dividends.

OEICs have INC and ACC units, but ETFs do not. For income OEICs, you have to account for equalisation for each purchase when the next dividend arrives when working out capital gains. For accumulating ETFs, you add the Excess Reportable Income to the CGT base cost. (That avoids double taxation of the Excess Reportable Income.) The easiest admin is probably that for the accumulating ETF. The accumulating ETFs will, however, usually have wider spreads than the distributing versions.

[JohnB]

If the OP is an index investor, they should stick to ETFs and avoid OEICs. The latter are priced daily rather than a spot price, have complications like equalisation (when faced with 40 slips of paper with equalisation numbers of a M&G re-investing OEIC I took out years ago, I just ignored them and was cautious with the capital gain numbers), and brokers often charge higher fees for them.

ETFs tend to come in pairs, INC and ACC, so the OP might see

VANGUARD FUNDS PLC S&P 500 UCITS ETF USD ACC (GBP) (VUAG)
VANGUARD FUNDS PLC S&P 500 UCITS ETF USD(GBP) (VUSA)

hl.co.uk is a good place to look for them

[GeoffF100]

It is worth adding that my comment regarding OIECs apply to UK domiciled OEICs. Some of the Vanguard OEICs are domiciled in Ireland, and have yet another set of tax rules applying to them.

OEICs do have some plus points. Unlike ETFs cannot go to a discount or premium to Net Asset Value. Swing pricing may work to your advantage, and even if it does not, the price hit may be less than half the ETF spread.

If you are putting a lot of money into an unsheltered fund, you need to be very confident that it will not be wound up at some point in the future, presenting you with a large CGT bill. Stay away from niche funds. Look for a fund with a large market capitalisation, and, if it is an ETF, a large capitalisation for the share class.

[Ilikebeer]

Thanks again for the comments... So if I invested in an investment trust that had no or limited dividends instead would this remove the problem? Then I would just need to work out average cost price when selling and calculating the gain? Just trying to keep things as easy as possible....

[Alaric]

. Would I be better off putting any excess money in an investment trust that doesn't pay dividends? The amounts won't be huge, a few k a year..
k

You would have difficulty finding any. As said earlier you don't have a tax liability unless the dividend exceeds £ 2000 a year. Excess Reportable Income can be a complete pain, basically because there's no onus on the Broker or ETF to tell you what it is. That contrasts with holding OEICs in accumulation unit form where at least they are required tp tell you what you have notionally earned tp be potentially taxed on.

[GeoffF100]

Thanks again for the comments... So if I invested in an investment trust that had no or limited dividends instead would this remove the problem? Then I would just need to work out average cost price when selling and calculating the gain? Just trying to keep things as easy as possible....

Yes, but you will be paying a lot more in costs within the fund.

[GeoffF100]

Excess Reportable Income can be a complete pain, basically because there's no onus on the Broker or ETF to tell you what it is.

The ETF manager must report Excess Reportable Income to retain the fund's reporting status. As has been said, it is easy to find the Excess Reportable Income for Vanguard funds, but some of the other fund managers make it more difficult.

[Alaric]

The ETF manager must report Excess Reportable Income to retain the fund's reporting status.

Unlike OIECs there doesn't seem any requirement to report actual amounts at a holding by holding level. Given the minimal amounts involved it's perhaps a surprise that there isn't lobbyimg to scrap the ERI taxation concept, for income distributing ETFs at the very least, There's no requirement to pay dividend tax on retained dividends in Investment Trusts.

[EthicsGradient]

If we use the principle that the tax tail shouldn't wag the investment dog, then we should be looking at ways of investing in the S&P 500, which the thread starter has chosen. For tax, the simplest way to do this would be an income-paying OEIC tracking the S&P 500 (or an investment trust that tracks the index, but I'm not sure if there are any of those). The income yield from the S&P 500 isn't that large, so will hopefully stay under the income tax reporting requirement, and there's no extra records to keep for capital gains computation (which an accumulation OIEC, or an ETF, would involve) when it's all sold in 12 years or so - it's just the occasion(s) when you buy it.

OEICs can be competitive with ETFS for ongoing charges if you find the right one - Morningstar has a fund screener that allow you to sort by ongoing charge, and then you can check the minimum investment amount is OK for you (some are institutional and require huge investments).

[GeoffF100]

The ETF manager must report Excess Reportable Income to retain the fund's reporting status.

Unlike OIECs there doesn't seem any requirement to report actual amounts at a holding by holding level. Given the minimal amounts involved it's perhaps a surprise that there isn't lobbyimg to scrap the ERI taxation concept, for income distributing ETFs at the very least, There's no requirement to pay dividend tax on retained dividends in Investment Trusts.

ERI has to be reported on a per shares basis. You just multiply by the number of shares to get the value for a holding. There is no ERI for offshore funds that have distributor status. Vanguard ETFs only have reporting status.

[Ilikebeer]

Thanks again for all the replies. I think based on this I will open an account with free trade and invest in Smithson. I really don't want the hassle of additional paperwork or reporting, just an investment I can add to over the next few years and then start to sell down pre retirement.. I can always invest in the S& P in my SIPP or ISA.

[Lootman]

Thanks again for all the replies. I think based on this I will open an account with free trade and invest in Smithson. I really don't want the hassle of additional paperwork or reporting, just an investment I can add to over the next few years and then crystallise pre retirement.. I can always invest in the S& P in my SIPP or ISA.

Yes, my rule of thumb is that any investment with a non-standard tax treatment goes in my ISA.

That includes ETFs, foreign holdings and REITs.

Plus anything that I believe is likely to undergo corporate actions.