Taxation On Non-ISA ETF Accumulating Index Funds

muldesia

Hi All,

I'm thinking about investing in a non-ISA accumulation Vanguard ETF index fund.  As I understand it, I'd pay capital gains tax when I sell any part of the fund (unless within CGT allowance).

My question is around dividends tax.  The index fund is an accumulating one, so the dividends are immediately invested straight back into the same fund. Would I still need to pay dividend tax on these dividends, or does the auto-investment in any way get around this?

Many thanks!

masonic

For ETFs, which are invariably domiciled outside of the UK, the UK reporting fund scheme usually applies (check it does, otherwise all gains are taxed as income, which you usually don't want). For an accumulation ETF, the income will not be distributed, so it will be included in a figure known as Excess Reportable Income, declared annually by the fund. This figure needs to be included in your dividend income, and deducted from the capital gain you carry forward. It should be noted that many of us find this record keeping a pain to do! I keep my accumulating ETFs safely sheltered within ISA and SIPP to avoid this. You can read more here:

https://monevator.com/excess-reportable-income/

ColdIron

muldesia said:

Would I still need to pay dividend tax on these dividends

Yes

You benefit from the dividend, it doesn't matter what happens to it later. You will also need to include the (retained) dividend in your calculations when working out any capital gain, many people find distributing (Inc) 'funds' easier for this reason outside of a SIPP or ISA

In addition, as this is an ETF you would need to account for ERI (Excess Reportable Income) annually for income tax purposes

Outside of a tax shelter I would be looking for a distributing non-ETF

EdSwippet

ColdIron said:

muldesia said:

Would I still need to pay dividend tax on these dividends

Yes

...

Outside of a tax shelter I would be looking for a distributing non-ETF

Me too. Although, if the OP's platform is one that charges a lot more for fund and OEIC holdings than for ETFs -- the poster child here being Hargreaves Lansdown -- then the slight inconvenience of a distributing ETF is worth accepting. That, or use a lower charge platform (such as IWeb or Interactive Investor).

GeoffTF

ColdIron said:

muldesia said:

Would I still need to pay dividend tax on these dividends

You benefit from the dividend, it doesn't matter what happens to it later. You will also need to include the (retained) dividend in your calculations when working out any capital gain, many people find distributing (Inc) 'funds' easier for this reason outside of a SIPP or ISA

In addition, as this is an ETF you would need to account for ERI (Excess Reportable Income) annually for income tax purposes

It is simpler than that. The tax reporting for the accumulating ETFs is marginally simpler than for the distributing ETFs. For an ETF with reporting status, when dividend is not paid out, it is included in the ERI. The ERI is then the only dividend payment that you need to report. It can be added to your capital gains base cost, so that you do not pay tax on it twice.

ColdIron

GeoffTF said:

ColdIron said:

muldesia said:

Would I still need to pay dividend tax on these dividends

You benefit from the dividend, it doesn't matter what happens to it later. You will also need to include the (retained) dividend in your calculations when working out any capital gain, many people find distributing (Inc) 'funds' easier for this reason outside of a SIPP or ISA

In addition, as this is an ETF you would need to account for ERI (Excess Reportable Income) annually for income tax purposes

For an ETF with reporting status, when dividend is not paid out, it is included in the ERI. The ERI is then the only dividend payment that you need to report.

That's interesting to know, I wasn't aware of that. masonic alluded to it

masonic said:

For an accumulation ETF, the income will not be distributed, so it will be included in a figure known as Excess Reportable Income

I had assumed that ERI was in addition (and reported thus) to the dividend as the Monevator suggests and is typically not included in the annual Consolidated Tax Certificate

Many thanks, you live and learn

EthicsGradient

I don't know how many platforms report ERI in a Consolidated Tax Certificate; the only ETFs I hold outside a tax wrapper are with ii, and they don't report the ERI - I have to find it myself (Vanguard publishes theirs on their own site; many others publish on the KPMG site), and convert to pounds where necessary. It's possible for distributing funds to have ERI as well, though it often turns out to be zero for a year, but you have to check anyway to be completely correct. 

muldesia

masonic said:

For ETFs, which are invariably domiciled outside of the UK, the UK reporting fund scheme usually applies (check it does, otherwise all gains are taxed as income, which you usually don't want). For an accumulation ETF, the income will not be distributed, so it will be included in a figure known as Excess Reportable Income, declared annually by the fund. This figure needs to be included in your dividend income, and deducted from the capital gain you carry forward. It should be noted that many of us find this record keeping a pain to do! I keep my accumulating ETFs safely sheltered within ISA and SIPP to avoid this.

Thanks for getting back to me. Seems this is more complex than I thought. I was planning on using the InvestEngine website to invest in the two Vanguard funds Vanguard FTSE Developed World (VHVG) and Vanguard FTSE Emerging Markets (VFEG).  Both of these have a 'depository' of 'Ireland'. Neither of the key facts documents for these funds mentions the Reporting Status.  However, on the InvestEngine website they state "If you would like to know about the UK Fund Reporting Status (UKFRS), we can inform our clients that all of our ETFs (funds) are UK reportable."  I'm assuming this would mean I wouldn't end up paying Income Tax, does that sound right to you?

Also, you mentioned it's a pain to keep records when held outside an ISA or SIPP.  Aren't the dividend amounts/Excess Reportable Income something that would just appear on the once a year report they'd give out?  Or is there more to it than this?

Thanks again for the information!

EthicsGradient

muldesia said:

masonic said:

For ETFs, which are invariably domiciled outside of the UK, the UK reporting fund scheme usually applies (check it does, otherwise all gains are taxed as income, which you usually don't want). For an accumulation ETF, the income will not be distributed, so it will be included in a figure known as Excess Reportable Income, declared annually by the fund. This figure needs to be included in your dividend income, and deducted from the capital gain you carry forward. It should be noted that many of us find this record keeping a pain to do! I keep my accumulating ETFs safely sheltered within ISA and SIPP to avoid this.

Thanks for getting back to me. Seems this is more complex than I thought. I was planning on using the InvestEngine website to invest in the two Vanguard funds Vanguard FTSE Developed World (VHVG) and Vanguard FTSE Emerging Markets (VFEG).  Both of these have a 'depository' of 'Ireland'. Neither of the key facts documents for these funds mentions the Reporting Status.  However, on the InvestEngine website they state "If you would like to know about the UK Fund Reporting Status (UKFRS), we can inform our clients that all of our ETFs (funds) are UK reportable."  I'm assuming this would mean I wouldn't end up paying Income Tax, does that sound right to you?

Also, you mentioned it's a pain to keep records when held outside an ISA or SIPP.  Aren't the dividend amounts/Excess Reportable Income something that would just appear on the once a year report they'd give out?  Or is there more to it than this?

Thanks again for the information!

You will pay income tax on the Excess Reported Income, ie the income the ETFs receive and retain - for VFEG that was, in 2022, $1.62 per share - about 3% of the price, and for VHVG $1.51 - about 2% of the price (both are listed in a spreadsheet here under "Vanguard Funds plc". Since they're reporting funds, an increase in the price is treated as a capital gain, rather than as income. But note that, since that ERI is liable to income tax, you can then record that amount as a cost in a future capital gains calculation, potentially saving you some capital gains tax later.

Whether InvestEngine shows the ERI on a report is something you'll have to find out yourself. 

masonic

muldesia said:

masonic said:

For ETFs, which are invariably domiciled outside of the UK, the UK reporting fund scheme usually applies (check it does, otherwise all gains are taxed as income, which you usually don't want). For an accumulation ETF, the income will not be distributed, so it will be included in a figure known as Excess Reportable Income, declared annually by the fund. This figure needs to be included in your dividend income, and deducted from the capital gain you carry forward. It should be noted that many of us find this record keeping a pain to do! I keep my accumulating ETFs safely sheltered within ISA and SIPP to avoid this.

Thanks for getting back to me. Seems this is more complex than I thought. I was planning on using the InvestEngine website to invest in the two Vanguard funds Vanguard FTSE Developed World (VHVG) and Vanguard FTSE Emerging Markets (VFEG).  Both of these have a 'depository' of 'Ireland'. Neither of the key facts documents for these funds mentions the Reporting Status.  However, on the InvestEngine website they state "If you would like to know about the UK Fund Reporting Status (UKFRS), we can inform our clients that all of our ETFs (funds) are UK reportable."  I'm assuming this would mean I wouldn't end up paying Income Tax, does that sound right to you?

Other providers state this rather more clearly on the webpage relating to the ETF, but Vanguard seem not to. They do state the following in the prospectus:

You can find that HMRC list here: https://www.gov.uk/guidance/offshore-funds-distributing-and-reporting-funds#reporting-funds

muldesia said:
Also, you mentioned it's a pain to keep records when held outside an ISA or SIPP.  Aren't the dividend amounts/Excess Reportable Income something that would just appear on the once a year report they'd give out?  Or is there more to it than this?

EthicsGradient has explained how to obtain this information from Vanguard. Then it is a case of converting the ERI to GBP using HMRC's approved exchange rates here: https://www.trade-tariff.service.gov.uk/exchange_rates , declaring the dividend income to HMRC if you have sufficient dividend income to pay any tax, and adding the same to your cost base for future CGT calculations.

AndyTh_2

GeoffTF said:

ColdIron said:

muldesia said:

Would I still need to pay dividend tax on these dividends

You benefit from the dividend, it doesn't matter what happens to it later. You will also need to include the (retained) dividend in your calculations when working out any capital gain, many people find distributing (Inc) 'funds' easier for this reason outside of a SIPP or ISA

In addition, as this is an ETF you would need to account for ERI (Excess Reportable Income) annually for income tax purposes

It is simpler than that. The tax reporting for the accumulating ETFs is marginally simpler than for the distributing ETFs. For an ETF with reporting status, when dividend is not paid out, it is included in the ERI. The ERI is then the only dividend payment that you need to report. It can be added to your capital gains base cost, so that you do not pay tax on it twice.

It really depends on the ETF fund provider making it easy to find their reports. Some are much harder to find than others.

That said, some distributing ETFs have ERI as well, but much smaller as used most of the money for the dividend.