Is it possible to avoid income tax on funds held in an ISA

the_learner

Hi,

I am a higher tax payer and I hold only "Acc" funds in my ISA with Fidelity.
I see that there is a 10% tax on income distributed by the fund while capital gains are tax free.
Is there a way to avoid paying the income tax? Switching from a fund that is going to distribute to a cash fund would work?
Of course you need to accept staying out of the market for sometime before switching back to the original fund once it has distributed.

For example, the M&G Optimal Income distributes twice a year, on April and October 1st. Selling before this date and buying it back few days post ex-dividend date would avoid paying the income tax?

dunstonh

I am a higher tax payer and I hold only "Acc" funds in my ISA with Fidelity.

ACC/INC versions are irrelevant to tax. Although the handling is a little different but end result the same.

Is there a way to avoid paying the income tax?

It isnt income tax. However, you cannot avoid it unless you stop investing in equity funds and use fixed interest funds.

Switching from a fund that is going to distribute to a cash fund would work?

No. The destination of the distribution does not change the tax status of the distribution as the source is the same.

or example, the M&G Optimal Income distributes twice a year, on April and October 1st. Selling before this date and buying it back few days post ex-dividend date would avoid paying the income tax?

Why would you want to miss out on the return from the income to save a tiny amount of tax? With Acc funds you would also have equalisation to consider and that would not solve your tax issue.

Stop worrying about tax. You can only avoid it by compromising your investments and that would typically result in a lower return.

TCA

Selling before the ex-dividend date and buying back afterwards means you don't get paid the dividend, which kind of defies the point of buying an income fund.

There is no way to avoid the 10% tax on dividends and it makes no difference to basic-rate tax payers if the investment is held within an ISA or not. There is however a large saving for higher-rate tax payers, who would have to pay an additional 22.5% outside of an ISA.