OEIC Funds inside ISA's - Income vs Accumulation

Judwin

In the past week I've set up a Maxi ISA with H-L, chosing 7 different funds, and putting £1000 in each. However - I've stuffed up.

One of the funds I meant to chose was Invesco Perp. High Income Acc Units. What I've done in error is choose Invesco Perp. High Income Income Units :doh:

Now I realise I can sell the income units and buy the accumulation ones within the ISA wrapper. But is there any point in doing this - it's still the same basic underlying fund isn't it?

I think I chose the option to have the 'income' automatically re-invested, so I think that means that the income will stay within the ISA wrapper, and when the income reaches £50, then it will automatically be used to buy more income units. So effectively, as long as the income stays within the ISA wrapper, it's an accumulation, isn't it?

Or have I missed something? Should I be selling the inc units, and buying the !!! ones to correct my mistake.

Cheers,
Judwin

Jake'sGran

The income units will remain within the ISA wrapper. I have just bought Invesco Perpetual Income - Accumulation units. I already have a few of the ones you've bought. If you contact HL you can change to Acc units. I think I have done this more than once with no hassle. And with one investment I changed to having the income paid out. Also, I have a feeling they changed the rule about £50. They send so much literature that I just don't get around to reading it all but recently I did read an article about this aspect - trouble is my memory is not what it was. In any case, it will be on their web page.

Sillychuckie

I might be wrong, but I think there is a difference.
If the fund is going up in price and doing well, accumulation units are better.

The reason being:
Accumulation means that the proceeds of the funds investment are put right back into the fund.
Instead of increasing the number of units you hold, instead, it increases the price of each unit (making you a profit with growth).

If you get paid out, and then rebuy whilst the fund is doing well, you'll be buying at a more expensive price, which isnt the case with accumulation. Your original purchase, just becomes more valuable.

There are also probably tax implications too.
If the fund pays dividends (which you auto re-invest into more units), you can be taxed on the divs first as income... no?
If it is simply re-accumulated, then it is seen as capital growth, which has no tax within an isa.

I look forward to finding out all of the above is totally incorrect and learning something. Take it with a pinch of salt.
My main advice though would be to call HL and just get it swapped. Should be easy enough for them to do.

dunstonh

I wouldnt worry about it. The difference will be tiny and could favour income units during one period and accumulation units in another. Typically, you are looking at less than 0.01% p.a.

As long as the income is reinvested, then its fine.

Judwin

dunstonh wrote: »

I wouldnt worry about it. The difference will be tiny and could favour income units during one period and accumulation units in another. Typically, you are looking at less than 0.01% p.a.

As long as the income is reinvested, then its fine.

Ok Thanks Dunston, that's what I thought/hoped.

Can I extend the question to outside the ISA wrapper please, where I think SillyChucky may have a point.

The Acc units, outside the ISA wrapper. All the 'profits' from the assets held in the fund (the divi's and share price rises) are automatically re-invested, so the unit price grows. Then when you go to sell the units, you might end up paying CGT on this rise in the unit value.

With the Inc units, outside the ISA wrapper. Some of the 'profits' from the assets held in the fund are paid out as income, and the rest is automatically re-invested so the unit price grows - but not as fast as the unit price of the Acc units does, because less is re-invested. The holder of the Inc units may have to pay CGT if/when the units are eventually sold, and also income tax on the income recieved each year.

If the above is right, then outside the ISA wrapper, there is a difference in the funds, depending upon your tax situation. Everyone has an £8000 ish CGT allowance, and therefore someone like me who doesn't currently use any of their CGT alowance at all would be better off with the Acc units, and selling some of their holding each year (approx equal to the fund growth minus inflation so the fund value stays constant in real terms) to use up their CGT allowance first. This would give up to £8000 of tax free 'income' per year.

With the Inc units, then you'd have to pay income tax on the income part, and that could be 40% for an HRT payer.

Is that basically right -outside the ISA?

Cheers,
Judwin

Chrismaths

No. The income (for both acc and inc) units increases the acquisition cost. There is no difference from a tax point of view. If you are a HR taxpayer and hold an equity based acc fund outside an ISA, you have to pay an extra 25% tax on the net "income", even though it is never paid out.

Judwin

Chrismaths wrote: »

No. The income (for both acc and inc) units increases the acquisition cost. There is no difference from a tax point of view. If you are a HR taxpayer and hold an equity based acc fund outside an ISA, you have to pay an extra 25% tax on the net "income", even though it is never paid out.

Ok that's done it. Confused me good'n'proper.

You seem to be saying that 'income', whether taken or not, is treated as a dividend, and taxed at 32.5% for a HRT tax payer. Ok I can see that.

And, although you don't say it, I assume that any increase in in unit values will be treated as a capital gain, and therefore subject to CGT, if/when the units are sold, and the gain is realised - yes?

What I don't see is how there is any 'income' from an Acc fund. If there is an 'income' that you have to declare on the tax form, but you haven't taken it, how do you know how much it is? Do you get some sort of certificate each year from the fund manager/IFA saying how much 'income' you have/haven't taken?

Or maybee I just don't understand the difference between Acc and Inc funds

Cheers,
Judwin

dunstonh

What I don't see is how there is any 'income' from an Acc fund. If there is an 'income' that you have to declare on the tax form, but you haven't taken it, how do you know how much it is? Do you get some sort of certificate each year from the fund manager/IFA saying how much 'income' you have/haven't taken?

Income is generated within the investment and that is built into the unit price with accumulation units. The income still exists exactly the same behind the scenes and you have to pay tax on it. A tax voucher is provided for unwrapped unit trust/oeics .

Jake'sGran

Judwin wrote: »

Ok that's done it. Confused me good'n'proper.

You seem to be saying that 'income', whether taken or not, is treated as a dividend, and taxed at 32.5% for a HRT tax payer. Ok I can see that.

Cheers,
Judwin

But didn't you say at the beginning that you had invested in a maxi ISA? In this case there is no tax or Capital Gain to worry about.

Judwin

Jake'sGran wrote: »

But didn't you say at the beginning that you had invested in a maxi ISA? In this case there is no tax or Capital Gain to worry about.

Yes - but in post 5 (once I'd got the answers for inside an ISA) I extended my question to outside an ISA.

I'm trying to work out the best way of utilising my £8000 CGT allowance, without incurring any more income tax liability. I thought OEIC's might be the answer, but obviously they're not.

Cheers
Judwin