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Difference between dividends and interest income in ACC class funds for Tax returns
Comments
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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.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?2 - 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
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mears1 said:
... Surely the financial gains for both funds will be the same before and after tax?- 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).
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.
2 - 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).
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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.
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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.3
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