ETF's and taxes

dunstonh

My understanding is that you do not actually get the dividends separately in an ETF, this is put back into the fund which raises the funds price?

The is how accumulation units work.

 but you still have to allow for the dividend on your tax return?

yes

This means you are actually paying tax on the dividend part twice? once on your return as dividend tax and then again as profit on the ETF?

No.  You only pay CGT on the gain after the income has been removed.     This is why most people consider income units much easier than accumulation units when it comes to unwrapped investments.   Many platforms will be able to provide the difference for you.  Some may not or may not be able to do it in a user friendly way.  So, stick with income units if you want to keep it simple.

Adyinvestment

Idunstonh said:

My understanding is that you do not actually get the dividends separately in an ETF, this is put back into the fund which raises the funds price?

The is how accumulation units work.

 but you still have to allow for the dividend on your tax return?

yes

This means you are actually paying tax on the dividend part twice? once on your return as dividend tax and then again as profit on the ETF?

No.  You only pay CGT on the gain after the income has been removed.     This is why most people consider income units much easier than accumulation units when it comes to unwrapped investments.   Many platforms will be able to provide the difference for you.  Some may not or may not be able to do it in a user friendly way.  So, stick with income units if you want to keep it simple.

Thanks for putting that in a way I understand

To help me further my knowledge are there any Vanguard ETF's on the below link (H missing) that I would be able to hold until ready to sell and then pay CGT at the point of sale without incurring any dividend or income tax along the way.    (not as an investment advice but just so I can get my head around this)

ttps://www.vanguardinvestor.co.uk/what-we-offer/all-products

bowlhead99

Adyinvestment said:

My understanding is that you do not actually get the dividends separately in an ETF, this is put back into the fund which raises the funds price? but you still have to allow for the dividend on your tax return?
This means you are actually paying tax on the dividend part twice? once on your return as dividend tax and then again as profit on the ETF?
I said I was confused...

As dunstonh said you don't get hit twice for tax because the notional dividend income (undistributed) which you recognise for income tax purposes is allowable as an increase in your allowable cost of the asset for CGT purposes at the time it gets recognised.

Traditional 'open ended' funds (oeics and unit trusts and equivalents) are generally handled quite well by investment platform's systems so they can give you an annual consolidated tax certificate showing the income allocated to you but unpaid. However, for ETFs which trade as shares on a stock exchange and are not actually distributing all of the income that they collect, the investment platforms or stockbrokers often either don't receive the information or don't have a mechanism for reporting it to customers.

The ETF provider (as long as it is an HMRC registered reporting fund) will generate a report once per year showing the amount of income generated but undistributed for the year per share, which you can usually find on their documentation and reporting area of the ETF provider's website. You would need to use that to calculate the income relevant to you (based on the number of shares held) and it would be deemed distributed to you x months after the fund's accounting year end (I forget if it is 3 or 6 but it will say on the excess undistributed income report), at which point you need to record it as income and an increase in cost in your own records.

Adyinvestment

The ETF provider (as long as it is an HMRC registered reporting fund) will generate a report once per year showing the amount of income generated but undistributed for the year per share, which you can usually find on their documentation and reporting area of the ETF provider's website. You would need to use that to calculate the income relevant to you (based on the number of shares held) and it would be deemed distributed to you x months after the fund's accounting year end (I forget if it is 3 or 6 but it will say on the excess undistributed income report), at which point you need to record it as income and an increase in cost in your own records.

Thankyou

So what I am looking for does not exist? an ETF that you can keep until you sell and then pay CGT at that point in the future?

Alexland

Adyinvestment said:

So what I am looking for does not exist? an ETF that you can keep until you sell and then pay CGT at that point in the future?

Something like iShares Physical Gold SGLN might suit as part (maybe 5-10%) within the lower growth allocation (although it can still be quite volatile) in your broader diversified portfolio spread across multiple accounts. Gold doesn't generate any income, costs money to store/insure but should go up in value over the long term.

bowlhead99

Adyinvestment said:

The ETF provider (as long as it is an HMRC registered reporting fund) will generate a report once per year showing the amount of income generated but undistributed for the year per share, which you can usually find on their documentation and reporting area of the ETF provider's website. You would need to use that to calculate the income relevant to you (based on the number of shares held) and it would be deemed distributed to you x months after the fund's accounting year end (I forget if it is 3 or 6 but it will say on the excess undistributed income report), at which point you need to record it as income and an increase in cost in your own records.

Thankyou

So what I am looking for does not exist? an ETF that you can keep until you sell and then pay CGT at that point in the future?

Correct - the only types of exchange traded products that you could allow to 'roll up' and sell for a gain without ever getting an reportable income along the way would be the ones where the underlying assets literally don't produce income - e.g. a commodity such as gold sitting in a vault as mentioned by Alexland - or produce so little income from their portfolio that the income is wiped out by the fund running costs. 

HMRC's offshore fund rules mean that if you put money into an ETF which hasn't registered with them as a reporting fund and committed to make a report of the annual 'excess undistributed income' available to you, and then you later sell it at a gain, they are not willing to argue the toss with you about how much was really  underlying income and how much was gain - they will simply say it is ALL income. Which is generally not what you want. So all ETFs with UK customers are generally all going to be producing these excess income reports if they roll it up and accumulate it instead of distributing it, because that's the way you can at least get to make some gains and pay CGT rates with annual exemption etc, rather than HMRC deeming it to be all income taxed at marginal rates.

As ETFs generally follow indexes and most indexes don't discriminate to exclude investments that generate income, you would struggle to find an ETF without some sort of income unless it was just speculatively holding commodities or commodities contracts. A managed fund using active management decisions to screen out stocks may be more likely to be able to construct a portfolio of 'growth' stocks that have relatively lower income than the average company, than an ETF following a broad index.

Adyinvestment

bowlhead99 said:

Adyinvestment said:

The ETF provider (as long as it is an HMRC registered reporting fund) will generate a report once per year showing the amount of income generated but undistributed for the year per share, which you can usually find on their documentation and reporting area of the ETF provider's website. You would need to use that to calculate the income relevant to you (based on the number of shares held) and it would be deemed distributed to you x months after the fund's accounting year end (I forget if it is 3 or 6 but it will say on the excess undistributed income report), at which point you need to record it as income and an increase in cost in your own records.

Thankyou

So what I am looking for does not exist? an ETF that you can keep until you sell and then pay CGT at that point in the future?

 So all ETFs with UK customers are generally all going to be producing these excess income reports if they roll it up and accumulate it instead of distributing it, because that's the way you can at least get to make some gains and pay CGT rates with annual exemption etc, rather than HMRC deeming it to be all income taxed at marginal rates.

I think I am nearly there - shame I can't find something easy to invest in until I am in a lower tax bracket in the future.
Can I ask the below on a typical Vanguard Lifestrategy ETF
Buy in £100
End of tax year value £110
Dividend proportion of £10 profit is £2 (subject to dividend tax but can be take this off my £10 profit to leave £8 for reporting)
As a higher rate tax payer what do I have to pay on the £8?

bowlhead99

Adyinvestment said:

bowlhead99 said:

Adyinvestment said:

The ETF provider (as long as it is an HMRC registered reporting fund) will generate a report once per year showing the amount of income generated but undistributed for the year per share, which you can usually find on their documentation and reporting area of the ETF provider's website. You would need to use that to calculate the income relevant to you (based on the number of shares held) and it would be deemed distributed to you x months after the fund's accounting year end (I forget if it is 3 or 6 but it will say on the excess undistributed income report), at which point you need to record it as income and an increase in cost in your own records.

Thankyou

So what I am looking for does not exist? an ETF that you can keep until you sell and then pay CGT at that point in the future?

 So all ETFs with UK customers are generally all going to be producing these excess income reports if they roll it up and accumulate it instead of distributing it, because that's the way you can at least get to make some gains and pay CGT rates with annual exemption etc, rather than HMRC deeming it to be all income taxed at marginal rates.

I think I am nearly there - shame I can't find something easy to invest in until I am in a lower tax bracket in the future.
Can I ask the below on a typical Vanguard Lifestrategy ETF
Buy in £100
End of tax year value £110
Dividend proportion of £10 profit is £2 (subject to dividend tax but can be take this off my £10 profit to leave £8 for reporting)
As a higher rate tax payer what do I have to pay on the £8?

1) Vanguard Lifestrategy is not an ETF but an open ended investment company (OEIC) fund. 
2) If you choose the accumulating rather than distributing version of the fund, the £2 of income stays in the fund and the unit price goes up to £110 from £100.
3) the deemed dividend of £2 is subject to dividend tax but your cost of investment for of the shares that are now worth £110, is now considered to be £102.
4) If you sell your shares in the fund for £110, you compare that to the cost of buying the shares for £102, and make an £8 profit per share. 
5) So if you had 2000 shares and chose to sell them all at £8 per share gain, you would make £16,000 capital gain at the point you sell them.  If it was the only sale you made in the tax year your annual exempt amount (the first £12,300 of gains realised in a tax year) could be taken off this £16,000 leaving £3,700 taxable.  A higher rate taxpayer pays 20% tax on whatever gains they make (after deducting losses or annual exemptions) so that's £740 of capital gains tax due on the £3700 gain.

If you didn't actually sell any shares and are simply observing that they have gone up in value to £110, you have not made any capital gain at all; a gain is when you sell something for more than it cost you. So if you didn't sell at the end of the year, no capital gains tax calculation is required - other than making the mental note that your original allowable cost of £100 per share has now gone up to £102 per share because of the undistributed income which counts as investment cost if it is still in the fund.

The longer you leave gains before 'cashing them in', the more unrealised gain builds up (e.g. by year three or four the shares might be worth £130 or £140 or £150 etc) so the more likely you are to make a gain that exceeds your annual CGT exemption when you do eventually cash in a lot of shares in one year.

Adyinvestment

1) Vanguard Lifestrategy is not an ETF but an open ended investment company (OEIC) fund. 
2) If you choose the accumulating rather than distributing version of the fund, the £2 of income stays in the fund and the unit price goes up to £110 from £100.
3) the deemed dividend of £2 is subject to dividend tax but your cost of investment for of the shares that are now worth £110, is now considered to be £102.
4) If you sell your shares in the fund for £110, you compare that to the cost of buying the shares for £102, and make an £8 profit per share. 
5) So if you had 2000 shares and chose to sell them all at £8 per share gain, you would make £16,000 capital gain at the point you sell them.  If it was the only sale you made in the tax year your annual exempt amount (the first £12,300 of gains realised in a tax year) could be taken off this £16,000 leaving £3,700 taxable.  A higher rate taxpayer pays 20% tax on whatever gains they make (after deducting losses or annual exemptions) so that's £740 of capital gains tax due on the £3700 gain.

If you didn't actually sell any shares and are simply observing that they have gone up in value to £110, you have not made any capital gain at all; a gain is when you sell something for more than it cost you. So if you didn't sell at the end of the year, no capital gains tax calculation is required - other than making the mental note that your original allowable cost of £100 per share has now gone up to £102 per share because of the undistributed income which counts as investment cost if it is still in the fund.

The longer you leave gains before 'cashing them in', the more unrealised gain builds up (e.g. by year three or four the shares might be worth £130 or £140 or £150 etc) so the more likely you are to make a gain that exceeds your annual CGT exemption when you do eventually cash in a lot of shares in one year.

That is an awesome explanation - many thanks. That one post has made more sense than my googling for the last week!

One last thing (I hope) - are all ETF's & OEIC's classed as CGT and not as regular income?

csgohan4

if your selling, best to sell in tranches to just below CGT for each financial year