SONIA tracking fund in an ISA vs easy-access cash ISA rate

spider42

thegentleway said:

spider42 said:

Stargunner said:

The Royal London also offer an acc version of the fund so no income distributions are paid out.

Accumulation units don't pay the distributions out as cash, which is instead retained in the fund and will increase the unit price. But the notional distributions are still taxable income.

taxable as dividend income?

That depends on the fund. A SONIA tracking fund will almost certainly invest almost exclusively in cash and fixed interest securities, and would be taxed as interest. A fund primarily investing in equities would be taxed as dividends. (The cut-off point is 60% invested in cash and fixed interest securities. More than this and it is treated as interest for tax purposes, less than this and it is treated as dividends).

thegentleway

spider42 said:

thegentleway said:

spider42 said:

Stargunner said:

The Royal London also offer an acc version of the fund so no income distributions are paid out.

Accumulation units don't pay the distributions out as cash, which is instead retained in the fund and will increase the unit price. But the notional distributions are still taxable income.

taxable as dividend income?

That depends on the fund. A SONIA tracking fund will almost certainly invest almost exclusively in cash and fixed interest securities, and would be taxed as interest. A fund primarily investing in equities would be taxed as dividends. (The cut-off point is 60% invested in cash and fixed interest securities. More than this and it is treated as interest for tax purposes, less than this and it is treated as dividends).

Makes sense. Thank you for explaining. 

mark_cycling00

If I had a mix of funds including a royal London accumulation, and sold some of the portfolio each year to supplement retirement income, I'd have no idea that I needed to treat parts of the price increase as income. 

Maybe this is just a dream and I'll wake up soon

Does this also apply to funds such as merchants trust?

wmb194

mark_cycling00 said:

If I had a mix of funds including a royal London accumulation, and sold some of the portfolio each year to supplement retirement income, I'd have no idea that I needed to treat parts of the price increase as income. 

Maybe this is just a dream and I'll wake up soon

Does this also apply to funds such as merchants trust?

Tax wise, the easiest thing with OEICs is to avoid using accumulation funds in taxable accounts.

Merchants Trust plc (LSE:MRCH) is easy as it's an investment trust i.e. a listed company. It pays dividends and capital gains and losses crystallised when you sell shares are treated as you would with shares in any other company.

spider42

mark_cycling00 said:

If I had a mix of funds including a royal London accumulation, and sold some of the portfolio each year to supplement retirement income, I'd have no idea that I needed to treat parts of the price increase as income. 

Maybe this is just a dream and I'll wake up soon

Does this also apply to funds such as merchants trust?

There isn't really any tax advantage from accumulation units. Even though you've not received any cash from the distributions, the distributions are still taxed as income every year. The tax treatment on accumulation units is effectively equivalent to the situation where you hold income units, receive cash from distributions (taxable), and then reinvest that cash by buying more units with it. The accumulation units just mean that reinvestment process happens automatically (and you don't get more units, you keep the same number of units, but the value of a unit increases instead). The income accumulated is an allowable cost when working out the CGT, just as it would be if you held income units and bought more units with the income.

You should get a tax voucher from your platform each tax year with the dividend and interest figures needed for your tax return. This will already include the notional distributions on the accumulation units. That is all you potentially need to pay Income Tax on (if not covered by dividend and savings allowances etc). If you then sell some units, there is no further Income Tax to pay as a result of the sale (unless it is an offshore non-reporting fund). The income part of it has already been taxed over the time you've held it.

Merchants Trust is I believe an investment trust not a fund (i.e. unit trust / OEIC). For the investor, these are taxed in the same way as shares in a normal limited company (and 'dividends' are taxed as dividends, not classified as interest, even if the investment trust invested primarily in bonds).

easysaver

This article is nearly a decade old but it should serve as a pointer to do your own research....
https://monevator.com/excess-reportable-income/

I don't remember all the intricacies but as far as I understand it for an equivalent fund you pay the same tax whether accumulation or distribution variety. And as said earlier, these SONIA tracking funds and other predominantly bond funds are taxed as interest (there may be capital gains/loses along the way, particularly in the case of bond funds).

wmb194

spider42 said:

mark_cycling00 said:

If I had a mix of funds including a royal London accumulation, and sold some of the portfolio each year to supplement retirement income, I'd have no idea that I needed to treat parts of the price increase as income. 

Maybe this is just a dream and I'll wake up soon

Does this also apply to funds such as merchants trust?

Merchants Trust is I believe an investment trust not a fund (i.e. unit trust / OEIC). For the investor, these are taxed in the same way as shares in a normal limited company (and 'dividends' are taxed as dividends, not classified as interest, even if the investment trust invested primarily in bonds).

Careful. If an IT or IT-like company (CEIC) is domiciled abroad e.g., quite a few are domiciled in Jersey and Guernsey, dividends from these will need to classified as interest if it's primarily invested in fixed income.

British domiciled ITs/CEICs can also make interest distributions but these are explicitly stated as such and paid separately from dividend distributions e.g., LSE:HICL does this a lot.

GeoffTF

easysaver said:

This article is nearly a decade old but it should serve as a pointer to do your own research....
https://monevator.com/excess-reportable-income/

I don't remember all the intricacies but as far as I understand it for an equivalent fund you pay the same tax whether accumulation or distribution variety. And as said earlier, these SONIA tracking funds and other predominantly bond funds are taxed as interest (there may be capital gains/loses along the way, particularly in the case of bond funds).

There will inevitably be capital gains (or losses) too. You need to take account of Equalisation for OEICs. If you are outside a tax shelter, it is important to fully understand all the tax rules, or hire an accountant.

Roseybug

The HL app/website shows the Vanguard Sterling Short Term Money Market fund as paying a dividend, but the Royal London Short Term Money Market as paying interest.

Could this be an information error, or are the funds structured differently?

(edited typo in fund name)

mark_cycling00

thanks all. I found this to be a very informative thread and helped me understand these products much better.

For now I will hold the Royal London one within an ISA rather than outside, as this seems to keep things simple