Accumulation tracker funds that only accumulate?

UncleK

I am looking to put some money in tracker funds for my children (in their name, as gifts to avoid IHT, for those following my previous posts on trusts). Am I right in thinking that even in accumulation funds, there are still actually dividends, just that they are reinvested. I ask because that means there will be income to be declared, won't it? That appears to be the case for the ones that I have looked at so far. Maye that's too broad a question - I am aiming at global tracker funds like VWRL and that kind of thing. The Legal & General International Index Trust (C) Accumulation was another one.

dunstonh

 Am I right in thinking that even in accumulation funds, there are still actually dividends, just that they are reinvested.

yes.  If you look at INC funds with income reinvested and ACC funds, the returns are the same.   

I ask because that means there will be income to be declared, won't it? 

Only if it takes them into a position that requires tax to be paid. 
If you are not using a tax wrapper, than having INC units may well make things a lot easier in the long run.

aroominyork

No tax is paid on the first £2000 of dividends so, if the yield is 2%, an investment up to £100,000 would not attract any tax.

dunstonh said:

If you are not using a tax wrapper, than having INC units may well make things a lot easier in the long run.

Until you approach the level where dividend tax would need to be declared and paid, is this necessary given the time and cost involved in reinvesting dividends up to four times a year? Maybe the answer is that if you complete a self assessment, you need to declare it even if no tax is due.

dunstonh

Until you approach the level where dividend tax would need to be declared and paid, is this necessary given the time and cost involved in reinvesting dividends up to four times a year? Maybe the answer is that if you complete a self assessment, you need to declare it even if no tax is due.

If its for a child, it could be that time creates the issue.   Maybe nothing in the early years but potentially in the later years

Many platforms have auto-reinvestment of dividends (at no cost).  A case of making sure your platform fits your objectives and not the other way around.

No tax is paid on the first £2000 of dividends so, if the yield is 2%, an investment up to £100,000 would not attract any tax.

It is also unlikely the child is a taxpayer. as well and will have personal allowance available.     We don't have sufficient information on the amounts involved but if the OP is considering unwrapped holdings outside of  tax wrapper (i..e JISA) then the amounts could well be more significant.

aroominyork

dunstonh said:

Until you approach the level where dividend tax would need to be declared and paid, is this necessary given the time and cost involved in reinvesting dividends up to four times a year? Maybe the answer is that if you complete a self assessment, you need to declare it even if no tax is due.

If its for a child, it could be that time creates the issue.   Maybe nothing in the early years but potentially in the later years

You can always switch from Acc to Inc in later years. Anyway, "my child" ≠ "a child", ie adult children. (Is there a mathematical sign for "not necessarily equal to"?)

UncleK

We don't have sufficient information on the amounts involved but if the OP is considering unwrapped holdings outside of  tax wrapper (i..e JISA) then the amounts could well be more significant.

The amounts are indeed significant and thus will attract income tax, hence the original question. Seems the answer is "yes" and the tax on the dividend will have to be taken on the chin.

aroominyork

Then 8.75% tax on dividends is likely to be less of an issue than capital gains tax. I expect you have thought this through, eg crystallising gains each year to use the CGT allowance and switching between the two funds you mentioned? 

dunstonh

UncleK said:

We don't have sufficient information on the amounts involved but if the OP is considering unwrapped holdings outside of  tax wrapper (i..e JISA) then the amounts could well be more significant.

The amounts are indeed significant and thus will attract income tax, hence the original question. Seems the answer is "yes" and the tax on the dividend will have to be taken on the chin.

The income on the investments (and any other source) would need to be in excess of the personal allowance and dividend allowance to attract tax.  So, you would need a substational amount to do that.

One assumes you would be using the JISA allowance each year and potentially the pension allowance each year (may as well if we are talking substational amounts).  This assumes the children are minors.  if the children are not minors then there is the S&S ISA allowance, LISA potentially and their pension allowances.