Accumulation units - when to sell

Dilbert_Investor

I’m thinking of switching an investment fund from accumulation to income units.

My question is when is the best time to sell from an income tax perspective?

I know if you hold the units at the fund distribution date (six months after the last day of the funds reporting period) you are subject to Excess Reportable Income (ERI), so is it best to sell ahead of this date rather than after?

Thanks in advance.

masonic

Most available investment funds don't have ERI because they are UK domiciled and therefore required to distribute all of their income. Are you referring to an offshore fund or ETF?

Dilbert_Investor

It’s offshore, so ERI shown on the annual report to participants.

masonic

Dilbert_Investor said:

It’s offshore, so ERI shown on the annual report to participants.

If you are switching from accumulation to income units in the same fund, then you will be subject to ERI on the unit class you hold (if any) on the last day of the reporting period.

Dilbert_Investor

Ok thanks, but the report to participants I’m looking at only shows the accumulation version not the income only.  Would the income version show on your annual tax certificate instead?

masonic

Dilbert_Investor said:

Ok thanks, but the report to participants I’m looking at only shows the accumulation version not the income only.  Would the income version show on your annual tax certificate instead?

And does the ERI on the acc unit class equal the dividend(s) on the income unit class?

Dilbert_Investor

I don’t have the exact figures, but the yield paid look similar on both types of unit.

masonic

Dilbert_Investor said:

I don’t have the exact figures, but the yield paid look similar on both types of unit.

Assuming the ERI just includes the income distributed in the inc unit class, which seems likely, and that there is one distribution per year which is aligned with the reporting period, then there would be no tax difference between taking the income or letting it accumulate. However, if there were multiple distributions from the inc unit class, and/or the record date(s) for distributions are not aligned, then it may be more advantageous to switch to the inc unit class before the end of the reporting period so as to receive the benefit of earlier distributions as a capital gain.

Dilbert_Investor

Thanks that makes sense.  It’s just one distribution per year and the dates are the same.

Dilbert_Investor

But if I wasn’t reinvesting it makes sense to sell ahead of the report period?

masonic

Dilbert_Investor said:

But if I wasn’t reinvesting it makes sense to sell ahead of the report period?

If you sell ahead of the end of reporting period, then you are not on the hook for ERI, but have had a capital uplift in the unit price from that income. Instead of being declared as income and taxed accordingly, it would be treated as part of your capital gain. If you held beyond this date, then you would report it as income and could deduct it from your capital gain.