Investing through E*TRADE - Capital Gain tax in the UK

harrinho

Hi experts. I have a question on which you can hopefully help. I have a stock option plan provided from my employer through E*TRADE. The good thing is that I am able to create an individual brokerage account within E*TRADE and trade US stocks, ETFs etc. However, the earnings would not be tax free. E*TRADE says that I am responsible to pay tax on my earnings and I would like to ask if anyone knows how this would actually happen? Should I submit a self assessment? How and where do I declare my capital gains and what's the tax they would be subject to? I am at 40% tax rate btw.   

Would it be worth trading through E*TRADE in US stocks or go with UK domiciled platforms/portfolios through an ISA? The struggle with the latter is that, from my research, it doesn't seem possible to be able to invest in VTI or VOO Vanguard ETFs for example, in a UK ISA. I only found those available in etoro but not under ISA. 

Thanks for your help in advance

george4064

Have you had a thorough read through the prospectus/guide that is provided by your employer regarding the stock option plan you have participated in? That should normally give you details of any tax benefits and implications.

eskbanker

harrinho said:

Hi experts. I have a question on which you can hopefully help. I have a stock option plan provided from my employer through E*TRADE. The good thing is that I am able to create an individual brokerage account within E*TRADE and trade US stocks, ETFs etc. However, the earnings would not be tax free. E*TRADE says that I am responsible to pay tax on my earnings and I would like to ask if anyone knows how this would actually happen? Should I submit a self assessment? How and where do I declare my capital gains and what's the tax they would be subject to?

Perhaps unsurprisingly, the tax you'd pay on capital gains is Capital Gains Tax, explained at https://www.gov.uk/capital-gains-tax

harrinho said:

Would it be worth trading through E*TRADE in US stocks or go with UK domiciled platforms/portfolios through an ISA? The struggle with the latter is that, from my research, it doesn't seem possible to be able to invest in VTI or VOO Vanguard ETFs for example, in a UK ISA. I only found those available in etoro but not under ISA.

An ISA offers a tax shelter that avoids not just capital gains tax but also income tax on dividends, so is generally worth doing for UK investors but if you're interested in specific US funds and stocks that can't be held in an ISA then that would indeed change things, although you may wish to consider the likes of VUSA if you want to hold a S&P 500 tracker ETF within an ISA.  You're presumably aware of the risks in investing in individual shares rather than collective investments, and of sticking to one market rather than diversifying globally?

harrinho

Thank you. Yes, I'm aware and I will go for a diversified investment anyway. What I'm not really on top of yet, is how the VUSA differs to VOO, since it is, from what I know, the UK version of the same fund.  

bowlhead99

harrinho said:

Thank you. Yes, I'm aware and I will go for a diversified investment anyway. What I'm not really on top of yet, is how the VUSA differs to VOO, since it is, from what I know, the UK version of the same fund.  

Simply, VOO is US-domiciled while VUSA is run over here in Europe (Irish domiciled) and could be bought on the London stock exchange priced in sterling.

As VUSA is marketed to a European audience it complies with all the local regulations here about risk disclosure and key information required to be published to Investors on this side of the pond for people to be able to buy it through brokers and ISA/pension managers. The same is not the case for the various US-domiciled and marketed ETFs whose local managers generally don't care about that stuff.

From a tax perspective, VOO and VTI have both done the same as VUSA over here and registered with HMRC as Reporting funds under HMRC's offshore funds regime, so there are no particular adverse consequences of investing in them. You'll find that some ETF managers running products for a US audience don't bother to do that, because it's more hassle and expense. Unfortunately that means you can't always find out if the fund made any income in a year that wasn't distributed to you, so as an anti-avoidance measure HMRC would make you characterise all capital gains from such funds as ordinary income at 40% tax, with no annual capital gains exemption able to be used against it.

So generally it can be a bad idea to invest in US domiciled ETFs if they are not registered as Reporting Funds, but VOO and a large number of Vanguard ones are actually ok from that point of view, because they're registered -so no worse on the tax side than investing in the Irish equivalents.

But even if investing dollars in VOO through a US broker is the same total return and tax outcome as investing pounds in VUSA through a UK broker , if you're UK-resident it makes much more sense to use UK ISAs and pensions to do your investing and avoid altogether the both the tax, and the tax record keeping, that you would need to do if you were investing outside a tax wrapper. 

In other words, just because your employer gives you access to a US broker, it doesn't make it a good idea to take advantage of that service or use collective investment funds domiciled in that jurisdiction when we have reasonable brokers over here (which offer UK regulatory protection in case of fraud or failure) together with account types that shield from UK income and capital gains taxes on the profits you make.

wmb194

harrinho said:

Thank you. Yes, I'm aware and I will go for a diversified investment anyway. What I'm not really on top of yet, is how the VUSA differs to VOO, since it is, from what I know, the UK version of the same fund.  

The good news is that I don't think you're going to need to worry about it as since Morgan Stanley's acquisition of etrade a few months ago you're no longer able to buy ETFs or CEFs, the US equivalent of investment trusts, via etrade if you live in the EEA. I've just double checked with VOO and when I try to place an order the following message appears: "This product is not available due to PRIIPs Regulation which impacts customers that reside in the European Economic Area."

harrinho

bowlhead99 said:

harrinho said:

Thank you. Yes, I'm aware and I will go for a diversified investment anyway. What I'm not really on top of yet, is how the VUSA differs to VOO, since it is, from what I know, the UK version of the same fund.  

Simply, VOO is US-domiciled while VUSA is run over here in Europe (Irish domiciled) and could be bought on the London stock exchange priced in sterling.

As VUSA is marketed to a European audience it complies with all the local regulations here about risk disclosure and key information required to be published to Investors on this side of the pond for people to be able to buy it through brokers and ISA/pension managers. The same is not the case for the various US-domiciled and marketed ETFs whose local managers generally don't care about that stuff.

From a tax perspective, VOO and VTI have both done the same as VUSA over here and registered with HMRC as Reporting funds under HMRC's offshore funds regime, so there are no particular adverse consequences of investing in them. You'll find that some ETF managers running products for a US audience don't bother to do that, because it's more hassle and expense. Unfortunately that means you can't always find out if the fund made any income in a year that wasn't distributed to you, so as an anti-avoidance measure HMRC would make you characterise all capital gains from such funds as ordinary income at 40% tax, with no annual capital gains exemption able to be used against it.

So generally it can be a bad idea to invest in US domiciled ETFs if they are not registered as Reporting Funds, but VOO and a large number of Vanguard ones are actually ok from that point of view, because they're registered -so no worse on the tax side than investing in the Irish equivalents.

But even if investing dollars in VOO through a US broker is the same total return and tax outcome as investing pounds in VUSA through a UK broker , if you're UK-resident it makes much more sense to use UK ISAs and pensions to do your investing and avoid altogether the both the tax, and the tax record keeping, that you would need to do if you were investing outside a tax wrapper. 

In other words, just because your employer gives you access to a US broker, it doesn't make it a good idea to take advantage of that service or use collective investment funds domiciled in that jurisdiction when we have reasonable brokers over here (which offer UK regulatory protection in case of fraud or failure) together with account types that shield from UK income and capital gains taxes on the profits you make.

Literally, eye-opener post, thanks very much for explaining in such a detail.

bowlhead99 said:
But even if investing dollars in VOO through a US broker is the same total return and tax outcome as investing pounds in VUSA through a UK broker , if you're UK-resident it makes much more sense to use UK ISAs and pensions to do your investing and avoid altogether the both the tax, and the tax record keeping, that you would need to do if you were investing outside a tax wrapper. 

Yes, I am a UK tax resident and currently wavering among Interactive Investor, Vanguard and Hargreaves Lansdown to open my S&S ISA.

Do you know (or can you share any relating info about) what is the equivalent VOO/VTI (if available) in UK/IR domiciled ETFs? Which of the above (or any other) S&S ISA provider offer these ETFs for investment in the UK? 

harrinho

wmb194 said:

harrinho said:

Thank you. Yes, I'm aware and I will go for a diversified investment anyway. What I'm not really on top of yet, is how the VUSA differs to VOO, since it is, from what I know, the UK version of the same fund.  

The good news is that I don't think you're going to need to worry about it as since Morgan Stanley's acquisition of etrade a few months ago you're no longer able to buy ETFs or CEFs, the US equivalent of investment trusts, via etrade if you live in the EEA. I've just double checked with VOO and when I try to place an order the following message appears: "This product is not available due to PRIIPs Regulation which impacts customers that reside in the European Economic Area."

That saves a lot of time and paper work. Thanks a lot!

Another_Saver

harrinho said:

bowlhead99 said:

harrinho said:

Thank you. Yes, I'm aware and I will go for a diversified investment anyway. What I'm not really on top of yet, is how the VUSA differs to VOO, since it is, from what I know, the UK version of the same fund.  

Simply, VOO is US-domiciled while VUSA is run over here in Europe (Irish domiciled) and could be bought on the London stock exchange priced in sterling.

As VUSA is marketed to a European audience it complies with all the local regulations here about risk disclosure and key information required to be published to Investors on this side of the pond for people to be able to buy it through brokers and ISA/pension managers. The same is not the case for the various US-domiciled and marketed ETFs whose local managers generally don't care about that stuff.

From a tax perspective, VOO and VTI have both done the same as VUSA over here and registered with HMRC as Reporting funds under HMRC's offshore funds regime, so there are no particular adverse consequences of investing in them. You'll find that some ETF managers running products for a US audience don't bother to do that, because it's more hassle and expense. Unfortunately that means you can't always find out if the fund made any income in a year that wasn't distributed to you, so as an anti-avoidance measure HMRC would make you characterise all capital gains from such funds as ordinary income at 40% tax, with no annual capital gains exemption able to be used against it.

So generally it can be a bad idea to invest in US domiciled ETFs if they are not registered as Reporting Funds, but VOO and a large number of Vanguard ones are actually ok from that point of view, because they're registered -so no worse on the tax side than investing in the Irish equivalents.

But even if investing dollars in VOO through a US broker is the same total return and tax outcome as investing pounds in VUSA through a UK broker , if you're UK-resident it makes much more sense to use UK ISAs and pensions to do your investing and avoid altogether the both the tax, and the tax record keeping, that you would need to do if you were investing outside a tax wrapper. 

In other words, just because your employer gives you access to a US broker, it doesn't make it a good idea to take advantage of that service or use collective investment funds domiciled in that jurisdiction when we have reasonable brokers over here (which offer UK regulatory protection in case of fraud or failure) together with account types that shield from UK income and capital gains taxes on the profits you make.

Literally, eye-opener post, thanks very much for explaining in such a detail.

bowlhead99 said:
But even if investing dollars in VOO through a US broker is the same total return and tax outcome as investing pounds in VUSA through a UK broker , if you're UK-resident it makes much more sense to use UK ISAs and pensions to do your investing and avoid altogether the both the tax, and the tax record keeping, that you would need to do if you were investing outside a tax wrapper. 

Yes, I am a UK tax resident and currently wavering among Interactive Investor, Vanguard and Hargreaves Lansdown to open my S&S ISA.

Do you know (or can you share any relating info about) what is the equivalent VOO/VTI (if available) in UK/IT domiciled ETFs? Which of the above (or any other) S&S ISA provider offer these ETFs for investment in the UK? 

VUSA and Vanguard US equity index fund.
Vanguard and probably any mainstream S&S ISA provider will have it on their platforms.
I'd watch out for the ridiculous valuations though.

harrinho

Another_Saver said:

VUSA and Vanguard US equity index fund.
Vanguard and probably any mainstream S&S ISA provider will have it on their platforms.

I'd watch out for the ridiculous valuations though.

Thanks @Another_Saver. 
bowlhead99 made it clear VOO=VUSA in UK domiciled ETFs. 

I checked out US Equity Index Fund in Vanguard and Interactive Investor. Could you please explain what's the difference between Income and Accumulator types? 

bowlhead99

harrinho said:

I checked out US Equity Index Fund in Vanguard and Interactive Investor. Could you please explain what's the difference between Income and Accumulator types? 

To meet the tax rules that allow them to not pay UK taxes, UK open-ended investment companies or unit trusts need to either actually distribute, or deem a distribution, of all of their net income out to their investors each year.

Over the year they will receive dividend income from the funds in which they invest, and after paying their running costs the fund will have some net income left over.

- If you buy the income distribution share class of the fund, your share of the income net of expenses will be paid out to you as a dividend once a year.  If you imagine they have received £2 per share worth of net dividend income during the year from their portfolio which caused the share price to go up from £100 to £102 over the course of the year, the share price will then drop at the moment the dividend officially becomes payable to you, reflecting the fact that instead of having (e.g.) £102 of asset value in the fund, you have £100 of asset value in the fund and £2 on the way to your fund platform's cash account. 

- The people who instead used the accumulation share class, are saying they never want to be sent the £2, and would like the fund manager to reinvest the fund's spare money into more shares of the underlying companies held by the fund. So the fund value will stay up at £102 per share and you don't receive any cash. For tax purposes you're still deemed to have 'got' a £2 distribution and reinvested it, but it just stays in the fund to save you the hassle of having to spend it on more shares of the fund in order to get it reinvested.

If you were doing this in a taxable investment account, the £2 is taxable (subject to your personal tax bands and allowances etc) whether or not you ask for the physical distribution. You'll get a tax voucher from the platform once a year saying how much you got, whether it was actually distributed (inc class) or just deemed to be a distribution (acc class).  If you're using an ISA there's no tax or recordkeeping to worry about so many people will just prefer the accumulating versions to keep things simple and stay invested, without needing to bother about having bits of income dripping in to their platform account which they'd need to figure out what to do with.

Some people use the income versions even if they plan to reinvest because seeing the receipts helps prompt them to keep track of the tax consequences of how much they 'received' (income tax) and how much they have re-invested (affecting their cost for CGT purposes). And as they will be holding a bunch of different funds (e.g. a US fund and a UK fund and a Europe fund and an emerging markets fund and a bond fund etc etc) they may find it convenient to have small amounts of income arrive from time to time to help them rebalance their holdings and cover investment platform fees etc.

Meanwhile a lot of people, especially those who don't have to worry about taxes and just want to keep the maximum amount of money invested for a long time, will just use accumulation versions of the funds - if they want a bit of cash, sell some.