GIA Taxes on accumulating ETFs

jifmoose

The learned discussion of the complicated tax implications for CSH2 in the other thread has got me thinking: As mentioned in some previous threads I've generally done investment inside an ISA in the past, but have used up all my allowance this year so have been putting some extra into stocks in a GIA.

A good chunk of this is ETFs (simply because they make sounder investments than picking individual shares myself!). Many of these are accumulating ETFs, i.e. don't pay dividends but rather reinvest back into the funds. The iShares NASDAQ 100 (Acc) is an example.

So as far as I'm aware, in principle three types of tax might be liable on these kinds of ETF, all with different allowances and rates:

1. Capital gain tax, e.g. upon selling at a gain. £3K allowance before it's taxed.
2. Dividend tax. £500 allowance before it's taxed.
3. Income tax, e.g. as applied to interest. Personal allowance varies by income (I have used up).

Now, I don't intend to sell, and have ample CGT allowance (£3K) anyway, so let's put that aside. But otherwise I just want to check my understanding because as far as I gather there are other tax liabilities to worry about which don't seem to be all that well-known for ETFs.

1. Accumulated reinvested units. These are taxable as dividends, right? I'm going by this https://monevator.com/income-tax-on-accumulation-unit/
2. Excess Reportable Income (ERI). This sounds like a nightmare for CSH2, but it occurs to me that ETFs domiciled outside the UK are liable for this too. And indeed many (e.g. iShares) are domiciled in Ireland and are "reporting" funds. Am I right in saying: this counts as dividends, unless the fund is >60% bonds in which case it is interest? I'm going by https://tgiltd.co.uk/excess-reportable-income-what-it-is-where-to-find-it-and-what-to-do-with-it/ here.

I certainly don't mind paying this tax - but as I'm on PAYE I really, really want to avoid having to fill out a tax return (especially for these doubtless trifling amounts will be a waste of both mine and HMRC's time!). My hope is I'm well inside the allowance for these.

So - am I right that even if the ETFs I invest in need to be taxed based on accumulating units, and even if they accrue ERI (assuming not bond funds), both of these count as dividends?

I'll certainly not exceed the dividend allowance (I have less than 5K invested in the GIA) and, barring miraculous stock performance, the CGT allowance either. But I don't have any PSA remaining. It'll be rather suboptimal if some of it counts as interest, and requires a lot of complex maths and a declaration to the tune of a few quid!

ColdIron

jifmoose said:

So - am I right that even if the ETFs I invest in need to be taxed based on accumulating units, and even if they accrue ERI (assuming not bond funds), both of these count as dividends?

My understanding is that for distributing ETFs the dividend (paid out) is classed as a dividend but you may have some ERI that needs to be reported as well

For accumulating ETFs there are no 'dividends' as such (for tax purposes anyway, even though they are retained) and it is all ERI

• For income funds, you’ll owe tax on excess reportable income plus any cash distributions that are paid directly to you. 
• For accumulation funds, your excess reportable income amounts to your entire taxable income. That’s because actual cash distributions are zero. 

See 'Yes there's more'
https://monevator.com/excess-reportable-income

Personally I avoid unwrapped ETFs

Edit: Your first Monevator link relates to open ended funds (OEICs) and is not applicable to non-UK domiciled ETFs

hallmark

This stuff is incredibly complex.  Thankfully however I've recently heard that even if you underpay your tax by tens of thousands of pounds you can just say you made a mistake.

GeoffTF

hallmark said:

This stuff is incredibly complex.  Thankfully however I've recently heard that even if you underpay your tax by tens of thousands of pounds you can just say you made a mistake.

Even if HMRC accepts that, you still have to pay interest on the underpayment at 8%.

jifmoose

Thanks ColdIron, this is helping me get my head around it. Ah, right yes that link seems more relevant. So, indeed it all will be ERI for an accumulating ETF. So (correct me if I'm wrong) - all that ERI is taxed as a dividend? I.e. at dividend rates and with the dividend allowance, separate from the PSA? That's how I'm interpreting this:

• Equity fund distributions are returned on the SA106 as dividends in the section ‘Dividends from foreign companies’. 

      Dividends are taxed at dividend income tax rates.

(assuming it is an "equity fund" and not a "bond fund" - presumably this is the complex unknown about CSH2).

So to use that iShares NASDAQ 100 (Acc) as an example:

- That's an accumulating fund
- It's an equity fund ("The Fund intends to replicate the Index by holding the equity securities which make up the Index, in similar proportions to it.")
- It is domiciled in Ireland (fairly clear from the Blackrock Ireland Ltd., Dublin etc. but made even clearer by ISIN IE00B53SZB19, IE=Ireland)

- It is an offshore reporting fund (I can find it on that list of approved reporting fund)
- So it will accrue ERI
- Which, if held at the specified date, is liable for Dividend tax
- If the holder is below the dividend tax threshold, owes nothing

Am I in the ballpark here?

masonic

jifmoose said:

Thanks ColdIron, this is helping me get my head around it. Ah, right yes that link seems more relevant. So, indeed it all will be ERI for an accumulating ETF. So (correct me if I'm wrong) - all that ERI is taxed as a dividend? I.e. at dividend rates and with the dividend allowance, separate from the PSA? That's how I'm interpreting this:

• Equity fund distributions are returned on the SA106 as dividends in the section ‘Dividends from foreign companies’. 

      Dividends are taxed at dividend income tax rates.

(assuming it is an "equity fund" and not a "bond fund" - presumably this is the complex unknown about CSH2).

So to use that iShares NASDAQ 100 (Acc) as an example:

- That's an accumulating fund
- It's an equity fund ("The Fund intends to replicate the Index by holding the equity securities which make up the Index, in similar proportions to it.")
- It is domiciled in Ireland (fairly clear from the Blackrock Ireland Ltd., Dublin etc. but made even clearer by ISIN IE00B53SZB19, IE=Ireland)

- It is an offshore reporting fund (I can find it on that list of approved reporting fund)
- So it will accrue ERI
- Which, if held at the specified date, is liable for Dividend tax
- If the holder is below the dividend tax threshold, owes nothing

Am I in the ballpark here?

Correct. There are edge cases where such income could tip you into a different tax band, but in the simple case you wouldn't owe any tax. You would need to declare the income anyway if you completed a tax return.

jifmoose

Brilliant, music to my ears (and glad my understanding isn't entirely askew). Thanks Masonic!

ColdIron

jifmoose said:

Am I in the ballpark here?

Yes that seems about right to me but as I only hold ETFs wrapped I have no personal experience with it

jifmoose said:

- Which, if held at the specified date, is liable for Dividend tax

Except, possibly this bit. The 'specified date' for ETF ERI is is not the same as for plain vanilla dividends

Generally the relevant tax year is deemed to be six months after the end of the funds reporting period. Different funds have different reporting periods. You would need to dig into the fund's documentation

Did I mention I avoid unwrapped ETFs? There's a reason for that

Edit: The Consolidated Tax Certificate issued by your platform is unlikely to detail ERI for you, you will need to 'roll your own'

EthicsGradient

To find the ERI for an ETF, first look among the manager's website - eg for the iShares NASDAQ 100 ETF a page here has "iShares VII reportable income 2024" (and earlier years), linking to a spreadsheet with a line for that ETF: iShares NASDAQ 100 UCITS ETF | CNDX
If you can't find it from the manager, try the KPMG website at KPMG reportingfunds.co.uk . With a free sign-up, you can search for many ETFs which record it there, rather than on their own sites.

jifmoose

Thanks both, yep finding this information can be tricky, indeed the platform reporting (Trading 212 in my case) doesn't make this particularly accessible. Thanks for the date info and useful links.