tax on "total return"

Bazn

Hi,

I've been looking at putting some money into ETFs... and DB X-trackers look pretty attractive...

however i have a question about taxation that maybe dunstonh or one of the other regulars might be able to help with...

Many of the ETFs are "total return" products, which mean they track a total return index inclusive of dividends. so i assume they don't pay dividends.

but what is the tax treatment of such funds? are the dividends effectively tax-free, as i don't receive them?

(btw, the situation with unit trust "acc" class is clear that you DO have to pay income tax, but these "TRN" ETFs seem different...)

please can someone shed any light on this?

Bazn

hmm does nobody know?

Blah99

It depends on the ETF, some pay dividends and some don't. If the ETF pays dividends then they are taxed (or not, etc) in the normal way. If the ETF doesn't pay dividends but keeps the dividends it receives from its asset basket and reinvests, then you don't pay tax on that because you haven't realised a taxable gain from that. The gain is reflected in the ETF's price, which is only taxed when you sell it.

Does that make sense? Obviously I've skipped over the specific tax rules that may or may not apply, but...
.

cirius12

I think you may have a very good point and I have been thinking about this myself. If you invest in a trn etf, then you seem to pay no tax on dividends since they are not distributed. Instead the dividends net of any witholding tax in the country of residence of the etf are rolled up in the total return. If you sell shares to realise the accumulated dividend component, it seems that you pay tax under CGT rules, which is far more beneficial than paying tax on the dividends. But you have to make sure that the etf has distributor status in the UK, otherwise all gains will be charged as income and taxed accordingly. But I am far from being an expert and I may have got all this wrong. HELP please!

Richard_DandR

It may depend on whether it has distributing fund status (as an offshore fund).

http://www.hmrc.gov.uk/offshorefunds/dist_fundlist.htm

Gains on funds without distributing status would be taxed as income, I believe.