Tax Implicitations On IShares Fixed Income

Joey122

Does anyone know what the tax implications on this are

I have bought some Isxf http://uk.ishares.com/en/rc/funds/ISXF which is an equity traded on the LSE but which holds fixed income bonds.

They are also based in Dublin

Does anyone know whether dividends are taxable and whether you get the dividend is already tax deducted???

Finally does the dividened paid by ishares include a portion that they have paid to HMRC? Do you need to claim this back if you dont pay tax ?? ISA for example

Californication

From the prospectus:

All Funds are “offshore funds” for the purposes of the Income and Corporation Taxes Act 1988. iShares Barclays
Euro Aggregate Bond, iShares Barclays Euro Corporate Bond, iShares Barclays Euro Corporate Bond 1-5, iShares
Barclays Euro Corporate Bond ex-Financials, iShares Barclays Euro Corporate Bond ex-Financials 1-5, iShares
Barclays Euro Government Bond 5-7, iShares Barclays Euro Government Bond 10-15, iShares Barclays Euro
Treasury Bond, iShares Barclays Euro Treasury Bond 0-1, iShares Barclays Global Aggregate Bond, iShares
Citigroup Global Government Bond, iShares FTSE Developed World ex-UK, iShares FTSE Gilts UK 0-5, iShares
iBoxx £ Corporate Bond ex-Financials, iShares MSCI Emerging Markets SmallCap, iShares MSCI Europe ex-EMU,
iShares MSCI GCC Countries ex-Saudi Arabia, iShares MSCI Japan SmallCap, iShares S&P SmallCap 600 and
iShares € Covered Bond are “distributing funds” and will seek certification as distributing funds under the UK tax
legislation. Accordingly for such distributing funds, any distribution will be treated for UK tax purposes as income
but any gain arising on a disposal of shares (for example, by way of transfer or redemption) will normally
constitute a capital gain for all purposes of United Kingdom taxation. As certification is currently granted
retrospectively it cannot be guaranteed that such certification will be granted for any particular period, or will
continue to be available for future accounting periods.

and

United Kingdom Taxation
It is the intention of the Directors to conduct the affairs of the Company so that it does not become resident in
the United Kingdom for taxation purposes. Accordingly, and provided that the Company does not carry on a
trade in the United Kingdom through a permanent establishment situated there, the Company will not be subject
to United Kingdom corporation tax on its income or chargeable gains.
Subject to their personal circumstances, Shareholders resident in the United Kingdom for taxation purposes may
be liable to United Kingdom income tax or corporation tax in respect of any dividends or other income
distributions of the Company (including Redemption Dividends (see page 38) and any dividends funded out of
realised capital profits of the Company). There is no withholding by the Company for Irish tax on dividends
payable to United Kingdom investors on the basis that it is the current intention that all shares will be held in
CREST or in another “recognised clearing system” (see previous section headed “Irish Taxation” for further
details).
When United Kingdom resident individuals receive dividends from United Kingdom companies, there is a nonrefundable
tax credit equivalent to 10% of the dividend plus the tax credit, which may be offset against their
liability to tax. Finance Bill 2009 extends, from 22 April 2009, the eligibility for the non-refundable tax credit to
UK resident individuals in receipt of dividends from the Company. However, where the Fund holds more than
60% of its assets in interest bearing (or similar) form, any distribution will be treated as interest in the hands of
the UK individual investor. This means that no tax credit will be available and the relevant tax rates will be those
applying to interest.
It is the intention of the Company to seek the following statuses for iShares Barclays Euro Aggregate Bond,
iShares Barclays Euro Corporate Bond, iShares Barclays Euro Corporate Bond 1-5, iShares Barclays Euro
Corporate Bond ex-Financials, iShares Barclays Euro Corporate Bond ex-Financials 1-5, iShares Barclays Euro
Government Bond 5-7, iShares Barclays Euro Government Bond 10-15, iShares Barclays Euro Treasury Bond,
iShares Barclays Euro Treasury Bond 0-1, iShares Barclays Global Aggregate Bond, iShares Citigroup Global
Government Bond, iShares FTSE Developed World ex-UK, iShares FTSE Gilts UK 0-5, iShares iBoxx £ Corporate
Bond ex-Financials, iShares MSCI Emerging Markets SmallCap, iShares MSCI Europe ex-EMU, iShares MSCI GCC
Countries ex-Saudi Arabia, iShares MSCI Japan SmallCap, iShares S&P SmallCap 600 and iShares € Covered
Bond:
- UK Offshore Fund Distributor Status
- German Tax Transparent Status
- Austrian Grey/ White Status
It is the intention of the Company to seek the following statuses for iShares DJ Euro STOXX 50 (Acc), iShares
Global Inflation-Linked Bond, iShares MSCI Emerging Markets (Acc), iShares MSCI Europe (Acc), iShares MSCI
Japan (Acc), iShares MSCI Pacific ex-Japan, iShares MSCI World (Acc) and iShares S&P 500 (Acc):
- German Tax Transparent Status
- Austrian Grey/ White Status
Investors should refer to their tax advisors in relation to the implications of the Fund obtaining such status.
Chapter V Part XVII of the Income and Corporation Taxes Act, 1988 (“ICTA”) provides that if an investor resident
or ordinarily resident in the United Kingdom for taxation purposes holds a “material interest” in an offshore fund,
and the fund does not qualify as a “distributing fund” for each accounting period of the fund in which the investor
holds that interest, any gain accruing to that investor upon the sale or other disposal of the interest will be
charged to tax as income and not as a capital gain. Changes introduced by the United Kingdom Finance Act
2004 amend the definition of offshore fund, such that it relates in the case of the Company, to each individual
share class of each Fund. Each share class will therefore be viewed as a separate offshore fund and Shares in a
share class of a Fund in the Company are likely to constitute a “material interest” in an offshore fund for the
purposes of ICTA.
It should be noted that a “disposal” for United Kingdom taxation purposes includes a switching between Funds
and may include a switching between share classes of Funds.
For those share classes seeking UK Offshore Fund Distributor Status, it is intended that each share class will
distribute at least 85 per cent of its income and at least 85 per cent of its United Kingdom equivalent profits for
each accounting period within six months of the end of each accounting period. As certification is granted
retrospectively however it cannot be guaranteed that such certification will be granted for any particular period
or will continue to be available for future accounting periods.
The Company will also be required to ensure that (with certain exceptions), not more than 5 per cent by value of
the assets of each share class seeking certification are invested in other offshore funds.
So long as such certification is obtained, Shareholders who are resident or ordinarily resident in the United
Kingdom for taxation purposes may (unless holding shares as trading assets, when different rules apply) be
liable to United Kingdom capital gains tax or corporation tax on chargeable gains in respect of gains arising from
the sale, redemption or other disposal of their shares (save that a charge to tax on income may arise on the
income-element of the disposal proceeds).
It should be noted that the above treatment will only apply on the disposal of interests in distributing funds
provided that they are certified by the HM Revenue & Customs during the entire holding period of any particular
Shareholder resident or ordinarily resident in the United Kingdom.
Investors should be aware that a new reporting regime is expected to come into effect from 1 December 2009.
In broad terms it is not anticipated that the proposed changes will affect the ability of individual share classes to
obtain a status comparable to distributing fund status, nor should they materially affect the way in which a UK
investor will be taxed upon their interests in the Company. The proposed rules should also not materially affect
the quantum of income on which a UK investor is taxed, albeit, under the new regime, the basis for the charge to
income tax or corporation tax will be the income a fund “reports” to investors rather than its cash distributions.
An individual Shareholder domiciled or deemed for United Kingdom tax purposes domiciled in the United
Kingdom may be liable to UK Inheritance Tax on their shares in the event of death or on making certain
categories of lifetime transfer.
The attention of individual Shareholders ordinarily resident in the United Kingdom is drawn to the provisions of
Chapter 2 of Part 13 of the Income Tax Act 2007. These provisions are aimed at preventing the avoidance of
income tax by individuals through transactions resulting in the transfer of assets or income to persons (including
companies) resident or domiciled outside the United Kingdom and may render them liable to income tax in
respect of undistributed income of the Company on an annual basis. The legislation is not directed towards the
taxation of capital gains.
66
The attention of corporate Shareholders is drawn to the current provisions of Chapter IV Part XVII of ICTA, which
subjects certain United Kingdom resident companies to corporation tax on profits of companies not so resident in
which they have an interest. The provisions affect United Kingdom resident companies which are deemed to
have an interest of at least 25% in the profits of a non-resident company, which is controlled by residents of the
United Kingdom, does not distribute substantially all of its income and is also resident in a low tax jurisdiction.
Since the Company intends to distribute substantially all of its income, it is not anticipated that this legislation
will have any material effect on United Kingdom resident corporate Shareholders. The legislation is not directed
towards the taxation of capital gains. Corporate Shareholders should note that these rules are currently under
review as part of a wider consultation process covering the Taxation of Foreign Profits.
The attention of persons resident or ordinarily resident in the United Kingdom for taxation purposes (and who, if
individuals, are also domiciled in the United Kingdom for those purposes) is drawn to the fact that the provisions
of section 13 of the Taxation of Chargeable Gains Act 1992 could be material to any such person whose
proportionate interest in the Company (whether as a Shareholder or otherwise as a “participator” for United
Kingdom taxation purposes) when aggregated with that of persons connected with that person is 10%, or
greater, if, at the same time, the Company is itself controlled in such matter that it would, were it to be resident
in the United Kingdom for taxation purposes, be a “close” company for those purposes. Section 13 could, if
applied, result in a person with such an interest in the Company being treated for the purposes of United
Kingdom taxation of chargeable gains as if a part of any capital gain accruing to the Company (such as on a
disposal of any of its Investments) had accrued to that person directly, that part being equal to the proportion of
the gain that corresponds to that person’s proportionate interest in the Company (determined as mentioned
above).
Under the corporate debt tax regime in the United Kingdom any corporate Shareholder which is within the
charge to United Kingdom corporation tax will be taxed on the increase in value of its holding on a mark to
market basis (rather than on disposal) or will obtain tax relief on any equivalent decrease in value, if the
Investments held by the Fund within which the Shareholder invests, consist of more than 60% (by value) of
“qualifying investments”. Qualifying investments are broadly those, which yield a return directly or indirectly in
the form of interest.
Transfer taxes may be payable by the Company in the United Kingdom and elsewhere in relation to the
acquisition and/or disposal of Investments. In particular, stamp duty reserve tax at the rate of 0.5% (or, if the
transfer does not take place in Dematerialised Form, stamp duty at an equivalent rate) will be payable by the
Company in the United Kingdom on the acquisition of shares in companies incorporated in the United Kingdom or
which maintain a share register in the United Kingdom. This liability will arise in the course of the Company’s
normal investment activity and on the acquisition of Investments from subscribers on subscription for shares.
In the absence of an exemption applicable to a prospective Shareholder (such as that available to intermediaries
under section 88A of the Finance Act 1986) stamp duty reserve tax (or stamp duty) at the same rate as above
will also be payable by prospective Shareholders on the acquisition of shares in companies incorporated in the
United Kingdom or which maintain a share register in the United Kingdom for the purpose of subsequent
subscription for shares, and may arise on the transfer of Investments to Shareholders on redemption.
Because the Company is not incorporated in the United Kingdom and the register of holders of shares will be
kept outside the United Kingdom, no liability to stamp duty reserve tax will arise by reason of the transfer,
subscription for or redemption of shares except as stated above. Liability to stamp duty will not arise provided
that any instrument in writing transferring shares in the Company is executed and retained at all times outside
the United Kingdom.

Californication

So, the important bits are:

This means that no tax credit will be available and the relevant tax rates will be those
applying to interest.

and

It is the intention of the Company to seek the following statuses for iShares Barclays Euro Aggregate Bond,
iShares Barclays Euro Corporate Bond, iShares Barclays Euro Corporate Bond 1-5, iShares Barclays Euro
Corporate Bond ex-Financials, iShares Barclays Euro Corporate Bond ex-Financials 1-5, iShares Barclays Euro
Government Bond 5-7, iShares Barclays Euro Government Bond 10-15, iShares Barclays Euro Treasury Bond,
iShares Barclays Euro Treasury Bond 0-1, iShares Barclays Global Aggregate Bond, iShares Citigroup Global
Government Bond, iShares FTSE Developed World ex-UK, iShares FTSE Gilts UK 0-5, iShares iBoxx £ Corporate
Bond ex-Financials, iShares MSCI Emerging Markets SmallCap, iShares MSCI Europe ex-EMU, iShares MSCI GCC
Countries ex-Saudi Arabia, iShares MSCI Japan SmallCap, iShares S&P SmallCap 600 and iShares € Covered
Bond:
- UK Offshore Fund Distributor Status

The 'dividends' are subject to UK tax as interest, not as dividends. The Irish govt have not taken a withholding tax.

It doesn't currently have distributing status (which is granted retropectivly, although this is changing currently) but if it is granted then capital gains on disposal will be UK taxable as capital gains. If distributing status is not granted then they will be taxable as income.

--C

ses6jwg

Looks like a decent yield at 5%+ I like the look of these, how risky are they compared to standard savings?

I've never dabbled in corporate bonds before, do you have to hold them to maturity or is there an active secondary market?

Californication

ses6jwg wrote: »

I've never dabbled in corporate bonds before, do you have to hold them to maturity or is there an active secondary market?

This is an ETF which holds a portfolio of corporate bonds designed to mimic the return on an index. The ETF shares are traded on the London Stock Exchange and so are liquid.

Corporate bonds are also traded in a secondary market, but it is over the counter, so not accessible to small investors for the most part.

--C

Cook_County

Do bear in mind that for UK tax purposes the dividends are foreign income so belong on the foreign pages of a UK tax return although there is no notional 10% tax credit because the dividends are treated as taxable as interest by the UK.

If there is Irish withholding tax from the dividends, this can be claimed as a credit on the UK tax return but only to the extent it avoids double taxation.

Californication

Cook_County wrote: »

If there is Irish withholding tax from the dividends, this can be claimed as a credit on the UK tax return but only to the extent it avoids double taxation.

There's no withholding tax on iShares or DB x-trackers, but there is on Lyxor ETFs.

(This could be a problem with Lyxor ETFs in a SIPP, since you can't offset the tax against anything.)

--C

Joey122

Californication wrote: »

There's no withholding tax on iShares or DB x-trackers, but there is on Lyxor ETFs.

(This could be a problem with Lyxor ETFs in a SIPP, since you can't offset the tax against anything.)

--C

Californication : Have you used these products much??

Do you use TDWaterhouse? @12.50 a trade I am happy but the bid offer spreads are sometimes 0.5% which is quite a lot on a large sum

Also do you prefer IShares to DB in terms of value (size of spreads / tracking error)

Californication

Joey122 wrote: »

Californication : Have you used these products much??

Do you use TDWaterhouse? @12.50 a trade I am happy but the bid offer spreads are sometimes 0.5% which is quite a lot on a large sum

Also do you prefer IShares to DB in terms of value (size of spreads / tracking error)

I just buy and hold (sell to use capital gains allowance), so the economics may be different if you want to trade frequently.

I use Hargreaves Lansdowne for historical reasons, but they're not the cheapest for execution only brokerage, so if I was starting from scratch, I'd probably pick someone different.

I have Lyxor, iShares and xtrackers. I generally look at spread and the annual charges and buy the cheapest. The bid/ask spread should be the same for different brokers since they're just getting the prices from the exchange.

The important difference between iShares and db xtrackers/Lyxor, is that iShares use full replication (they buy the shares/bonds in the index) while the others are derivative based, so there's up to 10% credit risk against the issuer of the equity swap. I'm happy with this risk but others may not be.

--C

Joey122

Californication wrote: »

I just buy and hold (sell to use capital gains allowance), so the economics may be different if you want to trade frequently.

I use Hargreaves Lansdowne for historical reasons, but they're not the cheapest for execution only brokerage, so if I was starting from scratch, I'd probably pick someone different.

I have Lyxor, iShares and xtrackers. I generally look at spread and the annual charges and buy the cheapest. The bid/ask spread should be the same for different brokers since they're just getting the prices from the exchange.

The important difference between iShares and db xtrackers/Lyxor, is that iShares use full replication (they buy the shares/bonds in the index) while the others are derivative based, so there's up to 10% credit risk against the issuer of the equity swap. I'm happy with this risk but others may not be.

--C

Without saying amount held can you describe your portfolio in terms of ETFs held and percentage allocated ??

Californication

Joey122 wrote: »

Without saying amount held can you describe your portfolio in terms of ETFs held and percentage allocated ??

I'm not sure whether I'll stay in the UK long term, I'm fairly young, I have a high risk tolerance and I'm a higher-rate tax payer, so I have a globally diversified portfolio with developed and emerging equities and real estate investment trusts (REITs in ISA, since they produce most income).

This means that as much as possible of the (potential) gains are taxed as capital gains.

If one makes the assumption from financial economic theory that the market portfolio is efficient, then one should buy funds in different regions based on the market capitalisation of those regions. (Or just use an MSCI world tracker for developed global equity.)

This is what I do, except I increase the allocation to emerging (relative to developed) equity and to small cap relative to large cap. Theoretically, both of these should have expected returns greater than developed large cap.

For instance, on the MSCI indices small cap is defined as 15% of market cap, so I allocate 25% to small cap in each region.

I only use trackers (mainly ETFs), since the evidence is that active management under-performs by the amount of the charges and that out-performance by some funds is due to luck and survivorship bias in the date.

--C