iShares equity & bond ETFs

[Stiv]

I am trying to find the most tax-efficient (in a quest for the cheapest!) way of holding a UK equity index/tracker fund, a foreign equity index fund and a bond fund long-term within an ISA.

There is a choice between iShares (ETFs), unit trusts and investment trusts, which differ in how their dividends/distributions are taxed (this is important since dividends make up the majority of long-term returns!).

I’ve tried to piece together an understanding of the tax liability (courtesy of Google!), which is complicated by the fact that iShares are Irish rather than UK-based. Since I have no background in the area, I would gratefully appreciate the input of those that do – to see whether my understanding of the 3 situations is correct and whether anything has been missed. Here goes…

For a UK index fund in an ISA, it appears unit trusts and investment trusts pay no corporation tax on UK dividends received and the investor pays no additional tax on dividends paid.

iShares UK ETFs (e.g. iFTSE100, iShares FTSE250) appear to pay no corporation tax on dividends received but the investor appears to pay 10% foreign dividend tax on dividends paid by the iShare within an ISA - is this correct and are there any other taxes, or is the foreign dividend tax not paid because of the ISA status? Also, as an Irish-based entity, the iShare appears to have to pay withholding taxes on dividend income received from UK companies. Thus, it appears that iShares are at a disadvantage from a tax perspective.

For a foreign index fund (e.g. an S&P 500 tracker) unit trusts pay 20% corporation tax on dividends received and investment trusts pay 30% corporation tax (though they can offset any withholding taxes already paid against these). iShares appear to pay no corporation tax on dividends received and the investor pays 10% foreign dividend tax on dividends paid by the iShare. Thus the iShare seems to have the advantage.

For a bond fund, unit trusts pay 20% tax on income but this can be reclaimed in an ISA. I am unsure whether the iShare (iBoxx Sterling bond index fund) has its income treated as a dividend (subject to 10% foreign dividend tax?) or as a distribution (subject to 20% tax, but could this be reclaimed in an ISA?). It appears the iShare is at a tax disadvantage.

Thank you for your help!