Taxation On Non-ISA ETF Accumulating Index Funds

GeoffTF

EthicsGradient said:

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. 

For a non-reporting fund both dividends and capital gains are taxed as income:

https://planfirstwealth.com/reporting-funds-non-reporting-funds/

For a reporting fund, ERI is taxed as dividend or interest income:

https://www.cklg.co.uk/do-you-owe-tax-on-excess-reportable-income-eri/