INC or ACC ?

20122013

I will be investing in index funds (OEICs) using my cash ISA (37.5%) and cash (62.5%).

My plan is to use the entire cash ISA to invest in one Income (INC) fund, in case I need to replenish my cash ladder. (I hope my other plan works; if so, I can keep the income reinvested, even though Interactive Investor (ii) charges a fee for this).

Also, it seems an INC fund is simpler for tax returns than an Accumulation (ACC) fund. With the remaining cash, I plan to invest for at least 10 years, transferring it into a Stocks & Shares ISA each year. I understand that I cannot sell and then immediately buy back the same fund?

Both Income (INC) fund and Accumulation (ACC) fund have tax to pay : CGT and income and interest only for INC fund.

I would like to check these are correct, please?

masonic

If you are investing outside of an ISA, then Inc will make your life easier and you may as well use Inc everywhere.

I take it Interactive Investor still has free regular investing, so you can use this (adjusted each month) to reinvest dividends for free.

When moving into your S&S ISA, you can immediately buy back the same fund (there will necessarily be some time out of the market waiting for your trade to settle). People trying to manufacture capital gains without using an ISA need to wait 30 days. You would be doing a "Bed & ISA", and this always triggers a disposal for CGT whether you want it to or not.

CGT and dividend/interest apply to both Acc and Inc versions of the fund, and will be near identical. If the fund holds less than 60% bonds, then you'll be dealing with dividends, else interest.

EthicsGradient

You are allowed to transfer part of an ISA to another ISA, without using any of your yearly ISA allowance (I don't know if all providers will do this; if yours won't, then you should be able to transfer it all to ii, and then transfer what you want to remain in a cash ISA back). There's no tax return for anything in an ISA.

You are allowed to sell a fund outside an ISA, contribute the resulting cash into the ISA (that contribution is what has the £20k per tax-year limit), and then immediately buy the same fund inside the ISA.

Yes, outside an ISA, both Inc and Acc units are subject to income tax, and CGT; by "interest" do you mean the income from funds that are heavily weighted to bonds?

20122013

Ethics Gradient:
'You are allowed to sell a fund outside an ISA, contribute the resulting cash into the ISA (that contribution is what has the £20k per tax-year limit), and then immediately buy the same fund inside the ISA.'

That's great to know as I have read that you are not allow to buy back the exact same fund when you move from a fund outside an ISA to S&S ISA (that make things better for me) - is there a name of this process?

Ethics Gradient:
'Yes, outside an ISA, both Inc and Acc units are subject to income tax, and CGT; by "interest" do you mean the income from funds that are heavily weighted to bonds?'

I have read on internet (AI) that there are 3 type of tax from ACC fund and INC fund, these are CGT, income and interest and it had mentioned that interest does not apply to ACC not sure what it meant by interest. And it seems AI is not correct.

20122013

@masonic

Thanks for the pointers.

'If you are investing outside of an ISA, then Inc will make your life easier and you may as well use Inc everywhere.
I take it Interactive Investor still has free regular investing, so you can use this (adjusted each month) to reinvest dividends for free.'

- Going forward INC for everything outside an ISA, will the tax be the same for ETFs? As I have not use ETF before, they seem to have lower fees and more fund choices.

For S&S ISA, does it matter if I use ACC, as I am planning to grow the capital and reinvest the dividends and may need to rebalance but it should not matter due to no tax due?

'I take it Interactive Investor still has free regular investing, so you can use this (adjusted each month) to reinvest dividends for free.'

- Yes, ii still has free regular invest, I will check whether that applies to reinvesting the dividends /income.

'CGT and dividend/interest apply to both Acc and Inc versions of the fund, and will be near identical. If the fund holds less than 60% bonds, then you'll be dealing with dividends, else interest.'

- Would you mind explaining a bit more on 'If the fund holds less than 60% bonds, then you'll be dealing with dividends, else interest.'? Do you mean with a 'multi asset fund'?

EthicsGradient

https://forums.moneysavingexpert.com/discussion/comment/81941430#Comment_81941430

I was writing my post while masonic replied, so much of what I said, or the follow-up questions, are covered in their reply.

For "is there a name of this process?", that's the "Bed and ISA" that masonic referred to - see their "When moving into your S&S ISA" paragraph.

"it had mentioned that interest does not apply to ACC not sure what it meant by interest. And it seems AI is not correct." - as masonic said, the income from funds can be taxed in two ways: if the assets of the fund are less than 60% bonds, it will be taxed at the dividend rate (for a basic rate payer, 10.75% from April 6th onwards). If it's more than 60% bonds, it is taxed at the savings interest rate (for basic rate payers, this will be 20% in 2026-27, and 22% from April 2027 onwards). If it's an Acc fund, you will still pay this same rate of tax.

masonic

"Going forward INC for everything outside an ISA, will the tax be the same for ETFs? As I have not use ETF before, they seem to have lower fees and more fund choices."

ETFs are more complex, because they are offshore funds and don't have to distribute all of their income like index funds. This means you generally lose the benefit of INC, and have to deal with Excess Reportable Income, which you have to go looking for. I would avoid holding ETFs outside of an ISA.

"For S&S ISA, does it matter if I use ACC, as I am planning to grow the capital and reinvest the dividends and may need to rebalance but it should not matter due to no tax due?"

It doesn't matter, but sometimes it's simpler to keep everything consistent, especially if using the same funds inside and outside the ISA.

"Yes, ii still has free regular invest, I will check whether that applies to reinvesting the dividends /income."

It uses any cash balance in the account, so it doesn't matter where it comes from. Using regular investing may be a way to avoid dividend reinvestment fees.

20122013

I have a HSBC all world index tracker and want to replace it with one that excludes US or has 40% or less. I am looking for an OEIC but can only find ETF ? any other options, please?

masonic

The L&G Multi-Index multi-asset funds underweight the US. For example, Multi-Index 7 is almost 90% equities and US equities are in the low 20s (19% direct and a few percent indirect from global small-caps and the AI thematic fund it holds a slice of).