Tim Huver, ETF Product Manager, Vanguard, talks about the tax considerations around ETFs compared to traditional investment funds.
Investment taxation is obviously a complex and technical area, but generally speaking, your client should not experience any great difference in the way they are taxed on ETFs compared to a traditional investment fund. Of course, each individual experiences taxation differently, based on their own circumstances, but they should pay the same level of tax on capital gains and income in an ETF as they would on any other investment. Dividend payments from an ETF, for example, will be taxed as income at a given investor’s tax rate. Likewise, ETFs can be held in tax-free wrappers, such as ISAs or SIPPs, just like any other fund.
But there are some things to watch out for on ETFs that are domiciled overseas, such as in Dublin or Luxembourg. Overseas domicile ETFs are nothing to be afraid of, you just need to check that they have reporting status in the UK. As long as they have that status, your client should be taxed appropriately. An ETF provider can inform you about their ETF’s domicile, and reporting status. If it doesn’t, though, any gains made on the ETF could be subject to alternative tax, which could mean that capital gains are taxed as income, which can be at a much higher rate.