UK Stamp Duty Reserve Tax - VG Funds & ETF?

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Topic Author
kancell10
Posts: 29
Joined: Thu Jan 09, 2020 3:21 pm

UK Stamp Duty Reserve Tax - VG Funds & ETF?

Post by kancell10 »

Hi guys,

I've been doing some research lately on UK SDRT. I hold VG Lifestrategy 100 & FTSE Global All Cap in various SIPP and ISA on the VG platform.

I was doing comparisons with Interactive Investor platform to understand if I could further reduce my costs, but I couldn't see any reference to SDRT.

I then started digging in on VG platform, contract notes, ex ante costs and charges, and I cannot see any reference to SDRT anywhere.

Does anyone know how VG manage and charge SDRT for their mutual funds on their platform?

Second part of my question is, I read somewhere that ETF do not currently pay SDRT, so ETF save 0.5% on purchases, is that correct?

As we typically save £30k per year in various accounts, I understand that would be £150 per year spent on SDRT, that I could avoid by using ETF?

If that is correct, I could move my holdings to Freetrade, pay £3 a month per S&S ISA and £10 for my SIPP, and buy VG VWRP ACC GBP ETF and save 0.5% on SDRT?

Many thanks in advance for your help, as always!
TedSwippet
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Location: UK

Re: UK Stamp Duty Reserve Tax - VG Funds & ETF?

Post by TedSwippet »

kancell10 wrote: Wed Apr 28, 2021 1:55 am Does anyone know how VG manage and charge SDRT for their mutual funds on their platform?
SDRT only applies to share purchases, not to funds, OEIC or unit trust purchases. And ETFs are specifically exempted from SDRT in UK tax law. Any SDRT due will be paid internally(*) by the fund or ETF as part of its trading costs when that fund or ETF itself buys any UK shares.

Most UK platforms offer a full-ish range of funds/OEICs, ETFs, shares and investment trusts, so these platforms will have procedures in place to handle SDRT for the investments to which it applies. Vanguard's UK platform offers only (their own) funds/OEICS and ETFs, both exempt from (direct) SDRT, so it has no requirement to do anything related to SDRT.
kancell10 wrote: Wed Apr 28, 2021 1:55 am Second part of my question is, I read somewhere that ETF do not currently pay SDRT, so ETF save 0.5% on purchases, is that correct?
Save 0.5% compared to what? You are already not paying SDRT on when you buy shares in your current Lifestrategy 100 and FTSE Global All Cap holdings, so for you, moving to ETFs is in itself not a saving.
kancell10 wrote: Wed Apr 28, 2021 1:55 am If that is correct, I could move my holdings to Freetrade, pay £3 a month per S&S ISA and £10 for my SIPP, and buy VG VWRP ACC GBP ETF and save 0.5% on SDRT?
Your SDRT reasoning is not correct, but at £30k/year of new investing it may be worth comparing costs anyway.

Vanguard's UK platform charges 0.15%, capped at £375/year. £3/month for a Freetrade ISA is £36/year, which is 0.15% of £24k. So for an ISA holding above £24k, Vanguard costs more than Freetrade. For a SIPP, the breakeven amount is £80k.

Potentially a cost saving, but you would have to change from your current OEICs to ETFs, because Freetrade do not offer funds. Also, you might be prepared to pay a bit more simply for the added comfort, simplicity, and perhaps more reliable customer service of a platform owned by a major fund provider.


(*) Side note: the problem case here for investors is investment trusts. These trade as shares and their shares are not exempt from SDRT, but they also pay SDRT internally if/when they buy UK shares. Investment trusts holding UK shares are effectively double-taxed by SDRT, then. Not a bother for you though, not least because Vanguard's UK platform does not offer any investment trusts.
Topic Author
kancell10
Posts: 29
Joined: Thu Jan 09, 2020 3:21 pm

Re: UK Stamp Duty Reserve Tax - VG Funds & ETF?

Post by kancell10 »

Excellent response Ted Swippet! Thanks for the detailed explanation, it makes sense.

I had thought Funds etc also paid the SDRT, and it was only ETF's that were exempt, so that's great to hear.

I was reviewing Interactive Invester and Freetrade costs, and this is specifically what threw me, some products charged 0.5% SDRT and some did not, but I couldn't work out why this was, as I had assumed SDRT was payable on all transactions initially.

I agree with your thoughts on Vanguard, have been very happy with the company and their platform, but still considering whether to move a small percentage of my holding to a couple of investment trusts for 'fun' money. At least being on II platform would give me this option for S&S ISA or GIA at a relatively low cost.
Genghis
Posts: 138
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Re: UK Stamp Duty Reserve Tax - VG Funds & ETF?

Post by Genghis »

I remember reading some comments online that Vanguard passes on the cost of the stamp duty onto investors as an entry fee which is reflected in the price you pay. It’s the fairest way for long term buy and hold investors.

Eg https://www.vanguardinvestments.dk/docu ... harges.pdf

What’s not clear to me is the scale of this. Ie if you buy say the FTSE all share UK specific fund then there will likely be this 0.4% charge.

But if you buy the life strategy 100 fund do you effectively get charged 25% (UK weighting) x 0.4%?
TedSwippet
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Location: UK

Re: UK Stamp Duty Reserve Tax - VG Funds & ETF?

Post by TedSwippet »

kancell10 wrote: Wed Apr 28, 2021 3:58 am At least being on II platform would give me this option for S&S ISA or GIA at a relatively low cost.
UK platforms are a confusopoly, so make sure to compare every cost facet.

For example, Interactive Investor charges £7.99 for each trade (fund, ETF, share, ... doesn't matter), but includes one 'free' trade a month in its £9.99/month fee (you can only accumulate up to three). And it adds £10/month for a SIPP. By contrast, Vanguard charges nothing for trades and nothing extra for a SIPP. So now you have to factor in how often you buy and sell things. And note that for Interactive Investor, transferring between funds -- rebalancing say -- counts as two trades.

My own LTA-sized pension lives at Interactive Investor, and I'm happy with it (for historical reasons, my ISA and GIA are elsewhere). I'm making no new contributions, and everything lives in accumulation units of passive tracker funds, so from Interactive Investor's perspective I might as well be in a coma -- I don't even use my 'free' trades. I'm paying Interactive Investor a few pennies under £240/year for this, but that is £135/year less than I would pay at Vanguard for the same stuff.

Now, I could optimise this further still by moving my SIPP from OEICs to broadly equivalent ETFs and transferring it to Freetrade, or even (horrors!) Hargreaves Lansdown. But on balance I prefer not to have my choice of investment vehicle (OEIC, or ETF) dictated by some platform's marketing department halfwit. My current platform charge with Interactive Investor works out at 0.03%, and that seems hard to complain about.
Genghis
Posts: 138
Joined: Fri Jun 26, 2020 6:53 am

Re: UK Stamp Duty Reserve Tax - VG Funds & ETF?

Post by Genghis »

I’ve just checked a pdf from 2014 that I saved on my computer (no longer online). It says the SDRT entry fee on Vanguard funds is only passed on on UK specific funds.
TedSwippet
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Location: UK

Re: UK Stamp Duty Reserve Tax - VG Funds & ETF?

Post by TedSwippet »

Genghis wrote: Wed Apr 28, 2021 4:12 am I remember reading some comments online that Vanguard passes on the cost of the stamp duty onto investors as an entry fee which is reflected in the price you pay. It’s the fairest way for long term buy and hold investors.
In the early days, Vanguard used to charge a 'dilution levy', implemented as an 'entry charge'. They scrapped this some time ago.

https://www.vanguardinvestor.co.uk/arti ... ng-pricing
We used to use pre-set dilution levy's (charged separately to the fund price) to protect long-term investors in our funds. The move to swing pricing serves the same principle, but is both simpler and has some operational benefits for our UK and European investors.
Genghis wrote: Wed Apr 28, 2021 4:12 am What’s not clear to me is the scale of this. Ie if you buy say the FTSE all share UK specific fund then there will likely be this 0.4% charge. But if you buy the life strategy 100 fund do you effectively get charged 25% (UK weighting) x 0.4%?
No added entry (or exit) charges. Everything is now absorbed into -- or perhaps more accurately, hidden within -- swing pricing.
Topic Author
kancell10
Posts: 29
Joined: Thu Jan 09, 2020 3:21 pm

Re: UK Stamp Duty Reserve Tax - VG Funds & ETF?

Post by kancell10 »

Thanks again guys, a very interesting discussion. I am aligned with your thoughts on interactive investor etc, fully researching before i make any hasty decision. If i did go, I'd only move my S&S ISA, leave the rest with VG, then use the regular investment feature to fill up my ISA first, then my one free trade to pop some in to GIA. Good point on re-balancing though, hadn't considered that.

I guess my key takeaway then is to understand when 0.5% is applied or not, funds and ETF's will not be, but investment trusts etc it likely will be, so that 0.5% will be and additional performance headwind to those trusts!
Genghis
Posts: 138
Joined: Fri Jun 26, 2020 6:53 am

Re: UK Stamp Duty Reserve Tax - VG Funds & ETF?

Post by Genghis »

Thanks TedSwippet.

So for OEICs the investor effectively still pays the cost of stamp duty but it is wrapped up within the price paid for the share as a result of swing pricing?

And for an ETF, as it’s exchange traded, what you’re buying doesn’t need to be created so there’s no stamp duty to be paid by the fund?

... Until it does where the authorised participant would bundle together the required securities to create the ETF unit. How would this transaction be reflected and who would effectively pay the stamp duty?
TedSwippet
Posts: 5181
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: UK Stamp Duty Reserve Tax - VG Funds & ETF?

Post by TedSwippet »

Genghis wrote: Wed Apr 28, 2021 5:15 am So for OEICs the investor effectively still pays the cost of stamp duty but it is wrapped up within the price paid for the share as a result of swing pricing? And for an ETF, as it’s exchange traded, what you’re buying doesn’t need to be created so there’s no stamp duty to be paid by the fund?
Not really. OEICs and ETFs are both open-ended, so each is entirely capable of, and willing to, create (or destroy) units/shares as required. When an investor buys an ETF, either another holder has sold theirs (no stamp duty) or a new share has to be created (stamp duty). When an investor buys an OEIC, the fund provider could well 'net out' this with another holder's sale of some OEIC units (no stamp duty), or again, might instead have to create new units (stamp duty).

The fact that stamp duty only applies to unit creation is the reason why Vanguard felt the need to introduce a 'dilution levy' when their funds were still new to the UK and building up assets, and also why they could remove it later and when there would be much less need to create new fund units.
Genghis wrote: Wed Apr 28, 2021 5:15 am ... Until it does where the authorised participant would bundle together the required securities to create the ETF unit. How would this transaction be reflected and who would effectively pay the stamp duty?
Obviously, as with all of this, the customer ultimately pays every tax, fee, charge and so on. The only mystery is where to find it shown.

To locate it, you have to dig around in the MiFID disclosures of full fund pricing. FWIW, there's an argument to be made here that MiFID might actually require a little too much fee disclosure in some areas (perhaps especially pensions), in the sense that breaking everything down to this degree perhaps creates (or perpetuates) the entire confusopoly of charges.

Anyway, Vanguard's full fee disclosure is here:

https://www.vanguardinvestor.co.uk/cont ... harges.pdf

SDRT is wrapped up in the 'Transaction costs' column. You can see that although it's not an immutable law, to some extent the higher numbers in this column tend towards funds with a higher UK stock weighting.

The moral is that a fund's TER/OCF is not the complete story. For example, at the extreme, adding transaction costs can more than triple the 'headline rate', seen with the FTSE 250 ETF. Vanguard also has to include their own platform fee, 0.15%, in these numbers, but you can factor out this column if holding these funds or ETFs on a non-Vanguard platform, and replace it instead with your own (effective) platform fee.

So, Vanguard's funds are pricier than their OCF makes them look. But ... this turns out to be true of every fund provider's offerings. HSBC, Fidelity, and so on all have this pricing wrinkle. My own view is to compare OCFs, and assume that the incidentals and other transaction costs that fund providers make you indulge in financial archaeology to find will be broadly the same across all of them, and are therefore nothing I can do anything about. (That view might or might not be correct.)
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