Question: A reader wants to know what his tax liabilities would be for the popular SPDR US Dividend Aristocrats UCITS ETF (UDVD), which is domiciled in Ireland but invests in US stocks. He says: "My understanding is that if I were to invest in an Ireland-domiciled ETF that invests in US shares, then I would pay two amounts of tax on the dividend: 15 per cent US withholding tax (deducted at source) followed by 25 per cent UK dividend tax. Even if the exchange traded fund (ETF) were to be held in a self-invested personal pension (Sipp) or individual savings account (Isa), the US withholding tax would still be applied because the ETF provider as the holder of the shares would have had the tax deducted up front. Is this correct?"
Answer: Tax on exchange traded funds (ETFs) can be confusing as they are often domiciled in other jurisdictions, meaning you might pay tax elsewhere.
The short answer is yes, our reader is right. The Ireland-domiciled ETF withholds 15 per cent of the dividends paid into it at source. The amount then distributed from the ETF to the investor is subject to UK dividend tax unless it is held in a tax wrapper such as an Isa or Sipp.
If you held the ETF in an Isa or Sipp, the 15 per cent US withholding tax would still apply, but you would not have to pay anything on the dividends received. If not held within a wrapper, dividends would be subject to UK dividend tax at a rate dependent on your income level.
If you are a higher- or additional-rate taxpayer you will pay tax on dividends of either 32.5 per cent (for higher-rate taxpayers) or 37.5 per cent (for additional-rate taxpayers). A 10 per cent notional tax credit applies to non-UK dividends, including UDVD.
The only other tax implication of UDVD is capital gains and income tax on selling shares. The ETF has UK reporting status meaning that capital gains are taxed within the UK capital gains tax regime. For ETFs without reporting status, both capital gains and income are taxed within the income tax regime. Capital gains tax is less punitive as you have an annual allowance of £11,100 before you pay anything, after which basic-rate taxpayers incur 18 per cent on their gains, and higher and additional rate taxpayers incur 28 per cent. Distributed and retained income amounts plus any realised capital gains should be entered on your tax return.
