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?

  • 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
  • 1
    what's your tax rate and is this held in an ISA or not
    – Pepone
    May 11 '15 at 22:33
  • I cannot answer the part about the taxes, but the expenses play no role in your scenario, as you've presented it. The ETF will not deduct expenses from your gains. As regards the expenses portion of the question, it would impact whether both options would really got up the same 11k pounds given their different ratios. Assuming they did, however, the expense ratio no longer plays.
    – user32479
    Oct 9 '15 at 5:45
  • Note that after 6th April basic rate tax payers in uk have a £5000 tax free allowance for dividend payments
    – Pepone
    Mar 24 '16 at 0:48

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
  • Totally wrong ignores the CGT allowance
    – Pepone
    May 11 '15 at 22:34
  • 1
    This also seems to wrongly calculate the expenses. The expenses are built into the market price, so they should not be subtracted from the gains. (I can't speak to the UK / international tax part of the question.)
    – user32479
    Oct 9 '15 at 5:43

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