Tax treatment of Acc Fund dividends

Tom99

[FONT=Verdana, sans-serif]I am liable to income tax on Acc Fund dividends so would like to understand how the 1[/FONT][FONT=Verdana, sans-serif]st[/FONT][FONT=Verdana, sans-serif] dividend paid is taxed before I make an investment.

[/FONT] [FONT=Verdana, sans-serif]Assuming a purchase price of £100 and a 1[/FONT][FONT=Verdana, sans-serif]st[/FONT][FONT=Verdana, sans-serif] dividend of £5 what is the income tax treatment in the following two cases:

[/FONT] [FONT=Verdana, sans-serif]Example 1[/FONT][FONT=Verdana, sans-serif]: Day 1 £100 purchase, Day 2 £5 Div pay day (the ex div date being before Day 1)

[/FONT] [FONT=Verdana, sans-serif]Example 2[/FONT][FONT=Verdana, sans-serif]: Day 1 £100 purchase, Day 2 Ex Div date, Day 3 £5 Div pay day

[/FONT] [FONT=Verdana, sans-serif]In each of the above examples is it £5, £0 or some figure in-between which is subject to income tax?

[/FONT] [FONT=Verdana, sans-serif]Assuming no market movement the fund value on Day 4 will still be £100 and I will not have received any income nor made any gain. I want to make sure I don't end up paying tax on say £1,000, which could have been saved by delaying the purchase for a day or two.[/FONT]

ColdIron

If you receive a dividend you are liable for tax on it, so you have a choice. Pay no tax but get no dividend or get a dividend and potentially have a tax liability. In your example 1 you get no dividend as you purchased after the ex-div date, you will have to wait for the next one. In your example 2 you get a dividend but it will be tiny as most of the dividend accrued will be returned to you as capital. We could go into equalisation payments and all that good stuff but in general it's not worth mucking about as it all balances out in the end

Why don't you just put it in an ISA and avoid tax altogether?

Tom99

[FONT=Verdana, sans-serif]Thanks for the reply. The ISA is already full so I cannot transfer any more this year.[/FONT]
[FONT=Verdana, sans-serif]In neither example 1 nor 2 do I actually get any dividend, as has already accumulated in the £100 paid on day 1.[/FONT]
[FONT=Verdana, sans-serif]I am trying to avoid having a income tax liability on something I have not received.[/FONT]
[FONT=Verdana, sans-serif]I appreciate my CGT base cost will go up by whatever dividend I notionally received but that is not of any immediate help and may never be so. [/FONT]

Fed

As I understand it

If you purchase the fund after it's gone ex-dividend then you receive no distribution and no income. So in example 1 you have no income subject to income tax until the next distribution date if you are still holding the fund till the ex-div date

In example 2 you qualify for the distribution as you held the fund when it went ex-div. However to determine the amount of income subject to income tax you need to look at the fund report or wait for your tax voucher. The first distribution after you purchase a fund will comprise of part dividend and part equalisation. So whilst the fund may pay out a dividend of £5 to long term holders, as this is the first distribution this might comprise of say £2 dividend and £3 equalisation to you so the amount subject to income tax (£2) wouldn't be as much as you think

As long as you hold the fund when it goes ex-div there will be income subject to tax (even though you receive no dividend payout into your account). The only way to avoid it would be to sell before it goes ex-div and repurchase after

Tom99

[FONT=Verdana, sans-serif]Thank you for that explanation of equalisation payment.

[/FONT] [FONT=Verdana, sans-serif]I am with Halifax Sharedealing and they are the ones who prepare the dividend schedule at the end of each year.

[/FONT] [FONT=Verdana, sans-serif]Since the equalisation payment would seem to need separate calculations for each and every individual shareholder, I am not sure I would trust the Fund to pass that information on to Halifax nor for Halifax to incorporate it into my year end report.

[/FONT] [FONT=Verdana, sans-serif]I think it will be best to avoid my purchase just before an ex-div date. [/FONT]

ColdIron

But you do trust them to determine the dividends (which needs separate calculations for each and every individual shareholder) accurately and to correctly report equalisations for other purchase points? Seems a curious stance. You can rely on the consolidated tax report

Fed

Tom99 wrote: »

[FONT=Verdana, sans-serif]Thank you for that explanation of equalisation payment.

[/FONT] [FONT=Verdana, sans-serif]I am with Halifax Sharedealing and they are the ones who prepare the dividend schedule at the end of each year.

[/FONT] [FONT=Verdana, sans-serif]Since the equalisation payment would seem to need separate calculations for each and every individual shareholder, I am not sure I would trust the Fund to pass that information on to Halifax nor for Halifax to incorporate it into my year end report.

[/FONT] [FONT=Verdana, sans-serif]I think it will be best to avoid my purchase just before an ex-div date. [/FONT]

The calculations are only different for those units (Group 2) purchased since the last ex-dividend. This information will be passed to Halifax and should appear on your consolidated tax voucher.

If you check the fund's annual report it may well have a break down of the unit distribution to Group 1 shares (all dividend) and Group 2 (part dividend part equalisation). I know Vanguard do. Then you can cross check them as i've spotted errors on my tax voucher in the past which were rectified.

Seems silly to delay your purchase just for this reason. If you wait till the day after ex-div, you'll have to worry about the calculations next year. The units you purchase now (Group 2) become Group 1 on the ex-div date but if you wait they'll be Group 2 for the next distribution phase

Tom99

[FONT=Verdana, sans-serif]Thanks for that. Looking back at a 2015 tax report from Halifax I can see the following numbers for the same fund.[/FONT]
[FONT=Verdana, sans-serif]Equalisation £501.97, Tax Credit £46.36, Amount payable £417.22[/FONT]
[FONT=Verdana, sans-serif]I assume in future there will be no tax credit but using the above figure:[/FONT]

• [FONT=Verdana, sans-serif]Is £501.97 the figure I deduct from my purchase costs for CGT?[/FONT]
• [FONT=Verdana, sans-serif]What is the figure I report as dividend for income tax?[/FONT]
• [FONT=Verdana, sans-serif]Why is the equalisation higher than the amount paid out?[/FONT]

[FONT=Verdana, sans-serif]PS I have now worked it out, the total dividend is £501.97 + £417.22 = £919.19[/FONT]
[FONT=Verdana, sans-serif]I also understand that I do not need to delay a purchase so thanks for all your help.[/FONT]

Fed

Tom99 wrote: »

[FONT=Verdana, sans-serif]Thanks for that. Looking back at a 2015 tax report from Halifax I can see the following numbers for the same fund.[/FONT]
[FONT=Verdana, sans-serif]Equalisation £501.97, Tax Credit £46.36, Amount payable £417.22[/FONT]
[FONT=Verdana, sans-serif]I assume in future there will be no tax credit but using the above figure:[/FONT]

• [FONT=Verdana, sans-serif]Is £501.97 the figure I deduct from my purchase costs for CGT?[/FONT]
• [FONT=Verdana, sans-serif]What is the figure I report as dividend for income tax?[/FONT]
• [FONT=Verdana, sans-serif]Why is the equalisation higher than the amount paid out?[/FONT]

Tax credit refers to the tax due (10% I believe) on the dividend part of the distribution. [STRIKE]So will be there every year.[/STRIKE] Sorry, this is incorrect as the rules changed

- It's complex to understand but for accumulation units you can ignore equalisation. When you come to sell you total up all the net dividends you have 'received' according to your tax voucher.
You then take the sale proceeds and deduct both the purchase cost AND the total net dividends.

- Income would be £417.22. This is the net dividend.

This thread helped me get my head round it

https://forums.moneysavingexpert.com/discussion/2370299

ColdIron

Probably worth pointing out that the old system of dividend tax credits was replaced by new tax rules for the 2016/17 tax year onwards

Tom99

[FONT=Verdana, sans-serif]Thanks Fed for that link, very interesting.

[/FONT] [FONT=Verdana, sans-serif]It seems that the equalisation amount is not per individual shareholder but an average of all the purchases between the last two dividend dates? That being so, for a large fund you would expect the equalisation amount to roughly equal the income amount as on average the units will have been bought half way through the period.

[/FONT] [FONT=Verdana, sans-serif]So for a total dividend of say £1,000 you would expect equalisation to be about £500 and income to also be about £500 no matter when in the period you, as an individual, bought the units. My actual figure above from 2015 seem to bear that out.

[/FONT] [FONT=Verdana, sans-serif]That being the case it would seem still make scene to delay a purchase if it was just before an ex-div date and avoid having to pay tax on the £500?[/FONT]