Inc versus Acc funds outside an ISA

ivorysky

I've read conflicting advice on whether it's best to hold Income or Accumulation funds outside an ISA. Some say that holding income funds makes completing self assessment much simpler whilst others are saying that the platform should provide an annual tax statement so it's not an issue to hold accumulation funds.

What is your recommendation?

lr1277

Personaly I don't hold accumulation funds because I believe you have to include the accumulated units on your tax return, but I don't know how or where I would start. So for me, I would use income funds.


If you are using a standard trading account and are willing to use an accountant who knows about these things, then it might be a consideration. Especially if your desired fund is only offered as accumulation unit.


If you put your holding into an ISA then it doesn't matter how income or capital gains arise, you don't have to account for it to the taxman.

SonOf

Some say that holding income funds makes completing self assessment much simpler

It certainly does.

whilst others are saying that the platform should provide an annual tax statement so it's not an issue to hold accumulation funds.

Which is fine for dividends but not for calculating CGT.

What is your recommendation?

Inc units.

sebtomato

I am assuming any reputable platform will give a tax report showing the income generated (interest or dividends) so it doesn't matter much whether you have accumulation or income funds.

It's then more down to whether you want to draw an income, manage its reinvestment or let the funds do it for you automatically.

There is also the timing element to it: accumulation funds are less sensitive to the timing of the investment (and the fund value going up and down around the interest or dividend payment dates). If you are not going to drip feed your investment over a long period to average out, accumulation funds would be preferable.

Tom99

[FONT=Verdana, sans-serif]The treatment of equalisation and income distribution differ depending on whether you hold Acc units or Inc units:

ACC Units:
Equalisation - Ignore
Income distribution - Add to cost for CGT purposes and add to income for Income Tax purposes.

INC Units:
Equalisation - Deduct from cost for CGT purposes.
Income distribution - Add to income for Income Tax purposes.[/FONT]

[FONT=Verdana, sans-serif]As you can see from the above, holding Acc units is not any harder to make tax returns, both income tax and CGT, than Inc units.[/FONT]

[FONT=Verdana, sans-serif]Unless you need the income for some reason then holding Inc units is more of a faff as you have to reinvest the dividend which will then give you a lot of small purchases to account for CGT wise and if you re-invest in funds I presume you will, for ever rather than in just the 1st year, be getting a split dividend between income and equalisation for the new units bought that year. [/FONT]

bowlhead99

SonOf wrote: »

It certainly does.


Which is fine for dividends but not for calculating CGT.

Inc units.

I would agree that Inc units are more convenient when it comes to taxes administration, because you can easily see from your account statement the receipt of cash (which prompts you to go look for a tax voucher and update your records for each event), and you can see what if anything you manually invested /reinvested.

Some platforms are better than others at summarising accumulation events in your transaction history when there's been no receipt of cash.

It generally doesn't hurt to have a bit of cash arriving on your account from time to time to settle fees or to rebalance into other holdings.

Although, people who are using platforms that levy an explicit charge every time you manually invest any money, and are not adding new cash from time to time so would not otherwise be making any investments; and only have one or two investments so are not bothered about using dividend proceeds to help fund rebalances; may find the 'hassle' of receiving cash dividends to be more than the pain of keeping their tax records up to date without any cash transactions to act as markers for the distribution events.