ETFs and Tax: What You Need to Know

The
majority
of
people
do
not
fill
all
their
ISA
allowance
each
tax
year.
But
for
those
who
do,
there
will
be
tax
implications.

When
You
Say
Tax
Free,
What
Does
That
Mean?
In
this
case,
if
you’re
investing
in
ETFs
in
an
ISA
wrapper,
you’re
shielded
from

capital
gains
tax.
Dividend
income
is
also
received
tax
free.
In
an
example,
you
put
£20,000
in
a
global
ETF
tracker
and
it
rises
to
£30,000;
the
tax
authorities
can’t
touch
that
gain.
Likewise,
you
may
get
£1,000
a
year
in
dividend
income
from
an
income
ETF;
again
you
get
to
keep
all
of
this.

Hold
those
two
taxes
in
your
head
until
we
look
at
them
again
later.

What
About
ETFs
and
Inheritance
Tax?
This
is
a
hot
topic
as
there
could
be
plans
to
scrap
this

hated
“death
tax”
ahead
of
the
General
Election
this
year
or
next.
Like
all
ISA
or
non-ISA
investments,
ETFs
are
very
much
“in
scope”
for
inheritance
tax,
which
is
a
flat
40%
above
a
certain
threshold.
It’s
worth
talking
to
an
IFA
to
ask
whether
you
are
likely
to
be
subject
to
IHT
and
whether
ETFs
are
an
appropriate
vehicle
for
your
investment
needs.

I’m
an
ETF
Investor
Who’s
Breached
My
ISA
Limit.
What
do
I
do?
Let’s
start
with
capital
gains
tax.
ETFs
have
no
special
tax
status
here.
Every
year
you
get
a
capital
gains
tax
allowance,
which
is
currently
£6,000
and
is
set
to
drop
to
£3,000.
The
allowance
used
to
be
£12,300
a
tax
year.
Remember
that
you
can
transfer
assets
to
a
spouse
or
civil
partner
to
utilise
both
individual
allowances.

Here
it
depends
what
the
gain
relates
to
as
residential
property
(second
homes,
not
primary
residences)
are
subject
to
a
different
tax
rate.
But
for
investments
like
ETFs,
you
would
pay
10%
as
a
basic
rate
tax
payer
or
20%
as
a
higher
rate
tax
payer.
You
may
notice
that
this
half
what
you
pay
on
income
tax
as
a
basic
or
higher
(or
indeed
additional)
rate
tax
payer.

So
I
just
pay
my
CGT
at
10%
or
20%
then?

Check
Out
Your
ETFs
Reporting
Status
Here’s
where
things
can
get
tricky.
While
they
may
be
traded
on
the
London
Stock
Exchange,
ETFs
bought
and
sold
by
a
UK
investor
are
often
“domiciled”
outside
of
the
UK
and
are
technically
“offshore”,
a
word
associated
with
tax
havens
and
wealthy
people.
When
you
look
at
the
ETFs’
ISIN
for
example,
you
may
see
IE
or
LU
at
the
beginning
instead
of
GB
(although
ETFs
can
in
some
cases
start
with
GB
too).
This
is
unlike
UK
shares
which
would
always
have
GB
as
a
prefix.

Despite
Brexit,
you
still
have
access
to
a
wide
range
of
ETF
products.

The
biggest
issue
is
whether
the
ETF
you
buy
have
“UK
reporting
fund
status”
according
to
UK
tax
authorities.
The
majority
do
–
and
it
should
be
readily
accessible
information
on
a
fund
factsheet,
or
on
an
investment
platform.
Morningstar’s
ETF
centre
can
provide
the
information
too.
But
if
the
ETF
doesn’t
have
reporting
status,
that
could
radically
alter
the
tax
you
might
have
to
pay.
For
example,
an
additional
tax
rate
payer
could
assume
their
ETF
gains
are
identical
to
those
of
say
a
fund
or
share,
so
subject
to
(lower)
capital
gains
tax
rates.
But
buying
an
ETF

without
UK
reporting
status
could
expose
your
gains
to
a
45%
tax
here.

Accountants
EY
have
a

useful
guide
to
how
this
works.
Again,
it’s
worth
getting
either
tax
or
financial
advice
if
you
are
unsure
how
it
might
affect
you.

What
About
ETF
Income
Then?
The
“personal
savings
allowance”
(PSA)
is
a
handy
buffer
for
savers,
and
also
helps
HMRC
because
it
removes
the
hassle
of
administering
and
keeping
track
of
small
interest
amounts.
If
you’re
a
basic
rate
tax
payer
you
can
earn
£1,000
in
interest
tax
free,
higher
rate
tax
payers
get
a
£500
allowance
and
additional
rate
tax
payer
get
nothing.

Here
you
might
assume
that
your
ETF
dividends
are
taken
care
of
by
the
PSA,
but
that’s
not
correct,
as
they
are
“income”
and
not
“interest”.
It’s
probably
easiest
to
think
of
the
income
as
like
your
usual
share
dividends.

So
here
the
dividend
allowance
comes
into
play
instead.
This
was
£2,000
in
the
2022/2023
tax
year
but
is
£1,000
in
the
current
tax
year
2023/2024
–
and
will
drop
to
£500
in
the
next
tax
year
2024/2025.
Once
again,
there
is
another
tax
rate
to
consider
here,
which
is
connected
to
your
income
tax
status
but
not
the
same
rate
as
that:
basic
rate
taxpayers
pay
8.75%
on
dividends,
higher
rate
taxpayers
pay
33.75%,
and
additional
rate
taxpayers
(who
pay
45%
on
income)
pay
39.35%
on
dividends.

Again,
the
tax
treatment
is
different
if
you
choose
to
have
your
dividends
reinvested
rather
than
paid
out
as
cash.

Should
I
Just
Stick
With
ISAs
Then?
You
could
be
forgiven
for
drawing
that
conclusion,
given
the
multiple
tax
exposures
outlined
here.
Many
ETFs,
especially
trackers,
don’t
pay
cash
dividends
at
all
so
that
takes
care
of
that
particular
tax
anxiety.

For
those
who
can’t
keep
within
their
ISA
allowance
or
for
those
who
rely
on
the
income
from
ETFs,
expert
help
is
available
to
advise
on
the
best
way
of
reducing
their
tax
exposure.

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