Question
I understand ETFs without distributor/reporting status have tax implications. Gains are treated as income and taxed accordingly. If they are held inside an ISA wrapper, are gains free of income tax?
I understand dividends are classed as income and tax is payable within an ISA. So I suspect capital gains treated as income is also liable to income tax. Very confusing!Answer
Thanks for raising this point, which is confusing!
Thankfully gains from a non-distributor or non-reporting fund are tax-free when held within an ISA or pension. This is because although any gains are treated as income, they're not dividends.
Dividends are not taxed within an ISA/pension, but they're not truly tax-free either because they're paid out of taxed company profits. The net result is that basic rate taxpayers don't save any tax on dividends within ISAs or pensions, but higher rate taxpayers avoid paying an extra 25% tax on the dividend received.
I understand ETFs without distributor/reporting status have tax implications. Gains are treated as income and taxed accordingly. If they are held inside an ISA wrapper, are gains free of income tax?
I understand dividends are classed as income and tax is payable within an ISA. So I suspect capital gains treated as income is also liable to income tax. Very confusing!Answer
Thanks for raising this point, which is confusing!
Thankfully gains from a non-distributor or non-reporting fund are tax-free when held within an ISA or pension. This is because although any gains are treated as income, they're not dividends.
Dividends are not taxed within an ISA/pension, but they're not truly tax-free either because they're paid out of taxed company profits. The net result is that basic rate taxpayers don't save any tax on dividends within ISAs or pensions, but higher rate taxpayers avoid paying an extra 25% tax on the dividend received.
Read this Q and A at http://www.candidmoney.com/questions/question434.aspx
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