UK investing in VWRL

📊 Investing
1

Hi there,

I am currently investing in the VWRL ETF and I wondered whether it would be better for me to invest in a distributing ETF or accumulating ETF. Because of the 15% witholding tax from the US. I am in an ISA account also.

VWRL is domiciled in Ireland but I know it is a US ETF. So I have 2 questions I suppose, am I better going for a distributing ETF or accumulating ETF and where would the 15% US witholding tax apply? To dividends and or capital gains when I sell my holdings.

Thanks

2

This questions requires a long answer. The answers have been discussed in previous threads. Here are some bullet points:

  • VWRL and VWRP, distributing and accumulating respectively, will return the nearly the same investment gains if dividends of VWRL are reinvested. It also makes little practical difference which version you buy, whether it is priced in GBP, USD or EUR.

  • Both incur the same 15% US withholding tax on that component of the ETF that is US company shares. This happens while the company stocks are with Vanguard. You don’t ever see it happening.

  • Both give rise to liability to income tax, and approximately the same amount.

    • VWRL pays £100, say. You owe tax on £100. There is no tax credit available for the withholding tax that has already been paid to the US.
    • VWRP internally reinvests £100. You still owe tax on £100 - but you can increase your cost basis by £100 as if you had personally reinvested, reducing the capital gains tax when you eventually sell. This is called “excess reportable income” (ERI). In fact, VWRL also has some “excess reportable income”. So tax reporting hassle is similar. The amounts of this ERI can be found in documents on the Vanguard web site.

  • The above applies for UK taxpayers. Things differ elsewhere, such as in Belgium.

  • Some people like a distributing ETF so they can either spend the dividends or redirect them to other investments. Others like accumulating ones because dividends get reinvested more quickly and automatically. Some think the accumulating version saves dividend tax - but because of the requirement to report ERI they are mistaken.

  • In an ISA account all the things I have said about tax can be ignored. Only the first two bullet points matter.

Can anyone think of something I have missed out?

4 Likes
3

Hi Richard,

Thank you for taking the time to send me this answer. I really appreciate your feedback and help. This is really detailed!

Regards