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Potential Brexit risk to ETFs in ISAs?

Index tracking funds and ETFs
hiriskpaul
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Potential Brexit risk to ETFs in ISAs?

#98969

Postby hiriskpaul » November 26th, 2017, 2:32 pm

This is not something I have seen crop up yet anywhere, but I think there is a risk that ETFs may not be allowed in ISAs post Brexit. The popular LSE listed ETFs are mostly domiciled in Ireland and as such are considered overseas funds by the HMRC and FSA. The current ISA rules do not allow overseas collectives to be held in an ISA unless they are both recognised by the FSA and are UCITS compliant. UCITS funds are allowed because of passporting rights. If passporting rights are lost as part of Brexit, which currently looks likely to me, that would put into question the eligibility of ETFs in ISAs. A simple solution would be to change the ISA rules, dropping the UCITS requirement. Personally I would like to see that go anyway along with the FSA approval and allow any foreign funds to be allowed (US ETFs for example).

Has anyone read anything about this potential issue? If not, then perhaps a bit of lobbying may be in order so this is sorted out pre-Brexit.

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Re: Potential Brexit risk to ETFs in ISAs?

#98989

Postby Lootman » November 26th, 2017, 3:42 pm

You can probably rely on the ETF providers to do the lobbying. It's a big business these days and Blackrock etc. have influence, and probably run a few public sector pension funds.

I suspect changing the ISA rules is the simplest solution. In fact the scope of what you can invest in has changed constantly since PEPs were introduced over 30 years ago, and the trend has been to liberalise what can be held. Orinally it was designed only for UK shares - the idea was to encourage ownership of individual British companies. Even investment trusts, which otherwise are shares, were restricted. And insofar as you could hold collectives, the subscription limit was much lower.

Over the years, and especially after the transition to ISAs, the universe of securities you can hold broadened to include funds, bonds and quite a few overseas securities. As long as that principle is maintained, it would not be a huge deal to carve out ETFs - at least those domiciled in Ireland. And the Irish government itself would presumably want some kind of bilateral deal to ensure its big fund management business can continue to be marketed here.

I worry more about the tax benefits of ISAs being restricted, especially if we get a Labour government, than I do about ETFs becoming unavailable, but it's certainly worth keeping an eye on.

hiriskpaul
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Re: Potential Brexit risk to ETFs in ISAs?

#99192

Postby hiriskpaul » November 27th, 2017, 11:55 am

I think you are right about the providers doing the lobbying. I will email iShares and Vanguard and ask if they are aware of the potential problem. It will not do any harm to email my MP either and ask her to ask the treasury to apply the same set of rules to ISA investments as they do to SIPPs. It is fairly ridiculous now that the rules are different, especially as ISAs provide an increasingly important part of pensioners income. Osborne's LISA really is another pensions savings vehicle with the quirk that early access is allowed for a house deposit. I am sure the brokers would welcome a single set of rules covering both SIPPs And ISAs.

I fear taxes or restrictions coming on ISAs as well. There has been so much talk about intergenerational fairness and which age group are currently receiving the lions share of tax savings from ISAs?

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Re: Potential Brexit risk to ETFs in ISAs?

#99275

Postby Lootman » November 27th, 2017, 4:13 pm

I should add AIM shares and of course cash to the list of assets that have also been made available within ISAs over the years. So there has been a clear trend towards making ISAs a more universal home for all types of investments and savings.

There is no reason to believe that will continue, let alone not be reversed, under a future government with a very different agenda from what we have known since the 1980's. But that's really just speculation - the history of ISAs so far indicates that ETFs would continue to be able to be held as they are increasingly becoming a core part of many investors' portfolios.

ETFs could also be brought back onshore, over Dublin's dead body, if it was beneficial to do so.

More generally the hope has to be that future governments want to preserve ISAs as is, partly because they encourage saving and investment, reducing the potential future burden on the state that we otherwise might be. And partly because it saves HMRC having to oversee the tax situation of millions of savers with relatively small amounts invested.

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Re: Potential Brexit risk to ETFs in ISAs?

#99729

Postby Muddywaters » November 28th, 2017, 10:06 pm

If it came to it, which I seriously doubt, then Irish domiciles ETFs would likely just be brought back onshore. Wasn’t the original issue stamp duty which the government then removed from onshore domiciled ETFs?

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Re: Potential Brexit risk to ETFs in ISAs?

#99742

Postby 1nv35t » November 28th, 2017, 11:51 pm

Uptake of UK based ETF providers has been very low despite realignment of taxation. Ireland have something like 1 trillion of ETF AUM. Without a deal they'll fall into being foreign non registered status which would mean all of gains retrospectively being taxed as income (even a brief lapse in reporting registered status ... means the entire holding period gains fall into non-reporting-registered). It would seem that there are significant financial sector and treasury benefits under status quo (no-deal/changes).

The likes of Vanguard have presence in both UK and Ireland, I would suspect that existing Ireland domiciled funds might be split to be managed in both regions rather than just the one post Brexit, likely with investors being given the option of which domicile they'd rather hold. Many of their funds are global anyway and they do internal share lending between them for cost/tax efficiencies purposes. Providing investors had opted to hold the UK based versions prior to Brexit then otherwise falling into non reporting status would have been mitigated.

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Re: Potential Brexit risk to ETFs in ISAs?

#99744

Postby Alaric » November 28th, 2017, 11:58 pm

1nv35t wrote: Without a deal they'll fall into being foreign non registered status which would mean all of gains retrospectively being taxed as income (even a brief lapse in reporting registered status ... means the entire holding period gains fall into non-reporting-registered).


I think you are making that up. Surely the key point for UK taxation is "reporting" status? In other words that income is reported to the UK holder and HMRC. That's not dependent on the EU as various "tax haven" funds also have reporting status.

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Re: Potential Brexit risk to ETFs in ISAs?

#99752

Postby 1nv35t » November 29th, 2017, 12:49 am

The current structure is such that a EU based fund might be regulated in Ireland, managed in London, sold to someone in Paris. Post Brexit may prohibit London marketing into the EU and vice versa. Two thirds of UK fund managers opine that they will not be able to sell their funds freely across the EU and if so its reasonable to assume that would be reciprocated. Little point in renewing a reporting registration in a region in which you cannot sell your product/service. Tax havens maintain registration as they have access to selling their fund within the UK.

Like other sectors, uncertainty abounds and most haven't a clue of what will arise from Brexit and given such uncertainty are restructuring accordingly i.e. split presence in both in order to retain access to both. Commonly we hear about the negatives of UK businesses splitting, but hear little about flows in the other direction (UK is the EU's largest single export market, ahead of the US). As some UK funds are split (poached) by Paris/Berlin, so others will be poached by the UK (such as from Ireland). It simply would not be sensible to favour Irish domiciled ETF's on the one hand whilst seeing outflows from London to Berlin (or wherever) on the other hand.

Another tact could be to revise withholding tax rates, perhaps keeping it at 0% for those with whom we have a tax treaty, 50% for others (France at one time had their higher rate up at 70% levels). Under a no-deal Brexit scenario that would be similar to a no access barrier. I suspect that rather than the beneficial ISA mapped to SIPP like rulings, that the opposite would be the more likely (non reclaim of withholding taxes).

hiriskpaul
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Re: Potential Brexit risk to ETFs in ISAs?

#100006

Postby hiriskpaul » November 29th, 2017, 5:43 pm

Alaric wrote:
1nv35t wrote: Without a deal they'll fall into being foreign non registered status which would mean all of gains retrospectively being taxed as income (even a brief lapse in reporting registered status ... means the entire holding period gains fall into non-reporting-registered).


I think you are making that up. Surely the key point for UK taxation is "reporting" status? In other words that income is reported to the UK holder and HMRC. That's not dependent on the EU as various "tax haven" funds also have reporting status.

Correct, what matters is reporting status, not where a fund/ETF is domiciled. Many US funds and ETFs have reporting status. Hard to see why reporting status would change just because of Brexit.

The larger ETFs tend to me managed globally as well, so for example when the Vanguard World ETF needs rebalancing, the deals for the US market will be done in New York, Europe, probably in the UK or maybe Ireland, China probably in HK, etc.

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Re: Potential Brexit risk to ETFs in ISAs?

#103877

Postby 1nv35t » December 13th, 2017, 11:33 am

hiriskpaul wrote:
Alaric wrote:
1nv35t wrote: Without a deal they'll fall into being foreign non registered status which would mean all of gains retrospectively being taxed as income (even a brief lapse in reporting registered status ... means the entire holding period gains fall into non-reporting-registered).

I think you are making that up. Surely the key point for UK taxation is "reporting" status? In other words that income is reported to the UK holder and HMRC. That's not dependent on the EU as various "tax haven" funds also have reporting status.

Correct, what matters is reporting status, not where a fund/ETF is domiciled. Many US funds and ETFs have reporting status. Hard to see why reporting status would change just because of Brexit.

The larger ETFs tend to me managed globally as well, so for example when the Vanguard World ETF needs rebalancing, the deals for the US market will be done in New York, Europe, probably in the UK or maybe Ireland, China probably in HK, etc.

Simply because it could be in the UK's best interest to make such changes. Also we have arrangements with the likes of the US, but once we've left the EU no such arrangements might exist. Not having the ability/authority to validate what is being reported as being correct warrants disconnect.


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