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ETFs and the peculiar effects of withholding tax

Razor-brained Monevator reader Chris recently emailed to ask us whether some investors are better off holding foreign-listed Exchange Traded Funds (ETFs) in place of our native species, on the grounds that you suffer less from the ravages of withholding tax.

Well, I’ve done some digging. And it turns out that Chris has a very good point…

American withholding tax in London

Let’s zero in on the foreign-listed ETFs we’re mostly likely to want: US ETFs.

For the avoidance of doubt, when I say foreign-listed, I mean ETFs traded on foreign exchanges as opposed to the London Stock Exchange.

The travails of withholding tax mean that a US-domiciled ETF will pass on dividends to a UK investor minus 30%.

That’s a mighty tax chomp, which you can cut to 15% by filling in a W8-BEN form.

Then once you get your divis over the UK border – hello, here comes Her Majesty’s crack tax troopers, slavering for another pound of flesh.

Basic rate taxpayers can be on their way without further unpleasantness, but higher rate payers must cough up a further 25% in dividend income tax. Top earners hand over another 27.5%.

The good news is that you can flash your US withholding tax bite marks and get 15% knocked off your UK tax bill, because even HMRC knows mercy.

So your total dividend income tax liability is 15% (US) + 10% (UK) = 25% for higher rate tax payers who don’t have their investment in a tax shield such as an ISA.

We’ll come back to the tax avoidance question later.

Destination Ireland or Luxembourg?

As well as being two major Eurovision powers, Ireland and Luxembourg are the domicile of choice for most London-listed ETFs.

Why? Well, for one thing they don’t menace UK investors for withholding tax.

So we’re laughing, right?

Definitely not.

Irish and Luxembourgian ETFs still pay withholding tax to the US on their underlying assets.

In other words, a London-listed S&P 500 ETF will pay 15%1 withholding tax to the US IRS before they pay the balance to you.

So your dividends are shorn of 15% as usual. But again the UK taxman cometh and this time you can’t claim 15% back. The ETF paid it, not you.

That means a higher rate taxpayer suffers 15% (US) + 25% (UK) = 40% tax loss on these US dividends outside of tax wrappers.

So you’re better off with a US-listed ETF, right?

Withholding tax implications for a higher rate taxpayer

Maybe yes, maybe not

Come now, my poppet, neither of us wants this to end so soon.

Let’s suppose that in comparison to its London listed alternative, the higher dividend payout and slightly cheaper expense ratio of your US-listed ETF outweighed the higher cost of trading and general hassle.

The tax-based fly in your returns ointment would now be if you were to accidentally invest in a non-reporting fund.

Non-reporting funds are bad because their capital gains are taxed as income. In other words, you’ll be taxed on gains at 40% or 45% (rather than 28%) as a higher-rate payer.

Most London-listed equity ETFs apply to HMRC for reporting fund status and are thus subject to normal capital gains taxation. Your typical US fund doesn’t bother, and so falls into the non-reporting camp.

Smashingly, some US-listed ETFs and funds wear Union Jack underpants and have acquired reporting fund status. You can find HMRC’s list here. There are plenty of Vanguard options on the list, so passive investors are well catered for.

Ultimately the calculation will come down to your individual tax position, but:

  • Higher-rate taxpayers without ISA space should look into foreign-listed ETFs to fulfill single-country positions.
  • Basic rate taxpayers needn’t bother.
  • Anyone holding London-listed ETFs in an ISA is fine.
  • Stick with London-listed ETFs for multi-country ETFs such as emerging market or global trackers.
  • Definitely investigate US-listed ETF options for your SIPP.

Read on for the tax shelter twist in the tale.

Tax bubble wrap

When it comes to withholding tax, ISAs are like paper overcoats versus bullets: irrelevant.

ISAs do protect against UK dividend tax, but generally they don’t admit foreign-listed funds, so they are not a factor in this debate.

SIPPs, however, are more like your lucky cigarello case: they can deflect withholding tax if positioned properly.

The excellent International Investor has written a superb post on which countries cut pension schemes a break.

Happily, US dividends paid into a SIPP are not liable to pay any withholding tax and SIPPs will accept most foreign-listed funds.

The snag is that the Americans still deduct your withholding tax at source. To get away Scot-free, you should choose a broker who can recover the additional 15% for your SIPP. (Not all can).

Tax dodge

I’d like to sign-off now, especially as I imagine this piece has witnessed desertion rates not seen since Napoleon’s retreat from Moscow.

But sadly there’s a couple more withholding tax tricks-of-the-trade that we need to clear up before I go.

Many ETF managers use withholding tax to massage their returns. Here’s how.

Though we know that ETFs generally use Double-Taxation Treaties to pay lower rates of withholding tax (e.g. 15% instead of 30% for ETFs with US holdings) they measure themselves against indices that assume the maximum tax whammy.

If you dig beneath the factsheet, you’ll discover that many ETFs track the Net Total Return version of their index.

For example, the S&P 500 Net TR index will post returns minus 30% withholding tax, but ETFs only pay 15% and can use the difference to close their tracking error.

The second way that ETF managers can exploit withholding tax is through security lending. When the dividend is due, a share can be whisked to a territory with a reduced withholding tax liability.

Lend a French share to a French institution, for example, and no withholding tax is paid whatsoever.

The ETF manager and friend then split the upside and hopefully we enjoy another shaving off the tracking error for bearing the counterparty risk.

Both physical and synthetic ETFs play these games and I haven’t seen any concrete evidence that it makes either type a slam-dunk purchase over the other.

There are far better reasons to buy an ETF, so measure its tracking error as best you can and choose the one that hugs its index like its mama.

Take it steady,

The Accumulator

  1. …having diligently filled out their W8-BEN type paperwork. []
{ 53 comments… add one }
  • 1 Moneywise August 6, 2013, 10:39 am

    Really good article, thank you for the info, I didn’t consider investing US ETFs. But in UK, for me, Db X-trackers/SCM Multi Asset ETF is a good option. They have dropped in July, hope they will pick up in until September =(

  • 2 Paul Claireaux August 6, 2013, 12:10 pm

    Are you really sure about this?
    I’ve never heard of UK residents needing to claim tax back on overseas funds before.
    Surely if the fund itself is UK resident it will sort out this part of the reclaim and then UK residents are taxed on the dividends / distributions as normal?

  • 3 Jon August 6, 2013, 12:32 pm

    @TA, this is very relevant for me as I am currently in process of opening a Charles Schwab USA $ account, although its for my wife who is a basic rate taxpayer and I’m only planning to buy big blue chip individual shares ….. I may have a few questions for you, but I will have to print off and read this article a few times ….


  • 4 Paul Claireaux August 6, 2013, 12:52 pm

    Or did i read that too quickly?

    Did the article confirm what I’ve just said?

  • 5 The Accumulator August 6, 2013, 5:47 pm

    @ Paul – speed-reading skid, I think. If the ETF is London-listed then you don’t need to claim back withholding tax. But that doesn’t mean it doesn’t affect you, as the article outlines.

  • 6 The Taxman cometh August 6, 2013, 5:59 pm

    I’m a tax professional
    @ Paul Claireaux – TA is correct in the article. What happens in effect is that UK HMRC charge the income to higher rate tax (effectively 25%), but allow you to use the foreign tax that you have suffered to meet part of this liability, just leaving the 10% left to pay.
    You should note that there is a maximum credit for foreign tax that you can claim against UK tax – this is 15% for the US and most countries, but there are some that are lower or that you can’t claim any credit for, meaning that you don’t get full credit for the foreign tax that you have paid.

    The ‘claim’ is all done via your UK tax return, and there’s no need for US tax returns (provided you have filled in the W8-Ben form mentioned).

    @TA – I’m new to the world of passive investing, but thanks to your site, and lots of research, have recently decided to take control of my pension and investments. Thanks for the multitude of excellent articles!

  • 7 gadgetmind August 6, 2013, 6:49 pm

    We look at our savings and investments and see something put away for a rainy day or retirement. Governments look at them and see an eat-all-you want buffet.

  • 8 smith August 6, 2013, 7:57 pm

    Beware of the IRS estate tax if you invest more than 60k$.

    You should check the tax treaty between the UK and the US.
    The minimum could be higher than 60k$ for UK residents.

  • 9 Retirement Investing Today August 6, 2013, 8:13 pm

    I know that the post was predominantly about withholding tax but readers should also heed your brief warning about non-reporting funds also. It’s a mistake I made as a baby faced investor and one which I now can’t get out of sensibly until I’m back into the land of 20% tax (ie retirement).

  • 10 Aidan August 6, 2013, 8:58 pm

    Great article, just when I thought I understood ETF taxation… However, watch out for currency conversion charges when buying and selling a foreign ETF compared to a London listed £ sterling fund. E.g: Sippdeal charge a 0.5% premium; iWeb charge a whopping 1.5%. These will destroy any tax advantage for the first few years of ownership. The long term tax savings will be sweet though for a buy and hold Sipp fund.

  • 11 William August 6, 2013, 10:01 pm

    Excellent article – for those of us who list ‘investing’ as a hobby in our Who’s Who entry! – thank you very much. No idea how you do this research but keep it up…

  • 12 dearieme August 8, 2013, 10:37 am

    Maybe you know this already, but it was new to me.

  • 13 dearieme August 8, 2013, 10:42 am

    Moreover, from Redblog,
    “The cost saving varies of course, but for a typical pension scheme our calculation predicts that trustees would save costs equivalent to 0.4% or more of assets per year by using a passive portfolio. While that may not sound like much, over 10 years for a £10million scheme growing at 6% a year a year that reduction of 0.4% would amount to a saving of nearly £650,000 or 6.5% of the scheme’s starting value. – See more at: http://blog.redington.co.uk/Articles/Bob-Campion/July-2013/SIZE-DOES-NOT-MATTER.aspx#sthash.VexA1Fdw.dpuf

  • 14 Martyn Smith August 8, 2013, 5:04 pm

    Now like as not we have all heard of the “fog of war” but I think I have now come across the “fog of investing”!!

    After reading the excellent article on ETF taxation, I sought out the SPDR (State Street Global Investors, purveyors of the USDV Dividend Aristocrats ETF) guidance on taxation for their ETF and a copy of the relevant extract is:
    “The fund may be liable to withholding tax on the gains and income from investments held in jurisdictions which impose such withholding taxes. Where a Double Taxation Treaty is in place between Ireland and the source country of the income, a reduced withholding tax rate may apply. In certain cases, the fund may also be entitled to reclaim the withholding tax suffered based on CJEU case law.”

    Anyone care to hazard a guess as to precisely what this means in terms of taxation for their ETF? Ok it “may ” be subject to tax but presumably equally, it “may” not. Is it subject to some unfathomable set of rules only available to the “glitterati” of the Fund world or are they ever likely to let Joe Soap in on the secret?

    The choice is yours, as they say! Well, theirs probably.

  • 15 The Accumulator August 10, 2013, 8:04 pm

    @ all – thanks for the useful / kind comments. Much appreciated.

    @ Martyn – spot on. Whenever I read any prospectus / small print for these things, every clause reads along the lines of “We’ll do this thing, until we decide not to, you OK with that?”

    @ Aiden – very good point and well worth knowing the currency mark-up your broker charges if you’re swimming in these waters. There will be currency conversion costs for Sterling denominated funds too, where the base currency is non-Sterling, but that’s a whole new investigation.

  • 16 Cookie January 2, 2014, 6:45 pm

    @TA: Thanks for this post. Very informative. What I am confused about in all this, wouldn’t by far the best option be a non-distributing US-domiciled UK-reporting fund? And if it is non-distributing, does it even have to be UK-reporting? So shouldn’t in that case the bottom line be a non-distributing US domiciled fund? And if that is the case, could you just list the few best ones here please as I am sure a lot of people are doing the same search…

  • 17 David January 8, 2014, 3:40 pm

    Here’s another option for pension investors to avoid US withholding tax. The Vanguard US Equity Index Common Contractual Fund is an Ireland-domiciled fund tracking the S&P 500. It uses an Irish legal structure that allows pension funds to receive dividends free of US withholding tax. You can’t invest in it directly, but you can buy funds from Standard Life (and possibly other pension providers) which use it as an underlying investment.

    As the blog post states above, tax treaties theoretically exempt pension schemes from paying US withholding tax, but in practice, nearly all collective investments domiciled outside the US pay withholding tax at ordinary rates on the underlying US assets. The CCF legal structure simply allows pension funds to take advantage of the tax treaty benefits they are already entitled to.

    There may be other CCFs out there that could benefit anyone looking to invest in markets other than the US.

    More info here: http://ukgroup.standardlife.com/content/news/new_articles/2012/260112_SL_add_Vanguard_CCF.xml

  • 18 ivanopinion February 10, 2014, 1:42 pm

    Just to add that this seems to matter most for ETFs investing in US equities. Judging by the financial statements for Vanguard UK-listed Irish-domiciled ETFs, withholding tax suffered is 15%, so the fund is claiming the reduced rate and the investor doesn’t need to be filling in forms. For other regional trackers, the withholding tax is lower. eg, Europe 3%, Asia Pac (ex Jap) 6%, Japan 7% and EM 10%.

  • 19 ivanopinion February 10, 2014, 2:56 pm

    Is it correct that the total tax on UK-listed ETFs invested in US equities is 40%? I make it 36.25%.

    What you are saying is that for every 100 of underlying dividend, a US-listed ETF will pay you 85 of dividend, net of 15% WHT, assuming you filled in the US form. For UK purposes, the gross dividend of 100 is taxed at 25%, but you offset the 15% WHT, so you pay another 10% in the UK. Total tax is 25%.

    Whereas, if the ETF is UK listed, domiciled in say Ireland, the ETF suffers the 15% WHT, so you can’t offset it against the UK tax on the dividend from the ETF. (No need to file the US form, because the fund does that.) In that case, for the same underlying 100 of dividend income from the underlying US equities the dividend from the ETF will be 85, so the UK investor’s income is 85, not 100. So, UK tax is 25% of 85, which is 21.15. So, you are left with net income of 63.75, meaning you have suffered 36.25% of combined US and UK tax.

    That’s still a higher rate than the 25% tax if you buy a US-listed ETF, but not as high as 40%.

    The S&P 500 currently yields 2%, so a tax saving of 11.25% on this should increase your return on the ETF by 0.22%. Against this you would have to offset other costs and hassle of buying US ETFs.

  • 20 ivanopinion February 26, 2014, 4:41 pm

    How does this compare with a UK unit trust/OEIC invested in US markets? Here’s my guess, but correct any errors:

    UK UT receives 100 of dividends from shares in its portfolio, but suffers 15% WHT, so receives 85. It is taxable at 20% in UK, so UK tax on the gross income of 100 is 20, but claim tax credit for the WHT, so UT has a further 5 UK tax payable. UT has 80 income, net of tax. It then pays net cash dividend of 80 to UK investor, but this comes with notional 10% UK tax credit, so gross income of investor is 80/9=88.89.

    Basic rate tax payer ends up with 80, net (because tax credit meets their tax liability). 40% tax payer pays extra tax equal to 25% of the net dividend, so ends up with 80×0.75 = 60, so effective rate of tax on the underlying 100 is 40%. So, that’s slightly worse than a UK listed ETF, and a lot worse than a US listed ETF.

    Have I got that right?

  • 21 Matthew Fong July 10, 2015, 5:31 pm

    Are you sure that the S&P 500 TR Index assumes 30% tax liability in dividends? I was compare charts on morningstar.com and this does NOT appear to be the case. Infact one PDF I read stated that the TR Indexes do NOT include the tax draw.

    So far the most competitive offshore S&P tracker I found was the Horizon S&P 500 fund traded in Toronto. The 3 year annualized tracking difference is only 59 bps, compared to VOO (US traded) 4 bps tracking difference + 31 bps tax withholding @ 15%

  • 22 Ben December 17, 2015, 6:02 pm

    Will this still hold true in April 2015, with the £5000 free, does it mean it now makes more sense in all cases to just stay domiciled in the UK?

  • 23 Mike April 20, 2016, 7:19 pm

    Another difficult question 🙂
    For an emerging market ETF, is it better to buy a US tracker, or one based in Ireland as a non-US resident? For example the WisdomTree ETF DEM can be bought in the US or on a European exchange, domiciled in Ireland then.
    I think it all comes down to how the tax treaties are between US-emerging market countries or Ireland-emerging market countries? Or anything else at play?
    Which is likely to be the better option?

  • 24 ivanopinion January 11, 2017, 3:39 pm

    I’m just revisiting the issues raised in this article and I was looking at the US estate tax point. If anyone else is looking at this, I thought it might be helpful to share this information from a US tax adviser:
    UK domiciled individuals with assets sited in the US, such as US-listed ETFs, can reply on a tax treaty, which means US estate duty would only apply if their estate is greater than $5.45m. So for most of us, the only problem would be that you (or your executor) would still need to file an estate tax return.

  • 25 The Accumulator January 11, 2017, 3:42 pm

    Great job Ivan! De Giro make US listed ETFs look mighty tempting.

  • 26 ivanopinion January 11, 2017, 3:56 pm

    Incidentally, the tax treaties in the HMRC link in post 8, above, do not relate to death taxes. In fact, I can’t find the relevant treaty on the HMRC website, which is surprising. But I think it is here:
    Article 8(5) says:
    “Where property may be taxed in the United States on the death of a United Kingdom national who was neither domiciled in nor a national of the United States and a claim is made under this paragraph, the tax imposed in the United States shall be limited to the amount of tax which would have been imposed had the decedent become domiciled in the United States immediately before his death, on the property which would in that event have been taxable.”

  • 27 Michael - Foxy Monkey March 27, 2017, 11:27 am

    Do mutual funds withhold tax as well?

  • 28 The Accumulator April 9, 2017, 7:42 pm
  • 29 ivanopinion April 26, 2017, 8:00 pm

    I suppose these figures all change with the introduction of the dividend tax rates for 16/17 onwards. I assume it applies to divs from US and Irish ETFs. Unless anyone knows different…

    I’ll take a stab at the new figures, but if anyone thinks I got it wrong, they are probably correct.
    1) Direct holding in US listed ETF, with form filled in to get WHT reduced to 15%:
    Assume 100 dividend. US WHT = 15
    (a) If div income is covered by personal allowance/£5k div allowance (reducing to £2k from April 2018)/ISA/SIPP, no UK tax, so total tax suffered is 15.
    (b) Basic rate taxpayer pays 7.5%, on the gross 100 div, but offset 15 WHT, so no further tax to pay. Total tax suffered is 15.
    (c) Higher rate taxpayer pays 32.5%, minus 15 credit. Total tax suffered = 32.5.

    2) Holding in UK listed, Irish domiciled ETF, which invests in US equities:
    Assume 100 dividend income earned by the ETF. US WHT = 15. ETF declares dividend of 85 to UK investor.
    (a) If div income is covered by personal allowance/£5k div allowance (reducing to £2k from April 2018)/ISA/SIPP, no UK tax, so total tax suffered is 15.
    (b) Basic rate taxpayer pays 7.5%, on the 85 div = 6.375. No WHT credit, as the ETF suffered it, not the UK investor. Total tax suffered is 21.375 (versus 15 on the US listed ETF).
    (c) Higher rate taxpayer pays 32.5% on the 85 = 27.625. Total tax suffered = 42.625 (vs 32.5 on the US listed ETF).

    So, there is still an income tax saving by buying a US listed/domiciled US index tracker ETF, rather than UK listed/Irish domiciled. Of course, the US market yields less than 2%, so the benefit is 0.2% of your investment (for a higher rate tax payer). Worth having, but is it worth the potential issues? (FX costs, US estate duty return filing, WHT form)

  • 30 ivanopinion April 27, 2017, 8:51 am

    Just for completeness, here’s my guess about the tax hit on the divs from a UK unit trust investing in US equities, under the new dividend tax rules.

    UK UT receives 100 of dividends from shares in its portfolio, but suffers 15% US WHT, so receives 85. It is taxable at 20% in UK, so UK tax on the gross income of 100 is 20, but claim tax credit for the WHT, so UT has a further 5 UK tax payable. UT has 80 income, net of tax. It then pays cash dividend of 80 to UK investor. No tax credit any more.

    Basic rate tax payer pays 7.5% on the 80, so is left with 74. Total tax cost 26 (vs 21 for UK listed foreign ETF and 15 for US listed ETF).

    40% tax payer pays 32.5% on the 80, so ends up with 54. Effective rate of tax on the underlying 100 is 46%. So, that’s 3% worse than a UK listed ETF, and 13.5% worse than a US listed ETF.

    There seems to be a definite benefit of ETFs over unit trusts/OEICs. This is because the ETF does not pay UK tax itself (assuming it is foreign domiciled).

  • 31 andrew May 10, 2017, 6:00 pm

    I’ve wondered why in Vanguard’s factsheet for VWRL, they state the dividend to be 2.4%, but looking at Hargreaves Lansdown’s website it’s 1.94ish%
    Is this due to the withholding tax?
    If so, would I be better off holding iShares SWDA acc @90% & iShares EIMI acc @10% to mimic VWRL holdings? I’ve heard (probably in Monevator’s comments section) that withholding tax isn’t applied to accumilating funds.

  • 32 ivanopinion May 10, 2017, 8:15 pm

    SWDA and EIMI are Irish domiciled accumulation ETFs. Ireland does not levy WHT anyway, so does accumulation make any tax difference for UK investors? The fact that they are accumulation ETFs won’t stop them incurring WHT on the dividends they receive from the underlying securities.

    Perhaps US domiciled accumulation ETFs (if there is such a beast) do not levy WHT (as they do not actually pay out a dividend)? I have no idea if that is true, but if it is, they might be beneficial where a UK taxpayer holds the ETF in tax wrappers or by someone paying less than higher rate tax. For a higher rate taxpayer, however, I’m guessing that avoiding US WHT is no benefit, because (I assume) the amount reinvested would still be treated as a dividend for the purpose of UK tax in the holder of the ETF, just as it is on accumulation unit trusts. So, for a higher rate taxpayer, there is still a 32.5% tax liability, regardless of whether part of that includes 15% US WHT.

  • 33 PB May 15, 2017, 3:25 pm

    I hold ETFs in an investment account owned by my limited company.

    For some reason, this year my broker (IB) has started to withhold full 30% of US taxes on dividends. This has never happened before, and I have always diligently filled in my W-8BEN-E. I have tried to get an answer from them, but pulling out my own teeth is easier than getting a straight answer out of IB, and my accountant is clueless about foreign taxation.

    This has happened with the ETF EMDV, which I bought on the LSE, never realising that I’d be hit by US taxes. I made it a point to seek out ETFs listed on the LSE.

    How does one find out where a fund is domiclied? For example, I have checked the prospectus and fact sheet of EMDV this morning, and I can’t find that information anywhere…

  • 34 The Accumulator May 15, 2017, 6:19 pm

    @ PB – Is this your ETF:

    It’s listed on the London Stock Exchange as EMDV. It’s domiciled in Ireland. You shouldn’t be paying withholding taxes on it. Ireland doesn’t levy withholding taxes.

    Alternatively, you are in the US EMDV which is listed in New York:

    Then you’d need to pay withholding taxes, although only at 15% as you’ve filled in your paperwork.

    Either way, something isn’t right about what you think you’ve bought.

  • 35 PB May 18, 2017, 10:35 am

    Hi The Accumulator, I definitely bought the EMDV listed in London.

  • 36 ivanopinion March 28, 2018, 3:49 pm

    Due to a discussion on another thread, I’ve realised that my posts 29 and 30 are not right, as regards investments made through SIPPs. For two reasons:

    1 Although the SIPP pays no UK tax, this is just a deferral. The investment income is taxed when it is withdrawn from the SIPP, at marginal tax rates at that time (with up to 25% tax free, subject to restriction to 25% of the LTA).

    I’m guessing most readers of this forum will be basic rate taxpayers in retirement, as they will use most of their SPA to offset tax on their state pension. And if you are lucky enough to have so much retirement income that you exceed the higher rate threshold, you can work out your own figures. So, after taking 25% tax free lump sum, the effective tax rate on the withdrawal will be 20%x75% = 15%.

    2 The SIPP should be able to reclaim the 15% WHT from the US.

    Eventual tax rate if held in a SIPP (and assuming effective marginal rate of 15% on withdrawal):
    US domiciled ETF 15%
    Irish domiciled 27.75% (1-0.85×0.85)

  • 37 Jeff Beranek April 7, 2018, 4:03 pm

    I’ve had a response to the question I put into AJ Bell Youinvest about whether or not I could hold US domiciled ETFs in my SIPP and if I could benefit from a 0% rate of withholding tax. This is what they said:

    “Unfortunately since 03 January it has been very difficult to purchase any US listed ETFs, but this is not because of tax reasons. Usually, any
    US income within a UK SIPP is paid gross (i.e. no tax), however new regulation came in on 03 January which means that any packaged
    product, such as an ETF, must have a Key Information Document in order to be traded in the UK.

    UK ETFs do have these documents, but most US ETFs don’t, because if they did, it may breach some US regulations about marketing and
    promoting, so it’s a bit of a catch 22as things stand.

    VTI is one of the ones that unfortunately cannot be traded at present, for the above reasons.”

    I’ve heard that Hargreaves Lansdown have also removed at least some US domiciled funds from their platform for the same reason.

  • 38 The Accumulator April 7, 2018, 5:41 pm

    Yes, it’s all moot at the moment – despite Ivan’s and Theta’s sterling efforts on the broker thread – every platform I look at has pulled US-listed ETFs until they comply with the new PRIIPs regulations. Even racier outfits like Degiro and IG have pulled ’em. It looks like we’re at an impasse until US-domiciled ETFs decide to produce European compliant KIDs. I guess those that have a financial incentive to do so will in time. And if they don’t then some platforms may provide for the ‘sophisticated investor’ workaround.

  • 39 Donf May 31, 2018, 9:34 am

    Does anyone know if this PRIIP regulation issue about US-domiciled ETFs affects other US-listed investments, as well? Is it at all possible to invest in US-listed funds? And I guess US-listed shares or REITs shouldn’t be affected?

  • 40 The Accumulator May 31, 2018, 9:39 am

    Hi Donf, I couldn’t find anywhere that would let me invest in US-listed funds even before PRIIP. I think mutual funds were kept off-sale outside the US by some other form of regulations / fear of regulations.

  • 41 Donf May 31, 2018, 10:08 am

    Thank you The Accumulator. That’s what I thought. I guess we’ll just have to wait for European compliant KIDs or your afro-mentioned ‘sophisticated investor’ workarounds.

  • 42 John June 10, 2018, 1:26 pm

    Hi All,

    Please can anyone help me with the following:

    I know you can reclaim withholding tax suffered on dividends against your personal income tax, but does the same apply for UK companies if it’s the company that has invested in the overseas ETF?

  • 43 ivanopinion June 10, 2018, 4:23 pm

    John, if this is a company that you own, you probably need specialised advice, as it is not straightforward. The dividend might be exempt, in which case you can’t claim a credit for the WHT, because there is no UK tax on the dividend (though there might be further tax when the UK company itself pays a dividend). See, for instance: https://www.taxadvisermagazine.com/article/small-or-large-company

  • 44 John June 11, 2018, 3:35 pm

    Hi ivanopinion,

    Many thanks for your reply. That has certainly helped me out a lot!

  • 45 ivanopinion August 12, 2018, 1:04 pm

    Can I point out that my post 30, above, is wrong. (I did say it was just a guess.)

    A post (post 53 here: monevator.com/etfs-vs-index-funds-differences) under the name John, on another thread, has pointed out that UK unit trusts and OEICs are not taxable in the UK on dividend income. Having googled a bit, this does seem to be correct, so investing in US equities via a UK UT/OEIC should be taxed the same as via a foreign-domiciled ETF.

  • 46 john September 4, 2018, 12:06 pm

    I love that this thread is still going.
    Could I get confirmation that US domiciled ETFs that holds NO US SECURITIES (such as iShares frontier markets ETF), still pays the US a withholding tax??? This is nuts if so.
    Perhaps I’m letting the tax tail wag the investing dog, but this puts me right off US dividend payers.

  • 47 Jeff Beranek September 4, 2018, 4:56 pm

    The multiple problems with US-domiciled funds are explained fairly clearly here:

    However, it misses out the issue with US-domiciled funds probably being considered US situs assets (even if the funds are not holding any US shares/property) and therefore you could get hit with US estate tax on anything over $60,000.

  • 48 ivanopinion September 4, 2018, 5:00 pm

    As discussed in post 24, for UK investors the estate tax issue only applies to estates bigger than $5.45m.

  • 49 Jeff Beranek September 4, 2018, 6:20 pm

    Okay, maybe, but I would be very careful about offering tax advice on this forum. The article pointed to in the post says “Even if no tax is due, the filing of a U.S. estate tax return is required if the value of the U.S. assets exceed $60,000 at date of death”. As a US citizen resident in the UK with a “non-resident alien” (i.e. British) wife I know how difficult it is to file US tax returns. Yes, thankfully there is a UK/US tax treaty, but there is significant debate among tax accountants about what it actually means today. There are special pages of the IRS tax return that you need to file if you are claiming a treaty position which I still have not got my head around…

  • 50 Jeff Beranek September 4, 2018, 7:32 pm
  • 51 ivanopinion September 5, 2018, 9:37 am

    The second link confirms that the estate duty may be disapplied by a relevant tax treaty and that Form 706NA is still required if the US assets are greater than $60k. I agree it would be a bit of a pain to fill in the form, so that might be good enough reason to avoid having more than $60k worth of US dom investments, unless the benefits are significant.

    On a quick look at that form and the notes to it, it doesn’t seem too bad, however. The executor would have all the data, for the purpose of UK probate. The executor just adds a note explaining that, due to the treaty, the form has been filled in on the basis that the deceased is entitled to the same estate duty treatment as US domiciliaries. (Thanks to Trump/Ryan, US estate duty now only applies on estates of greater than $11.18m, for US domiciliaries.)

    Incidentally, the third link is the treaty dealing with income tax. The treaty covering estate duty is linked in post 26.

  • 52 Ivanopinion June 3, 2019, 3:42 pm

    Another thread has discussed the US estate tax, but as this thread is the main discussion, I thought it would be helpful to add some new information here. Specifically, that for most Brits any US ETFs will not be subject to US estate duty entirely.

    I did find a UK government source for the relevant double tax agreement for estate duty:

    Under that agreement, the basic rule on country taxing rights is:
    (1)(a) …if the decedent or transferor was domiciled in one of the Contracting States at the time of the death or transfer, property shall not be taxable in the other State…”

    Decedent is US legal jargon for deceased person. So, if the deceased was only UK domiciled at the time they died, the basic rule is that the US cannot impose estate duty, even on US situs assets.

    This rule does not apply if the deceased was, at the time of death, a US national. (Art 5(1)(b)) So, Jeff may not be protected from US estate tax, but most Brits will be.

    There are exceptions which mean that the US could still tax US real estate (eg, Florida holiday home) or US assets of a business the deceased carried on in the US. But investments in ETFs would not come under either exception.

    There are a few other exceptions to the general rule, relating to assets held in trust or where the tax in the country of domicile is not paid, but these would not seem relevant.

    Obviously, the only way to know for sure is to get advice from an expert, but it certainly looks as if a UK citizen, domiciled in the UK, holding investments in US ETFs or shares would not normally be exposed to US estate tax.

  • 53 Ivanopinion June 3, 2019, 3:50 pm

    The interpretation of Art 5(1)(a) was confirmed the report to Senate when the agreement was agreed. The text of the report is available here:

    Specifically, the report said:
    “The proposed treaty generally provides that property, other than real property and assets of a permanent establishment or a fixed base in the other country, may only be subject to tax in the country of domicile of the decedent or donor.”

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