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  • FIRST POST
    • lindabea
    • By lindabea 13th Jul 18, 4:33 PM
    • 987Posts
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    lindabea
    Tax on Investment Fund
    • #1
    • 13th Jul 18, 4:33 PM
    Tax on Investment Fund 13th Jul 18 at 4:33 PM
    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
Page 1
    • londoninvestor
    • By londoninvestor 13th Jul 18, 4:43 PM
    • 62 Posts
    • 46 Thanks
    londoninvestor
    • #2
    • 13th Jul 18, 4:43 PM
    • #2
    • 13th Jul 18, 4:43 PM
    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 thread
    • ColdIron
    • By ColdIron 13th Jul 18, 4:50 PM
    • 4,338 Posts
    • 5,509 Thanks
    ColdIron
    • #3
    • 13th Jul 18, 4:50 PM
    • #3
    • 13th Jul 18, 4:50 PM
    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
    • londoninvestor
    • By londoninvestor 13th Jul 18, 4:52 PM
    • 62 Posts
    • 46 Thanks
    londoninvestor
    • #4
    • 13th Jul 18, 4:52 PM
    • #4
    • 13th Jul 18, 4:52 PM
    For Inc funds it's just the difference between the purchase and sale values
    Originally posted by ColdIron
    ...plus the value of any equalisation payments that you received along with your dividends.
    • ColdIron
    • By ColdIron 13th Jul 18, 4:53 PM
    • 4,338 Posts
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    ColdIron
    • #5
    • 13th Jul 18, 4:53 PM
    • #5
    • 13th Jul 18, 4:53 PM
    Let's walk before we run
    • lindabea
    • By lindabea 13th Jul 18, 5:00 PM
    • 987 Posts
    • 138 Thanks
    lindabea
    • #6
    • 13th Jul 18, 5:00 PM
    • #6
    • 13th Jul 18, 5:00 PM
    Let's walk before we run
    Originally posted by ColdIron
    Sounds good to me
    Before doing something... do nothing
    • lindabea
    • By lindabea 13th Jul 18, 5:11 PM
    • 987 Posts
    • 138 Thanks
    lindabea
    • #7
    • 13th Jul 18, 5:11 PM
    • #7
    • 13th Jul 18, 5:11 PM
    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
    Originally posted by ColdIron
    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
    Before doing something... do nothing
    • lindabea
    • By lindabea 13th Jul 18, 5:16 PM
    • 987 Posts
    • 138 Thanks
    lindabea
    • #8
    • 13th Jul 18, 5:16 PM
    • #8
    • 13th Jul 18, 5:16 PM
    ...plus the value of any equalisation payments that you received along with your dividends.
    Originally posted by londoninvestor
    I read the link you gave me, but this equalisation payments.. well, it just blew my mind
    Before doing something... do nothing
    • londoninvestor
    • By londoninvestor 13th Jul 18, 5:30 PM
    • 62 Posts
    • 46 Thanks
    londoninvestor
    • #9
    • 13th Jul 18, 5:30 PM
    • #9
    • 13th Jul 18, 5:30 PM
    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 ):
    1. I buy 5000 units in an Acc fund at 2 each. My number of units is 5000 and my running base cost is 10000.
    2. I receive a 200 dividend (per my tax voucher). Now I still have 5000 units and my running base cost is 10200.
    3. 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.
    4. 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).
    Last edited by londoninvestor; 13-07-2018 at 5:36 PM.
    • badger09
    • By badger09 13th Jul 18, 6:32 PM
    • 6,104 Posts
    • 5,472 Thanks
    badger09
    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
    Originally posted by lindabea
    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.
    • bowlhead99
    • By bowlhead99 13th Jul 18, 6:49 PM
    • 8,086 Posts
    • 14,740 Thanks
    bowlhead99
    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
    Originally posted by lindabea
    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...

    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.
    Last edited by bowlhead99; 13-07-2018 at 7:48 PM.
    • londoninvestor
    • By londoninvestor 13th Jul 18, 8:42 PM
    • 62 Posts
    • 46 Thanks
    londoninvestor
    You're still mixing up 2 separate potential tax liabilities
    Originally posted by badger09
    They're a little intertwined for accumulation units though, because the reinvested dividend amount is subject to Income Tax, but also deductible from your CGT cost basis when you sell.
    • masonic
    • By masonic 13th Jul 18, 9:30 PM
    • 9,498 Posts
    • 6,656 Thanks
    masonic
    I read the link you gave me, but this equalisation payments.. well, it just blew my mind
    Originally posted by lindabea
    Equalisation can sound complex and confusing, but it can be explained simply:
    - When funds are valued, the value of the assets plus accrued income is used
    - Buying a fund with accrued income results in you paying more for the assets than you would if they were valued alone
    - When you receive the next dividend, the part of it that represents your "overpayment" is effectively refunded, and to avoid overtaxation it is not treated as income.

    This makes it very difficult to work out your tax position without the help of your platform and is a good reason to make use of an ISA.

    Has anyone mentioned excess reportable income yet?
    http://monevator.com/excess-reportable-income/
    Last edited by masonic; 13-07-2018 at 9:36 PM.
    • lindabea
    • By lindabea 13th Jul 18, 10:10 PM
    • 987 Posts
    • 138 Thanks
    lindabea
    Thank you all for your elaborate explanations. It's much appreciated. It always amazes me how much knowledge and skills there is on this forum.

    If I were to proceed with a non-isa investment fund, would I have to work out the figures, or will the fund platform give me the figures I need to give to HMRC. I'm worried if I'm not able to give the correct figures to HMRC, although from the explanations above, it would appear that I would never exceed the CGT threshold.
    Before doing something... do nothing
    • londoninvestor
    • By londoninvestor 13th Jul 18, 11:01 PM
    • 62 Posts
    • 46 Thanks
    londoninvestor
    Thank you all for your elaborate explanations. It's much appreciated. It always amazes me how much knowledge and skills there is on this forum.

    If I were to proceed with a non-isa investment fund, would I have to work out the figures, or will the fund platform give me the figures I need to give to HMRC. I'm worried if I'm not able to give the correct figures to HMRC, although from the explanations above, it would appear that I would never exceed the CGT threshold.
    Originally posted by lindabea
    For a UK onshore fund, you should get all you need from the platform - although different platforms present it in different ways.

    For an offshore fund, you may not get the excess reportable income figure from your platform (HL doesn't seem to do it for example). The fund manager will publish it somewhere, though with some fund managers that really does take some rooting around. So personally I tend to put those funds in my ISA or SIPP.
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