What happens with dividend payment after you sell your holding in a accumulation fund

As you probably know - if it was an INC fund and you sell or redeem the shares ex dividend (literally: the person who buys the shares from you has no right to receive the dividend, because you alone have the right to the dividend having held the share on the relevant date to earn that right, and are selling the shares ex- the rights to the next dividend) then you will get the cash payment of the dividends, paid along to you separately even though you no longer own the shares.

And as you probably know, with ACC funds, there is no 'cash payment of the dividend' and so the price of the share does *not* drop on ex-div day (which with an INC fund it would have done, to reflect the fact that you have a pending dividend cash receipt in one hand and a tradeable share in the other). Instead, the share price stays the same, reflecting the fact that your class of shares is one where you pre agreed for no cash to be paid to you and all dividend income to be redeployed into new assets.

In an ACC fund on ex div day, therefore instead of being left with in one hand a tradeable share at a reduced value and in the other, an IOU for cash dividend to be received in due course; you have in one hand a tradeable share whose value has *not* been reduced, and in the other, nothing.

So, when a few days later, you decide to redeem that ACC share at its fair market value, the value you can cash it in at, is implicitly inclusive of the dividend monies, because it's been agreed that no dividends were going to get paid out in cash and 100% of the dividends would be rolled up into the ongoing value of the fund and invested in more of the fund's underlying investments.

So although you are thinking of your situation as one in which you sell ex div, without the right to the div, really the cash element of the div was only going to be £0, so you can still get the full amount of disposal price for the shares when selling ex-div, that you'd have received if selling a few days earlier c u m div instead.

From a tax perspective though, if you are holding the funds outside a tax wrapper, and you chose to hold the shares through until the ex div date and maybe a little bit beyond... You will still have the responsibility to account for income tax on the income (not the £0 cash dividend, but the entire deemed dividend applicable to the share). That's because you sold the share, ex div, without the rights to the dividend, so implicitly you have kept the rights to the dividend for yourself.

Glen_Clark wrote: »

The Accumulation funds I hold don't have ex-dividend dates or pay out dividends.
Dividends are constantly re-invested throughout the year.
They just publish a figure of the amount of dividends that have been re-invested over the year for tax purposes.

That can perhaps be the case with non-UK funds, accumulating ETFs and so on but generally open ended funds (oeics / UTs) for the UK market will have fixed ex div dates which are typically aligned with the dates of their INC counterparts (in the case where there is an INC version). When investing through a fund platform, the platform will get the data from the funds for the relevant dates you held the shares and bring it into your consolidated tax certificate.

I fail to understand how a fund that doesn't pay out dividends can have an ex-dividend date?,

The government generally accepts that it's good for investors to be able to access a diversified set of investments by pooling their resources on a collective basis with others, without huge tax leakage from the "middleman" vehicle which actually holds the investments.

Consider how inefficient it would be if, in order to invest collectively in the companies in the FTSE, you had to stick your money into a UK investment vehicle which had to pay corporation tax at 20% on all its UK dividend income and capital gains from its investment activities... and then when you as an investor got paid dividends from the investment vehicle, or sold your shares in the investment vehicle for a profit, you had to pay your personal income tax and capital gains as well.

It would be a pretty bad way of doing things from a tax perspective, compared to the result you could achieve by investing in the underlying shares directly. Especially for some entity types that don't even pay tax, like pensions. But holding everything directly might be similarly unacceptable due to the risks and inefficiencies of trying to personally hold the whole portfolio in your own name directly.

So, regulated collective investment schemes in the form of OEICs and investment trusts are allowed to not pay corporation tax on their gains and UK divs received, as long as they follow the rules.

One of the rules for them to follow is that they have to 'pay out' all their net income every year. Otherwise they could just hoard it and the owners (investors) of the collective investment scheme could sell on their shares to other people, paying CGT only on their rolled-up personal gains, at rates well below income tax marginal rates. The individual owners/shareholders of the scheme having never received any dividends from the scheme in which they invested, and therefore never getting any income tax bills.

So, a UK OEIC or UT which wants to avail itself of the exemption from corporation tax on gains and div income (without which exemption, investors wouldn't touch it)... is going to have to be seen to distribute all the net income it has generated.

HMRC recognise that some funds want to be structured to reinvest returns from their investment without kicking them back to investors and have the investors push the money back into the fund again. So they allow ACC classes where the net income isn't physically distributed but it is still officially allocated out to investors on the share register at a particular time, just like a physically-paid cash dividend would be.

As such, just like with a distributing INC fund, there must be some day that you look at the register of members and say OK, as of this particular day, these are my investors, and I am going to declare the income is now theirs to keep. I will 'distribute' (well, assign) [£x] of income per unit to all investors on the register at midnight on the [y] of July which means that with the standard settlement timelines you have to get your order to me to subscribe in or redeem out by [z] of July if you want to make sure you are on or off the register. If you don't subscribe or redeem by z July your shares will now be "ex div' without the latest allocation of profit

If you didn't have these organised ex div dates with big lumps of dividend being allocated out, one option to put the money from profits to the OEIC or UT would have been to just allocate out a little on a daily basis, but that would be a pain for the fund and the investor alike.