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[Deleted User]

jamesd wrote: »

It's more of an issue in the US where each year you are subject to capital gains tax on the trades made by your funds during the year. Since the US also has a higher capital gains tax on things held for less than a year this tends to penalise trading and reward buy and hold approaches.

Passives have to buy and sell based on investor money movements into and out of a fund as well as index changes.

1. Buying and selling based on investor money movements out of the funds triggers capital gains for people who sell units/shares in the funds only. Does not impact taxes for anyone else.

2. Index changes hardly ever trigger capital gains.

[Deleted User]

Linton wrote: »

In the US, not the UK.

In the UK no-one pays capital gains tax on any fund unless they sell units/shares. In terms of tax efficiency trackers are exactly the same as active funds.

Yes, the US is different, but I believe the OP is investing in the UK.

Why is Morningstar unaware of this?

“If you're investing in a taxable account, broad-market index funds or exchange-traded funds will tend to be a better fit for your portfolio's equity exposure than actively managed products. That's because broad-market index funds and ETFs have low turnover.”

And further “Actively managed equity funds, by contrast, usually have higher turnover, and more-frequent selling can translate into more-frequent capital gains distributions. Of course, tax is not an issue if you're investing in a tax-efficient account such as an ISA, SIPP or your company retirement plan. As a fund can make capital gains distributions every day and you still won't owe taxes on them.
Also, bear in mind that even though ETFs and index funds are more tax-efficient in the equity space, the tracker/ETF format has no low-tax advantages when it comes to bond funds. Instead, bond funds must pay out the income to shareholders of bond ETFs, index funds, and actively managed funds on an ongoing basis, and shareholders in taxable accounts will owe income tax on those coupons.”

http://www.morningstar.co.uk/uk/news/139017/active-passive-or-both-7-questions-to-help-you-decide.aspx

bostonerimus

Linton wrote: »

I
In the UK no-one pays capital gains tax on any fund unless they sell units/shares. In terms of tax efficiency trackers are exactly the same as active funds.

My core US equity holding is VTSAX (Vanguard Total US Stock Market Index). I hold a lot of this outside of tax advantaged accounts and so I want it to be tax efficient....and it is. As you say, in the US when a fund sells it's shares and there is a capital gain that is distributed and the fund owners have to pay capital gains tax even though they haven't sold any fund shares themselves, So I use VTSAX because it has very low turnover and hasn't had to distribute any capital gains since 2001. To get back to the OP they need to take a similar approach and design their investment strategy in a tax efficient manner cognisant of their tax bracket and allowances.

bostonerimus

Deleted_User wrote: »

Why is Morningstar unaware of this?

“If you're investing in a taxable account, broad-market index funds or exchange-traded funds will tend to be a better fit for your portfolio's equity exposure than actively managed products. That's because broad-market index funds and ETFs have low turnover.”

And further “Actively managed equity funds, by contrast, usually have higher turnover, and more-frequent selling can translate into more-frequent capital gains distributions. Of course, tax is not an issue if you're investing in a tax-efficient account such as an ISA, SIPP or your company retirement plan. As a fund can make capital gains distributions every day and you still won't owe taxes on them.
Also, bear in mind that even though ETFs and index funds are more tax-efficient in the equity space, the tracker/ETF format has no low-tax advantages when it comes to bond funds. Instead, bond funds must pay out the income to shareholders of bond ETFs, index funds, and actively managed funds on an ongoing basis, and shareholders in taxable accounts will owe income tax on those coupons.”

http://www.morningstar.co.uk/uk/news/139017/active-passive-or-both-7-questions-to-help-you-decide.aspx

It looks like Morningstar is making a mistake regarding how capital gains in funds are taxed in the UK.

In the US you pay CGT on the underlying fund trades ie you pay as you go along and in the UK you store it up until you sell.

[Deleted User]

bostonerimus wrote: »

It looks like Morningstar is making a mistake regarding how capital gains in funds are taxed in the UK.

In the US you pay CGT on the underlying fund trades ie you pay as you go along and in the UK you store it up until you sell.

...but you still accumulate tax liability? That’s all the Morningstar article is saying: “you will owe taxes”.

In my mind, someone who all of a sudden has to invest 2M will have to use taxable accounts. And on this scale tax efficiency will be an important issue. Which is another argument for indexing.

[Deleted User]

jamesd wrote: »

UK investors are able to buy them but generally don't. Usually they won't even be one of the funds offered in say the workplace pensions that are likely to be the only investments for much of the population.

You don't avoid UK funds just because you don't use an IFA. No IFA and the usual pension or ISA is still going to be in UK funds.

Most of the world's market cap isn't owned by UK investors. They can and do invest in most markets, whether with an IFA or not.

Yes, my company pension fund offers Emerging Markets, high and moderate growth, Ethical, Property and Sharia funds but no specific US or European index trackers. It’s nuts. To be fair, they do have FTSE All Share Ex-UK, which focuses on large companies and charges almost 1 percent

One of the reasons I will be moving to a SIPP. 1M UK investors who use SIPP can invest in funds covering the vast majority of world stock market cap. Same goes for people with taxable accounts.

bostonerimus

Deleted_User wrote: »

...but you still accumulate tax liability? That’s all the Morningstar article is saying: “you will owe taxes”.

In my mind, someone who all of a sudden has to invest 2M will have to use taxable accounts. And on this scale tax efficiency will be an important issue. Which is another argument for indexing.

Yes, the tax is still due, in the UK you pay it all at the back end, whether index or active. In the US you pay some of the CGT as you go along if you own funds that distribute capital gains. Index funds are good in the US as they limit those yearly CG distributions.

The OP will certainly have to hold a lot of their $2M outside of things like ISAs and SIPPs for a long time because of annual contribution limits. The UK has substantial CGT and dividend allowances and the OP should use those to the max and then limit tax liability, maybe the venture capital type of tax shelters would be worth looking at. Then there is always the old insurance policy chestnut.

Linton

Deleted_User wrote: »

...but you still accumulate tax liability? That’s all the Morningstar article is saying: “you will owe taxes”.

In my mind, someone who all of a sudden has to invest 2M will have to use taxable accounts. And on this scale tax efficiency will be an important issue. Which is another argument for indexing.

UK CGT liability for funds is solely based on your overall profit from buying to selling the units/shares. What happened within the fund in the meantime is irrelevent. Dividends and interest received by the fund from its underlying investments on the other hand are taxed as income.


If you buy a fund at £1 and sell at £2 you may be liable for CGT depending on whether you exceed the annual allowance in that tax year, currently £11500, no matter whether its a tracker or an active fund.

[Deleted User]

Linton wrote: »

UK CGT liability for funds is solely based on your overall profit from buying to selling the units/shares. What happened within the fund in the meantime is irrelevent. Dividends and interest received by the fund from its underlying investments on the other hand are taxed as income.


If you buy a fund at £1 and sell at £2 you may be liable for CGT depending on whether you exceed the annual allowance in that tax year, currently £11500, no matter whether its a tracker or an active fund.

If it were true, it would be a very straightforward mechanism for tax avoidance. I am pretty sure that Morningstar is correct and that capital gains distributions are in fact added to your tax liability (in taxable accounts).

Linton

Deleted_User wrote: »

If it were true, it would be a very straightforward mechanism for tax avoidance. I am pretty sure that Morningstar is correct and that capital gains distributions are in fact added to your tax liability (in taxable accounts).

I dont think you are going to get very far arguing with a UK investor on a UK website about UK taxation. I suggest you study https://www.gov.uk/capital-gains-tax,

In summary and not going into the details:

In the UK Capital Gains (investment funds, company shares, real estate (except ones own home), precious stones, bitcoins etc ) are generally taxed on the same basis. The gain is simply and solely the difference between the cost of the item and the amount you sell it for minus costs. There is an annual allowance, currently £11700 for the total of all realised capital gains in a tax year. Any realised gains above the allowance are taxed at rates depending on what other taxable income you have. The rates for residential property are different to other things.

There is some room for tax avoidance in that it can be worthwhile to realise sufficient capital gain each year to ensure your annual allowance is fully used. It is not quite as easy as that since if you sell and buy the same investment within a month the transaction is ignored, but there is nothing to prevent you selling one tracker and buying an identical one from a different fund manager for example.

However if you have say £2M invested outside a tax protected environoment this is not going to help a lot.

The world outside the US can be very different to what most US residents simply take for granted.