Platform FX Conversion Costs & Vanguard

[LondonChris]

I'm after some advice on the cheapest route to convert US$ dividends that I receive from Vanguard's VEVE ETF. Question would also apply to holders of Vanguard's VUSA & VWRL.

My platform is currently II. They have a 1.5% FX conversion cost over the interbank rate which is high. I'm exploring cheaper ways to manage this divi. I spoke to Vanguard's UK platform as the website is silent on FX charges. Vanguard told me that even if their ETF pays a US$ dividend (such as VEVE or VUSA) when it is held on a 3rd party platform, when held on Vanguard's UK platform they would automatically pay the divi in GBP. Basically, the FX conversion is internalised on their platform and the FX rate would not be visible. It begs the question as to whether Vanguard are converting at the interbank rate. Do any Lemon Foolers hold US$ divi payers like VEVE & VUSA on Vanguard's platform and have you looked closely at this FX question ?

I'm aware some Lemon Foolers may say:
1) hold the accumulation units which sidesteps FX conversion or
2) hold a fund (rather than an ETF) as can pay divis in GBP - eg Fido Index World P Inc or Vanguard Dev World Ex UK Inc. or
3) set up a US$ bank a/c, transfer the US$ divi and seek a cheaper FX conversion away from II's platform

Re 1) my VEVE holding is not held in an ISA or SIPP - it's in a general trading a/c and I need the income. Hence the Inc units and holding Acc units would result in a CGT charge if I partially sold in order to manufacture income.
Re 2) holding an OEIC is an option, but sub optimal given you deal blind on price when buying / selling.
Re 3) II charge $20 to transfer away US$ to a bank a/c, the recipient bank would most likely charge for receiving US$ as an international SWIFT transfer (even WISE charge $4 to receive US$ via SWIFT) & then you have FX charges as well. I've seen some people reference HSBC's US$ a/c like that's a solution - but HBSC's FX rates are not visible and they basically charge a mark-up over the interbank rate but are deliberately silent on the mark-up.

Any thoughts, advice or input gratefully received. I know I can't be alone here !

[kempiejon]

I have Vanguard $ paying ETFs with AJ Bell. They only charge 0.5%. For quite a while the fx charge was hidden but they have started publishing it on my statements. I questioned them and they said I'd always paid it but it was not itemised the way it is now.
My recent $ dividends, end of March, applied an exchange rate of 0.796622.

[GeoffF100]

I would not place too much credence on what Vanguard customer services says, even if you get a written answer from them. I fully expect that Vanguard does not charge commission on converting USD dividends to GBP. I have not been able to verify that for my VEVE holding, because Vanguard does not give the time at which the currency conversion takes place.

iWeb states clearly that they do not charge foreign exchange commission when they convert dividends. I expect that the same applies to the other Halifax Share Dealing Limited brands.

If you sell ETF accumulation shares to raise income you do not get taxed twice on the dividends. Your sole tax liability is the Excess Reportable Income. You pay dividends tax on any amount of that above the allowance, but you can add the Excess Reportable Income to your Capital Gains Tax base cost. You will, however, in the long run, incur the cost of reinvesting the dividends and selling shares to get them back again.

[londoninvestor]

If you sell ETF accumulation shares to raise income you do not get taxed twice on the dividends. Your sole tax liability is the Excess Reportable Income. You pay dividends tax on any amount of that above the allowance, but you can add the Excess Reportable Income to your Capital Gains Tax base cost. You will, however, in the long run, incur the cost of reinvesting the dividends and selling shares to get them back again.

This is true, but it doesn't make the tax treatment identical: if the fund grows by more than the underlying dividends, then the base cost of a holding in the accumulation shares (even adjusted for ERI) won't keep pace with the value of the shares, and selling the shares will incur CGT.

For example, if an investor holds income shares and has spending needs less than the dividend yielded by the fund, they can achieve this simply by receiving the dividends and spending some of them. They never sell the units, and so never pay CGT. When they go the way of all flesh, the shares are inherited CGTlessly and have their base cost reset, so the kids can cash them in tax-free.

Now imagine an investor with identical spending needs, but holding accumulation shares in the same fund. They don't pay any less in dividend tax (because of ERI), but to meet their cash needs they have to sell shares, and this will result in taxable gains if the fund has performed well.

[LondonChris]

I would not place too much credence on what Vanguard customer services says, even if you get a written answer from them. I fully expect that Vanguard does not charge commission on converting USD dividends to GBP. I have not been able to verify that for my VEVE holding, because Vanguard does not give the time at which the currency conversion takes place.

iWeb states clearly that they do not charge foreign exchange commission when they convert dividends. I expect that the same applies to the other Halifax Share Dealing Limited brands.

If you sell ETF accumulation shares to raise income you do not get taxed twice on the dividends. Your sole tax liability is the Excess Reportable Income. You pay dividends tax on any amount of that above the allowance, but you can add the Excess Reportable Income to your Capital Gains Tax base cost. You will, however, in the long run, incur the cost of reinvesting the dividends and selling shares to get them back again.

Re iWeb, can you provide a link re waiving FX on divis. I can't see this on their full charges schedule - just a 1.5% FX cost. Re tax treatment on divis, thanks on this although I'm fully aware. My point is in the absence of a paid out divi, in order to manufacture/replicate income I would have to sell some units. This would crystallize a partial CGT charge (given I've held for a while) - and I want to minimise unnecessary tax leakage.

[LondonChris]

I have Vanguard $ paying ETFs with AJ Bell. They only charge 0.5%. For quite a while the fx charge was hidden but they have started publishing it on my statements. I questioned them and they said I'd always paid it but it was not itemised the way it is now.
My recent $ dividends, end of March, applied an exchange rate of 0.796622.

Thanks. Looks like a capped p.a. cost of £42 (£3.5/mth) to have a trading a/c holding an ETF - and then as you say they auto convert non-£ divis with a 0.5% cost. Might be worth an ETF transfer - I have some funds and AJ Bell's % charge costs on funds would rule out a full switch.

[LondonChris]

Now imagine an investor with identical spending needs, but holding accumulation shares in the same fund. They don't pay any less in dividend tax (because of ERI), but to meet their cash needs they have to sell shares, and this will result in taxable gains if the fund has performed well.

Agreed. Thanks

[kempiejon]

it's in a general trading a/c and I need the income.

We know there is tax to pay on dividend income and capital gains over the threshold. I have tucked most of my holdings away now. Dividend is the lower rate but I learnt while selling my holdings to move dividend income into ISAs and SIPPS that maximising the other allowance was a good thing too so these days I am of the opinion one should harvest gains annually too. Both the tax free amounts diminished at an annoying rate for my investment planning so perhaps will not be here in a few years.

[LondonChris]

We know there is tax to pay on dividend income and capital gains over the threshold. I have tucked most of my holdings away now. Dividend is the lower rate but I learnt while selling my holdings to move dividend income into ISAs and SIPPS that maximising the other allowance was a good thing too so these days I am of the opinion one should harvest gains annually too. Both the tax free amounts diminished at an annoying rate for my investment planning so perhaps will not be here in a few years.

I'm maxed out on my SIPP & do a full £20k in my ISA each year. Other holdings therefore automatically fall into my trading a/c and it is just a case of minimising unnecessary costs (inc. FX charges) & tax (which includes full use of the now £3k CGT annual exemption). Just canvassing views on the cheapest way to handle US$ divis.

[GeoffF100]

If you sell ETF accumulation shares to raise income you do not get taxed twice on the dividends. Your sole tax liability is the Excess Reportable Income. You pay dividends tax on any amount of that above the allowance, but you can add the Excess Reportable Income to your Capital Gains Tax base cost. You will, however, in the long run, incur the cost of reinvesting the dividends and selling shares to get them back again.

This is true, but it doesn't make the tax treatment identical: if the fund grows by more than the underlying dividends, then the base cost of a holding in the accumulation shares (even adjusted for ERI) won't keep pace with the value of the shares, and selling the shares will incur CGT.

For example, if an investor holds income shares and has spending needs less than the dividend yielded by the fund, they can achieve this simply by receiving the dividends and spending some of them. They never sell the units, and so never pay CGT. When they go the way of all flesh, the shares are inherited CGTlessly and have their base cost reset, so the kids can cash them in tax-free.

Now imagine an investor with identical spending needs, but holding accumulation shares in the same fund. They don't pay any less in dividend tax (because of ERI), but to meet their cash needs they have to sell shares, and this will result in taxable gains if the fund has performed well.

Yes you are right. For simplicity assume, that you buy £100K of both the distributing and the accumulating units. Assume that the share prices have doubled when you receive your first £2K dividend. Consider the two cases:

Distributing. The capital value falls to £198K on the XD date. You pay dividend tax on £2K, assuming that there is no ERI. You need £4K income, so you sell £2K of stock. The CGT base cost for the sale is £100K * £2K / £198K = £1.0101..K. Your capital gain is £0.989989..K.

Accumulating. After dividend reinvestment the capital value is £200K. You pay dividend tax on the ERI of £2K. You need £4K income, so you sell £4K of stock. The CGT base cost for the sale is £100K * £4K / £200K = £2K. Your capital gain is £2K.

I have always had distributing ETFs outside a tax shelter, so I had not thought about at this level of detail.

[GeoffF100]

Re iWeb, can you provide a link re waiving FX on divis. I can't see this on their full charges schedule - just a 1.5% FX cost. Re tax treatment on divis, thanks on this although I'm fully aware. My point is in the absence of a paid out divi, in order to manufacture/replicate income I would have to sell some units. This would crystallize a partial CGT charge (given I've held for a while) - and I want to minimise unnecessary tax leakage.

Here are the Dividend Details for a dividend that I received last year:

Stock VANGUARD FUNDS PLC FTSE EMERGING MARKETS UCITS ETF USD DIS
XD Date 15/06/2023
Shares Held on XD Date 377
Record Date 16/06/2023
Pay Date 28/06/2023
Issue Date 29/06/2023
Dividend Rate 0.421587
Gross Dividend 158.94 USD
Withholding Tax - Amount 0.00 USD
Withholding Tax - Rate 0.00%
Additional Withholding Tax - Amount 0.00 USD
Additional Withholding Tax - Rate 0.00%
Net Dividend Payable 158.94 USD
FX Rate 1.26122 USD To 1.00 GBP
Gross Dividend Payable 126.02 GBP
Withholding Tax - Amount 0.00 GBP
Additional Withholding Tax - Amount 0.00 GBP
Net Dividend Paid 126.02 GBP

Handling Option Hold In Account

The Foreign Exchange rate used to convert your Net Dividend Payable to sterling is an overnight rate from our provider Interactive Data. This rate is a mid-rate, averaged from the latest spot rates quoted by at least 3 approved international financial institutions. The rates are sampled at 4pm on the working day previous to the dividend release.

[TedSwippet]

This is true, but it doesn't make the tax treatment identical: if the fund grows by more than the underlying dividends, then the base cost of a holding in the accumulation shares (even adjusted for ERI) won't keep pace with the value of the shares, and selling the shares will incur CGT.

..

Yes you are right. For simplicity assume, that you buy £100K of both the distributing and the accumulating units. Assume that the share prices have doubled when you receive your first £2K dividend. Consider the two cases:
...
I have always had distributing ETFs outside a tax shelter, so I had not thought about at this level of detail.

I think this is really just a special case of a more general annoyance created by the 'section 104' pool cost rules. Best illustrated by an example.

Suppose you buy £100k of a distributing fund, and its share price doubles, so you have £200k. You put in another £10k, but just a day later you find that you need it back (trading while inebriated and accidentally bought the wrong fund -- oops!). You sell £10k of stock, but in the process you realise £4,762 of taxable capital gain. This creates a CGT bill that leaves you potentially well short of the £10k you started out with.

For index investors in particular, it's possible to mitigate some of this. Once gains become significant in a fund you hold, start again with an equivalent but different one. And repeat as necessary. This lets you use a limited form of last-in-first-out policy, to help minimise or avoid unwanted CGT liability.

[LondonChris]

Pay Date 28/06/2023
Issue Date 29/06/2023

FX Rate 1.26122 USD To 1.00 GBP

Handling Option Hold In Account

The Foreign Exchange rate used to convert your Net Dividend Payable to sterling is an overnight rate from our provider Interactive Data. This rate is a mid-rate, averaged from the latest spot rates quoted by at least 3 approved international financial institutions. The rates are sampled at 4pm on the working day previous to the dividend release.

Thanks. This looks really helpful. Bloomberg has a closing ex rate on 28 June 23 of 1.2636. This I think will be 5pm Eastern time. On Interactive Investor’s platform that would be 1.2825 (1.5% mark-up). Presumably when you cite “The rates are sampled at 4pm on the working day previous to the dividend release” as the issue date is 29 June 23 this essentially means 4pm on 28 June – query whether that’s 4pm BST. I don’t have access to intra-day exchange rates, but your 1.26122 is pretty close to BB's closing rate (19 bps difference) – and a million miles keener than where Interactive Investor will be. More importantly, the basis of the exchange rate note you have provided is very reassuring.

[GeoffF100]

Yes you are right. For simplicity assume, that you buy £100K of both the distributing and the accumulating units. Assume that the share prices have doubled when you receive your first £2K dividend. Consider the two cases:
...
I have always had distributing ETFs outside a tax shelter, so I had not thought about at this level of detail.

I think this is really just a special case of a more general annoyance created by the 'section 104' pool cost rules. Best illustrated by an example.

Suppose you buy £100k of a distributing fund, and its share price doubles, so you have £200k. You put in another £10k, but just a day later you find that you need it back (trading while inebriated and accidentally bought the wrong fund -- oops!). You sell £10k of stock, but in the process you realise £4,762 of taxable capital gain. This creates a CGT bill that leaves you potentially well short of the £10k you started out with.

For index investors in particular, it's possible to mitigate some of this. Once gains become significant in a fund you hold, start again with an equivalent but different one. And repeat as necessary. This lets you use a limited form of last-in-first-out policy, to help minimise or avoid unwanted CGT liability.

You are saved by the 30 day rule. If you buy back the shares immediately, the overall effect is as if you had never sold them at all (assuming zero casts). The share matching rules were designed to deter people from washing out capital gains, but they work in your favour in this case.

[TedSwippet]

I think this is really just a special case of a more general annoyance created by the 'section 104' pool cost rules. Best illustrated by an example.

Suppose you buy £100k of a distributing fund, and its share price doubles, so you have £200k. You put in another £10k, but just a day later you find that you need it back (trading while inebriated and accidentally bought the wrong fund -- oops!). You sell £10k of stock, but in the process you realise £4,762 of taxable capital gain. This creates a CGT bill that leaves you potentially well short of the £10k you started out with.

For index investors in particular, it's possible to mitigate some of this. Once gains become significant in a fund you hold, start again with an equivalent but different one. And repeat as necessary. This lets you use a limited form of last-in-first-out policy, to help minimise or avoid unwanted CGT liability.

You are saved by the 30 day rule. If you buy back the shares immediately, the overall effect is as if you had never sold them at all (assuming zero casts). The share matching rules were designed to deter people from washing out capital gains, but they work in your favour in this case.

Well yes. But. You have this backwards. In this case it's not a buy-back. It's a sale explicitly without a buy-back of the same thing, since you want the cash you invested in the fund for some other purpose. In that case, the 30-day rule doesn't apply. The rule can save you from accidental sale, but not accidental purchase.

If you have a 'section 104' pool with significant unrealised gains, there's no way of getting money out of it without realising some of that capital gain. Given this, you only want to add money to it further if you're certain you won't need that money again soon.

[GeoffF100]

[Well yes. But. You have this backwards. In this case it's not a buy-back. It's a sale explicitly without a buy-back of the same thing, since you want the cash you invested in the fund for some other purpose. In that case, the 30-day rule doesn't apply. The rule can save you from accidental sale, but not accidental purchase.

If you have a 'section 104' pool with significant unrealised gains, there's no way of getting money out of it without realising some of that capital gain. Given this, you only want to add money to it further if you're certain you won't need that money again soon.

Sorry, I misread your post. Yes, if you have accidentally bought a stock that already has big gains, you have a problem. Fortunately, I have only accidentally sold the wrong stock with a similar ticker. It did not cost me much to get out of that one.

[TedSwippet]

[Well yes. But. You have this backwards. In this case it's not a buy-back. It's a sale explicitly without a buy-back of the same thing, since you want the cash you invested in the fund for some other purpose. In that case, the 30-day rule doesn't apply. The rule can save you from accidental sale, but not accidental purchase.

If you have a 'section 104' pool with significant unrealised gains, there's no way of getting money out of it without realising some of that capital gain. Given this, you only want to add money to it further if you're certain you won't need that money again soon.

Sorry, I misread your post. Yes, if you have accidentally bought a stock that already has big gains, you have a problem. Fortunately, I have only accidentally sold the wrong stock with a similar ticker. It did not cost me much to get out of that one.

Right. Unfortunately though, you can wind up in the situation I outlined in many ways, not just by accident or fat-finger purchase. All it takes is a sudden and unexpected need for the cash you just invested. Plumbing emergency, car breakdown or replacement, roofing repairs, that sort of thing. Really just anything that retrospectively makes having invested this lump of cash something you'd rather not have done ... or at least, not done yet.

My trigger point is about 50% gain. Once a fund holding hits that I generally don't add to it, but instead add to an equivalent but different fund. Fine for index investors (that's me), but obviously it won't work well for active fund or individual stock investors. Of course, sooner or later I'll run out of equivalent index funds I can use.

The cost to all this is complexity; more and larger spreadsheets. Eventually the CGT comes due, but this way, by drawing on your holdings with the lowest CGT liabilities first you can put off more of it, and for longer. And tax delayed means more gain from money you still have invested, and not yet lost to tax.

Anyway, all an aside, and not related to platform forex. Sorry for the diversion.

[GeoffF100]

Now that the final dregs of VFEM have gone into my ISA, my only unsheltered equity holding is Vanguard Developed World ex UK. I was adding to it as late as a year ago. I considered using VEVE, as you suggest, but I decided against the added complexity. My numbers are now sufficiently big that raising cash is not going to be an issue anyway, and there is no CGT for charitable gifts or on death. I have a simplification plan, but it is like the Office of Tax Simplification. The spreadsheet just gets bigger. My current priority is cutting the number of accounts, currently standing at 15, but that will take time.