Tax status of ETFs.

[gryffron]

Hi,
I have some cash in my AJBell trading account. Non-ISA, Non-SIPP, so tax reporting. Want to buy some trackers but AJBell charge holding fees for ITs. Never used ETFs before. A few questions if I may. I can't seem to find any simple answers anywhere.

Most ETFs seem to be based in RoI, or Germany. Why? How is this treated for tax? Are dividends foreign income or UK income? Is there any foreign tax to pay or declare? That would put me right off.
1) For dividends.
2) For CGT
3) For IHT.

Thanks,
Gryffron

[genou]

Hi,
I have some cash in my AJBell trading account. Non-ISA, Non-SIPP, so tax reporting. Want to buy some trackers but AJBell charge holding fees for ITs. Never used ETFs before. A few questions if I may. I can't seem to find any simple answers anywhere.

Most ETFs seem to be based in RoI, or Germany. Why? How is this treated for tax? Are dividends foreign income or UK income? Is there any foreign tax to pay or declare? That would put me right off.
1) For dividends.
2) For CGT
3) For IHT.

Thanks,
Gryffron

Germany? Mostly RoI / Luxembourg. It's internal tax on the ETF/ access to Double Taxation treaties that drive this AFAIK. They all have multiple share classes, with the different classes listed on different markets. So you want a class listed in London. There may be a UK listed class quoted in sterling and also a UK listed class quoted in non-sterling ( mostly USD ). Which ever way you go you are likely to get dividends in USD - but at AJB they'll automatically convert to GBP as they don't do multi-currency accounts.

Dividends are foreign income for UK purposes. The ETF may well be paying foreign tax, but you'll see none of that . Just a dividend to report in the UK. If your dividends get over two grand you must use the foreign pages, otherwise you don't need to.

For CGT / IHT it's just a normal share. There may well be the complexity of Excess Reportable Income, but that's fairly trivial.

Decent background explainers here https://www.vanguardinvestor.co.uk/inve ... nformation

[monabri]

From https://www.gov.uk/tax-foreign-income

"Foreign income is anything from outside England, Scotland, Wales and Northern Ireland. The Channel Islands and the Isle of Man are classed as foreign"

I would check the ISIN (12 digits) , if it does not begin with "GB" then I'd say it is "foreign".

In a non tax sheltered account, you can currently earn up to £2000 in dividends before having to fill in a tax return. This limit is reducing to £1000 next tax year and then further to £500 in subsequent years.


https://www.justetf.com/uk/news/passive ... he-uk.html



so, if you were investing in "Equities" (in a non ISA account), then there is a consideration on dividend tax and CGT. I would bet that there is also IHT considerations to consider "at the end of the day/Game Over"!


Then there is Excess Reportable Income - as mentioned above.

[mike]

Hi,
I have some cash in my AJBell trading account. Non-ISA, Non-SIPP, so tax reporting. Want to buy some trackers but AJBell charge holding fees for ITs. Never used ETFs before.

If it is the holding charge that is pushing you in the ETF direction, AJ Bell charge a holding fee for both ITs and ETFs

[gryffron]

If it is the holding charge that is pushing you in the ETF direction, AJ Bell charge a holding fee for both ITs and ETFs

Yes mike, But shares&ETFs are capped at £42pa - which I'm already at. The OEICS charge doesn't max out until £875pa. That's a hell of a difference! 0.25% holding fee doubles the cost of many trackers.

@monibri. Thanks. I'd found that graphic. I expected to pay UK taxes. More worried about whether there were any foreign tax issues?

Gryff

[JohnB]

You want GBP denominated, and "UK reporting" ETFs. Domicile in Ireland/Luxembourg is not a problem, and indeed most of the big ETFs providers (Vanguard, Fidelity, Blackrock, HSBC etc) on UK broker sites will be there. Generally your broker will split dividends into UK and foreign. The tax treatment is the same for both, as tax is not deducted at source. US index tracking ETFs do deduct withholding tax at source, but you can't do anything about that. Capital gains all in GBP are easy, just make sure you have INC rather than ACC units for ease of calculation.

[mc2fool]

If it is the holding charge that is pushing you in the ETF direction, AJ Bell charge a holding fee for both ITs and ETFs

Yes mike, But shares&ETFs are capped at £42pa - which I'm already at. The OEICS charge doesn't max out until £875pa. That's a hell of a difference! 0.25% holding fee doubles the cost of many trackers.

@monibri. Thanks. I'd found that graphic. I expected to pay UK taxes. More worried about whether there were any foreign tax issues?

Gryff

Yeah, but you said "ITs" in your OP, which is what prompted Mike's response. You, of course, meant UTs/OEICs....

As noted by others, the dividends will be foreign income for UK tax purposes but the tax rates for foreign and UK dividends are the same, so the only difference that makes is which box you put it into in your self assessment return. And as others have also noted there may well be the complexity of Excess Reportable Income.

The big thing to look out for is that the ETF (indeed, any non-UK collective) has UK Reporting Fund Status. If it doesn't then all returns -- both income (dividends) and capital gains when you sell -- are taxed as income at your marginal rate (20%/40%/45%). If it does then dividend and capital gains are taxed separately in the normal way. All (?) of the ETFs from the big players do have UK Reporting Fund Status.

[Lootman]

The big thing to look out for is that the ETF (indeed, any non-UK collective) has UK Reporting Fund Status. If it doesn't then all returns -- both income (dividends) and capital gains when you sell -- are taxed as income at your marginal rate (20%/40%/45%). If it does then dividend and capital gains are taxed separately in the normal way. All (?) of the ETFs from the big players do have UK Reporting Fund Status.

In that regard it is generally viewed that having everything taxed at your marginal income tax rate is a bad thing. And so non-reporting funds are looked down upon.

However they can be advantageous if, at some future time, you will be in a lower UK tax bracket. This might happen when you retire for example. Or, if you plan to emigrate in the future then your marginal UK tax rate might then be zero!

And in such cases you could be better off holding non-reporting funds as, in at least some cases, they make no interim or regular distributions of income or gains, and therefore there is no tax event until you eventually sell. Effectively the non-distributing type of funds are a tax deferral vehicle.

Note: US-listed ETFs do have to pay out dividends annually, but don't usually distribute gains. Funds from some other jurisdictions may elect to make no distributions, and instead roll up the added value.

[absolutezero]

Long and short of it.

Foreign dividend section on the tax return and the irritant ERI calculations to do.
So I avoid ETFs unless tax sheltered.

I tend to seek out UK domiciled investment trusts that track the index as closely as I can* for my non tax sheltered accounts.

So in my case, the JP Morgan American IT (JAM) is a good proxy** for the S&P500 and City of London IT (CTY) is a good proxy** for the FTSE 100.

Select 'equity' in this graph plotter. https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/v/vanguard-ftse-uk-equity-income-index-accumulation/charts Then punch in CTY, VUKE, VUSA and JAM and notice the similarities.

* There is a higher fee to pay for an actively managed IT compared with a passive ETF but I consider that money well spent for tax simplification.
** No guarantee that will stay the case but it has so far.

[gryffron]

Thanks for the comments. ETFs do look to be a bit of a pain outside of tax protected holdings.

Yeah, but you said "ITs" in your OP, which is what prompted Mike's response. You, of course, meant UTs/OEICs....

You are correct. Mea culpa.

Gryff

[JohnB]

But your alternatives are ITs and OEICs, which tend to have higher costs, both for regulatory and historic reasons. And the daily pricing of OEICs is a pain if you want exact transactions, while ETFs have instant prices.

[GeoffF100]

Foreign dividend section on the tax return and the irritant ERI calculations to do.
So I avoid ETFs unless tax sheltered.

You are not being very clear here, but it is worth pointing out that foreign domiciled open ended funds also have ERI, but the rules are different from those for ETFs. Vanguard has lots of Ireland domiciled OEICs. Any fund that is foreign domiciled has ERI whenever it does not distribute all its reportable income.

[absolutezero]

Foreign dividend section on the tax return and the irritant ERI calculations to do.
So I avoid ETFs unless tax sheltered.

You are not being very clear here, but it is worth pointing out that foreign domiciled open ended funds also have ERI, but the rules are different from those for ETFs. Vanguard has lots of Ireland domiciled OEICs. Any fund that is foreign domiciled has ERI whenever it does not distribute all its reportable income.

Not sure what's not "very clear" about that.
ETFs are a faff if held outside an ISA or SIPP because of tax return reasons.
Sermon ends.