Advice on holding Funds in a GIA (ETF vs OEIC, and Accumulation vs Income)

diamondjubilee

Hello folks,

I would greatly appreciate any advice that some of you might be kind enough to share.
I recently inherited £100,000 from a relative who very sadly passed away. I have maxed out both my ISA and SIPP contributions for this year, but I want to get this money working for me in a Fund right away. Over the coming years, I can slowly move this money into my tax-sheltered accounts, but for now my only option is to have it in a GIA.

I would like to keep things as simple and efficient as possible from a Tax perspective. From the research I have done so far: it looks as if the best way of achieving this (inside a GIA) would be to buy an OEIC that distributes income, such as the Vanguard FTSE Global All Cap Index Fund (VFGAIGI).

One reason for my thinking that an OEIC would be preferable to an ETF (inside a GIA), is that an ETF would have ERI (Excess reportable income) to report each year, however an OEIC will not have ERI to report. Is this correct?

The reason that I think that a distributing income fund would be preferable, is that if and when I sell any of the fund, my CGT calculations would be much more straight-forward. Please correct me on this if I am wrong, but my research so far seems to show the following:

In a Distributing income fund, I will receive my dividends and pay tax on them each year. I can then choose to either keep them for myself, or manually re-invest them into the fund. And that is the end of that.
However, in an Accumulating fund, I will still have to pay tax on the dividends that will accumulate in the fund each year. When I come to sell part/all of the fund in the years down the line, in order to calculate the CGT correctly, I would have to keep a record of every dividend that I received and paid tax on. These dividends would then be added to the base price of the fund, and this would in turn reduce my CGT accordingly.
While this doesn’t seem too arduous a task – it is another still thing to remember, and another calculation to make.

Would I be correct in thinking that if I choose to manually reinvest all of my dividends in a Distributing income fund, then I would ultimately be in the same position (financially) as I would be if I had chosen an accumulating fund – but with the bonus of a very simple CGT calculation later on when I come to sell the fund?
Asides from this, are there any other differences between having an accumulating or income OEIC in a GIA?

I have also done some reading on Equalisation for when I come to calculate CGT later on. As this is basically a return of Capital which is included in a Dividend payment; on the Tax statement that I'd receive from my investment platform (I'm considering Vanguard Investor) - would this show the Dividend amount, minus the Equalisation payment? Thereby ensuring that I only pay Dividend tax in my self-assessment on the actual amount of dividend I have earned while in the fund, and not on the return of capital/equalisation?

I would be very grateful for any advice, and thanks to all for reading.

EthicsGradient

I think you understand it well. Yes, for your purposes, an income OEIC (that is, an OEIC domiciled in the UK - the vast majority you can purchase in the UK are, but there are a few based in Ireland) is simplest for CG calculations. Since your plan is to move money into ISA/SIPPs gradually, the income you get can easily form part of that.

With equalisation, some platforms report a total amount, and the equalisation or the actual dividend amount, and you find the other by subtraction from the total, and some show the dividend and the equalisation, and you add them to see the total. Just make sure you know how your platform is expressing it.

When you buy an income OEIC, the equalisation amount should be subtracted from the cost price (since it is, as you say, a "return of capital"). That then means the capital gain will be slightly more. So if you spent £10,000 to buy the OEIC units, and they later tell you "£75 equalisation", the acquisition cost is £9,925. But this calculation only needs to be done once for a purchase, not every year after.

leosayer

Do you hold any assets in non-taxable accounts that are likely to generate lower returns than you could expect from VFGAIGI eg. gilts / bond funds etc?

If so, it may be better to hold these in the GIA to reduce your future taxes and swap them for VFGAIGI.

GeoffTF

leosayer said:

Do you hold any assets in non-taxable accounts that are likely to generate lower returns than you could expect from VFGAIGI eg. gilts / bond funds etc?

If so, it may be better to hold these in the GIA to reduce your future taxes and swap them for VFGAIGI.

It is more complicated than that. Here is a Monevator article:

https://monevator.com/tax-efficient-investing-uk-order-isa-sipp/

Also read the comment by grey gym sock. Low coupon gilts are another complication.