ETF vs Fund: the tax perspective

newlease

Tax advantages seem to a consideration in certain countries (e.g. USA) when choosing between ETF and mutual fund. I can't find such a comparison from UK (HMRC) perspective, are they treated identically?

From what I understand, tax-free wrappers such as ISA and SIPP do not attract any tax on dividends or CGT. It seems both are subject to the 1/9th or 10% deduction (cut at source?) which seems to be an antiquated/legacy rule, but from an ISA or SIPP perspective there is nothing to declare (or claim back).

Is there any difference in ETF vs funds outside of ISA/SIPP? What about this 8 year EU rule?

Linton

In the UK ETFs and Funds are treated identically. In the US, if you own units in a fund you pay tax on the gains made by your fund when it internally buys and sells individual investments. This could lead to behaviour differences between the US and the UK both in terms of investor choices and fund strategies. eg in the US ETFs that dont directly hold shares but follow an index through financial wizardry may provide tax advantages.

For both an ETF and a fund there is no tax to pay if held in an ISA. You seem somewhat confused in thinking there is a deduction at source. There isnt one. Here isnt the place to go through where the 10% comes from, its basically an accounting fiction.

Outside an ISA, again ETFs and funds are treated the same.

I dont know about any 8 year eu rule. One thing I believe, but have no experience of , is that you do need to ensure that you buy ETFs that have been recognised for sale in the UK. Those that havent may not be eligible for ISAs and may fall foul of foreign tax regimes. Someone with more experience in ETFs may wish to comment.

grey_gym_sock

for ISA/SIPP, the issue is mainly whether you're allowed to buy it - ISAs are more restrictive. if your provider lets you buy it, nothing further to worry about.

for a taxable account, the important thing is that it is a "reporting fund" - because if it isn't, any capital gains you make will be taxed as income, not as gains. this is the same issue for all overseas-domiciled funds, not just for ETFs.

there is also a minor niggle - which, again, affects all overseas-domiciled funds/ETFs in taxable accounts - that the taxable income could be more than the income actually paid out: there could be "excess reportable income" - see http://monevator.com/excess-reportable-income/

this is all so complicated that i prefer to stick to UK-domiciled funds in a taxable account.

kamir

Is there a list of UK Domiciled funds ?

grey_gym_sock

kamir wrote: »

Is there a list of UK Domiciled funds ?

e.g. go to http://tools.morningstar.co.uk/uk/fundscreener/default.aspx - set "fund universe" to "uk domiciled funds" (and it says there are 10,774 of them)

mozboz

With an ISA, there is no tax to worry about. Period. Any investment returns be it value gain or dividend pay out are tax free. Any money taken out is tax free.

Same thing with SIPP until cash out. There is that 10% tax on dividends I don't really understand it either, but it does not matter whether ETF, share, fund.

The 8 year rule treats ETFs held after 8 years as relevant to tax ("deemed disposal"). So, where tax is relevant (outside of ISA/SIPP) this would trigger it. I'm not familiar with the rules and difference outside tax free options.

Cook_County

The 8 year rule appears in Irish law. I am not aware it is in UK law at all.

newlease

Thanks for replies.

This is confirming the only tax related topic regarding ISA/SIPP is any taxed dividends which can not be reclaimed. There is absolutely no dividend, CGT, etc. to declare/pay. This is good, makes things easy.

Outside of ISA/SIPP, HMRC treats ETF and funds the same and the 8 year rule is not applicable.