Small cap trackers & capitalized dividend?

Legacy_user

Looking at low cost global small cap passive trackers, income not accumulation. Vanguard looks to have the best option Vanguard Inv Ser Gbl Small Cap Index Acc Nav TER 0.38%

Also short-listed SPDR MSCI World Small Cap UCITS ETF (WOSC) TER 0.45% for an allocation but this is an ETF and does not distribute dividends but 'capitalizes' dividends.

In simple terms how does this work, and crucially for unwrapped investments, how do you calculate dividend income on units held, and are there any other tax implications and calculations necessary with this type of holding?

bowlhead99

Generally an ETF being marketed to UK investors that doesn't distribute some or all of its dividends and instead just reinvests them internally will produce an annual summary data sheet for UK investors showing the amount of income per share that was reinvested internally in excess of the amount it actually paid out during the year.

This amount will be considered to be "deemed" as an income distribution to you a few months after the end of their accounting year (even though you never physically got the income, you've had the benefit of it come into the fund you own).

So, armed with that information about excess undistributed income per share, you then have to do the maths on how many shares you held and recognise a 'virtual' dividend income for the purposes of your tax return. And then that amount that's chargeable to income tax and ended up being added to the value of your fund, is then an allowable cost for your capital gains tax calculations when you sell the fund (because the value of the fund went up when those divs were received and as long as you recognise the income tax side of it, you should increase your base cost for CGT to avoid you effectively paying two different types of tax on the exact same dividend monies).

The problem is that ETFs like that SPDR one are domiciled in Ireland, not UK, even though you buy them on the London stock exchange. As an "offshore fund", for the treatment above to be allowed, they have to apply to be recognised as a reporting fund by HMRC, making a commitment that their UK investors will definitely receive (or get easy access to) the details of any undistributed income each year. HMRC rules are along the lines of... If the offshore fund hasn't got approval as a reporting fund which definitely gives you the info to file your correct taxes each year, then it has to assume that ALL gains you make when eventually selling this offshore fund are probably from income received inside the fund and never declared by you as income.

In that circumstance, instead of paying CGT on your gains and getting a nice annual exempt amount and nice low tax rate when you do your disposal, they just make you pay income tax at your marginal rate on the amount you calculated as your gain.

So the moral of the story is that it's fine to use accumulating /capitalising ETFs which are resident in other countries like Ireland or Luxembourg or USA, *if* you can get the annual excess income figures to do your income tax calcs *and* they are a Reporting Fund within the meaning of HMRC's offshore funds rules.

If you look at the website for that SPDR one (
https://uk.spdrs.com/en/professional/etf/SPDR-MSCI-World-Small-Cap-UCITS-ETF-ZPRS-GY , fund overview section) it says
UK Reporting Status: Seeking

So, hopefully it will be fine but you don't want a risk of having all your gains billed as income so it is safer to first obtain confirmation that they did actually get that status and don't have HMRC reject them for some silly reason.

System

Thanks to bowlhead99. I'm not sure I want to have to do all those calculations each year.
It looks like for now Vanguard is the only option for a low cost index tracking global small cap income.

bundoran

wneil wrote: »

Thanks to bowlhead99. I'm not sure I want to have to do all those calculations each year.
It looks like for now Vanguard is the only option for a low cost index tracking global small cap income.

Vanguard Global Small Cap Index Fund is offshore too, as it is domiciled in Ireland. The fund manager is Vanguard Group (Ireland) Limited in Dublin, and it is regulated by the Central Bank of Ireland. So the income goes in the foreign income section of a tax return.

This is all on the KIID but I can't post a link to it as I'm new.

grey_gym_sock

there is a new ishares ETF, ishares MSCI world small cap ETF (WLDS), similar to WOSC (i.e. it's accumulating, too) but with a lower OCF, of 0.35%.

however, it too is only "seeking" reporting status.

jamesd

"Vanguard Inv Ser Gbl Small Cap Index Acc"

That's an accumulation version, not income which would have inc instead of acc in the name.

Thrugelmir

wneil wrote: »

Looking at low cost global small cap passive trackers, income not accumulation. Vanguard looks to have the best option Vanguard Inv Ser Gbl Small Cap Index Acc Nav TER 0.38%

With the size of the funds under management, many of the companies held are hardly small. The top holding having a capitalisation of $17.5 billion.

londoninvestor

One more point, if the fund is offshore, then not only the accumulation units, but even the income units may have "excess" reportable income that you need to account for and pay tax on, like bowlhead99 describes.

So unless it's in an ISA or a SIPP, you'll have this admin to do for any offshore fund. In principle it's not very different from an onshore accumulation fund, but you may have to work harder and dig around the fund manager's docs to find the excess income figure - whereas generally for an onshore fund the broker will give you what you need at the end of the tax year in a more user-friendly way.

System

jamesd wrote: »

"Vanguard Inv Ser Gbl Small Cap Index Acc"

That's an accumulation version, not income which would have inc instead of acc in the name.

Yes, copied the wrong title. It comes in Inc version as well. It appears to be the only global low cost small cap index tracker with an income version.

george4064

Take a look at ISP6: https://www.ishares.com/uk/individual/en/products/251920/ishares-sp-smallcap-600-ucits-etf?siteEntryPassthrough=true&locale=en_GB&userType=individual

London listed ETF priced in GBX.

That is my chosen US SmallCap ETF.