Do Accumulation and Income ETFs pay the same tax in a GIA with dividends reinvested/withdrawn?

bobfredbob

Thanks everyone,  I think I'm coming down on the side of Inc.  It will allow dividends to be taken without requiring sales and using up parts of my CGT allowance, and will allow my book keeping to just be date, quantity, price.

I'd also not considered the fact that with an Acc, you have to pay dividend tax on money you've not actually physically received!

Am I right in assuming that an Inc ETF has no equalization that needs to be tracked?

I guess re-investing four dividends per year will make calculating the draw-down sale prices interesting.

I've read through the HMRC HS284 "lobster shares" example.  I understand their first sale, and the "carried forward" pool for the second sale.  But, there's no example for when new purchases are made between the two sales.

So their example is:
B 1000@400. (+ 150 fee)
B   500@410. (+  80 fee)
S   700@480. (+100 fee)
S   400@520. (+105 fee)
 
But, what happens when there is a new buy in between the two sales?

masonic

bobfredbob said:

Am I right in assuming that an Inc ETF has no equalization that needs to be tracked?

No equalisation, since the holder on the XD date is entitled to all of the dividend.

But you do have ERI, as pointed out above. The holder at the end of the accounting year is liable for the tax on all of this (based on how many shares were held on that date). The annual ERI can be deducted from the gain as it is taxed separately as income. You will need to go and look this up annually for each ETF (usually available from the provider) and record it.

There's a case for using a UK domiciled Investment Trust rather than an ETF if you desire a simple life, as then there is no equalisation or ERI. Assuming you are avoiding OEICs for good reason - e.g. higher platform fee.

bobfredbob said:

But, what happens when there is a new buy in between the two sales?

It depends, if the new buy can be matched to a prior disposal in the last 30 days, then it will change the CGT calculation, as this will need to be matched to the disposal in priority to the pool.

If the purchase is outside of the 30 day window, then it gets added to the pool and a new average acquisition price is used for subsequent sales.

bobfredbob

Yes, I'm considering moving to a different platform since the platform lower fees will add up over time.  I plan to try an ETF on the new platform, see how the end-of-year reports, bookkeeping and experience compare to my current platform.  The ETF costs are quite a bit lower for similar enough indexes which will also help.  But "free" platforms require ETFs and I've not worked out if it will make financial sense to sell the OEIC.


For the buy/sell example, assuming not within the 30-day window.

It seems from the HMRC example that when we sell, we draw a line and say this is now the price and quantity of the entire pool at this point in time.

So, in the above example, they calculated the pool after the first sale as 800@3349.  So, any new purchases would be in a new pool with the 800@3349 and all the previous prices and quantities are no longer explicitly used in  calculations.

So, there is no "first in first out", where selling 1000 shares in the above example would "knock out" the initial purchase.

As long as I do a sale every few years, 31-days after a purchase, then I can consolidate all the book prices in to one pool price to carry forward.

EdSwippet

bobfredbob said:

It seems from the HMRC example that when we sell, we draw a line and say this is now the price and quantity of the entire pool at this point in time.

Not just when you sell, but also when you buy. For a purchase, you simply add the number of shares to the pool, and the price you paid for them (less fees) to the pool's cost.

So, in the above example, they calculated the pool after the first sale as 800@3349.  So, any new purchases would be in a new pool with the 800@3349 and all the previous prices and quantities are no longer explicitly used in calculations.

So, there is no "first in first out", where selling 1000 shares in the above example would "knock out" the initial purchase.

I think you may have it right, but just for clarity ... in HMRC's example, after the first sale, yes, 800 shares with a pool cost of £3,349. Suppose you now buy another 100 shares for 500p/share with £10 trading fee. Add to the pool gives 900 shares at  £3,839 (from £3,349 + 100 * £5 - £10). Simply use that cost going forward.

And yes, no FIFO, LIFO, or similar. Only average cost basis throughout. If your broker doesn't handle it for you (likely; many don't), it's easy enough to track with a simple spreadsheet - or even manually on paper for the fully technophobic.

As long as I do a sale every few years, 31-days after a purchase, then I can consolidate all the book prices in to one pool price to carry forward.

Yes. As long as you avoid the stupid and annoying 30 day 'bed and breakfast' rule, everything is simply consolidated after each sale or purchase. And avoiding that rule is fairly easy where you hold tracker funds; just switch to a different tracker that follows the same index for at least 30 days.

For ETFs and non-UK domiciled funds, your main fiddly thing will be ERI. A usually tiny (for income units) bit of extra dividend you don't receive but nevertheless have to pay tax on. For this, you simply add the ERI to the pool's cost, with (of course) no change to the number of pool units. That way, it's excluded from eventual CGT.

For funds (but not ETFs), you might also see an equalisation payment. Here, you subtract that from the pool's cost, since it's effectively a return of capital. So this adds slightly to eventual CGT.

So, things can be messy but not overly complicated once you know how the pieces fit together. Depending on what you choose to hold, if you don't know how to wrangle a simple spreadsheet already, you probably will soon.

bobfredbob

Thanks, that worked example is really helpful and the bookkeeping is not as complicated as I initially feared.

I especially liked the idea to use another index to avoid the 30-day rule.

poseidon1

EdSwippet said:

My own distaste for holding accumulation units in a taxable account would primarily be having to pay tax annually on money not actually received. To add further insult, raising the cash to pay that tax may mean selling some of those accumulation units, leading to painful CGT calculations and a possible CGT liability on top.

Personally I hold any accumulation units in SIPPs and ISAs, but outside, only income units of UK domiciled funds.

In total agreement.

This was a particular professional bug bear of mine in the management and tax compliance  of family trust funds when certain stock brokers and wealth managers habitually purchased accumulation units instead of income units ( a particularly problem for discretionary trusts).

 In the end, and for those trusts my firm controlled, a blanket ban was placed on the purchase of accumulation units.