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

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  • masonic
    masonic Posts: 27,409 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    edited 14 April 2022 at 10:21PM
    mears1 said:
    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?
    Perhaps we need to go back to basics. Once you understand the basics, you'll find the other concepts much more easy to understand.
    • A capital gain is a profit you make from holding an investment because of the change in value of the assets the fund holds. Not to be confused with capital gains tax as you have done above in bold
    • Income units, distribute income by making dividend payments. They are called 'income' because investors can take an income from the fund
    • Accumulation units, do not distribute income, but instead retain it in the fund and reinvest it
    From the above text, can you understand why one version of the fund contains reinvested dividends while the other does not?

    Consider the FundJones Equity fund, which has just launched at a unit price of 100p. Over 12 months it goes up 10% and pays a 5p/unit dividend after 6 months. It has two unit classes, Inc and Acc. What is the unit price of each class at the end of those 12 months?
    Suppose you started with £1000 in each fund class and you sold all of your holdings after 12 months. Do you have enough information to calculate the proceeds of the sale in each case and your capital gain? Are they the same? Are they calculated in the same way? If instead, you held on to the funds for 20 years and they declared a biannual dividend, how would the capital gain calculation change in each case?
  • EdSwippet
    EdSwippet Posts: 1,665 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    mears1 said:
    ... Surely the financial gains for both funds will be the same before and after tax?
    They are. 
    • For income units you hold, you receive dividends. These are taxed annually as income. When the fund goes ex-dividend, its unit price drops by an amount that accounts for the dividend. When you sell these units, the change in their price (what you get for them, less what you paid) is capital gain (or loss).

    • For accumulation units you hold, the fund retains the dividends. Nevertheless, the unreceived ("notional") dividends are still taxed annually as income. There is no ex-dividend unit price drop. When you sell these units their change in price but excluding the retained dividends (what you get for them, less what you paid, and also less the sum of all "notional" dividends received from them) is capital gain (or loss).
    That's the gist. There is an added wrinkle for "equalisations" where you hold income units for less than the full dividend period. These are a portion of your received dividend that are effective return of capital, so for tax you have to subtract these from what you paid, so increasing your capital gain (or loss). Equalisations only apply to newly bought units, and usually have only a small effect on capital gains/loss.

    So ... accumulation units are ideal for core, static, permanent holdings in tax-sheltered accounts -- pensions, ISAs -- that are rarely rebalanced. In unsheltered accounts though, they create a "dry" tax charge; that is, you pay tax on money ("notional" dividends) that you haven't yet received. That makes income units look more appealing outside of pensions and ISAs. 

  • mears1
    mears1 Posts: 158 Forumite
    Third Anniversary 100 Posts Name Dropper
    Thank you for your detailed examples and explanations. 

    There are some funds which have income in their title, but have the choice of the 2 different units, acc and inc.  The ACC version sounds like an oxymoron, giving give dividends (which are reinvested )and pays income too? Sounds great, you are getting more for your buck with these income acc versions!  See links below. Please correct any misunderstanding.

    https://www.trustnet.com/factsheets/o/ncto/trojan-global-income

    https://www.trustnet.com/factsheets/o/oz9o/vt-rm-alternative-income-retail-acc-gbp#:~:text=VT RM Alternative Income Fund,Infrastructure and Specialist Real Estate.
  • masonic
    masonic Posts: 27,409 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    edited 15 April 2022 at 9:03PM
    It has been stated multiple times that Acc units retain the income and do not pay it out.
    Funds with income in the title are targeting shares or other investments that produce an income. It does not mean it is paid out as a dividend from the fund. The Acc version will not do so.
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