Are ETPs eligible for tax-favored vehicles?
Individual savings accounts (ISAs) and self-invested pension plans (SIPPs) are tax shelters, enabling investors to “roll up” income without being taxed, and to avoid capital gains taxes.
ISAs can invest in company shares and funds, including those listed on “recognised” foreign stock exchanges. The HM Revenue and Customs (HMRC) website gives a list of recognised exchanges.
But not all foreign funds qualify. ISAs can invest in UCITS funds, the retail fund structure that almost all Europe’s ETFs comply with. But this is subject to the UCITS being “recognised” for sale in the UK by the local regulator, the Financial Conduct Authority (remember that European ETFs are domiciled outside the UK, in countries like Ireland, Luxembourg, France and Germany).
In practice, any ETF provider wanting to list its funds in the UK is likely to obtain such recognition, as a listing on the London Stock Exchange (and the offering of a sterling share class for local investors) is seen as a prerequisite to attract local business.
But in some cases, issuers have decided that it’s not worth applying for the recognised status (for example, iShares hasn’t bothered to make its German-domiciled ETFs ISA-eligible, since these funds are designed primarily for German investors).
In theory, a non-UCITS fund from another European Economic Area country (say, for example, a Swiss ETF) could also be eligible for an ISA if the fund has been recognised for UK distribution in the same way.
If an ETF is listed in a foreign currency, you can buy it within an ISA, but bear in mind that your ISA provider may charge you punitive foreign currency conversion rates. As a result, you may be better off sticking to those funds that are listed on UK exchanges and in sterling.
You can check whether an ETF is ISA-eligible either by searching the Collective Investment Schemes section of the FCA Register or by consulting the UK websites of ETF providers.
SIPPs have looser eligibility criteria than ISAs and can in theory allow investors to hold a broader range of foreign securities and funds. So as well as considering European ETFs, you could buy ETFs that are listed worldwide on exchanges not recognised by HMRC.
New York’s stock exchange, for example, where almost all US ETFs are listed, is not recognised. So you couldn’t buy a New York-listed ETF via an ISA, but you could (in theory) through a SIPP (though not all SIPP providers may be set up to allow this).
If you are considering buying non-European shares (or ETFs) in a UK SIPP, make sure your SIPP administrator has set up the arrangements to receive dividends at a reduced (or zero) rate of US tax. And again, pay attention to the costs of FX conversion to make sure you’re not losing out by choosing an instrument that’s not denominated in sterling.
If you are unsure about an ETP’s SIPP eligibility, consult with the ETP issuer.