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Paying tax on Accumulation ETFs

Practical Issues
CleverClogs
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Joined: January 12th, 2021, 3:24 pm

Paying tax on Accumulation ETFs

#376284

Postby CleverClogs » January 12th, 2021, 3:45 pm

I feel like a right fool... so I organised my portfolio so (I thought) my dividend ETFs would use up my £2000 dividend allowance and for other investments (the majority) I chose Acc ETFs. I thought that would make life easier and I'd only ever pay CGT on sales where my net gains exceeded the annual CGT allowance.

How naive I was. Since then I have learned that HMRC taxes dividends received by Acc funds incl. ETFs whether or not they are paid out. The bad news however was a reply to a question asked of Interactive Investor as to whether they state these "notional dividends" in their annual tax report. They said "no, they do not"... it is up to me to research this information myself it seems. The good news however is that notional dividend tax should be deducted from the gain when the ETF (or fund) is sold, so perhaps there is some hidden benefit.

The immediate issue appears to be that notional dividends appear not to be published in any easily accesible place. Unless any of you Lemon Fools have come across a Web site with this information? Ideally one would search using the 4 digit short codes that ii use. I've checked a few fund manage sites and reviewed ETF documentation and if the info is there is is well hidden!

So it seems I can't simply (is it ever simple?) use my ii tax report to input into my tax return, as I invest monthly, it seems I will have to do a whole load of Excel calculations to come up with a dividend for each Acc ETF.

If you have any helpful experience on this subject, please do share it. With thanks

Gengulphus
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Re: Paying tax on Accumulation ETFs

#376324

Postby Gengulphus » January 12th, 2021, 5:39 pm

No personal experience, I'm afraid, but it might help people help you if you said which ETFs you need to know about.

Gengulphus

Lootman
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Re: Paying tax on Accumulation ETFs

#376346

Postby Lootman » January 12th, 2021, 7:39 pm

Not a direct answer to your question but over the years I have come to adopt the following rules about holding funds (other than investment trusts) in a taxable account:

1) Never hold accumulating units since it complicates the determination and declaration of dividends. It also complicates the determination of the eventual capital gain since your cost basis keeps increasing.

2) For similar reasons do not reinvest your dividends manually, or automatically if available.

3) ETFs also have the problem of excess reportable income, especially accumulating ETFs. These are usually tiny amounts but not universally.

4) Avoid monthly or regular investments in the same fund, again due to complexity.

If I really want to do any of the above, I do it in a tax-sheltered account. If you follow these rules then the consolidated tax certificate should accurately represent your dividend income and you can simply copy it onto your tax return, or hand it to your accountant, as appropriate.

Ordinary shares are much simpler as you only really need to worry about the occasional corporate action.

doug2500
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Re: Paying tax on Accumulation ETFs

#376347

Postby doug2500 » January 12th, 2021, 7:40 pm

I doubt you're alone, it took me years to learn that. I often wonder how much tax is missed due to people just not knowing stuff rather than trying to evade. I wonder how many people don't realise that it's their responsibility to do a tax return if needed? Anyway I don't think it's unreasonable to expect any dividends subject to tax to appear on a CTV.

I ended up deciding it was easier to hold inc funds than keep track of dividends. Not that it's that difficult and if you're investing regularly you could view it as just another couple of entries a year, or maybe it's a complication too far.

doug2500
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Re: Paying tax on Accumulation ETFs

#376348

Postby doug2500 » January 12th, 2021, 7:43 pm

And then there's 'Group 2' units, don't get me started on them. Maybe you don't get them with ETFs?

CleverClogs
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Joined: January 12th, 2021, 3:24 pm

Re: Paying tax on Accumulation ETFs

#376628

Postby CleverClogs » January 13th, 2021, 3:28 pm

Thanks for the responses so far... I'm still looking for a solution and starting to email the ETF managers to ask.
So some examples as requested by Gengulphus:
    LGGG L&G Global Equity UCITS ETF (GBP),
    SWDA iShares Core MSCI World UCITS ETF USD (Acc),
    CSP1 iShares Core S&P 500 ETF USD Acc GBP,
    XDPG Xtrackers S&P 500 UCITS ETF 2C GBP hedged,
    CS51 iShares Core EURO STOXX 50 UCITS ETF (Acc),
    SJPA iShares Core MSCI Japan IMI UCITS ETF,
    EMIM iShares plc MSCI Emerging Markets IMI (EMIM).

And thanks Lootman for sharing your set of rules. I might well adopt similar once I've extracted myself from this mess!

Doug2500, I too suspect many are simply paying this tax. A tempting tactic and with no numbers on the CTV, that is of course a credible excuse.

Charlottesquare
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Re: Paying tax on Accumulation ETFs

#376662

Postby Charlottesquare » January 13th, 2021, 4:36 pm

Just to mention, holding these in companies can have weird and wonderful tax implications (getting taxed on unrealised gains) so holding them via private limited company ownership is often best avoided. (FRS102 and financial instruments)

CleverClogs
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Re: Paying tax on Accumulation ETFs

#378374

Postby CleverClogs » January 18th, 2021, 4:05 pm

OK, so I've made some progress. Go onto the fund provider's Website and seek out a document with a title something like this "Report of income for UK tax purposes Xtrackers IE (plc)" or with Vanguard it was called "UK Reporting Fund Status (UKRFS)". In some cases it was suggested I use the financial advisor Website, which I assume has more detailed information. With Xtrackers select the "IE" version if your ETF/s are domiciled in Ireland.

These reports appear to be produced annually and list all ETFs with UK Reporting status. In the report look for "Excess of reportable income over distributions" (or similar) and the "Fund distribution date". Check currency is as expected for your ETF listing.

Xtrackers document explains clearly....For UK tax purposes, you are treated as receiving income on the "Fund distribution date". You should therefore include this income in your [UK] tax return for the tax year which includes that date. The amount of income treated as received by you will be the "Excess of reportable income over distributions" for the applicable ETF, multiplied by the number of shares you held on the "Fund distribution date" stated.

So for example If I held 100 of Vanguard FTSE 250 UCITS ETF (Acc) at 31/12/20 my reportable income would be 100 x £0.8438 = £84.38 which I am pretty sure I would include on my tax return under Overseas Dividends.

Witholding tax will have been paid by the ETF in countries where individual dividends originated where this is applicable, but is not stated on the above documents, And my understanding is that the double taxation treaty benefits are not passed on to individuals when the investments are held in ETFs/funds, so I guess we put £0 in the Witholding Tax box on our tax returns or leave it blank.

daveh
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Re: Paying tax on Accumulation ETFs

#378511

Postby daveh » January 19th, 2021, 8:35 am

CleverClogs wrote:
So for example If I held 100 of Vanguard FTSE 250 UCITS ETF (Acc) at 31/12/20 my reportable income would be 100 x £0.8438 = £84.38 which I am pretty sure I would include on my tax return under Overseas Dividends.

Witholding tax will have been paid by the ETF in countries where individual dividends originated where this is applicable, but is not stated on the above documents, And my understanding is that the double taxation treaty benefits are not passed on to individuals when the investments are held in ETFs/funds, so I guess we put £0 in the Witholding Tax box on our tax returns or leave it blank.


Also note there is one specific date each year when you need to be holding the ETF for you to have to report the ERI to HMRC. If you are not holding the ETF on that date there is no ERI to report - even if you held the ETF for the other 365 days of the year. So for VVAL I noted in my spreadsheet that I needed to sell before the end of June to avoid having any ERI to report.

CleverClogs
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Joined: January 12th, 2021, 3:24 pm

Re: Paying tax on Accumulation ETFs

#378566

Postby CleverClogs » January 19th, 2021, 11:37 am

Many thanks DaveH, that looks like a nice strategy and with just one ERI PA, and careful timing, it allows one to hold the Acc. ETF for a useful time period. I'll set reminders in my diary!

So it seems my options are:

1. Sell the day before the ERI holding date*, and repurchase the same ETF soon after that dater - avoids dividend tax, CGT liability delayed due to 30 day rule (the cost is the spread and risk is time out of the market)
2. Sell just before ERI holding date, and on the same day~ buy an alternative ETF with a similar exposure from a different fund manager - avoids dividend tax, and crystalises my potential CGT liability (cost is spread and potentially a more costly fund)

* I have a slight concern that prices might be deflated and then inflated if a lot of us are doing this around the same dates!
~ I noted that ERI holding dates vary by fund manager. For instance end-June and end-Dec.

Alaric
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Re: Paying tax on Accumulation ETFs

#378578

Postby Alaric » January 19th, 2021, 12:51 pm

daveh wrote:Also note there is one specific date each year when you need to be holding the ETF for you to have to report the ERI to HMRC.


It's a gap in the legislation that ETF holders need to do their own research. If ETFs were under OEIC rules,, the OEIC manager would be required to report the taxable amount and platforms to pass this on to the individual holders. If the aggregate from all ETF holdings and other dividends is under £ 2,000 there's no tax to pay anyway and only a marginal impact on potential CGT liabilities in the holder's favour if ignored.


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