The new reporting regime for offshore funds allows UK investors access to accumulating ETFs at a beneficial tax rate, according to industry experts.
The reporting regime, which came into effect on December 1, 2009, means all ETFs regardless of whether they distribute or accumulate income could gain reporting status.
This allows UK investors to incur an 18% or 28% capital gains tax rate rather than an income tax rate of up to 50%, according to PricewaterhouseCoopers UK asset management tax partner Teresa Owusu-Adjei.
She says under the UK rules prior to the regime change in December, accumulating funds could not qualify for distributor status, which meant gains in the value of the fund were taxed as offshore income gains at 50%.
Consequently the rule change opens the door for UK investors to access accumulating funds at a beneficial tax rate.
Owusu-Adjei explains: "Now it makes sense for ETF providers to market their accumulating funds in the UK, because they can just seek reporting status and give their investors the most advantageous tax treatment."
Deloitte partner in the funds practice Ali Kazimi says in certain jurisdictions on the continent, the distribution of income triggers a tax charge, therefore continental investors' preference is typically for accumulation funds.
He adds this was a difficulty for UK fund managers trying to sell the same fund into continental Europe.
iShares has released accumulating versions of ETFs tracking core equity benchmarks on the London Stock Exchange.
iShares Europe head of product development Axel Lomholt says: "In response to client demand, we made the decision to make five of iShares' largest and most successful equity-based ETFs accumulating, meaning they automatically reinvest any dividend income into the funds, rather than paying it to investors."
He adds: "This means depending on investors' preference they can now make the choice between either accumulating funds or products that pay out dividend income to investors on a periodic basis."
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