Fund or ETF better?

masonic

JohnWinder said:

Thanks, but I don't follow. The issue I referred to

Doesn't apply in the UK

But the legitimate use of taxation strategies only

...eliminate it as a problem for most.

So it remains a problem for some??

Some people have to pay capital gains tax because they have unwrapped holdings and exceed the annual allowance. It is levied on them personally, not the fund, so it has no impact on other holders of the fund and there is no way of the individual making the disposal avoiding CGT through the choice of collective investment vehicle (though if the fund is non-reporting and non-distributing, they may end up paying income tax rather than capital gains tax).

JohnWinder

Some people have to pay capital gains tax because they have unwrapped holdings and exceed the annual allowance. It is levied on them personally, not the fund, so it has no impact on other holders of the fund

Thanks, that considers a particular circumstance which does not necessarily include mine.

Through brevity I fear I was not clear.
My reference source was USA; UK could be different in the matter I raised. Consider only investments in taxable accounts, and consider only cases in which the annual capital gains tax exemption threshold has already been exceeded from other assets.
In some jurisdictions a fund (not etf) can be a trust, and in some such jurisdictions a trust is required to distribute its gains (interest, dividends, capital gains etc) each year; they cannot be retained. When those capital gains are distributed in any year they become assessable for taxation for those holding units in the fund (not etf). Such capital gains can arise, if there is an exodus from the fund (not etf) by other people during a financial crisis when investors are taking out more than they are putting in, because the fund manager has to sell assets which have appreciated in the fund since they were purchased by the fund. So, ignoring those who bailed out of the fund, those who are left have a capital gain tax liability though they neither bought nor sold during the year.
The disadvantage is that paying tax reduces the money you have invested; and it’s considered more profitable to pay taxes later rather than earlier (years later, not days later).
Whether, how or to what extent this occurs in UK I have no idea. Lest my elaboration is still not clear, perhaps someone else familiar with where it happens and where it doesn’t happen can comment on the UK also.

masonic

JohnWinder said:

In some jurisdictions a fund (not etf) can be a trust, and in some such jurisdictions a trust is required to distribute its gains (interest, dividends, capital gains etc) each year; they cannot be retained. When those capital gains are distributed in any year they become assessable for taxation for those holding units in the fund (not etf). Such capital gains can arise, if there is an exodus from the fund (not etf) by other people during a financial crisis when investors are taking out more than they are putting in, because the fund manager has to sell assets which have appreciated in the fund since they were purchased by the fund. So, ignoring those who bailed out of the fund, those who are left have a capital gain tax liability though they neither bought nor sold during the year.

The disadvantage is that paying tax reduces the money you have invested; and it’s considered more profitable to pay taxes later rather than earlier (years later, not days later).
Whether, how or to what extent this occurs in UK I have no idea. Lest my elaboration is still not clear, perhaps someone else familiar with where it happens and where it doesn’t happen can comment on the UK also.

Can you give an example of such a fund that is required to distribute capital gains that can be held in a UK investment account (i.e. PRIIPs compliant)? I've never heard of this and I'm sure none of the investments I've ever held as a UK investor (including UTs, OEICs, ETFs, UK-reporting offshore funds and ITs) fall into that category. Investment trusts are entitled to distribute profits obtained through making capital gains, but these are treated as dividend income, just like any other dividend paying company. However, ITs have a fixed capital pool, so they never have to sell assets to meet redemptions by investors (unless they are wound up).

JohnWinder

No I can't. When I raised the matter I referred to a USA source, relevant to USA (?elsewhere), and I asked 'is this relevant?' by which I meant 'to readers', in UK or elsewhere come to that. Sorry if that was unclear.

JohnWinder

Investment trusts are entitled to distribute profits obtained through making capital gains, but these are treated as dividend income

Might it be the case that the capital gains I have described, ie gains made by the fund through selling in order to allow fund holders to flee during a crisis, despite my not selling, are labelled as dividends to me and taxable as such? The nature of an ETF is such that this does not occur, even when it occurs for a fund (not etf) as in USA.

Linton

JohnWinder said:

Thanks, but I don't follow. The issue I referred to

Doesn't apply in the UK

But the legitimate use of taxation strategies only

...eliminate it as a problem for most.

So it remains a problem for some??

There is a CGT allowance of £12300 ie you can realise that amount in net gains from your investments in a year and pay no tax. So if you have a large unsheltered pot you can arrange to always realise up to £12300/year in net gains and re-invest immediately in something similar but not identical.

Very few people are going to average more than £12300/year net gains in unsheltered accounts.

IanManc

JohnWinder said:

No I can't. When I raised the matter I referred to a USA source, relevant to USA (?elsewhere), and I asked 'is this relevant?' by which I meant 'to readers', in UK or elsewhere come to that. Sorry if that was unclear.

And @dunstonh replied very clearly, saying "Doesn't apply in the UK".

Linton

JohnWinder said:

Investment trusts are entitled to distribute profits obtained through making capital gains, but these are treated as dividend income

Might it be the case that the capital gains I have described, ie gains made by the fund through selling in order to allow fund holders to flee during a crisis, despite my not selling, are labelled as dividends to me and taxable as such? The nature of an ETF is such that this does not occur, even when it occurs for a fund (not etf) as in USA.

A fund dividend may be liable to income tax.  A dividend is an actual (or notional in the case of Acc OEICs/UT funds)  distribution of cash to all its investors.  The UK tax system is not interested in the internal details of how a fund operates. 

masonic

JohnWinder said:

Investment trusts are entitled to distribute profits obtained through making capital gains, but these are treated as dividend income

Might it be the case that the capital gains I have described, ie gains made by the fund through selling in order to allow fund holders to flee during a crisis, despite my not selling, are labelled as dividends to me and taxable as such? The nature of an ETF is such that this does not occur, even when it occurs for a fund (not etf) as in USA.

This is a special case applying to investment trusts, which are structured as a company, not a fund. Only a small number of ITs choose to do this and it has nothing to do with investors selling. It is the result of them wishing to pay a higher income than their natural yield during downturns.

Open ended funds do not do this and the consequences of their redemptions are confined to those selling, because the units being sold are cancelled, not spread over other investors.

JohnWinder

IanManc said:

JohnWinder said:

No I can't. When I raised the matter I referred to a USA source, relevant to USA (?elsewhere), and I asked 'is this relevant?' by which I meant 'to readers', in UK or elsewhere come to that. Sorry if that was unclear.

And @dunstonh replied very clearly, saying "Doesn't apply in the UK".

Indeed she did. And then pointed out that there is no internal taxation on capital gains in the funds we are talking about.

Apart from insured funds outside of a pension (e.g. life funds) there is no internal taxation on capital gains.

But I wasn't talking about tax 'internal to the fund', I was trying to talk about taxation of the individual investor as a result of the fund's payouts, so I thought she may not have understood my description.

And then she hinted that if an investor wasn't saved by a tax wrapper and their CGT allowance, they may still have the problem I was pointing out exists in other jurisdictions and might exist in UK.

The use of tax wrappers and annual CGT allowances eliminate it as a problem for most.