Taking the ETF plunge

3

3CC

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My desire to invest via an ETF started about 2 years ago when I started to research the idea. At first, my confidence grew as I got to know the basics but this was steadily displaced by confusion and fear as questions arose over tax treatment, domicile, the security of nominee accounts vs CREST personal vs share certs, which broker to use etc etc. I deliberated over this for quite a while but when no epiphany occurred, I became disillusioned and put the whole thing on the long finger.

And so I came back to the idea recently and did all the ground work again and arrived at pretty much the same place as before.

So this time, I think I'll just take the plunge rather than over-analyse everything to the point of paralysis.

So....., I intend to open a trading account with TD Direct Investing on which I expect to pay €15 - 20 per trade and nothing else. I expect the amount invested to exceed €5000 and so do not expect to pay the €15 quarterly inactive account fee. My shares will be held in a nominee account (I think - I need to ring and check this) and so will not be in my name and I understand that if TD go wallop, then I am exposed in this respect but I guess this is just a risk you have to take to invest. I know that Campbell O Connor do a CREST personal account but their charges are higher.

I intend to use this account to buy some iShare ETF's or similar. I have not decided which ones just yet but I understand that anything domiciled in Europe is better although I cannot figure out why. The ETF's I do buy will be chosen to rebalance the diversification of some other investments I already have (pension, ISA's from when I lived in the UK etc)

I still have not figured out the tax treatment but I understand that I need to include any shares/ETF's on my tax return each year. I am a paye taxpayer so I do not normally need to do a tax return but I have done so in the past and it is not the end of the world to have to do it again.

So, in summary, I have not figured it all out yet but I think it's better to press ahead than to let my savings languish in a savings account any longer.

If there is a classic novice fatal flaw in my plan, I would be very grateful to anyone who takes the time to point it out. Suggested improvements are also very welcome.

Thanks.

3CC.
 
> I understand that anything domiciled in Europe is better although I cannot figure out why.
I think this is because the European domiciled funds are typically UCITS funds which means that they are treated as offshore funds by Revenue (even the Irish ones assuming that they are held though a clearing system which means there is no tax at source) and are taxed under section 318e of Form 11 rather than as capital gains/dividends.
 
Thanks maturin,

I had assumed I would be filling out form 12 as I am a paye worker. I was going to put any dividends into section 30 and declare any gains in section 68. Do you think I must use form 11 (it looks more complex)
 
unfortunately, I can't claim to be an expert. I too am a paye worker and I return Form 11 every year. Looking at Form 10, I don't see any way to enter gains/distributions from ETFs that makes it clear that they they are not regular dividends (taxed at marginal rate) or capital gains. Perhaps you could try contacting Revenue for clarification?
 
3CC. I'm in the same position as you regarding ETF's. Did you go ahead and how did the process work out for you?
Also I don't understand this Nominee A/C thing you mention. Did you ask for a nominee a/c or what and why?
 
3CC. I'm in the same position as you regarding ETF's. Did you go ahead and how did the process work out for you?
Also I don't understand this Nominee A/C thing you mention. Did you ask for a nominee a/c or what and why?
 
Hi 149,

I have just recently opened a trading account with Redmayne Bentley in Cork and I intend to make my first investment in the next week or so in an iShares ETF. I intend to invest regularly over the course of a year or so in order to benefit from pound cost averaging. I will also spread my investments across 3 different ETF's for the sake of diversification.

RB were not the cheapest broker but they were the cheapest way to hold an ETF in a CREST personal account which is safer than a nominee account if the broker gets into financial trouble. I took the view that the extra commission is worth the extra security but it is a matter of opinion and lots of people use nominee accounts without concern. I came across a few recommendations for RB here on AAM and so I am going to give them a try. I rang them with a few questions about the forms that I had to fill in for opening the account and they were very helpful answering what I am sure for them were probably very basic questions.

My efforts to figure out the tax treatment of ETF's led to a lot of confusion but I did figure out that it was not just me and that there is a great deal of uncertainty generally on this point. This was summed nicely by a post here on AAM by Rory Gillen in recent days which leads me to believe that even qualified tax advisors have different views on this. I had intended to contact a tax advisor on this but given the lack of clarity on this issue, I am not sure if it would add any value. Instead, I will keep an eye on this and hope that Revenue make this clearer in the future.

I intend to hold the funds for the long term (hopefully ~20 years).

The ETF's I am going to use are Irish domiciled and are accumulating funds and so I understand that they are treated as follows for tax:
- I will return a form 11 to Revenue at the beginning of 2014 and will notify Revenue that I have acquired the fund(s) in 2013 in panel 318 g-j.
- The funds are accumulating so I do not have any distributions to declare each year.
- Eight years after I acquire the fund(s), I will need to pay exit tax as if I had disposed of the fund at that time (deemed disposal). Form 11 panel 408 seems to be the place to do this but it will probably be different 8 years from now so no need to worry too much about the details.
- I will need to declare and pay this deemed disposal exit tax every 8 years thereafter.
- In the distant future, I will dispose of the fund and I will then need to declare and pay the exit tax due at that time. This is calculated on the overall gain from initial investment to actual sale less the ‘deemed’ amounts paid previously above. Form 11 panel 318 seems to deal with this but, again, this should be so far into the future the form (and possible the rules and the rates) will have changed by then.

Hope this helps,

3CC


PS The whole calculation of the deemed disposal exit tax would be a lot simpler if I did not invest initially in dribs and drabs over time but I think the benefits of pound cost averaging make it worthwhile.

PPS I understand from Revenue that when you acquire the fund, you become a ‘chargeable person’ (which means you need to make a form 11 tax return). The Revenue site states the following also:
An individual becoming a "chargeable person" under Section 14 FA 2005 continues to be a "chargeable person" for future years, as long as the source(s) of the non-PAYE income continues to exist, irrespective of the amount of the annual gross income.
I am inclined to think that this means that a form 11 will need to be returned every year after the initial investment is made which is a bit of an inconvenience.
 
Hi 3CC

As if this question wasn't difficult enough but a word of warning you need to declare your UK ISAs when resident in Ireland as these are now taxable accounts as far as the Revenue here are concerned

Interest and Income exempt from tax in foreign country

If certain interest or income is exempt from tax in the country in which it arose, it does not follow that this income is similarly exempt from tax in this State. For example, income or interest from Post Office Savings in UK or from TESSA or ISA products is liable to Irish tax.
 
Hi Marc,

Thanks for that. I am aware that ISA's are taxable by Irish Revenue and therefore I am going to cash them in, pay the exit tax, and use them to invest in the ETF's. I just did not go into that in the post above because I did not think it was relevant.

Thanks for the information though.

Regards,

3CC.
 
Thanks Guys. This is beginning to sound a bit complicated for me particularly regarding the tax. Theres no point in asking for a quick simple to use guide on it as you 3CC did a lot of research.
My situation is that I've €40k to invest and was thinking about spreading it across 3 ETF's. I think I should be able to research the ETF's bit ok but how do I know where they are domiciled and the impact this will have on their tax treatments?
 
149,

I hope I have not put you off by being thorough in my post.

The iShares website shows where each of the funds is domiciled and most of them are in Ireland. I found that the iShares EURO STOXX 50 (Acc), MSCI Emerging Markets (Acc), MSCI Europe (Acc), MSCI World (Acc) are all domiciled in Ireland and are all accumulating funds. (I am not discussing the merits of these individual funds which would break the AMM posting rules, just giving some examples of Irish domiciled iShares accumulating ETF's.)

I suggest accumulating funds so that there will be no regular payment of distributions which will make the whole tax situation easier and because I do not need an ongoing income.

As far as I know, you just need to...

-decide on CREST or nominee
- open an account with a broker
- buy the ETF's
- declare the purchase on form 11
- as a precaution, return a form 11 each year from then on
- after every 8 years, pay the exit tax for the deemed disposal
- pay the exit tax when you sell them.

3CC
 
Thanks 3CC.
You're not putting me off - your informing me and it is very good in that it's not loaded with typical business jargon.
1 thing I don't understand is where you say "I suggest accumulating funds so that there will be no regular payment of distributions which will make the whole tax situation easier and because I do not need an ongoing income." Can you explain this please? and what happens the dividends?
 
149,

Many funds make payments every now and again a bit like dividends from shares. The terminology for funds is distributions rather than dividends.

As far as I can make out, these distributions from ETF's are taxable but if the ETF is an accumulating ETF, then there is no distribution and therefore no tax to pay.

Of course, accumulating funds do not just keep the distribution value, they leave it within the fund and this is reflected in a higher fund price.

Some people in their 40's (like me) do not want income from their investments, they just want them to grow as much as possible. So it would be better to go for accumulating funds which will mean there is no tax to pay in respect of distributions. Also, if you did receive a distribution which you then reinvested, you would pay broker charges which are avoided in an accumulating fund/ETF.

Others who may be retired want the opposite. They may want a fund that will pay a regular income and they would therefore probably not be suited to an accumulating ETF/fund.

So I am inclined to go for an accumulating ETF because
1) I do not want a regular income, I prefer to leave the value of the distributions within the funds for better capital growth,
2) I do not want to pay tax and broker charges unnecessarily,
3) I think it will make the tax returns fairly straightforward for except for years 8, 16 etc (due to the deemed disposal) and the year when the fund is finally sold.

Hope this helps.

3CC
 
Thanks 3CC. You have really done your homework and it's of great help to me.
Just 1 point to clarify - I take it that Accumulating Funds are identified by having (Acc) at the end of their name and ticker?
 
Hi 149,

That's correct. Also, if you look at the key facts page on the iShares site for a particular fund, it will have a entry for 'distribution frequency' and this will be 'none' for accumulating funds. Incidentally, the same page will tell you the domicile of the fund that you were asking about before.

See this example:
[broken link removed]

I rang Redmayne Bentley myself today and my account should be up and running in the next few days - almost ready to dive in!

Good luck with the investing.


3CC
 
@3CC are there any annual charges on the below ETFs? Also what are the broker charges incurred though RB for these transactions?

iShares EURO STOXX 50 (Acc), MSCI Emerging Markets (Acc), MSCI Europe (Acc), MSCI World (Acc)

Good info guys, very clearly laid out 3CC.
 
Hi Candyman,

The charges are listed on the Key Facts pages and I gave a link to an example of one of these above.

The charges are referred to as the (Total) Expense Ratio or TER so for the example above (Eurostoxx 50) you will see that the TER is 0.35%. You can check out the TER's for the other funds yourself but there are generally a bit higher for broader indices outside Europe (up to 0.75% for the ones I am looking at).

I have not actually bought an ETF yet but I as far as I can understand from their charges document that they sent me, I will pay RB 1.25% (minimum €25) for deals up to €9000. It is 0.5% for the balance above €9k. So basically an upfront brokerage fee of 1.25% and a TER of 0.35% - 0.75% for the ETF's I am looking at.

By comparison, I am currently getting out of some mutual funds that I bought into when I lived in the UK and their typical entry fee was up to 5% with a TER of 1.7%-2.4%.

So overall, the ETF's look like a big improvement as long as you are happy that active fund management is not worth the additional charges (which I am).

You can get a better deal on the broker charges with TD Direct but they do not offer a CREST Personal account which I am prepared to pay a little more for.

3CC
 
Thanks for that 3CC, great info.

Am I right in assuming that the 0.35% - 0.75% ETF charge is the annual charge for the ETF itself and the broker charge, in this case, 1.25% is a one off charge to buy into the ETF.

Also is it 1.25% of the amount to be invested e.g. if investing 5k, 1.25% = 62.50?

Interested to understand why you prefer a CREST over a nominee also.

Apologies for all the qs but interesting stuff.
Many thanks.
 
candyman said:
Am I right in assuming that the 0.35% - 0.75% ETF charge is the annual charge for the ETF itself and the broker charge, in this case, 1.25% is a one off charge to buy into the ETF.

Also is it 1.25% of the amount to be invested e.g. if investing 5k, 1.25% = 62.50?
Click to expand...

Yes Candyman. As far as I know, all of the above is correct.

The only concern that I have about nominee accounts is that the broker actually owns the ETF's on your behalf. There is a risk that if the broker went bust your investments might be at risk. This happened in the Morrough case in Ireland a few years ago.

CREST Personal Membership is apparently safer as the investor owns the shares directly.

There is a compensation scheme for investments up to €20k subject to certain conditions; so if your investment does not, or will not in the future, exceed this amount, the risk associated with a nominee account may not be worth considering.

3CC
 
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