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Non-reporting fund gains taxable in an ISA?

Investment | Trackers Helpful? 4

Asked by montresor, submitted 27 March 2011.

Open Quote I understand ETFs without distributor/reporting status have tax implications. Gains are treated as income and taxed accordingly. If they are held inside an ISA wrapper, are gains free of income tax?

I understand dividends are classed as income and tax is payable within an ISA. So I suspect capital gains treated as income is also liable to income tax. Very confusing!
End Quote

Answered by Justin on 28 March 2011

Thanks for raising this point, which is confusing!

Thankfully gains from a non-distributor or non-reporting fund are tax-free when held within an ISA or pension. This is because although any gains are treated as income, they're not dividends.

Dividends are not taxed within an ISA/pension, but they're not truly tax-free either because they're paid out of taxed company profits. The net result is that basic rate taxpayers don't save any tax on dividends within ISAs or pensions, but higher rate taxpayers avoid paying an extra 25% tax on the dividend received.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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