Capital gains on accumulation units?

Californication

Hi all

Something regarding capital gains that I don't understand...

If one has accumulation units in a fund, one still pays the equivalent income tax on the reinvested dividends/coupons. Each year there's a tax statement for this. However, this implies that only part of the gain on accumulation units is capital gain; additionally, some of the growth is due to reinvestment that has already been taxed, and for CGT purposes the 'purchases' from reinvestment happened at a different market price for the underlying assets than for the original units. How is the capital gain calculated and declared when the units are sold, please?

Would the fund provide a statement of some sort on disposal?

Thanks
C

Californication

Just to clarify the above. People normally suggest that around half of the log run returns on equities are from dividends. This being the case, one would expect approximately half of the long run growth of an accumulation unit to be capital gain and half to be due to reinvested dividends. However, if the units make a loss, some dividends would still have been reinvested so the capital loss should be greater than the actual decrease in value of the units.

What I don't understand is how I'm supposed to work out the loss or gain on accumulation units of a fund for tax purposes, since a fund containing higher yielding stocks will have a smaller percentage of it's gain due to capital growth compared to a fund of low yielding stocks which has achieved the same increase in unit price. (And I'll have paid more income tax on reinvesting the dividends in the fund of higher yielding stocks.)

NB, I'm a higher rate tax payer and in the future I will probably need to make use of most of my capital gains tax allowance each year.

As an aside, I know that I can't sell and re-buy units the next day to crystallise the capital gain in a particular year, but would it, for instance, be possible to sell units in one tracker and then to purchase units in a different tracker following the same index?

Thanks
C

EdInvestor

Do you mean this?

cheerfulcat

Californication wrote:

Hi all

Something regarding capital gains that I don't understand...

If one has accumulation units in a fund, one still pays the equivalent income tax on the reinvested dividends/coupons.[...] How is the capital gain calculated and declared when the units are sold, please?

I think that your answer is here ( bottom of page six ). You can add the value of the reinvested dividends to the original cost, and subtract the total from the sale proceeds.

As an aside, I know that I can't sell and re-buy units the next day to crystallise the capital gain in a particular year, but would it, for instance, be possible to sell units in one tracker and then to purchase units in a different tracker following the same index?

Yes, you can do that. In fact people used to swap between the Alliance Trust and Second Alliance Trust ITs ( being similar funds ), for just that reason.

Californication

EdInvestor wrote:

Do you mean this?

Actually, no; but it's something interesting that I wasn't aware of.

Many thanks
C

Californication

cheerfulcat wrote:

I think that your answer is here ( bottom of page six ). You can add the value of the reinvested dividends to the original cost, and subtract the total from the sale proceeds.

Great. That was just what I was looking for. Will I get a statement every time dividends are reinvested or just once a year for my tax return, please? Presumably once a year is fine, since I won't be calculating the capital gains until after the end of the tax year in which I sold the units.

cheerfulcat wrote:

Yes, you can do that. In fact people used to swap between the Alliance Trust and Second Alliance Trust ITs ( being similar funds ), for just that reason.

That's what I was hoping.

Many thanks
C

mroller

What I understand is that if you hold acc units, then any dividend reinvestment happens within the Unit trust/Oeic and you dont need to worry about it. The Fund manager doesn't pay income tax on your behalf and you don't have to either.

All you have to worry about is the capital gain tax (nil if within an isa, pension, or below annual allowance of 8800£)

cheerfulcat

Californication wrote:

Will I get a statement every time dividends are reinvested or just once a year for my tax return, please?

You will get a dividend voucher when the dividend is paid - usually twice a year. Just keep a note of the amounts ( preferably with the original contract note ).

mroller wrote:

The Fund manager doesn't pay income tax on your behalf and you don't have to either.

The investor must declare the dividends and, in the case of a higher rate tax payer - as here - pay the extra tax.

Californication

cheerfulcat wrote:

You will get a dividend voucher when the dividend is paid - usually twice a year. Just keep a note of the amounts ( preferably with the original contract note ).

Thanks. I read the document you posted earlier, so I see I'll need the documentation for all of the purchases I make to top-up my holding, to get the LIFO ordering correct.

Many thanks
C

MonkeyMinkey

Hi,

Excellent thread so I have joined.

I have accumulation units. Dividend is declared on 01-Aug, payable on 30-Sep. I have 2,000 accumulation units. I sell 500 on 08-Sep. What part of the declared dividend, if any, should be included in the CGT computation base cost for the 500 sold units and what part, if any, should be added on to the base cost of the remaining 1,500 units?

Many thanks for any help on this.

Rogerthelodger_2

I have to pay higher rate tax so on all my dividends, I have to pay an extra 22.5% income tax each year on the notional income.

When I sell the shares and will pay CGT and I can deduct the net (at basic rate) dividends from the proceeds. However can I also deduct the extra 22.5% from the proceeds ?