Taxes on saving in offshore ETFs and similar accumulation funds

NotuProblem

Hello!

First of all thank you everyone for this forum.

Me and my wife moved to live to Republic of Ireland just some months ago and we were pretty happy until we discovered here they have a tax called "Deemed Disposal"; since I cannot post links I'll summarize it: It means that every 8 years you are charged a 41% tax over the profit within all your funds as if you had exited them and sold them, regardless of your intentention to keep them. And sadly ETFs and similar funds are the main way we have decided to save money and plan for an early retirement. So we don't have any intention to stay here and pay that tax now, as it completly destroys all our expectatives when we check the numbers.

So now we are considering moving to the UK within the next few years to live. I have searched around a lot and I haven't found anything alike in the UK but I'm worried since at least from my perspective such a tax is something so strange I didn't expected it existing in Ireland either. Is there anything similar on the UK?

Or to make the question in a broader way. As far as I expect, I would pay taxes on the income I receive from my job. Then if that income is spent into buying ETFs and similar Funds I will not paymore taxes for buying them. And those ETFs and Funds, if they are accumulating and not Distributing any dividend I won't pay any taxes until the moment I decide to sell them to cash out those profits, be it 10, 15, 20 or any number of years after original acquisition...:

- Are there any more taxes to account for on these type of investments in the UK?

- Once we retire with these money and start living from selling our funds, are there any more taxes than Capital Gain?

Thank you all for your time.

Hoenir

The tax wrapper determines the tax status of income. Not the whether the investment is distribution or accumulation. Accumulation funds pay a notional dividend. 

ColdIron

Accumulation or Income makes no difference, you are liable for dividend (or interest) tax annually as you are the beneficiary regardless of whether they are retained or not

ETFs may report this as Excess Reportable Income. With Income ETFs it is likely it will be split between dividends and ERI. For Accumulation ETFs it will all be ERI

With either Accumulation funds or ETFs you would deduct the income from the apparent gain on disposal to establish your actual capital gain

Your best bet will be to shelter these in an ISA or pension

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

wmb194

NotuProblem said:

Hello!

First of all thank you everyone for this forum.

Me and my wife moved to live to Republic of Ireland just some months ago and we were pretty happy until we discovered here they have a tax called "Deemed Disposal"; since I cannot post links I'll summarize it: It means that every 8 years you are charged a 41% tax over the profit within all your funds as if you had exited them and sold them, regardless of your intentention to keep them. And sadly ETFs and similar funds are the main way we have decided to save money and plan for an early retirement. So we don't have any intention to stay here and pay that tax now, as it completly destroys all our expectatives when we check the numbers.

So now we are considering moving to the UK within the next few years to live. I have searched around a lot and I haven't found anything alike in the UK but I'm worried since at least from my perspective such a tax is something so strange I didn't expected it existing in Ireland either. Is there anything similar on the UK?

Or to make the question in a broader way. As far as I expect, I would pay taxes on the income I receive from my job. Then if that income is spent into buying ETFs and similar Funds I will not paymore taxes for buying them. And those ETFs and Funds, if they are accumulating and not Distributing any dividend I won't pay any taxes until the moment I decide to sell them to cash out those profits, be it 10, 15, 20 or any number of years after original acquisition...:

- Are there any more taxes to account for on these type of investments in the UK?

- Once we retire with these money and start living from selling our funds, are there any more taxes than Capital Gain?

Thank you all for your time.

Where are these ETFs and, "similar accumulation funds" (what are these?) domiciled? There can be an issue where if they're non-UK reporting funds capital gains from them will be taxed as income.

"If you dispose of your shares/units in a non-reporting offshore fund, any gain you realise will normally be treated as an ‘offshore income gain’ unless an exception applies in which case consult the Investment Funds Manual.

You will be subject to income tax, rather than capital gains tax, on any offshore income gain you realise."

https://www.gov.uk/government/publications/offshore-funds-self-assessment-helpsheet-hs265/hs265-offshore-funds

NotuProblem

Ok, thank you a lot, that link was very helpful, I think I understand that part now. And I will have to study a lot about ISA since that's something totally new for me

But all that is in regards to the dividends paid, and also I read that there are some exceptions with index trackers (which are a big part of our portfolio), so are offshore index tracker funds allowed to not pay tax on accumulation?

Also, the increase of value of the fund that happens just because the underlying stocks increase in value does not pay any tax until the day we sell it, for which we'd pay Capital Gain tax. Is this right?

ColdIron

NotuProblem said:

Ok, thank you a lot, that link was very helpful, I think I understand that part now. And I will have to study a lot about ISA since that's something totally new for me

ISAs generally are free of tax. Your problem will be that you can only put £20,000 into them a year

https://www.moneysavingexpert.com/savings/stocks-shares-isas/

But all that is in regards to the dividends paid, and also I read that there are some exceptions with index trackers (which are a big part of our portfolio), so are offshore index tracker funds allowed to not pay tax on accumulation?

There are no exceptions for index trackers. It is the structure of the instrument that matters. Open ended funds (OEICs, Unit Trusts etc), ETFs Investment Trusts etc and whether they are onshore or offshore

Also, the increase of value of the fund that happens just because the underlying stocks increase in value does not pay any tax until the day we sell it, for which we'd pay Capital Gain tax. Is this right?

Broadly yes but see my mention above regarding deducting income from apparent or simple gain, you wouldn't want to pay tax on the same money twice. You would also need to account for Equalisation for Income funds/OEICs also mentioned in the link

EthicsGradient

NotuProblem said:

Ok, thank you a lot, that link was very helpful, I think I understand that part now. And I will have to study a lot about ISA since that's something totally new for me

But all that is in regards to the dividends paid, and also I read that there are some exceptions with index trackers (which are a big part of our portfolio), so are offshore index tracker funds allowed to not pay tax on accumulation?

Also, the increase of value of the fund that happens just because the underlying stocks increase in value does not pay any tax until the day we sell it, for which we'd pay Capital Gain tax. Is this right?

Index trackers do not have any special rules that I'm aware of. If they accumulate dividends from the stocks they own, then, for UK reporting funds (see wmb194's post), they either pay those dividends through to you, and you are liable to income tax on that, or they accumulate them and they are listed as Excess Reportable Income, on which you still liable to income tax; but you can then list that as a new cost of acquiring your ETF shares (so it's the equivalent of re-investing income back into the ETF).

If the ETF has UK reporting status, then yes, the increase in value from underlying stocks is not taxed until sale, when CGT is assessed.

Since it sounds like you're coming from a third country, make sure about the rules for taxation applying in both your original country and the UK, and things like eligibility for ISAs. Most people here won't have experience with that (though some may, of course).

NotuProblem

Thank you everybody! I think I get the idea now. Of course I'll have to dig a lot into some of this concepts to be sure, like the difference between "apparent or simple gain" and how can we use it, and all the different paperwork that will be required, but hopefully it won't be as nightmarish as it seems?

wmb194 said:

Where are these ETFs and, "similar accumulation funds" (what are these?) domiciled? There can be an issue where if they're non-UK reporting funds capital gains from them will be taxed as income.

It depends. Some are European mutual funds and European ETFs (UCITS) provided by a Spanish-Andorran broker. Some are Spanish value investing author themed mutual funds provided by their creators. And some are US ETFs and mutual funds provided by a Swiss broker to avoid the EU soft limitation on buying non-EU ETFs (nothing illegal there, just navigating the regulations).

ColdIron said:

ISAs generally are free of tax. Your problem will be that you can only put £20,000 into them a year

Can I consider such a funds and ETFs as my ISA or I need to find a specific ISA that offer similar stocks? (Right now I'm not sure if I understand whether an ISA is just a way to declare part of my savings or a very specific financial product I need to decide to buy from a certain set of offers).

Thankfully though, it is not that important, as our planning does not rely so much on dividends, so they are just a very marginal part of the growth. Selling assets to buy new ones as part of the investment strategies directed by the fund managers is though... which I believe still falls under the "notional gains" that you said? Can they be compensated if they have been reinvested?

EthicsGradient said:
Since it sounds like you're coming from a third country, make sure about the rules for taxation applying in both your original country and the UK, and things like eligibility for ISAs. Most people here won't have experience with that (though some may, of course).

Yes, we come from Spain. There I'd say tax rules for investments are simpler... not cheaper by default though, but you don't pay taxes on accumulation products for example, or if the fund sells assets but the money is kept inside the fund. You only need to worry about the difference in value from the moment you bought and the moment you sell. That's why many of these things sounded alien to me. But there are many reasons moneywise to not go back (starting by salaries and many other taxes).

As said, thank you all for your time and answers. As time passes and we start taking steps to move to the UK probably new questions related to this topic will arise.

ColdIron

ColdIron said:

ISAs generally are free of tax. Your problem will be that you can only put £20,000 into them a year

Can I consider such a funds and ETFs as my ISA or I need to find a specific ISA that offer similar stocks? (Right now I'm not sure if I understand whether an ISA is just a way to declare part of my savings or a very specific financial product I need to decide to buy from a certain set of offers)

An ISA is a tax wrapper in much the same way that a pension is. Broadly they shield the investments that you choose to hold within them (open ended funds like your 'mutual funds', ETFs etc) from tax on capital gains, dividends and interest

There are limits on what you can hold in them but they are pretty broad and you won't have any problems finding many equivalents to what you have or want. See ISA-Eligible Investments

https://www.morningstar.co.uk/uk/news/106440/what-can-you-put-in-your-isa.aspx

Re-read the MSE link in my earlier post

Thankfully though, it is not that important, as our planning does not rely so much on dividends, so they are just a very marginal part of the growth. Selling assets to buy new ones as part of the investment strategies directed by the fund managers is though... which I believe still falls under the "notional gains" that you said? Can they be compensated if they have been reinvested?

Dividends or gains are irrelevant, neither are taxable within an ISA so no compensation required

BTW As regards "apparent or simple gain"

If you buy £10,000 of something and it goes up by 50% then your apparent or simple gain is £5,000. But if £1,000 of it was retained dividends then your actual capital gain was only £4,000. Obviously this doesn't apply to ISAs

Bostonerimus1

If you become a UK tax resident and own ETFs and mutual funds outside the UK you will have to deal with their UK reporting status and also cross border taxation and the applicable double tax treaties. This can be expensive and will be complicated unless the funds are held within a tax wrapper like a pension recognized by the tax treaty.