Question
Hi Justin, I have read a couple of articles in the FT recently stating that gains on some ETFs are liable to Income Tax rather than CGT, i know this is all to do with whether it has distributor status however do you know what the rules are with regard to US listed ETFs? I appreciate these woudl not have distributor status in the UK but would have something similar in the US so I would expect them to treated like any normal US share for tax purposes as I understood the issues on ETFs the papers are referring to is more foreign domiciled funds listed on the UK but would appreciate any insight you can offer.
Regards
CraigAnswer
First, a quick recap. If you own an offshore fund you’ll need to declare and pay UK tax on income, even if it’s re-invested into the fund. Gains are subject to capital gains tax in the usual way unless the fund has ‘non-distributor’ or ‘non-reporting’ status, in which case gains are taxed as income. The reason for this is to prevent a tax loophole from investing in funds that convert income into gains (which enjoy a more favourable tax treatment than income in the UK).
Exchange traded funds (ETFs), including those domiciled in the US, are no different, so it’s important to check their status. It can get confusing as ETFs listed on the London Stock Exchange are invariably domiciled (i.e. based) overseas, meaning they are treated as offshore funds. ETFs listed on US stock exchanges tend to be domiciled in the US so will also be classed as offshore funds and subject to UK distributor/reporting rules in the hands of a UK taxpayer, as well as any applicable US withholding taxes on dividends.
However, checking an ETF’s distributor or reporting status (under UK tax rules) can prove a headache, as it’s seldom clearly shown in literature. You could look for confirmation in a fund’s ‘simplified prospectus’, although this is pretty tedious and sometimes inconclusive for a UK investor. Alternatively there are lists of offshore funds (including ETFs) with distributor and reporting status on the HMRC website (you’ll need to scroll down to the relevant sections to find links to these lists).
On a separate issue, US shares and funds normally pay dividends after deducting a 30% withholding tax, of which only 15% can be reclaimed by a UK taxpayer. However, you should be able to reduce the withholding tax to 15% by completing US tax form W-8BEN if your stockbroker is agreeable (as they’ll have to process the form).
It’s a shame ETFs are being caught by these potentially complicated tax rules as they provide a great way to access certain markets. We really need ETF providers to start highlighting the status of their funds more clearly - most currently fail dismally in this respect.
Hi Justin, I have read a couple of articles in the FT recently stating that gains on some ETFs are liable to Income Tax rather than CGT, i know this is all to do with whether it has distributor status however do you know what the rules are with regard to US listed ETFs? I appreciate these woudl not have distributor status in the UK but would have something similar in the US so I would expect them to treated like any normal US share for tax purposes as I understood the issues on ETFs the papers are referring to is more foreign domiciled funds listed on the UK but would appreciate any insight you can offer.
Regards
CraigAnswer
First, a quick recap. If you own an offshore fund you’ll need to declare and pay UK tax on income, even if it’s re-invested into the fund. Gains are subject to capital gains tax in the usual way unless the fund has ‘non-distributor’ or ‘non-reporting’ status, in which case gains are taxed as income. The reason for this is to prevent a tax loophole from investing in funds that convert income into gains (which enjoy a more favourable tax treatment than income in the UK).
Exchange traded funds (ETFs), including those domiciled in the US, are no different, so it’s important to check their status. It can get confusing as ETFs listed on the London Stock Exchange are invariably domiciled (i.e. based) overseas, meaning they are treated as offshore funds. ETFs listed on US stock exchanges tend to be domiciled in the US so will also be classed as offshore funds and subject to UK distributor/reporting rules in the hands of a UK taxpayer, as well as any applicable US withholding taxes on dividends.
However, checking an ETF’s distributor or reporting status (under UK tax rules) can prove a headache, as it’s seldom clearly shown in literature. You could look for confirmation in a fund’s ‘simplified prospectus’, although this is pretty tedious and sometimes inconclusive for a UK investor. Alternatively there are lists of offshore funds (including ETFs) with distributor and reporting status on the HMRC website (you’ll need to scroll down to the relevant sections to find links to these lists).
On a separate issue, US shares and funds normally pay dividends after deducting a 30% withholding tax, of which only 15% can be reclaimed by a UK taxpayer. However, you should be able to reduce the withholding tax to 15% by completing US tax form W-8BEN if your stockbroker is agreeable (as they’ll have to process the form).
It’s a shame ETFs are being caught by these potentially complicated tax rules as they provide a great way to access certain markets. We really need ETF providers to start highlighting the status of their funds more clearly - most currently fail dismally in this respect.
Read this Q and A at http://www.candidmoney.com/questions/question234.aspx
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