ETF v's OEIC Questions

[Hariseldon58]

2) Use a fund with an "accumulation" share class so that the dividends are not paid out as cash, but rolled up into the value of the share. The dividends are still taxable as dividend income though, which as mentioned adds a bit of admin.

There is a nasty catch with that when the fund already has a large capital gain. When a dividend is paid and reinvested within an accumulating fund, the dividend is pooled with the rest of the fund for Capital Gains Tax (CGT) purposes. If you then sell units in the fund the recover the dividend, you not only pay tax on the dividend but also pay CGT tax on the capital gain.

I’m pretty confident your reference to taxation of capital gains tax within a fund does not apply to the uk, CGT applies to the investor , OEICs do not pay CGT on gains within the funds.

[url][https://techzone.abrdn.com/public/investment/Guide-Taxation-of-Collectives][/url]

[Alaric]

I’m pretty confident your reference to taxation of capital gains tax within a fund does not apply to the uk, CGT applies to the investor , OEICs do not pay CGT on gains within the funds.

There's also an option which mitigates double taxation on the gain in the hands of the investor. You can increase the base cost by the amount of dividend reinvested. The effect of this is to reduce the amount on which any gains tax is based.

[Hariseldon58]

I’m pretty confident your reference to taxation of capital gains tax within a fund does not apply to the uk, CGT applies to the investor , OEICs do not pay CGT on gains within the funds.

There's also an option which mitigates double taxation on the gain in the hands of the investor. You can increase the base cost by the amount of dividend reinvested. The effect of this is to reduce the amount on which any gains tax is based.

Absolutely, it’s easier to hold accumulation units in a tax sheltered account to avoid this and the question of equalisation purchases.

Likewise with ETFs there are complications outside a tax shelter , accumulation units require you to fund out the excess reportable income, this also applies to the income units ( the amounts are much smaller of course) in addition the income is often paid in a tax year to when the amount is declared ( income deemed payable six months after annual reporting date)

Important to ensure the ETF has reporting and distribution status or gains can be taxed as income. Irish ETFs are good but there are potential complications with ETFs from some other European countries.

All in all ETFs are easier in a tax sheltered account if you want to minimise administration.

As an aside I find holding some ETFs cheaper with HL than ii because of currency conversion complications on dividend income and purchases.

It’s unfortunate that it can all get very complicated!!!

[londoninvestor]

I’m pretty confident your reference to taxation of capital gains tax within a fund does not apply to the uk, CGT applies to the investor , OEICs do not pay CGT on gains within the funds.

OEICs indeed don't themselves pay CGT on gains. But what Geoff and I are referring to (as detailed here and here) is the CGT position of the investor during decumulation.

Say you have a holding that has appreciated in value since you bought it, and now you want to realise some cash from it for spending. If you hold accumulation units, the only way to do this is to sell units, incurring a taxable gain. If you have an identical position but with income units, you can realise some cash simply by collecting the dividends as they come in, without selling units.

This isn't double taxation for the reason @Alaric explained: the reinvested dividend in the accumulation units increases the base cost. So if you're going to exhaust your holding in your lifetime, then for the same rate of decumulation, the total capital gain will be the same whether you have accumulation or income units: all that differs is the way that the gain is spread across the years. If, however, you end up bequeathing some of the holding then your total taxable gain will be higher with accumulation units.

[Hariseldon58]

I’m pretty confident your reference to taxation of capital gains tax within a fund does not apply to the uk, CGT applies to the investor , OEICs do not pay CGT on gains within the funds.

OEICs indeed don't themselves pay CGT on gains. But what Geoff and I are referring to (as detailed here and here) is the CGT position of the investor during decumulation.

Say you have a holding that has appreciated in value since you bought it, and now you want to realise some cash from it for spending. If you hold accumulation units, the only way to do this is to sell units, incurring a taxable gain. If you have an identical position but with income units, you can realise some cash simply by collecting the dividends as they come in, without selling units.

This isn't double taxation for the reason @Alaric explained: the reinvested dividend in the accumulation units increases the base cost. So if you're going to exhaust your holding in your lifetime, then for the same rate of decumulation, the total capital gain will be the same whether you have accumulation or income units: all that differs is the way that the gain is spread across the years. If, however, you end up bequeathing some of the holding then your total taxable gain will be higher with accumulation units.

With the greatest respect this is more of a theoretical issue than a real issue, unless you have a very large portfolio indeed, you can shelter a lot of assets in ISAs and SIPPs.

The recent reduction of CGT allowances is unhelpful but you can direct the source of your income if necessary to your tax sheltered assets, once you have used your allowances.

Managing your assets for tax efficiency is not hard.
The ISA and SIPP allowances are very generous and sheltering multimillion sums is possible.

[GeoffF100]

With the greatest respect this is more of a theoretical issue than a real issue, unless you have a very large portfolio indeed, you can shelter a lot of assets in ISAs and SIPPs.

Some of us have always filled our pension and ISA allowances and still have far more unsheltered assets than sheltered ones. Many of us will be passing on a large portion of our assets on death. It is not a theoretical issue for us.

[stacker512]

Some of us have always filled our pension and ISA allowances and still have far more unsheltered assets than sheltered ones. Many of us will be passing on a large portion of our assets on death. It is not a theoretical issue for us.

Curious to find out more about how those people got there. I'm a proponent of people finding ways to increase their wealth.

[GeoffF100]

Some of us have always filled our pension and ISA allowances and still have far more unsheltered assets than sheltered ones. Many of us will be passing on a large portion of our assets on death. It is not a theoretical issue for us.

Curious to find out more about how those people got there. I'm a proponent of people finding ways to increase their wealth.

Investment conditions were different back in the 1980s and 1990s. It was not so easy or as cheap to tax shelter investments, and the tax advantages of doing so were less. If you earn a lot of money, spend little and get a reasonable return on your investments, you will eventually accumulate a lot of money. The last survey of household wealth was from April 2018 to March 2020. You needed £3.7 million to be on the threshold of the top 1% back then:

https://www.ons.gov.uk/peoplepopulation ... omarch2020

We have had a period of high inflation and asset price growth since then, and 1 in 100 is not rare. What is "a very large portfolio indeed"? £10 million+ perhaps. You do not need as much as that to have a large proportion of unsheltered assets.

[Urbandreamer]

Curious to find out more about how those people got there. I'm a proponent of people finding ways to increase their wealth.

Investment conditions were different back in the 1980s and 1990s. It was not so easy or as cheap to tax shelter investments, and the tax advantages of doing so were less.

NOT TRUE!

PEP's were introduced in 86 and you could invest £6k. Were we to allow for inflation that's over £20k (the current ISA allowance).
Single company PEP's were added in 1996, so you could in theory invest £9kpa. Sill just over £20k in today's terms.

I opened an account with a stockbroker in the late 80's. Cheap? No stockbrokers were not. Commissions were from memory 0.75% with a minimum commission of £30.

The tax advantages of the PEP were no different from it's replacement the ISA.
Were you possibly ignoring PEP's/ISA's and only considering SIPP's?

[Lootman]

Curious to find out more about how those people got there. I'm a proponent of people finding ways to increase their wealth.

Investment conditions were different back in the 1980s and 1990s. It was not so easy or as cheap to tax shelter investments, and the tax advantages of doing so were less. If you earn a lot of money, spend little and get a reasonable return on your investments, you will eventually accumulate a lot of money. The last survey of household wealth was from April 2018 to March 2020. You needed £3.7 million to be on the threshold of the top 1% back then:

https://www.ons.gov.uk/peoplepopulation ... omarch2020

We have had a period of high inflation and asset price growth since then, and 1 in 100 is not rare. What is "a very large portfolio indeed"? £10 million+ perhaps. You do not need as much as that to have a large proportion of unsheltered assets.

People can also end up with taxable portfolios because they receive a windfall, such as an inheritance or the exercise of employer stock options. Both have happened to me. And then again when I sold my BTL properties in the 2000s. Income isn't always smooth; it can be lumpy.

So you do not have to have a eight-figure net worth to have to worry about the taxes on capital gains and dividends.

[tjh290633]

Some of us have always filled our pension and ISA allowances and still have far more unsheltered assets than sheltered ones. Many of us will be passing on a large portion of our assets on death. It is not a theoretical issue for us.

Curious to find out more about how those people got there. I'm a proponent of people finding ways to increase their wealth.

As noted above, PEPs began in 1987 and you could invest £2,400 in the first year, £3,000 in the second, then £6,000 annually until they ceased when ISAs were introduced. I'm not sure when Single Company PEPs were introduced, possibly 1992-93, but I opened one in 96-97. ISAs began in 1999 with a £7,000 limit, increased to £10,200 in 2009-10 rising to £20,000 in 2017-18, where it has stayed. That's over £400,000 which could have been saved in ISAs and PEPs. Using the rate of return which I have achieved over the same period, that would now be worth over £4million.

TJH

[Hariseldon58]

With the greatest respect this is more of a theoretical issue than a real issue, unless you have a very large portfolio indeed, you can shelter a lot of assets in ISAs and SIPPs.

Some of us have always filled our pension and ISA allowances and still have far more unsheltered assets than sheltered ones. Many of us will be passing on a large portion of our assets on death. It is not a theoretical issue for us.

Well done for having a large portfolio and generating a large unsheltered portfolio.

It certainly pays to be tax efficient but the reinvestment of dividends, pooling the purchase price is the same regardless of the investment type.

There are many tax efficient methods of handling an unsheltered portfolio in conjunction with a sheltered portfolio but that’s OT.

[GeoffF100]

Investment conditions were different back in the 1980s and 1990s. It was not so easy or as cheap to tax shelter investments, and the tax advantages of doing so were less.

NOT TRUE!

PEP's were introduced in 86 and you could invest £6k. Were we to allow for inflation that's over £20k (the current ISA allowance).
Single company PEP's were added in 1996, so you could in theory invest £9kpa. Sill just over £20k in today's terms.

I opened an account with a stockbroker in the late 80's. Cheap? No stockbrokers were not. Commissions were from memory 0.75% with a minimum commission of £30.

The tax advantages of the PEP were no different from it's replacement the ISA.
Were you possibly ignoring PEP's/ISA's and only considering SIPP's?

£6K was piddling amount of money to me in 1986, and I had to pay over 1% p.a. to run a PEP. CGT was indexed back then and there was no dividend tax. You could not have a personal pension if you already had a company one. There were AVCs, but they opaque as far as costs were concerned. You had to buy an annuity at age 75 and I would have had to pay high rate tax on the proceeds.

[Alaric]

£6K was piddling amount of money to me in 1986, and I had to pay over 1% p.a. to run a PEP. CGT was indexed back then and there was no dividend tax.

There was a deemed witholding tax on dividends which could be reclaimed by investors not subject to tax, These included pension funds, charities and PEPS.

There were observations that 1% or similar annual charges wiped out the tax advantages as compared with holding paper certificates at zero custody cost. CGT allowances were relatively generous as well.

[Helinlouise]

People can also end up with taxable portfolios because they receive a windfall, such as an inheritance or the exercise of employer stock options. Both have happened to me. And then again when I sold my BTL properties in the 2000s. Income isn't always smooth; it can be lumpy.

So you do not have to have a eight-figure net worth to have to worry about the taxes on capital gains and dividends.

I agree with this, aside from the fact that I have been a little lazy with investing my savings, I've had an inheritance and stock options in the last 2 years which has caused significant lumpy income.