Are ETF dividends taxed differently?


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, 18:05, Friday 16 April 2010

Is there any difference in the way dividends from different exchange-traded funds (ETFs) are taxed, depending on where a fund is domiciled/listed?Justin Modray of, the financial guidance website, says there are differences: ETFs domiciled overseas may be subject to foreign withholding tax on dividends that can't always be fully reclaimed.

If you're investing in a growth ETF, the way dividends are taxed is unlikely to be an issue, but be careful not to be caught out with an income-generating ETF.

ETFs domiciled in France are potentially the most disadvantageous for Britons. For example, the Lyxor FTSE 100 ETF is tax-resident in France, despite being listed on the London Stock Exchange (LSE: LSE.L - news) , which means the French tax authorities deduct a 25 per cent withholding tax from dividend payments.

Double taxation agreements generally allow up to 15 per cent of foreign withholding tax to be credited against a UK tax liability, meaning basic-rate taxpayers have no further tax to pay and higher-rate taxpayers can offset 15 per cent against their 32.5 per cent liability on the gross dividend.

However, while withholding tax above 15 per cent can, in theory, be reclaimed, the process is often so laborious it's impractical, unless your stockbroker can do so on your behalf.

US-domiciled ETFs are subject to 30 per cent withholding tax on dividends, reduced to 15 per cent if you file a W-8BEN form.

Irish and Luxembourg-domiciled ETFs are the most tax-efficient for Britons as there's no dividend withholding tax, so the tax position is effectively the same as a UK-domiciled investment.

I am 90 years old and have a paraplegic son. What would be the inheritance tax (IHT) implications of contributing towards his nursing care costs? Is there an IHT exemption for his financial support? I have three other children.Lucy Johnson, solicitor at law firm Withers, says unfortunately there is no specific exemption from IHT for assisting someone with their medical costs.

However, using a trust may help to ringfence assets for your son if he also lacks full mental capacity and, if he does, this might be needed to avoid involvement from the Court of Protection.

You can create a "disabled person's trust" which, if the relevant conditions are satisfied, means that any gift to it is free of IHT if you survive a further seven years.

There is no IHT on the trust during the disabled person's lifetime but it will form part of his estate. To qualify, the disabled person must either lack mental capacity or be in receipt of certain benefits.

The trust may also offer certain income and capital gains tax (CGT) benefits, by allowing the beneficiary's full personal allowance and annual CGT exemption to be used against the trust's income and gains.

If you have surplus income out of which you could make gifts then, if the gifts are part of a regular pattern and do not affect your standard of living, they are completely free of IHT. You could pay for your son's care costs directly in this way, or you could fund a trust by making gifts from income over a period.

If you have assets that qualify for other IHT reliefs, such as business or agricultural assets, you could also make gifts of these into trust for your son, potentially without incurring IHT.

You also need to take into account the possible effect on your son's entitlement to state benefits before taking action.

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