Do You Pay Tax On Accumulation Fund Units


One often questions I get asked a lot is ‘do you pay tax on accumulation funds?’ The simple answer is yes, you need to pay tax on accumulation funds if they are held outside an ISA or SIPP (Pension) wrapper. You will need to pay income tax on any distributions and capital gains tax on any capital appreciation.




What are Accumulation Funds

Accumulation funds are funds whose income is automatically reinvested in the fund. An accumulation unit is designed to offer you growth in the fund rather than income, so any income generated will be reinvested within the fund.

Income funds on the other hand distribute any interest or dividend income from the fund to you.

Tax Consequences Of Dividends

When you receive a dividend, you need to show figures for dividend distribution in your tax return if you are required to complete one. If you pay income tax, HMRC will assess you on teetotal dividend income received over the dividend allowance.

For dividend payable before 6 April 2016, you need to show figures for tax credit separately. The tax credit, which was replaced by the dividend allowance, was available to offset against income tax chargeable on your total income. If you are UK resident, no part of the tax credit is payable to you. If you pay tax at the higher or additional rate, HMRC will assess you on the total of the income distribution and tax credit. You should consult a tax specialist regarding dividends.

Reinvested Income Tax Consequences In Accumulation Funds

With accumulation funds, the fund manager effectively uses the dividend to buy more shares in the fund for you. Reinvested income is taxable and should be dealt with similar to dividends mentioned above.

For capital gains purposes, the additional shares will form separate holdings, and be deemed to be acquired on the reinvestment date.

Accumulation income is taxable and should be dealt with similar to dividends above. For capital gains tax purposes the accumulation amount is deemed to have been added to the acquisition cost of the shares.



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