US Dividend Withholding Tax

Annoying isn’t it. It’s almost as though the US government don’t want you to invest there.
Fortunately, many US companies prefer not to pay dividends and find useful ways to reinvest profits and expand the company. Choose those.

An extract from a popular magazine… I’m confused by the fact that a form needs to be filled to pay 15% tax instead of 30%… does that affect all single shares within an ISA/GIA ? Also it mentioned no withholding tax on SIPP ?

I’m confused.

T212 already fills the form for you and applies it automatically. And I think the form is valid for 3 years or so, so T212 will ask you to fill the form again in that period of time.

You don’t need to complete either form if you hold your investments in a SIPP. This is because when in a SIPP, US investments are automatically exempt from withholding tax. At T212 you currently do not have an option to open a SIPP (to my knowledge at least). So this does not applies in this current platform. You need to go to providers such as HL or AJ Bell to start your SIPP account.

Question:

I just read this on justETF

Accumulating/capitalising ETFs

You’re liable for tax on dividends and interest as normal regardless of whether the ETF physically pays you income, or reinvests it back into the fund as with accumulating/capitalising ETFs.

Is this true ?

Also I was wondering if accumulating ETFs can re-invest all untaxed dividends back in the ETF ?

Yes it is true - the dividends are taxed at source.

An accumulating etf can reinvest all the dividends it receives ie total dividends less withholding tax.

Ah ok, so you don’t have to work out anything/declare anything.

Yes. Unfortunately Justeft is correct. UK taxpayers can owe tax on the dividends obtained by accumulating ETFs and reinvested, ie dividends that you never see. Read the section here titled What about ETFs?

The taxable amount is known as excess reportable income and the amount you need to report for tax can be found on the web pages of the ETF provider.

It would not make sense that accumulating ETFs should somehow escape the same tax liability as their distributing siblings.

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T212 will deduct the 15% US withholding tax for you automatically - be it distributing or accumulating options. However, if the total amount of dividends is above £2000, then you have to declare to HMRC (for UK tax payers). Hope this helps.

You have to declare only if over 2000£ or do you have to declare it anyway ? Like interests from bank accounts… ?

E.g. if I get £40 quid on dividends… do I need to write that on the form ? or just when I get over £2000 ?

PS. How do you work out dividends from an accumulating ETF ? e.g VUKG

Not quite. The 15% withholding tax is not charged, to you by Trading 212. The ETF provider who holds US shares pays US withholding tax on their own account at their corporate level, nothing at all to do with you.

The income that is left, net of tax, costs and fees, is used to pay dividends on ETF shares. That dividend is fully taxable at full UK rates. No foreign tax credit can be taken for the 15% US tax already paid, as it could be if you held US shares directly. This is why it can be better in terms of net of tax yield to hold a diversified portfolio of US shares directly rather than in an ETF like VUSA.

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This is explained by a worked example in the FAQ referenced above. Read it and then ask again if it is not clear.

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Are you saying that theoretically if I replicate the SP500, without having to paying fees for selling and buying in order to rebalance, I would be getting 15% more dividends compared to the ETF ? as VUSA is the cheapest of all already at .07% I think.

VUSA is currently yielding 1.13%. Adding back on the 0.07% fee makes 1.20%. This is net of 15% US withholding tax. So we can work out that the original yield on the US shares held by Vanguard must have been about 1.20/0.85 = 1.41%. (Compare VOO which does not pay withholding tax and yields 1.31% after 0.03% fee). These figures make sense, as a Google search finds that the current yield on the S&P500 is 1.37%.

Suppose you are a UK taxpayer paying 32.5% tax on dividends. Compare £100 invested in

(1) VUSA : tax is 32.5% of 1.13, so you net £0.96.

(2) direct investment: tax is 32.5% of 1.41 (after claiming credit for US withholding tax paid), so you net £1.20.

So net 25% more income by directly investing yourself, rather than through the ETF.

You can do similar calculations if your UK dividend tax rate is 0% (because total dividends are under 2000) or 7.5% for a basic rate tax payer.

One would not try to exactly match VUSA nor to continually rebalance. There is no reason to think that VUSA should outperform on a regular basis a portfolio of about 30-40 directly held US shares that are well-diversified across sectors. To my mind the main advantages of buying VUSA are convenience, and avoidance of regret or excitement, when one of your 30-40 does badly or well, respectively.

Direct share investment would allow you to obtain lesser or greater yield, depending on your preference. Maybe you want higher yield that 1.13% and so prefer to buy ABBV, VZ, IBM, etc.

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Right… but shouldn’t I get taxed on profits from sales only ?

I thought the entire point of Acc ETFs is that since you don’t get paid div you don’t get “income”… therefore you just have to pay when you sell shares. (if you make a profit :smiley: )

Declaring dividends that I didn’t receive doesn’t make sense to me…

Who ever promised that tax rules must make sense? Unfortunately, for UK taxpayers that is how it works. You have already seen that justETF.com has an article about this. Here is another article worth reading:

It may help to understand why this does make sense (at least to those who designed these rules) if you think about the fact that capital gains tax and dividend tax rates are different. It would be unfair/illogical if a higher rate taxpayer could reduce his tax simply by choosing to invest in an accumulating ETF (and hence pay capital gains tax on the accumulated dividends, say at 20%) compared to paying dividend tax on the dividends from a distributing ETF, say at 32.5%. It would also be unfair if he could wipe out dividend tax liability by a future capital loss upon sale. The rules are designed so that the annual dividend tax charge from owning either a distributing or accumulating version of the same fund is essentially the same. Here is shown the taxable income of VUAG, the accumulating version of VUSA, of $0.8957 per share:

With accumulating ETFs you need to remember that after you pay tax on the “excess reportable income” you should then add that amount to your cost basis for your shares. Otherwise you might find yourself paying more capital gains tax than you need to do when someday you come to sell the shares.

Also, beware of the fact that even distributing ETFs can also have undistributed income that is taxable, and which must be figured in the same way as for accumulating ETFs, by reference to tables on the provider’s website. For example, Vanguard VUSA has 5 dividends each year all of which are taxable. 4 of them are quarterly payments which you receive. The 5th is income that is reinvested but which you never see. Eg in the penultimate column of this table we see the excess reportable income of $0.0394 per share, considered paid at 31 December.

These screenshots are taken from here:

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Just to add to @Richard.W’s excellent answers, the perceived wisdom is that, outside of tax shelters such as Isas and Sipps, you should hold distributing versions because it generally makes your life a little easier in terms of dealing with tax.

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Failure to understand and comply with these HMRC rules must be very widespread. Few people who are not professional tax accountants would guess that a distributing ETF like VUSA has taxable income beyond the four quarterly dividends they receive. Self assessment tax forms do not mention it.

It would only be for huge shareholdings where the tax loss to HMRC could be significant. The excess reportable income of VUSA comes to about 0.05%.

What about SIPPs ? I read there’s no withholding tax in a SIPP…

If I buy VUSA in a SIPP, do I get automatically all dividends untaxed or do I need to claim the tax back somehow ?

When buying VUSA, it is Vanguard who pay the withholding tax a their corporate level since they are the owners of the underlying chares. So you cannot avoid the tax. There is no way to reclaim the US withholding tax that Vanguard paid.

I see…so only way to bag the tax free dividends in a SIPP is to have a SIPP that allows to buy shares…

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