Taxes and ETFs: A Guide for British Investors

IFA Lee Robertson outlines key factors that investors need to be aware of when buying ETFs, to ensure they don't get stung by the tax man

Alanna Petroff 25 March, 2013 | 6:00AM
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I’ve heard ETFs are tax-efficient. Is this true?
While US investors can take advantage of some ETF tax benefits, the same is not true in Britain. ETFs are not given special treatment in the UK. In general, when it comes to taxes, ETFs and traditional funds are treated the same.

In that case, what should I keep in mind, in terms of taxes, when buying ETFs?
The most important thing to consider before buying an ETF is the country of issue. If an ETF was issued in the US or France, you may have to pay more tax on that investment than you otherwise would if you bought the ETF in the UK. Specifically France and the US have tax regimes that enforce withholding tax, which often tax ETF dividends at a very high rate. Dividends from ETFs domiciled in France can be subject to a 30% tax deduction at source, which is not always fully reclaimable. Dividends paid by American-based ETFs can be subject to a withholding tax of 30%. This withholding tax takes a big bite out of your investment gains.

What other tax factors should I consider before buying an ETF?
There is an important classification system that investors should be aware of that govern taxes for ETFs.  It is very important to check an ETF’s classification before making a purchase. Many individuals, and even advisers, do not know to check this until it’s too late.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.