Author Topic: UK equivalent of index funds  (Read 4910 times)

rusnat

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UK equivalent of index funds
« on: November 23, 2015, 09:47:27 AM »
Hi, apologies if my question is totally stupid. I'm a complete novice in investing and trying to learn a thing or two. MMM mentions index funds a lot. I tried reading about them in the UK but can't find anything. What do they call them in the UK? Where can I read more about this? Thanks in advance.

cerat0n1a

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Re: UK equivalent of index funds
« Reply #1 on: November 23, 2015, 10:43:14 AM »
There are plenty of index funds in the UK - ones which track the FTSE-100, or the FTSE All Share index. Or you can invest in index funds elsewhere (eg the US) while living in the UK. You can invest in these through an ISA, or directly (an ISA has tax advantages). They are usually called things like FTSE trackers, but index fund is commonly used too. Lots of companies offer them, but with different levels of charges, which is quite important.

I'd suggest spending some time reading websites like monevator and UK version of motley fool to learn more, but asking here will work too. The only stupid question is the one you don't ask....

http://monevator.com/how-to-buy-index-trackers/

daverobev

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Re: UK equivalent of index funds
« Reply #2 on: November 23, 2015, 11:13:00 AM »
Mutual funds, and ETFs.

Look up HUKX.L, VEUR.L, etc.

vanguard.co.uk

Open an ISA with the most sensible fee structure for you (there is a list somewhere, probably on monevator).

frugledoc

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Re: UK equivalent of index funds
« Reply #3 on: November 23, 2015, 11:24:31 AM »
Hi rusnet, I would highly recommend www.monevator.com which has all the info you require.

My favoured ETF is VWRL which is the vanguard all world index ETF. 

It is usually best to buy index ETFs than mutual funds in the UK because the later attract a hefty platform charge.

rusnat

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Re: UK equivalent of index funds
« Reply #4 on: November 23, 2015, 12:34:48 PM »
Thank you for your replies, everyone. I will have a look at everything you have mentioned. A great starting point. I didn't even know where to begin.

Micks

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Re: UK equivalent of index funds
« Reply #5 on: November 30, 2015, 04:24:35 AM »
If you like to read, try out Tim Hale's Smarter Investing. Usually regarded as the go-to book for index investing from the UK.

Larry Swedroe, a reputable index investing author, recently published a UK version of his book Think, Act and Invest Like Warren Buffett. Should be a good read as well. I too agree that the Monevator website is a great source.

Good luck and do not hesitate to ask any further questions.

Doubleh

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Re: UK equivalent of index funds
« Reply #6 on: December 01, 2015, 05:55:06 AM »
Big second for both Monevator and Tim Hale's book, and for investing using an ISA to avoid any future tax on your fund.

I'd also add that it is extra important for UK investors to avoid being sucked into home bias - this means investing just in your own country's stocks for example buying a fund that tracks just the FTSE (London listed shares). Americans are just as prone to this bias but the impact if you buy a US only tracker is much less since the US makes up around 50% of the global market. The UK makes up only a small part of the world market, about 10% so getting international exposure is even more important for us. Vanguard All World or one of their LifeStrategy funds are a great and easy way to get exposure to the whole world market.

2lazy2retire

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Re: UK equivalent of index funds
« Reply #7 on: December 01, 2015, 08:37:18 AM »
Big second for both Monevator and Tim Hale's book, and for investing using an ISA to avoid any future tax on your fund.

I'd also add that it is extra important for UK investors to avoid being sucked into home bias - this means investing just in your own country's stocks for example buying a fund that tracks just the FTSE (London listed shares). Americans are just as prone to this bias but the impact if you buy a US only tracker is much less since the US makes up around 50% of the global market. The UK makes up only a small part of the world market, about 10% so getting international exposure is even more important for us. Vanguard All World or one of their LifeStrategy funds are a great and easy way to get exposure to the whole world market.

Here in the US there is different tax treatment if dividends are considered qualified ( generally US companies) - does HMRC make any such distinction in its treatment of dividend payments?

Doubleh

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Re: UK equivalent of index funds
« Reply #8 on: December 01, 2015, 09:53:52 AM »
There isn't a concept of qualified dividends, but there are additional taxes for foreign dividends. These can generally be avoided by choosing UK based funds or ETFs, although some trackers use Irish domiciled ETFs which can complicate matters.

For UK company dividends there is no requirement to have held the stock for a particular time period as I believe there is to get the qualified treatment in USA. The dividend tax regime is changing in April 2016 - currently there is no tax on dividends up to the higher rate of tax (about 40k per person). From next year there will be tax of 7% up to the 40k band, but you can apply your standard personal allowance of around 11k and a new dividend allowance of 5k. This means that if your income was all in dividends you could receive 40k per person and pay in the region of 1.7k in tax for an effective rate of just over 4% which isn't too shabby. This is 80k for a couple or the equivalent of USD120k; factor in free healthcare and the UK is actually a pretty FIRE friendly country.

Plus you have a 10k per person capital gains tax allowance, and of course any income and withdrawals from your ISA are completely tax free. It works like a Roth IRA but as it isn't specifically a retirement account you can take out as much as you want whenever you want with no penalty.

2lazy2retire

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Re: UK equivalent of index funds
« Reply #9 on: December 01, 2015, 11:36:54 AM »
There isn't a concept of qualified dividends, but there are additional taxes for foreign dividends. These can generally be avoided by choosing UK based funds or ETFs, although some trackers use Irish domiciled ETFs which can complicate matters.

For UK company dividends there is no requirement to have held the stock for a particular time period as I believe there is to get the qualified treatment in USA. The dividend tax regime is changing in April 2016 - currently there is no tax on dividends up to the higher rate of tax (about 40k per person). From next year there will be tax of 7% up to the 40k band, but you can apply your standard personal allowance of around 11k and a new dividend allowance of 5k. This means that if your income was all in dividends you could receive 40k per person and pay in the region of 1.7k in tax for an effective rate of just over 4% which isn't too shabby. This is 80k for a couple or the equivalent of USD120k; factor in free healthcare and the UK is actually a pretty FIRE friendly country.

Plus you have a 10k per person capital gains tax allowance, and of course any income and withdrawals from your ISA are completely tax free. It works like a Roth IRA but as it isn't specifically a retirement account you can take out as much as you want whenever you want with no penalty.

"There isn't a concept of qualified dividends, but there are additional taxes for foreign dividends. These can generally be avoided by choosing UK based funds or ETFs, although some trackers use Irish domiciled ETFs which can complicate matters. "

So if I was to go with Vanguard UK - "FTSE All-World High Dividend Yield" for example which is UK based but holds equities which are 80% NON UK would extra tax be payable? assuming there is no Irish complication

Doubleh

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Re: UK equivalent of index funds
« Reply #10 on: December 01, 2015, 02:08:53 PM »
So if I was to go with Vanguard UK - "FTSE All-World High Dividend Yield" for example which is UK based but holds equities which are 80% NON UK would extra tax be payable? assuming there is no Irish complication

Looking at Vanguard's factsheet for this fund shows that it is indeed domiciled in Ireland:

https://www.vanguard.co.uk/uk/portal/loadPDF?docId=1012

I'm in no way and expert on the tax implications of ETFs since all of my UK based passive investments are in index funds and are held in an ISA. I'm somewhat confused by your question though as you implied that you're US based, in which case (or even as a US citizen living in the UK) you would have far bigger issues to be concerned about when investing in UK funds than HMRC, like FATCA and PFIC rules, courtesy of Uncle Sam. Short answer - don't even bother looking into it, stick with US based funds if you're a US citizen. There is some information on ETF taxation on Monevator, for example this:

http://monevator.com/etfs-and-the-peculiar-effects-of-withholding-tax/

It's probably best not to go too far down this rabbit hole and take the thread off topic as we are getting into complex minutiae and I don't want to confuse the OP into thinking this is complicated, when the overall answer is that it is pretty simple - yes you can invest in cheap trackers and if you do so will probably be better off than most investors.

daverobev

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Re: UK equivalent of index funds
« Reply #11 on: December 01, 2015, 05:19:26 PM »
Irish dom means no divi withholding. For underlying stocks, any double taxation agreement will apply. So if you hold an Irish domiciled ETF that holds US stocks I believe you will lose 15% of the underlying divis; but this is completely transparent to you, the yield is after any withholding.

AFAIR for Irish dom of UK stuff (HUKX, HMCX, VUKE etc) you're ok. If there was a tax advantage to having UK domicile for Brits, there would be products on the market, but as it is most European domiciled ETFs choose Ireland or Luxembourg, for tax reasons.

Again AFAIR, if you hold something that DOES pay tax underlying, if you hold in an ISA the money is lost; if you hold outside, you can reclaim/offset vs any tax owing. Much better to fill the ISA first, anyway. Damn thing is so generous, I'm jealous.

2lazy2retire

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Re: UK equivalent of index funds
« Reply #12 on: December 02, 2015, 05:57:46 AM »
So if I was to go with Vanguard UK - "FTSE All-World High Dividend Yield" for example which is UK based but holds equities which are 80% NON UK would extra tax be payable? assuming there is no Irish complication

Looking at Vanguard's factsheet for this fund shows that it is indeed domiciled in Ireland:

https://www.vanguard.co.uk/uk/portal/loadPDF?docId=1012

I'm in no way and expert on the tax implications of ETFs since all of my UK based passive investments are in index funds and are held in an ISA. I'm somewhat confused by your question though as you implied that you're US based, in which case (or even as a US citizen living in the UK) you would have far bigger issues to be concerned about when investing in UK funds than HMRC, like FATCA and PFIC rules, courtesy of Uncle Sam. Short answer - don't even bother looking into it, stick with US based funds if you're a US citizen. There is some information on ETF taxation on Monevator, for example this:

http://monevator.com/etfs-and-the-peculiar-effects-of-withholding-tax/

It's probably best not to go too far down this rabbit hole and take the thread off topic as we are getting into complex minutiae and I don't want to confuse the OP into thinking this is complicated, when the overall answer is that it is pretty simple - yes you can invest in cheap trackers and if you do so will probably be better off than most investors.

"I'm somewhat confused by your question though as you implied that you're US based, in which case (or even as a US citizen living in the UK)"

Correct, currently living in the US, but a I am mindful of the UK as a possible FIRE location due to the reasons you highlighted above, also have connections and a house there after living for some years in London. I get what you are saying regarding the "FATCATS" and "FUBARS" and it would likely require a clean break from the US to avoid such issues.


2lazy2retire

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Re: UK equivalent of index funds
« Reply #13 on: December 02, 2015, 06:06:54 AM »
Irish dom means no divi withholding. For underlying stocks, any double taxation agreement will apply. So if you hold an Irish domiciled ETF that holds US stocks I believe you will lose 15% of the underlying divis; but this is completely transparent to you, the yield is after any withholding.
.

Thks, Just so I'm clear, A US based person investing in a US stock gets $100 in divs for example, and a UK based person in the same stock would only get $85, I know it seems obvious but just want to be clear that the 15% is only  relevant to outside investors ( UK to be exact - due to treaty ) . My thinking here is that anyone likely to be living off divs in the UK would lean towards UK stocks only?

I guess my bigger question is how could I leverage my dual status allowing me to live in the UK ( NHS and low property tax) while maintaining a sizable holding of US stock not subject to the 15% treaty withholding as the divs are paid stateside to a US person. I wonder how HMRC would handle the US divs paid directly into my US account but reported as income on my UK tax return as I am resident there.

« Last Edit: December 02, 2015, 07:20:36 AM by 2lazy2retire »

daverobev

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Re: UK equivalent of index funds
« Reply #14 on: December 02, 2015, 10:12:52 AM »
Irish dom means no divi withholding. For underlying stocks, any double taxation agreement will apply. So if you hold an Irish domiciled ETF that holds US stocks I believe you will lose 15% of the underlying divis; but this is completely transparent to you, the yield is after any withholding.
.

Thks, Just so I'm clear, A US based person investing in a US stock gets $100 in divs for example, and a UK based person in the same stock would only get $85, I know it seems obvious but just want to be clear that the 15% is only  relevant to outside investors ( UK to be exact - due to treaty ) . My thinking here is that anyone likely to be living off divs in the UK would lean towards UK stocks only?

I guess my bigger question is how could I leverage my dual status allowing me to live in the UK ( NHS and low property tax) while maintaining a sizable holding of US stock not subject to the 15% treaty withholding as the divs are paid stateside to a US person. I wonder how HMRC would handle the US divs paid directly into my US account but reported as income on my UK tax return as I am resident there.

Ok, here goes.

As a US person you pay tax to the IRS no matter where you live.

As a UK resident you pay tax on worldwide income.

You will pay the greater of the two in total, but not double. You deduct any foreign tax paid from the other return - that's the gist of the double taxation agreement.

So say you are UK resident, you get a personal allowance, ISA, cap gains allowance etc. You are not US resident but get some kind of allowances.

You do your US tax return, and owe $5000. You do your UK tax return, and owe 4k GBP which is currently about $6k USD. You probably reclaim much of the $5k from the US and pay the UK, as you are UK resident, but probably the US has first dibs on any US dividends. In total you shouldn't have to pay much more than 4kGBP/6kUSD - certainly not 11kUSD unless you're really structured badly. BUT the US will not see the ISA as a tax shelter, so you'd have to pay christ knows what in tax on any dividends in there, and it may be that you should break US ties - which means all of the above is moot.

HMRC would likely just want to know the value converted to GBP of all dividends received. For Canada at least, you can either do it based on the exchange rate of the day you receive each dividend distribution, or multiply the whole lot by the yearly average (which I get told is not actually 100% clear that it's allowed but I'm damned if I'll convert 20x or more distributions to CAD, when the whole lot is only a few hundred CAD).

Ahem. Anyway I'm probably talking shit, because actually you wouldn't even be subject to the 15% withholding as you're a US person. Or if you were, you'd get it back when you filed your tax return. It's tax paid. And either way, outside an ISA, you'd get to claim it on your UK tax return.

2lazy2retire

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Re: UK equivalent of index funds
« Reply #15 on: December 02, 2015, 11:09:50 AM »
Irish dom means no divi withholding. For underlying stocks, any double taxation agreement will apply. So if you hold an Irish domiciled ETF that holds US stocks I believe you will lose 15% of the underlying divis; but this is completely transparent to you, the yield is after any withholding.
.

Thks, Just so I'm clear, A US based person investing in a US stock gets $100 in divs for example, and a UK based person in the same stock would only get $85, I know it seems obvious but just want to be clear that the 15% is only  relevant to outside investors ( UK to be exact - due to treaty ) . My thinking here is that anyone likely to be living off divs in the UK would lean towards UK stocks only?

I guess my bigger question is how could I leverage my dual status allowing me to live in the UK ( NHS and low property tax) while maintaining a sizable holding of US stock not subject to the 15% treaty withholding as the divs are paid stateside to a US person. I wonder how HMRC would handle the US divs paid directly into my US account but reported as income on my UK tax return as I am resident there.

Ok, here goes.

As a US person you pay tax to the IRS no matter where you live.

As a UK resident you pay tax on worldwide income.

You will pay the greater of the two in total, but not double. You deduct any foreign tax paid from the other return - that's the gist of the double taxation agreement.

So say you are UK resident, you get a personal allowance, ISA, cap gains allowance etc. You are not US resident but get some kind of allowances.

You do your US tax return, and owe $5000. You do your UK tax return, and owe 4k GBP which is currently about $6k USD. You probably reclaim much of the $5k from the US and pay the UK, as you are UK resident, but probably the US has first dibs on any US dividends. In total you shouldn't have to pay much more than 4kGBP/6kUSD - certainly not 11kUSD unless you're really structured badly. BUT the US will not see the ISA as a tax shelter, so you'd have to pay christ knows what in tax on any dividends in there, and it may be that you should break US ties - which means all of the above is moot.

HMRC would likely just want to know the value converted to GBP of all dividends received. For Canada at least, you can either do it based on the exchange rate of the day you receive each dividend distribution, or multiply the whole lot by the yearly average (which I get told is not actually 100% clear that it's allowed but I'm damned if I'll convert 20x or more distributions to CAD, when the whole lot is only a few hundred CAD).

Ahem. Anyway I'm probably talking shit, because actually you wouldn't even be subject to the 15% withholding as you're a US person. Or if you were, you'd get it back when you filed your tax return. It's tax paid. And either way, outside an ISA, you'd get to claim it on your UK tax return.

Thanks, I kinda get how the double taxation thing works, but my devious plan is to maximise my US div allowance as a US person at 35k/person ( 70K couple ). I'm wondering how HMRC will view that 70K in divs when I report it as foreign income - ie will it be still treated as DIV income and be subject to their generous taxation of such.

daverobev

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Re: UK equivalent of index funds
« Reply #16 on: December 02, 2015, 11:23:29 AM »

2lazy2retire

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Re: UK equivalent of index funds
« Reply #17 on: December 02, 2015, 01:13:35 PM »
https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet

The source of the divis shouldn't matter.

Great news, I have dug a bit deeper into the foreign section of the UK return and it appears that DIVS are treated in isolation to general income so I should be good - thanks a lot,and apologies to OP for derailing your post.


cerat0n1a

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Re: UK equivalent of index funds
« Reply #18 on: December 02, 2015, 02:24:14 PM »
Foreign dividends are still a bit of admin pain, though. I mostly invest directly in a high yield share portfolio, rather than index trackers and pretty much now rule out shares that are based in Jersey (eg 3i, Glencore), Ireland, Gibraltar, Guernsey etc.

Although doubleh's point about the UK being a small %age of the world economy is spot on and one should aim for diversification into the rest of the world, it's worth noting that a reasonable chunk of the FTSE earn their money mostly outside the UK - the miners and oil companies for example and the likes of HSBC, Unilever or Standard Chartered. You do get a certain amount of exposure to US/Europe/Asia/emerging markets for free.