Income and Accumulation variants of the same fund

JMW00

Where a fund is available in both income and accumulation options, is the relationship between the unit prices of the two wholly and entirely a mathematical one? Or for example can one be influenced by sentiment, either positive or negative, more or less than the other?

Or to put it another way: Is there ever a case for reinvesting income in an income fund instead of just investing in the accumulation option in the first place? Why would you do that?

Linton

JMW00 wrote: »

Where a fund is available in both income and accumulation options, is the relationship between the unit prices of the two wholly and entirely a mathematical one? Or for example can one be influenced by sentiment, either positive or negative, more or less than the other?

Or to put it another way: Is there ever a case for reinvesting income in an income fund instead of just investing in the accumulation option in the first place? Why would you do that?

Funds arent influenced by sentiment, at least not sentiment towards the fund. Their value is simply based on the value of the assets they hold.

I cant think of any advantage in choosing to reinvest in an INC fund rather than buy an ACC one. For some funds there are no ACC versions, then reinvestment becomes the only option.

ColdIron

Some people like re-investing Inc funds as you can choose where to put it, a sort of rebalance as you go approach

JohnRo

There is also the issue of income tracking outside an ISA and being able to distinguish capital gain from income for tax purposes.

JMW00

Thanks for the explanations, things there I hadn't considered.

So there is a solely mathematical relationship between the prices of the income and accumulation units of the same fund at all times?

Porcupine

JMW00, as far as I know the relationship is mathematical, but it obviously depends on the amount of dividend that has been paid.

JohnRo wrote: »

There is also the issue of income tracking outside an ISA and being able to distinguish capital gain from income for tax purposes.

How does it work inside an Acc fund? Do you have to tease apart the income and the capital gain, or does it all count as capital gain?

bowlhead99

Imagine you invest at 100p. After a year, the value of assets per unit is 107p. The next day, they declare a 2p dividend. From that point on, the assets of the fund are only worth 105p per unit because the fund now has a liability for the 2p. If you bought the income units, you would physically get the 2p. If you bought the acc units, the 2p just goes back into the fund so that a unit is still worth 107p and you still own the same number of them.

But you can't avoid paying income tax on this 2p you earned, you will get an accumulation income statement from your broker.

Imagine this happens for 3 years in a row and say the unit price is 126p when you eventually choose to cash out. You get 126p sale proceeds but when doing your capital gain calculation you have to remember to take into account not just the fact that your original cost was 100p but also the face that it includes 6p of rolled up income which never got received in cash even though you paid tax on it as you were going along. You'd have 20p gain to report on sale and 6p income already reported. Similarly if you cashed out at 99p you would need to declare a loss of 7p not just a penny.

If your tax affairs and investment sizes are such that you have no extra income tax to pay on dividends and could never go over the gains threshold in a tax year, you probably don't mind this complexity as there's not much to go wrong. And it can save the headache of transaction costs or minimum purchase sizes if you don't need to actively reinvest it, instead just allowing it to accumulate. Investing in a sipp or isa wrapper will obviously make it easiest, if you can do that.

grizzly1911

bowlhead99 wrote: »

And it can save the headache of transaction costs or minimum purchase sizes if you don't need to actively reinvest it, instead just allowing it to accumulate.

Thank you for a useful explanation. I must admit I hadn't thought about having to split out any income from the gain (if you need to).

With regard to the part of your post I quote here presumably you could elect to have Income Distribution simply reinvested to avoid costs?

bowlhead99

Well, some fund houses don't reinvest dividends for free.

If I'm making regular contributions into an account and buying a variety of funds each month, then if I have £9.74 of extra cash available one month due to periodic dividends received on a £500 investment I own, I can just add it into whatever I'm buying that month.

If I wasn't doing regular investments and my fund platform charges £9.99 per transaction, or they have zero transaction fees but a minimum deal size of £10 or £50 or £500, the £9.74 is just going to sit useless in my account.

So really if you don't want redundant uninvested cash in your account and you're not going to be periodically buying and selling to allow you to sweep the spare cash up into another trade, you should probably just be using the ACC version of your fund.

Porcupine

Another stupid question time: what's the income tax threshold on dividends? Is that higher rate taxpayer land?

Going slightly off-piste here, I'm trying to figure out what the tax position is when holding stocks/funds abroad. It appears there's a dividend tax credit multiplier to apply, but I haven't quite got my head around it. Double taxation isn't usually a problem if you're non-resident where the funds are held, but I can't quite work out what the actual UK tax to pay is.

grey_gym_sock

dividends use the same income tax thresholds as other kinds of income, but with different rates of tax due - 10% in basic rate, 32.5% in higher rate, more in additional rate.

when you have several types of income, dividends are treated as the top slice. so e.g. if your salary uses up your personal allowance and basic rate band, then your dividends are taxed at higher rate.

UK dividends come with a 10% tax credit, so there no more to pay on basic rate, but 22.5% more to pay on higher rate.

foreign dividends may or may not come with tax already deducted, depending on the country. if they don't, then a basic rate tax payer has to actually pay 10% tax to HMRC, and a higher rate payer has to pay 32.5%. if they come with (e.g.) 15% tax deducted, then a basic rate payer would have no more to pay, and a higher rate payer would have 17.5% more to pay (to make it up to 32.5%). ... this is all assuming that there is a double taxation treaty between the UK and the other country.