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I would like to invest in ETF Index funds. Vanguard funds have cheapest MER, around 0.2% and it was my initial choice, but then I've learned about some tax complications which I still don't understand.

Could somebody explain to me, which option is better for a UK-based investor: VOO (VG S&P 500 ETF) - expense ratio of 0.06% Hypothetical SP500 tracker listed on LSE with expense ratio of 0.35%

What I don't understand is the difference in tax situation for both investments.

From what I have gathered so far: US dividend tax for non-resident aliens is 30% (but down to 15%, because of UK-US tax treaty) CGT in UK is 18%

There is new legislation (FACTA) coming up in 2013. How will it affect the situation? Is there anything else I need to know?

Since I lack even basic knowledge in the tax area, could somebody please tell me how much I'd pay in the following hypothetical scenario:

  1. Invest £10k in US ETF (VOO, expense ratio of 0.06): It goes up to £11k. How much will I have after taxes and expenses?

  2. Invest £10k in UK ETF that tracks SP500, with expense ratio of 0.35% It goes up to £11k. How much will I have after taxes and expenses?

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I was about to ask the same question, then found this question. I too would like to know the answer to this one. –  jaffa Jan 13 '12 at 17:25
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1 Answer

Based on the assumptions you provided you would have £11,012.81 in scenario 1, and £10,945.00 in scenario 2.

Security                 VOO            Hypothetical
Initial Investment       £ 10,000.00    £ 10,000.00 
Expenses                        0.06%          0.35%
Investable               £  9,994.00    £  9,965.00 
10% pre-tax gain         £    999.40    £    996.50 
1.99% pre-tax dividend   £    199.20    £    198.62 
Tax Rate                       15.00%         18.00%
Gains After Tax          £  1,018.81    £    980.00 
Total After Tax Value    £ 11,012.81    £ 10,945.00
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