Tax on fund dividends in SIPP

[Deleted User]

For example if you hold a sp500 or global equity tracker fund/etf, do you(or the fund) pay a withholding tax?

bowlhead99

You don't pay withholding tax i.e. there is no UK withholding tax on dividends paid to your pension on the fund that's sending you dividends).

But (assuming the fund doesn't benefit from a tax treaty) the fund will have paid it on the dividends it received from its underlying investments if those investments are in countries that levy withholding taxes on dividends paid to foreigners and the fund is a foreigner from the perspective of the company paying the dividend

jim1999

Unless you're holding a dollar denominated fund e.g. VUSA and your SIPP is recognised, then the fund will have paid the fee.

That is my understanding of the situation at least, having spent a few hours looking into this.

[Deleted User]

bowlhead99 wrote: »

You don't pay withholding tax i.e. there is no UK withholding tax on dividends paid to your pension on the fund that's sending you dividends).

But (assuming the fund doesn't benefit from a tax treaty) the fund will have paid it on the dividends it received from its underlying investments if those investments are in countries that levy withholding taxes on dividends paid to foreigners and the fund is a foreigner from the perspective of the company paying the dividend

Thanks bowlhead.

Assuming there is a tax treaty, do you think the fund, eg Vanguard SP500 still pays it even though some of the fund's units were held by SIPPS? I read that SIPPS are recognised by the USA as a tax wrapper/shield.

EdSwippet

newbinvestor wrote: »

Assuming there is a tax treaty, do you think the fund, eg Vanguard SP500 still pays it even though some of the fund's units were held by SIPPS?

Yes, it does. Here is how this all operates.

Suppose you hold Ireland domiciled VUSA, an S&P 500 tracker ETF, in your SIPP. It is VUSA that holds the US stocks, and when it receives dividends from those stocks it can use the US/Ireland tax treaty to reduce the US dividend tax withholding from the standard 30% to 15%, but no lower. So the fund (ETF, here) internally pays 15% in withholding tax to the US, and then pays the remaining 85% out to you as ETF dividends. No matter how you hold VUSA (ISA, pension, etc), you cannot reclaim this 15%, so it is lost. The US neither knows nor cares where or how Ireland domiciled VUSA shares are held. A sunk cost.

Now, suppose that instead of VUSA, you held VOO in your SIPP. This is Vanguard's US domiciled S&P 500 tracker ETF. It holds the same stocks as VUSA. However, being US domiciled it receives dividends from the stocks it holds with no US tax withholding. However ... when this ETF pays dividends, these are then taxed by the US (because the US treats it just like any other US stock), so 30% standard withholding, reduced to 15% under the US/UK tax treaty. And there is a special clause in the US/UK tax treaty that allows UK registered pension schemes -- and only pension schemes, not ISAs and other trading accounts -- to claim a 0% US tax withholding rate on dividends paid by US shares, including US domiciled ETFs.

So if you want to track the S&P 500, a US domiciled fund or ETF in a pension would likely be the most tax efficient way of doing so.

However, before you get too excited, an EU regulation known catchily as PRIIPs now more or less prevents EU residents from buying US domiciled funds and ETFs, because none of them (so far, anyway) produces the required fee disclosure documents (the KIDs).

bowlhead99

newbinvestor wrote: »

Thanks bowlhead.

Assuming there is a tax treaty, do you think the fund, eg Vanguard SP500 still pays it even though some of the fund's units were held by SIPPS? I read that SIPPS are recognised by the USA as a tax wrapper/shield.

It is as Edswippet says.

ETFs and OEICs are not tax-transparent entities from the perspective of the underlying US company (eg Microsoft) paying the dividend. So Microsoft can't see that your SIPP is a UK pension scheme sitting behind the ETF or OEIC and give the ETF any beneficial rates of withholding based on your personal status. Microsoft or their withholding agent will just look at the person to whom they are paying the dividend, see that it's an Irish ETF, and withhold 15%, which is a cost to the ETF. As an aside, if it was a Luxembourg ETF, that withholding would be 30% because ETFs from that country don't benefit from the same tax treaty deal.

When the ETF distributes its net income to its investors (or accumulates it un-distributed, depending on the type of ETF share class), the ETF won't withhold any further (eg. Irish) taxes. And your pension won't suffer any UK tax when it receives the dividend from the ETF or any UK CGT when it sells the ETF. Still, along the way, you 'lost' 15% of the Microsoft dividends that Microsoft was paying out.

Clearly it's still pretty efficient to use collective investment schemes rather than invite the cost and hassle of directly buying and holding all the constituents of the S&P500 in their index weights, but the irrecoverable US income tax on the dividends (assuming a Vanguard Irish ETF) is going to cost you 0.25-0.3% a year off your theoretical gross return (I'm guessing the natural gross yield is 1.7 to 2%, but will change over time)

[Deleted User]

Very interesting, thanks/ You would think that Vanguard etc would consider moving all USA stock funds to be domiciled in the USA and try and tackle the KID issue, to get their EU investors an extra 0.25-0.3% a year.

I'm looking at a US Tips ETF domiciled in Luxembourg. Do you have any idea if the TIPS interest payments are subject to 30% withholding tax (Because it's Lux not Ireland)? Or is it just on company dividends?

Edit, I think there is 0 tax on tips interest as per here
https://money.stackexchange.com/questions/78585/are-interest-income-from-u-s-bonds-subjected-to-withholding-tax-like-u-s-dividen