Excess Reportable Income

talexuser

Is there is an element to this for income dividend paying ETFs (Ireland based) , as opposed to accumulating ones outside a tax wrapper? I have to do a self assessment for the first time and can't find a clear explanation.

EthicsGradient

There can be, so you ought to check. Some ETF managers post their excess reportable income at https://www.kpmgreportingfunds.co.uk/Home/PublicInvestor (you need to register, but it's free, and they don't send email). Vanguard posts it on their own website - for the past year at https://www.vanguardinvestor.co.uk/content/documents/legal/vf-plc-excess-reportable-income-30-june-2020.pdf

For instance, the Vanguard Developed Asia Pacific ex Japan ETF pays income, but still had about 0.2% ERI this year.

dales1

Monevator has an explanatory article on this topic.

coastline

dales1 said:

Monevator has an explanatory article on this topic.

Do you owe tax on excess reportable income? - Monevator

Accumulation units – the income tax loophole that never was - Monevator

talexuser

Thanks all.
The excess for Vanguard FTSE Europe ETF is  0.0382 times my units gives €91, and if the 25% tax in the Motevator article is correct (it is from 2014) is €22. 
Likewise for North America ETF 0.0845 the tax works out to $26.
FTSE Japan is zero.

Now what exchange rate are you supposed to use? And since I have over 12k of dividends total to declare from all the funds that put me in the 40% tax bracket is it really worthwhile bothering with what are pretty trivial amounts in comparison?
 

underground99

talexuser said:

, and if the 25% tax in the Motevator article is correct (it is from 2014) is €22. 
Likewise for North America ETF 0.0845 the tax works out to $26.
FTSE Japan is zero.

Now what exchange rate are you supposed to use? And since I have over 12k of dividends total to declare from all the funds that put me in the 40% tax bracket is it really worthwhile bothering with what are pretty trivial amounts in comparison?
 

No longer correct - there used to be a tax credit system for dividends but these days after you've used your dividend allowance at 0% the marginal rate in dividend income for higher rate tax bracket people is 32.5%.

Generally with distributing ETFs they do intend to distribute the vast majority of their net income across their financial year and not leave any significant amounts of excess reportable income behind for you to recognise as 'notional' dividends. But they won't always get their planning perfect, so you can get these small amounts. With accumulating funds the amounts would be more significant. So if you only have distributing funds the amounts will likely be pretty trivial as you say, but you shouldn't ignore them if you want to get it right.

You can use any official exchange rate for the relevant date of the deemed distribution. Or you could even record all your foreign income from that currency using an average rate for the tax year. For example the FT publishes a daily USD / GBP rate, or HMRC publish monthly ones for businesses calculating their VAT and excise duties.

dales1

talexuser said:

 is it really worthwhile bothering with what are pretty trivial amounts in comparison?
 

Yes, you are supposed to declare even relatively small amounts to the taxman.

But on the other hand, these Excess Reportable Income amounts (whilst being declared as taxable at (low) dividend tax rates) are allowed as a deduction from the CGT calculation upon sale. So it is well worth bringing these costs into account if CGT might be an issue.

underground99

dales1 said:

talexuser said:

 is it really worthwhile bothering with what are pretty trivial amounts in comparison?
 

Yes, you are supposed to declare even relatively small amounts to the taxman.

But on the other hand, these Excess Reportable Income amounts (whilst being declared as taxable at (low) dividend tax rates) are allowed as a deduction from the CGT calculation upon sale. So it is well worth bringing these costs into account if CGT might be an issue.

Well, OP mentioned being a high rate taxpayer in excess on the dividend allowance, so would be paying income tax at 32.5% on each pound declared as income while only saving CGT at 20%.

Which is not a reason to fail to declare it as per your obligation to do so, but it does mean that 'low dividend tax rate' are not an incentive to go and find and declare the amounts.

talexuser

Ok, the next problem is of ~12k in dividends, only 1k is in the higher rate band. How does anyone know whether the ETF dividends are in the basic rate large chunk or in the minor higher rate chunk for tax purposes?

Yes I use up the CTG allowance every year in unwrapped to rebalance and reset the base levels so maybe should include these small amounts in that calculation.

underground99

talexuser said:

Ok, the next problem is of ~12k in dividends, only 1k is in the higher rate band. How does anyone know whether the ETF dividends are in the basic rate large chunk or in the minor higher rate chunk for tax purposes?

Yes I use up the CTG allowance every year in unwrapped to rebalance and reset the base levels so maybe should include these small amounts in that calculation.

The dividend tax rate is the same on an ETF dividend as it is on a UK share dividend. That is, it's taxed at 0% if it's the first £2k of dividends for that year that doesn't fit into your personal allowance, then taxed at 7.5% until your total income takes you over the threshold to higher rate tax (£50k), then taxed at 32.5% until your total income takes you to additional rate tax (£150k), then taxed at 38.1%

If you have, say, £10k of dividends from company X and £1.9k of distributed ETF dividends and £0.1k of excess distributable income from ETFs, that's £12k total. It doesn't matter if you say the ETF ones were taxed first or last, because overall you still have £12k of dividend income to be taxed at the appropriate rates; some at 0%, some at basic, some at higher.

talexuser

Thanks, I was confused over the out of date tax info in the Motevator article. So for self assessment I add the excess calculation to the dividend totals, and subtract it from the capital gains of the respective funds, but it's only used if I actually crystalise any gains of those funds? And that only six months after the reporting date, which for Vanguard is June, so in our next tax year?

Ridiculous that funds or platforms have no requirement to show it on your end of year return.