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Let's suppose that you invest in an accumulation ETF/mutual fund, whose automatically re-invest dividends.

In such case, those dividends should not be taxable since you actually never receive them. However, I have read that these dividends are not-taxable only if your brokerage firm doesn't provide you the option of distributing them. Let me explain:

Let's suppose there is brokerage firm that offers an ETF and the investor can choose if the dividends are directly reinvested or, conversely, distributed. In such case, even if you choose to re-invest dividends, they are taxable. Is this true?

Does this apply for different ETFs? That is, let's suppose that a brokerage firm offers exactly the same ETF but in two different versions, distribution (don't reinvest dividends) and accumulation (reinvest dividends), and an investor choose the accumulation one. Are those non-distributed dividends taxable?

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  • Do you have any reference for the idea that they aren't taxable if there's no option to distribute them? I found several references that confirm what the existing answer indicates, that they are always taxable as income tax (but then don't count for CGT when you sell).
    – GS - Apologise to Monica ♦
    Apr 20, 2020 at 20:57

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Companies pay corporation tax on dividends before the ETF receives them so whether the ETF/brokerage pays the dividend to you or reinvests it, that tax has already been paid.

If the dividend is paid to you and the ETF is

If you could escape tax by reinvesting your dividends then everyone would do so and then simply pay out of the fund capital at a slightly later date if they needed to.

If shares are not held in a pension or an ISA then capital gains tax (CGT) is liable when they are sold. Again there's a capital gains tax allowance, which for the 2020-21 tax year is £12,300.

CGT will be payable on the value of the investment when it's sold, minus the original investment and any income you’ve reinvested.

Thanks to timday for the ETF taxation link.

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    I think the above is misleading: on unsheltered (non-SIPP, non-ISA) holdings, income tax is due on the dividend income retained and reinvested by accumulating ETF units. See e.g the "You still pay tax on accumulating ETFs" section of this article: justetf.com/uk/news/etf/… . So far as HMRC is concerned the income is still there, even if you didn't take it, and it needs to be taxed accordingly. Personally I avoid accumulating funds/ETFs outside of ISA/SIPP wrappers; it makes the record-keeping simpler.
    – timday
    Apr 19, 2020 at 23:20
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    Isn't the final point precisely what the question is about - i.e. what counts as "receiving the dividend", when you aren't using a wrapper with tax-exempt growth.
    – GS - Apologise to Monica ♦
    Apr 20, 2020 at 10:25
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    @RobertLongson your link refers to US tax law, unless I've misunderstood. I think most of what you've said is tangential to the specific issue raised in the question - namely whether it makes a difference if you have the option to receive the dividend or not.
    – GS - Apologise to Monica ♦
    Apr 20, 2020 at 20:47
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    @RobertLongson I think that one is about an individual shareholding, rather than an ETF. Maybe the same rules apply. but I'm not sure.
    – GS - Apologise to Monica ♦
    Apr 20, 2020 at 21:22
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    That BAT DRIP page is another example of the general principle of not being able to pretend income is something else (capital gains) by reinvesting it. Seems a bit of an odd thing to link to when there are other things which explain it better though: the info at justetf.com/uk/news/etf/… page is unequivocally about accumulating ETFs, and there's a great Monevator article on OEIC fund ACC unit taxation (but which also applies to ETFs; they're fund units too) at monevator.com/income-tax-on-accumulation-unit
    – timday
    Apr 21, 2020 at 12:33

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