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UK Investment Trusts as an alternative to ETFs?

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  • 22-08-2020 11:55am
    #1
    Cirrus Incus
    Registered Users Posts: 64 ✭✭


    Hi,
    I'm trying to find an alternative to ETFs. I don't want to deal with the tax mess of the 8 year deemed disposal.

    People in other threads have mentioned UK investment trusts such as the F&C Investment Trust.

    My plan would be to dollar cost average via Degiro and then hold for 20-30 years. I know this would be a headache regarding tax if I was to go the ETF route.

    How does tax work with these?
    Do I only have to pay tax when I sell?
    What implications does a no deal Brexit have for an Irish investor?

    Is there any other alternative to ETFs?

    Thank you.


Comments

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    #2
    Saudades
    Registered Users Posts: 378 ✭✭Saudades


    I've been reading a bit into this myself today.

    UKIT's are taxed at 33% as opposed to ETF's which are taxed at 41%.
    There's no deemed disposal of IT's.
    I believe yes you only pay tax when you sell but some of them pay dividends which are taxed.
    No idea the implication of Brexit.

    The fees for IT's are much higher when you actually read the factsheet for some of the trusts; you could see Management Fees, Performance Fees, and Ongoing Charges. You're looking at at least 1% in fees per year.

    So over the course of say 8 years, a standard S&P500 will be deemed for 41% tax plus you've paid 8 x 0.07%.
    But the IT, if you sell after 8 years, you'll pay 'only' 33% tax, but you've already paid at least 8% in fees, maybe more, and then there's also a 0.5% UK stamp duty.

    So tax/fees wise, ETF's are probably still cheaper if you hold for a longer time. But of course the only figure that really matters are the total returns in your pocket which is dependent on if and how much the IT's beat their index.

    Some IT's have good long-term records, these all have nice 10 year returns; F&C as you mention, Scottish Mortgage, Allianz Technology, Polar Capital. These last 3 are very heavy in tech. Personal Assets Trust which has a conservative mix of stocks, bonds, and gold. Biotech Growth has a good long-term record but appears quite volatile.

    I've read from several sources that say the best thing is probably just invest in one index, something like the Vanguard FTSE All World, and dollar cost average every month. That's what I'm doing with my company pension at work. (I invest 6% of my salary and my company invest 8%).

    But being mid 30's years old I think I can take some higher risk with my savings, so I'm looking at a portfolio with two or three of the above IT's alongside ETF's S&P500, Nasdaq100, Vanguard All-World, and another investment vehicle called Fundsmith.
    There's going to be overlap of the FAANG's and Microsoft but I'm fine with that.


  • Options
    #3
    bobbyy gee
    Banned (with Prison Access) Posts: 1,306 ✭✭✭bobbyy gee


    A flat tax rate of 41 per cent must be paid on income or profits you make on an investment fund which is domiciled in Ireland. That same flat rate of tax will be paid on any money you make on funds domiciled in the EU, the European Economic Area (EEA) or the OECD - as long as the country has a double taxation agreement with Ireland and the funds are authorised and structured like Irish-based funds. if you're investing in an unregulated offshore fund which is domiciled in the EU, the EEA or the OECD, you must pay tax at your higher rate of income tax as well as PRSI and the universal social charge (USC) on any income you receive from the investment - even if Ireland has a double taxation agreement with the country where the fund is based. You must also pay 33 per cent capital gains tax (CGT) on any profits you make when you sell the fund.If investing in an offshore fund which is based outside the EU, the EEA or the OECD - but which is still in a country that Ireland has a double taxation agreement with - the amount of tax you pay will depend on whether you receive most of your income from the fund each year or if the income is allowed to build up over time. If you receive most of your income from the fund each year, you must pay tax at your higher rate of income tax as well as PRSI and the USC on any income you receive - and you must also pay 40 per cent CGT on any profits you make when you sell the fund. Otherwise, you are taxed at your higher rate of tax on any money you make when you sell your investment.

    The are some steps you can take to limit the extent to which the Tax Man can eat into your investment returns.

    "Invest in an Irish or EU-unit linked fund where gains and income are taxed at a flat rate of 41pc exit tax," Returns on these funds can be rolled up within the fund and will not be hit for tax until either money is withdrawn or the fund reaches its eighth anniversary."

    Saving more into your pension is one of the best tax moves you can make - particularly if a higher-rate taxpayer as you will qualify for a 40pc tax break on your pension contributions (up to certain limits). "Both income and growth within a pension fund are completely tax-free and the compounding effect of tax-free growth over time is very powerful


  • Options
    #4
    Mad_maxx
    Registered Users Posts: 13,505 ✭✭✭✭Mad_maxx


    Saudades wrote: »
    I've been reading a bit into this myself today.

    UKIT's are taxed at 33% as opposed to ETF's which are taxed at 41%.
    There's no deemed disposal of IT's.
    I believe yes you only pay tax when you sell but some of them pay dividends which are taxed.
    No idea the implication of Brexit.

    The fees for IT's are much higher when you actually read the factsheet for some of the trusts; you could see Management Fees, Performance Fees, and Ongoing Charges. You're looking at at least 1% in fees per year.

    So over the course of say 8 years, a standard S&P500 will be deemed for 41% tax plus you've paid 8 x 0.07%.
    But the IT, if you sell after 8 years, you'll pay 'only' 33% tax, but you've already paid at least 8% in fees, maybe more, and then there's also a 0.5% UK stamp duty.

    So tax/fees wise, ETF's are probably still cheaper if you hold for a longer time. But of course the only figure that really matters are the total returns in your pocket which is dependent on if and how much the IT's beat their index.

    Some IT's have good long-term records, these all have nice 10 year returns; F&C as you mention, Scottish Mortgage, Allianz Technology, Polar Capital. These last 3 are very heavy in tech. Personal Assets Trust which has a conservative mix of stocks, bonds, and gold. Biotech Growth has a good long-term record but appears quite volatile.

    I've read from several sources that say the best thing is probably just invest in one index, something like the Vanguard FTSE All World, and dollar cost average every month. That's what I'm doing with my company pension at work. (I invest 6% of my salary and my company invest 8%).

    But being mid 30's years old I think I can take some higher risk with my savings, so I'm looking at a portfolio with two or three of the above IT's alongside ETF's S&P500, Nasdaq100, Vanguard All-World, and another investment vehicle called Fundsmith.
    There's going to be overlap of the FAANG's and Microsoft but I'm fine with that.

    You can't offset losses on ETF,s , you can with investment trusts, that's a key difference


  • Options
    #5
    Cirrus Incus
    Registered Users Posts: 64 ✭✭Cirrus Incus


    What about if I bought a number of different shares individually? Do I only have to pay CGT when I sell in that situation?


  • Options
    #6
    irishguy
    Registered Users Posts: 3,299 ✭✭✭irishguy


    Cirrus Incus wrote: »
    What about if I bought a number of different shares individually? Do I only have to pay CGT when I sell in that situation?

    Correct


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    #7
    BishopBrennen
    Registered Users Posts: 56 ✭✭BishopBrennen


    Interesting topic.
    Can I ask, regards the Uk 0.5% stamp duty on UK trusts mentioned above, is this a once off fee charged after you sell? As opposed to an entry / yearly charge?


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    #8
    Saudades
    Registered Users Posts: 378 ✭✭Saudades


    BishopBrennen wrote: »
    Interesting topic.
    Can I ask, regards the Uk 0.5% stamp duty on UK trusts mentioned above, is this a once off fee charged after you sell? As opposed to an entry / yearly charge?

    You pay 0.5% stamp duty every time you purchase shares in UK investment trusts.


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    #9
    BishopBrennen
    Registered Users Posts: 56 ✭✭BishopBrennen


    Saudades wrote: »
    You pay 0.5% stamp duty every time you purchase shares in UK investment trusts.

    I didn't know this. Are there any other hidden or not hidden charges / fees with regard to Uk Investment Trusts?
    I only know how Uk trusts are treated regards tax, CGT tax like individual shares, etc... I know nothing about their fees yet, what fees are there on them?

    Is there a similar Irish stampo duty fee if buying shares in irish trusts?


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    #10
    Saudades
    Registered Users Posts: 378 ✭✭Saudades


    BishopBrennen wrote: »
    I didn't know this. Are there any other hidden or not hidden charges / fees with regard to Uk Investment Trusts?
    I only know how Uk trusts are treated regards tax, CGT tax like individual shares, etc... I know nothing about their fees yet, what fees are there on them?

    Is there a similar Irish stampo duty fee if buying shares in irish trusts?

    You can check out the factsheet document that each UK Trust provides; but yes there can be ongoing charges, management fees, and performance fees.

    No idea about Irish trusts.


  • Options
    #11
    Mad_maxx
    Registered Users Posts: 13,505 ✭✭✭✭Mad_maxx


    has there been a change with respect of those UK investment trusts since the UK officially left the EU ?

    I see on my own brokerage platform , the city of london investment trust is no longer available as an equity , its now listed as a FND which presumably means fund ?

    You can usually only buy a fund for a fixed end of day price and it often incurs larger fees


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