Holding ETFs in a non isa account

DjangoUnchained

ive read on here that holding etf,s in a non isa account can be complicated. I didnt realise ths. As having filled my isa allowance with etf,s i decided to buy more and have put about 12k in a non isa account (trading212).I have made some gains and going forward want to know what i should be doing as regards to declaring profits, or if it only needs to be done when i sell them to realise the gains. I did intend to hold them for 10+ years.

ColdIron

You will need to report gains when you sell (e.g. in 10 years) but you should also account for dividends/interest and ERI as it arises (e.g. annually)

You could look at open ended funds (OEICs), you should be able to find a close(ish) match and taxation is similar but without ERI. Personally I stick to investment trusts as they are very simple though you won't find trackers in that space

EthicsGradient

If the ETFs are a "reporting fund", according to HMRC (the popular ones in the UK all are), you don't have to declare capital gains until you sell a part, or all, of a holding. But you do need to know the income of them, each tax year - as well as the income of any funds, investment trusts or shared you hold.

In the case of ETFs, in practice all are domiciled overseas (typically in Ireland or Luxembourg), this means any distributions they make, plus Excess Reportable Income (ERI) - which is calculated for the ETF's financial year for whoever holds the shares at the end of the year (look it up for each one), and then is taxable 6 months later. The managers either publish the ERI on their websites, or on KPMG reportingfunds.co.uk (free sign-up), or now it seems Hargraves Lansdown is publishing a lot if you're a customer.

If the total of all your ETF, share etc. income is comfortably below £500, then there's nothing to do - you're inside the zero band allowance. But if it's close ,work it out exactly, and if it's more, you have to let HMRC know.

ivormonee

In theory it shouldn't be much more onerous managing a bunch of ETFs outside an ISA. The usual rules of CGT and income tax still apply as with any other investments. ie. when you sell, you are liable for CGT on the gains, and income whilst you hold ETFs is liable to income tax (eg. tax on dividend distributions or interest payments).

Having said this, it appears there may be some additional idiosyncrasies for ETFs as mentioned above, eg. ERI, which I don't know anything about. I've also read elsewhere that funds that accumulate distributions also need to account for income for tax purposes (but I imagine this would be the same for unit trusts and OEICs).

I am also wondering whether the platform on which you hold your ETFs outside of an ISA would provide you with a year end report of information that you might need for tax purposes. Is this something that you are aware of as being available on your platform?

jifmoose

Thanks to @EthicsGradient for laying this out in a super-clarifying way. That's right that the usual taxes still apply, but the whole aspect of offshore-domiciled ETFs, reporting and ERI was very murky to me and I found obtaining information on it, including from the platforms themselves, is not trivial (especially if you don't know what you're not looking for). As always thanks to the knowledgeable and patient posters on this forum that have explained the details.

My original misconception was that these were all exotic edge-cases that I didn't have to worry about. On the contrary, my rule of thumb is now:

• Nearly all ETFs, including common-or-garden and popular choices like iShares, are domiciled outside the UK
• On the plus side, they are (almost all?) reporting funds
• That means they accrue ERI which may be liable for tax
• Which category of tax (dividend, interest) this falls under depends on the composition of the ETF. Sometimes determining that category can be very non-trivial (e.g. in the case of CSH2)

This 100% can be important for dabbler investors like me, as while I'm never going to exceed my CGT or dividend allowances, I have already exhausted my PSA, so any further interest would mean I'd have to report them to HMRC - a bit of a hassle for what would, realistically, be trifling sums.

aroominyork

Monevator on ERI https://monevator.com/excess-reportable-income/

wmb194

jifmoose said:

Thanks to @EthicsGradient for laying this out in a super-clarifying way. That's right that the usual taxes still apply, but the whole aspect of offshore-domiciled ETFs, reporting and ERI was very murky to me and I found obtaining information on it, including from the platforms themselves, is not trivial (especially if you don't know what you're not looking for). As always thanks to the knowledgeable and patient posters on this forum that have explained the details.

My original misconception was that these were all exotic edge-cases that I didn't have to worry about. On the contrary, my rule of thumb is now:

• Nearly all ETFs, including common-or-garden and popular choices like iShares, are domiciled outside the UK
• On the plus side, they are (almost all?) reporting funds
• That means they accrue ERI which may be liable for tax
• Which category of tax (dividend, interest) this falls under depends on the composition of the ETF. Sometimes determining that category can be very non-trivial (e.g. in the case of CSH2)

This 100% can be important for dabbler investors like me, as while I'm never going to exceed my CGT or dividend allowances, I have already exhausted my PSA, so any further interest would mean I'd have to report them to HMRC - a bit of a hassle for what would, realistically, be trifling sums.

I always go for ETFs that pay out dividends or interest and in my experience with these ERI hasn’t been a concern.

dunstonh

I did intend to hold them for 10+ years.

That is not a great idea.  You want to be using your annual CGT allowance and potentially doing bed & ISA if you are not using the ISA allowance in full each year.

So, some activity each year would be needed.

ivormonee

wmb194 said:

I always go for ETFs that pay out dividends or interest and in my experience with these ERI hasn’t been a concern.

From what I gathered from the previous posts, ERI seems to be relevant to distributing ETFs which have reporting status. It appears to be the difference between an amount reported and what had been paid during a reporting period, ie. the excess. It is the total reported amount (distribution received + ERI) that is liable to tax (rather than just the distributed amount).

DjangoUnchained

dunstonh said:

I did intend to hold them for 10+ years.

That is not a great idea.  You want to be using your annual CGT allowance and potentially doing bed & ISA if you are not using the ISA allowance in full each year.

So, some activity each year would be needed.

i intend to fully use my isa allowance anyway. If the dividends are just reininvested and not taken out is ther CGT on this?

wmb194

ivormonee said:

wmb194 said:

I always go for ETFs that pay out dividends or interest and in my experience with these ERI hasn’t been a concern.

From what I gathered from the previous posts, ERI seems to be relevant to distributing ETFs which have reporting status. It appears to be the difference between an amount reported and what had been paid during a reporting period, ie. the excess. It is the total reported amount (distribution received + ERI) that is liable to tax (rather than just the distributed amount).

In my experience it's the accumulating ones that are an issue, the current extreme case being CSH2. The ones that pay out dividends and interest don't tend to have much left undistributed so therefore the ERI is usually small or non-existent. In the 24/25 tax year six of the seven distributing ETFs I owned in a GIA on the relevant date reported zero ERI and for the one that did the amount was minuscule.