Tax on Investment Fund
lindabea
Posts: 1,477 Forumite
Hello everyone, I'm trying to understand how you determine the (if any) tax you need to pay on an Accumulation fund (non-ISA). With an INC fund, I think you pay tax on the dividends received during the year, but with an Acc fund, do you simply subtract the value of the fund at the end of the tax year from the value at the start of the year. If it's a positive amount then you made a gain and pay tax on that gain. And would you receive a tax certificate from the fund platform? Would appreciate some guidance
Before doing something... do nothing
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Briefly, yes you'll get a certificate from the fund platform. That will tell you how much you need to pay Income Tax on: for an accumulation fund, it's not the overall gain, it's the amount of the dividends which the fund received and reinvested.
When you come to sell, Capital Gains Tax is a little more involved - for that, have a look at this thread (or some similar ones).
Edit - another useful thread0 -
You will get a tax certificate from your platform in the new tax year detailing the dividends received for the previous year regardless of whether they are Inc or Acc funds
What you describe is working out your gain for CGT purposes but it only comes into play if and when you sell your investment (not every year) and there is an annual allowance so you may pay no tax. For Inc funds it's just the difference between the purchase and sale values, with Acc funds you should deduct the dividends as you don't want to pay tax on them twice0 -
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Let's walk before we run
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You will get a tax certificate from your platform in the new tax year detailing the dividends received for the previous year regardless of whether they are Inc or Acc funds
What you describe is working out your gain for CGT purposes but it only comes into play if and when you sell your investment (not every year) and there is an annual allowance so you may pay no tax. For Inc funds it's just the difference between the purchase and sale values, with Acc funds you should deduct the dividends as you don't want to pay tax on them twice
OK - I understand about the CGT allowance, and the dividend allowance, and I think I grasp the concept if I were to sell the whole of the investment.... but, if I were to sell part of the investment, how do I work out the gain on that portion. For instance, say my org investment was 20K, after 10 yrs, it's value is 30K, I then sell 10K. How do I work out any tax liability when the dividends were spread across the whole investmentBefore doing something... do nothing0 -
londoninvestor wrote: »...plus the value of any equalisation payments that you received along with your dividends.
I read the link you gave me, but this equalisation payments.. well, it just blew my mind :eek:Before doing something... do nothing0 -
You can think of your holding as having a "current number of units" (which is hopefully self-explanatory) and a "running base cost".
Let's call the current number of units U, and the running base cost C.
The rules for calculating this are:- When you buy X units and pay £Y total for them, the number of units goes from U -> U+X, and the running base cost goes from C -> C+Y
- When you have an accumulation fund and "receive" a dividend D, the number of units is unchanged, and the running base cost goes from C -> C+D
- When you have an income fund and receive a dividend, it doesn't affect the number of units or the running base cost
- When you have an income fund and receive an equalisation payment E (skip this and come back to it if you like), the number of units is unchanged and the running base cost goes from C -> C-E. (NB minus, not plus)
- Now the bit you really care about. If you sell S units and receive £Z then:
- The cost associated with what you sell is deemed to be C*(S/U). So your taxable gain is Z-(C*(S/U)).
- That amount is then removed from your running base cost, i.e. your running base cost goes from C -> C-(C*(S/U))
- Your number of units of course goes from U -> U-S
So as a quick worked example (without equalisation payments):
- I buy 5000 units in an Acc fund at £2 each. My number of units is 5000 and my running base cost is £10000.
- I receive a £200 dividend (per my tax voucher). Now I still have 5000 units and my running base cost is £10200.
- Later I buy 8000 more units at £2.50 each (so £20,000 total). Now I have 13000 units and my running base cost is £30200.
- Later still I sell 6500 units and get £2.60 for them (so I receive £16900).
- The cost basis for my sale is £15100 (i.e. £30200 * 6500/13000).
- My taxable gain is £16900 - £15100 = £1800. Of course, that might fit into my annual allowance - depends what else I've done this year.
- I now have 6500 units left, and a running base cost of £15100 (£30200 - the £15100 cost attributable to this sale).
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OK - I understand about the CGT allowance, and the dividend allowance, and I think I grasp the concept if I were to sell the whole of the investment.... but, if I were to sell part of the investment, how do I work out the gain on that portion. For instance, say my org investment was 20K, after 10 yrs, it's value is 30K, I then sell 10K. How do I work out any tax liability when the dividends were spread across the whole investment
You're still mixing up 2 separate potential tax liabilities
1) Income tax:
This might be payable on dividends received during a tax year, if they exceed that year's dividend allowance. You will get a statement showing the amount of dividends received 6/4/18 - 5/4/19 so you can work this out
2) Capital gains tax:
When you sell some or all of your investments you will have to work out the gain since you bought them. If that gain is more than the annual Capital gains allowance, tax will be payable.
In your example the gain on your 20k investment is 10k, which is below the annual Capital gains allowance, so no GCT would be payable even if you sold it all.0 -
In this case, again keeping it (kinda) simple and just looking at capital gains on sale rather than income tax on dividends as you go along...OK - I understand about the CGT allowance, and the dividend allowance, and I think I grasp the concept if I were to sell the whole of the investment.... but, if I were to sell part of the investment, how do I work out the gain on that portion. For instance, say my org investment was 20K, after 10 yrs, it's value is 30K, I then sell 10K. How do I work out any tax liability when the dividends were spread across the whole investment
Your original investment was £20k, and over the years you have had dividends which were received (inside the fund without ever being paid out to you, because it was an Acc fund) and reinvested. The value of those amounts reinvested at the time (say for simplicity, £400 a year for ten years or £4k total over the ten years) is allowed to be added onto the original cost of your investment to make £24k total, as your cost base for any CGT calculation when you eventually decide to sell some of your shares in the fund.
In your example, you are saying your big pile of shares in the fund are currently worth £30k, but you are only going to sell £10k-worth.
So, you are selling about a third of your units. As these are all round numbers and examples, let's say you have 100000 shares in the ACC fund and it is selling for £0.30 a share. You would only need to sell one third (33,333) of your shares and the other two thirds would be unsold.
So... the question is, for this £9,999.70 of sales proceeds you now have, what was the allowable cost for the shares that you sold? Well, you know that ALL the shares had an allowable cost of £24k. But you have only sold one out of every three shares and kept the others. So ignoring the roundings, your allowable cost is 1/3 of the £24k. In other words, £8k.
So... you have shares with £30,000 of value. Instead of selling all the shares for £30,000 (which had an allowanble cost of £24,000) you just sell some of the shares for £10,000 (which had an allowable cost of £8,000). The gain (proceeds less allowable cost) is £2000.
Fortunately, £2000 is entirely covered by your annual exemption (which covers the first £11,700 of gains in a tax year). If you only have £2000 of gains on what you just sold you will have plenty of spare capacity to sell more shares in the same tax year without actually needing to pay capital gains tax; and every April you get another annual exemption amount to use on sales for that year.0
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