Question
I have read your interesting reply about dividends and ETFs in the FT of 16 April.
Would I be correct in thinking that, if you hold an Irish or Luxembourg based ETF in an ISA you would not pay any income tax on the dividends? Does this mean that you would receive higher net dividends in an ISA, all else being equal, by holding e.g. an Irish based FTSE 100 ETF than a UK FTSE 100 Index Tracking Unit Trust that deducts Withholding Tax?
I have only discovered your website as a result of the FT article.
Well done, it's a useful resource!Answer
Thanks for the positive feedback. I’m afraid there’s no tax advantage in holding the exchange traded fund (ETF) versus a unit trust. The tax works along the following lines:
When a UK company pays a dividend it’s out of taxed profits, i.e. corporation tax has already been paid. In recognition of this HMRC attaches a tax ‘credit’ to the dividend. While the tax credit can’t be reclaimed in ISAs, pensions or by non-taxpayers (Gordon Brown put a stop to this in 2004), it’s deemed to be worth 10% which offsets the 10% basic rate taxpayers must pay on dividends. Higher rate taxpayers must pay 32.5% tax on the dividend including the tax credit, equal to 25% tax on the dividend received, but can avoid paying this extra tax if the shares are held in an ISA or pension.
If the shares are held in an ETF or unit trust domiciled overseas then the foreign country might deduct further tax from the dividends, known as a ‘withholding’ tax. When this happens double taxation agreements usually allow up to 15% to be offset against your UK tax liability (although it does vary), meaning basic rate taxpayers have no further tax to pay and higher rate taxpayers can offset up to15% against their 32.5% liability.
In the case of an Irish domiciled FTSE 100 ETF the fund receives the dividends from UK companies after corporation tax has been deducted and the 10% tax credit is attached (just as you would if you held the shares directly). The fund then pays these dividends onto you and the 10% tax credit is deemed to be attached, i.e. it’s no different to holding the shares directly or using a UK tracker unit trust. This is because the Irish authorities don’t levy an additional withholding tax on the dividends.
Were the ETF domiciled in France then the French authorities would deduct an extra 25% withholding tax, leaving you out of pocket as only up to 15% can practically be reclaimed.
Hope this makes sense.
I have read your interesting reply about dividends and ETFs in the FT of 16 April.
Would I be correct in thinking that, if you hold an Irish or Luxembourg based ETF in an ISA you would not pay any income tax on the dividends? Does this mean that you would receive higher net dividends in an ISA, all else being equal, by holding e.g. an Irish based FTSE 100 ETF than a UK FTSE 100 Index Tracking Unit Trust that deducts Withholding Tax?
I have only discovered your website as a result of the FT article.
Well done, it's a useful resource!Answer
Thanks for the positive feedback. I’m afraid there’s no tax advantage in holding the exchange traded fund (ETF) versus a unit trust. The tax works along the following lines:
When a UK company pays a dividend it’s out of taxed profits, i.e. corporation tax has already been paid. In recognition of this HMRC attaches a tax ‘credit’ to the dividend. While the tax credit can’t be reclaimed in ISAs, pensions or by non-taxpayers (Gordon Brown put a stop to this in 2004), it’s deemed to be worth 10% which offsets the 10% basic rate taxpayers must pay on dividends. Higher rate taxpayers must pay 32.5% tax on the dividend including the tax credit, equal to 25% tax on the dividend received, but can avoid paying this extra tax if the shares are held in an ISA or pension.
If the shares are held in an ETF or unit trust domiciled overseas then the foreign country might deduct further tax from the dividends, known as a ‘withholding’ tax. When this happens double taxation agreements usually allow up to 15% to be offset against your UK tax liability (although it does vary), meaning basic rate taxpayers have no further tax to pay and higher rate taxpayers can offset up to15% against their 32.5% liability.
In the case of an Irish domiciled FTSE 100 ETF the fund receives the dividends from UK companies after corporation tax has been deducted and the 10% tax credit is attached (just as you would if you held the shares directly). The fund then pays these dividends onto you and the 10% tax credit is deemed to be attached, i.e. it’s no different to holding the shares directly or using a UK tracker unit trust. This is because the Irish authorities don’t levy an additional withholding tax on the dividends.
Were the ETF domiciled in France then the French authorities would deduct an extra 25% withholding tax, leaving you out of pocket as only up to 15% can practically be reclaimed.
Hope this makes sense.
Read this Q and A at http://www.candidmoney.com/questions/question196.aspx
No comments:
Post a Comment