Difference between dividends and interest income in ACC class funds for Tax returns

mears1

A different thread has made me query why many posters say that it is difficult doing their tax returns with ACC versions outside a tax wrapper so they use the Income version instead, especially as I have been told your platform will detail all dividend and interest income.

  Bit confused about the differences between between dividends and interest income for the purpose of tax returns?

 Below are entries under the Tax return's income section. It would make sense for the Dividends be entered in question 4 and the interest income in question 1? 
 1 Taxed UK interest – the net amount after tax has been taken off 
 2 Untaxed UK interest – amounts which have not had tax taken off 
 3 Untaxed foreign interest (up to £2,000) – amounts which have not had tax taken off 
 4 Dividends from UK companies – the amount received
 5 Other dividends – the amount received  
 6 Foreign dividends (up to £2,000) – the amount in sterling after foreign tax was taken off.  
 7 Tax taken off foreign dividends – the sterling equivalent

Surely interest income would only come from Income class and not ACC, so how can some funds can be ACC classes, but still give income?  eg. 

 VT RM Alternative Income Retail Acc GBP ISIN: GB00BYVZQ252  

 https://www.youinvest.co.uk/market-research/FUND:BYVZQ25

Does this type of fund give dividends too?

Linton

Whether income from a fund is classified as income or dividends depends on the fund.  It is either entirely interest or entirely dividends.  The HL website says that the info is on the fund factsheet though I did not find it in the few I checked.  Normally its pretty obvious where the majority of the income arises.

You are liable for income tax on the interest/dividends that are reinvested in a non tax protected ACC fund.  The fund manager should give you the numbers each year.  On the other hand the reinvested income component of any increase in an ACC fund's value is not liable to CGT, so swings and roundabouts.  But its messy and it makes it neccesary to retain data. Hence the reommendations to avoid ACC funds in a non tax protected environment.

ColdIron

mears1 said:

Surely interest income would only come from Income class and not ACC, so how can some funds can be ACC classes, but still give income? 

No. You are using 'income' in too broad a sense, I will use the term 'distributions'. Distributions can be dividends or interest. Funds with > 40% equities will pay dividends, < 40% will pay interest. It doesn't matter if the fund is Acc or Inc, you receive the same distribution (dividend or interest) either way and just because they are retained in the fund (Acc) or have them paid out (Inc) makes no difference, you owe the same tax

Below are entries under the Tax return's income section. It would make sense for the Dividends be entered in question 4 and the interest income in question 1?

I think you mean section 2 (the bolded bit) for interest, as tax has not been withheld. You would put actual interest here (from bond heavy funds regardless of Acc or Inc as explained above) along with interest from savings accounts etc

 1 Taxed UK interest – the net amount after tax has been taken off 
 2 Untaxed UK interest – amounts which have not had tax taken off 
 3 Untaxed foreign interest (up to £2,000) – amounts which have not had tax taken off 
 4 Dividends from UK companies – the amount received
 5 Other dividends – the amount received  
 6 Foreign dividends (up to £2,000) – the amount in sterling after foreign tax was taken off.  
 7 Tax taken off foreign dividends – the sterling equivalent

Actual dividends (regardless or Acc or Inc) would go in section 4 or 5

Point of detail: When you fill in your tax return it makes a distinction between dividends earned from UK companies and dividends from UK funds. UK companies would be UK company shares or UK Investment Trusts and would be in section 4. Dividends from funds (OEICs and Unit Trusts) in section 5. It doesn't really matter as they are taxed the same but I always (and you should) record them separately

A different thread has made me query why many posters say that it is difficult doing their tax returns with ACC versions outside a tax wrapper so they use the Income version instead, especially as I have been told your platform will detail all dividend and interest income.

At a high level it doesn't make a great deal of difference, you can just use the figures in the tax certificate for 'income' (in the broad sense), they are accurate (and just to labour the point it doesn't matter if they are dividends or interest, Acc or Inc)

The point that many people make is that as the distributions are paid out with Inc funds you don't need to deduct them from your gain for Capital Gains purposes. This is true, however you do have to account for Equalisation payments with Inc funds which you don't have to do with Acc funds, so six of one and half a dozen of the other

In my view the real advantage of Inc funds is for calculating capital gains when making partial sales. If you sell 50% of a fund, for Acc units you need to deduct 50% of the (retained) distributions. This means you need to keep a running total of distributions earned (including subsequent purchases and sales). With Inc units you can disregard this. As Linton says, it can be messy

Edit: For many people it isn't that important. As a practical example I used Acc funds in my unwrapped growth portfolio and used Bed & ISA over 6 years. As my simple gains (sale value - book cost) each year didn't exceed the annual 'allowance' of £12,300 I didn't need to reduce my simple gain by calculating my actual gain (sale value - book cost - distributions) and I think this would be the same for many investors

mears1

Thank you for both of your explanations. Very helpful. So, to paraphrase this, you are saying with Inc you do not have to pay for capital gains tax when you sell  funds or part of any funds as you pay have already paid dividend tax on it, whereas when you partially sell Acc  funds, you have to work out what the dividends gained from the portion of funds you are selling along with any gains...I suppose this could be messy if you later buy extra units. If, my understanding is muddled, please do correct me.

@ColdIronThis is the comment from another helpful poster that has made me wonder what the interest income is.
"The platform should send you an annual tax voucher detailing all dividend and interest income, whether accumulation or income units"

Very grateful with your help in how to fill the tax return. Do you still have to declare capital gains tax below £12,300?

 

talexuser

mears1 said:

Do you still have to declare capital gains tax below £12,300?
 

Yes, if the combined sale proceeds exceed 4 times the CTG allowance i.e. £49200, and the gains are less than £12300 you still need to declare. 

Notepad_Phil

mears1 said:

... So, to paraphrase this, you are saying with Inc you do not have to pay for capital gains tax when you sell  funds or part of any funds as you pay have already paid dividend tax on it,  ...

I'm not sure if I've misunderstood you, but you do have to consider that you may have to capital gains tax whether you've got Inc or Acc funds. With Inc funds you deduct any equalisation from the purchase price of those funds. E.g. say you buy your funds for £10,000 and then when the dividend is paid you're told that the equalisation was £100 of the dividend paid out, when you come to sell those funds your purchase cost is considered as £9,900 not £10,000. So if you manage to get £22,300 for selling, you would have gains of £22300-£9900 i.e. £12400 so you would have exceeded the cgt allowance.

masonic

mears1 said:

So, to paraphrase this, you are saying with Inc you do not have to pay for capital gains tax when you sell  funds or part of any funds as you pay have already paid dividend tax on it, whereas when you partially sell Acc  funds, you have to work out what the dividends gained from the portion of funds you are selling along with any gains...I suppose this could be messy if you later buy extra units. If, my understanding is muddled, please do correct me.

Dividend tax and capital gains tax are completely separate taxes. An acc fund will contain both capital gains and dividends, whereas an (onshore) inc fund will only contain capital gains. It can indeed be messy to separate the true capital gain from the overall gain in an acc fund.

mears1

Notepad_Phil said:

mears1 said:

... So, to paraphrase this, you are saying with Inc you do not have to pay for capital gains tax when you sell  funds or part of any funds as you pay have already paid dividend tax on it,  ...

I'm not sure if I've misunderstood you, but you do have to consider that you may have to capital gains tax whether you've got Inc or Acc funds. With Inc funds you deduct any equalisation from the purchase price of those funds. E.g. say you buy your funds for £10,000 and then when the dividend is paid you're told that the equalisation was £100 of the dividend paid out, when you come to sell those funds your purchase cost is considered as £9,900 not £10,000. So if you manage to get £22,300 for selling, you would have gains of £22300-£9900 i.e. £12400 so you would have exceeded the cgt allowance.

Thanks to your example, I now understand. Previously, was not sure what the term equalisation meant.

mears1

masonic said:

mears1 said:

So, to paraphrase this, you are saying with Inc you do not have to pay for capital gains tax when you sell  funds or part of any funds as you pay have already paid dividend tax on it, whereas when you partially sell Acc  funds, you have to work out what the dividends gained from the portion of funds you are selling along with any gains...I suppose this could be messy if you later buy extra units. If, my understanding is muddled, please do correct me.

Dividend tax and capital gains tax are completely separate taxes. An acc fund will contain both capital gains and dividends, whereas an (onshore) inc fund will only contain capital gains. It can indeed be messy to separate the true capital gain from the overall gain in an acc fund.

Why is this? Presume Acc and Inc funds will equal out during pay out.

masonic

mears1 said:

masonic said:

mears1 said:

So, to paraphrase this, you are saying with Inc you do not have to pay for capital gains tax when you sell  funds or part of any funds as you pay have already paid dividend tax on it, whereas when you partially sell Acc  funds, you have to work out what the dividends gained from the portion of funds you are selling along with any gains...I suppose this could be messy if you later buy extra units. If, my understanding is muddled, please do correct me.

Dividend tax and capital gains tax are completely separate taxes. An acc fund will contain both capital gains and dividends, whereas an (onshore) inc fund will only contain capital gains. It can indeed be messy to separate the true capital gain from the overall gain in an acc fund.

Why is this? Presume Acc and Inc funds will equal out during pay out.

I made three statements in my post, which one are you asking 'why' about? Could you explain how you have arrived at the presumption they will "equal out"? Or even what you mean by it?

mears1

masonic said:

mears1 said:

masonic said:

mears1 said:

So, to paraphrase this, you are saying with Inc you do not have to pay for capital gains tax when you sell  funds or part of any funds as you pay have already paid dividend tax on it, whereas when you partially sell Acc  funds, you have to work out what the dividends gained from the portion of funds you are selling along with any gains...I suppose this could be messy if you later buy extra units. If, my understanding is muddled, please do correct me.

Dividend tax and capital gains tax are completely separate taxes. An acc fund will contain both capital gains and dividends, whereas an (onshore) inc fund will only contain capital gains. It can indeed be messy to separate the true capital gain from the overall gain in an acc fund.

Why is this? Presume Acc and Inc funds will equal out during pay out.

I made three statements in my post, which one are you asking 'why' about? Could you explain how you have arrived at the presumption they will "equal out"? Or even what you mean by it?

Asking about why  "An acc fund will contain both capital gains and dividends, whereas an (onshore) inc fund will only contain capital gains tax".  From this comment, it sounds like you will pay less tax on an Inc fund. But that doesn't make sense, otherwise everyone would want Inc funds instead of ACC!  Surely the financial gains for both funds will be the same before and after tax?