Fund or ETF better?

JohnWinder

(buying and not selling) ...then finding that you have to pay income tax on that $10k distribution. Equivalent to paying tax on a refund of principal. This is the type of reality that capital gains distributions in particular can create for unwary (or even wary) US investors.

Not a concern for UK investors, though.

Thanks. So, can I take it that your answer to my issue would be 2b (solely among investors leaving the fund)?

masonic

JohnWinder said:

There's also an element of 2a because dividends and capital gains are kept entirely separate in the UK tax system

I wrote:

2a. The capital gain is never part of an annual 'dividend' to any fund holders, and is taxable by the fund or is tax exempt.

I may have confused the discussion with 'dividend' as I wrote it. I meant annual or other interval scheduled distribution from the fund to the investor, because I thought we had established that this payment in UK is referred to as 'dividend' even though it may be partly interest from cash or bonds. Reading your comment makes me think you are separating true stock dividends from CG.

I was just highlighting that there are no distributions of capital gains in the UK.

JohnWinder said:

This is incompatible with 2c as the fund house could never know the investor had reacquired the units and that the sale was exempt, or which rate of CGT would have applied to the disposal.

I'm certainly losing faith in 2c, but I disagree. The fund house knows the identity of each investor, and thus will know when they sold/reaquired, surely? I do see how the fund house would not know which rate of CGT would apply, but I don't think the fund house needs to know that, if the investor is responsible for completing their own personal annual tax report for Inland Revenue.

Thanks for the links. I didn't read all of the uk.gov information, so if there's a specific bit relevant to my initial concern, don't hesitate....

The fund house won't know the identities of most investors as the funds will be held in a collective nominee account operated by a separate organisation and will be held in the name of this nominee. The other complication is that they may trade the same fund on different platforms. As you say, it is the individual investor's responsibility to calculate and declare their capital gains. They do this by performing calculations on their own acquisitions and disposals. HMRC provide worksheets for doing this. There is no component to the calculation relating to gains made within funds held by the investor (as these gains result in the unit price of the fund increasing and form part of the calculation at disposal). All in all it is a much simpler regime where you only need to refer to actual transactions to perform your CGT calculations.

JohnWinder

Thanks for the clear elaboration, and others for helping me understand this.  Doing widespread internet searching on how capital gains within funds are taxed, I'm surprised how hard it has been to find something explanatory.

masonic

It's quite remiss of the internet, isn't it

I was surprised not to be able to find some sort of comparison between UK and USA. However, it seems websites focus on one or the other, taking peculiarities of their tax system for granted. I'd guess most UK investors find the concept of being on the hook for capital gains arising from somebody else's assets and actions completely alien (just as I did at the start of this discussion). The fact we are spared this through a vehicle level exemption just isn't discussed here.