Author Topic: Index fund withdrawal tax  (Read 650 times)

ScottishExpat

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Index fund withdrawal tax
« on: November 03, 2018, 10:46:34 AM »
Hypothetical situation but you have a 1 million pound fund and withdraw 4% per annum. Returns on an annual basis obviously vary so how do you work out what tax is payable? Are you withdrawing the principal which should be tax free or profit which is taxable or some combination?

Does this change if you are a UK non resident expat?

Iím based in a tax free country and on leaving would like to live off an index fund 3-4% withdrawal and trying to work out tax impact. Index funds invested through Luxembourg.
« Last Edit: November 03, 2018, 10:48:52 AM by ScottishExpat »

Playing with Fire UK

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Re: Index fund withdrawal tax
« Reply #1 on: November 03, 2018, 10:58:29 AM »
Hi there. Are you resident in the UK for tax purposes? Are your funds in the UK?

In the UK, interest is taxed as income (but with a tax-free allowance), dividends are taxed separately (with a different tax-free allowance), and capital gains are taxed as capital gains (with a hefty tax-free allowance). Anything in an ISA is free of tax.

Between a couple you could withdraw 4% without paying any tax if you structure it right.

ScottishExpat

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Re: Index fund withdrawal tax
« Reply #2 on: November 03, 2018, 11:32:04 AM »
Thanks for that. Iím based in the Middle East and funds invested through indexes in Luxembourg. Intent would be to keep it like that though may need to move back home at some point. Assume therefore that if back in the UK iíd Be subject to the taxes you outline, otherwise would be subject to Luxembourg rules.

Playing with Fire UK

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Re: Index fund withdrawal tax
« Reply #3 on: November 03, 2018, 11:37:58 AM »
Yes, if you move back to the UK, dunno about if the tax treatment between Luxembourg and the Middle East.

If you do come back to the UK open an ISA asap. Would it be worth looking into the requirements for remaining non-resident for tax purposes in the UK?

ScottishExpat

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Re: Index fund withdrawal tax
« Reply #4 on: November 03, 2018, 11:55:07 AM »
Yeah thatís a good call, I need to look into it just in case for whatever reason i need to move back. Thanks for your input

frugledoc

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Re: Index fund withdrawal tax
« Reply #5 on: November 03, 2018, 02:12:21 PM »
I think this is complicated enough that you should employ a specialist tax advisor.  I'm sure there are lots of pitfalls and loopholes to consider.

PhilB

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Re: Index fund withdrawal tax
« Reply #6 on: November 04, 2018, 12:56:50 AM »
The basic principle for unwrapped investments is that any income earned by your investments (interest and dividends) is taxable in the year it is paid, even if it is reinvested.  If you are holding inc units this is straightforward.  If acc units then you will get a statement from the investment manager telling you the income.  Any capital gains are only taxable when you realise them by selling the units.  As there is a capital gains tax allowance of £11,700 per year you will want to 'harvest' at least this amount of capital gains each year by selling units, even if you don't need the money and just re-invest it.  As a UK resident you get taxed on all your worldwide income.