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Do Include the Tax Credit on Accumulation Dividends for CGT
Shetland
Posted: 29 October 2017 14:45:19(UTC)
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I am currently preparing my tax return and have a liability for CGT. I know, that for funds with accumulation units, I include the dividend rolled up in the unit price as part of the cost but I am unclear if I should also include the associated tax credit. Logic tells me I should but I want to be certain. Anyone any idea ?
Shetland
Posted: 29 October 2017 14:50:03(UTC)
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Sorry title should say Do I .....
john_r
Posted: 31 December 2017 22:00:37(UTC)
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Shetland;52563 wrote:
I am currently preparing my tax return and have a liability for CGT. I know, that for funds with accumulation units, I include the dividend rolled up in the unit price as part of the cost but I am unclear if I should also include the associated tax credit. Logic tells me I should but I want to be certain. Anyone any idea ?



Seems no rush of expert volunteers in the last 2 months to answer your question so here is my simplistic layman reply.
My starting point is that I assume :
a) You have an "acc" type trust residing "outside" of your ISA investments.
b) The annual dividends for this trust are automatically reinvested into the trust each year.
c) That you have now sold all of this trust creating a taxable capital gains event i.e. which exceeds your annual tax free capital gains allowance.
d) you have no other taxable gain events in the same year.

To begin with, your question on "Tax credits" presumably refers to dividends of previous years.

Dividends are treated as "income" which are declared (by you) at the end of each tax year and could give rise to additional tax payments at that time according to your marginal rate.
They are not really anything to do with Capitals gains and do not have an impact on the amount of CG tax to be paid - but may impact your "income" tax only on a year by year basis.

However, as you have mentioned, this dividend each year (net amount after notional taxation of the dividend by the manager) is automatically reinvested back into your fund each year buying you more units and therefore these new units also represent new costs to you each time a dividend is declared and used in this manner.
£ capital gain = £ Sale price - £ total cost of purchase (include net cost of all dividend type purchases, any cost necessary to make the purchases and costs necessary to sell the trust) - £ annual CG allowance (currently £11,300pa) - any (other) capital losses crystallised in the same tax year.

In my own case, if I see capital gains tax looming on the horizon I try to offload partial amounts each year to use up my annual allowance. If that isn't enough I may cash in some loss making investments to lift my allowance.

Hope this helps but remember I am not a tax expert !!.

vietzone TOP
Posted: 11 January 2018 15:14:13(UTC)
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Joined: 11/01/2018(UTC)
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My starting point is that I assume :
a) You have an "acc" type trust residing "outside" of your ISA investments.
b) The annual dividends for this trust are automatically reinvested into the trust each year.
c) That you have now sold all of this trust creating a taxable capital gains event i.e. which exceeds your annual tax free capital gains allowance.
d) you have no other taxable gain events in the same year.
Thank you
Alan Selwood
Posted: 11 January 2018 20:00:23(UTC)
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I've written about this aspect of tax before on this forum, but here's another attempt to clear the scrub out from among the trees so that you can see the path to the right figures on your tax returns (but please remember that I am retired as an investment advisor, and have never had formal training in taxation, so check the following carefully!). Remember that taxes on dividends have changed since the days when a tax credit was notionally given, which was not taxable for basic rate taxpayers! (See below)

Example:

You bought 10,000 units in XYZ SuperSpiffing Trust (Accumulation units) on 1st Jan 2017. Cost each was, conveniently, a nice round £1.00 per unit. Total cost of holding was £10,000.

As you discover from your statement (or by looking the figures up on, for example, Trustnet) the trust made a distribution on 2nd May 2017 and 2nd November 2017, which for Income unit holders was £100 in May and £105 in November, and these same amounts were accumulated within the trust for Accumulation unit holders, thereby inflating the unit price.

You decided to sell the whole holding on 20th December 2017 to fund an extremely extravagant Christmas present for your better half, when the Accumulation unit price was £1.15 each.

Taking a simple route first, you believe, mistakenly, that all you have to report is £0 as income earned (because it was accumulated) and a capital gain of £1500.00 (i.e the proceeds of 10,000 x £1.15 = £11500.00 less the initial cost of £10,000.00)

BUT:
Although the dividends that were accumulated never hit your bank account or wallet at the time, they did count as taxable income from which you benefited - unless they were exempt through being in a SIPP or ISA account.

Under the new tax rules on dividends that affect 2017 onwards, there is a 0% band on the first £5,000 of dividends, and above that, the rates rise higher.

Gov.UK web page for 2017 onwards:
"You don’t pay tax on the first £5,000 of dividends you get in the tax year (from 6 April to 5 April the following year).
Above this allowance the tax you pay depends on which Income Tax band you’re in. Add your income from dividends to your other taxable income when working this out. You may pay tax at more than one rate.
The rules are different for dividends from tax years before April 2016.

Tax band Tax rate on dividends over £5,000
Basic rate 7.5%
Higher rate 32.5%
Additional rate 38.1% "

So in my example, the investor had accumulated £205 in dividends from this investment. If there was no other dividend that year, the amount is not subject to a tax charge, because under £5,000, but if there were other dividends to bring the total up to £6,000 in dividends, £1,000 would be taxed at 7.5% for basic rate taxpayers ( = £75 to pay), 32.5% for 40% taxpayers ( = £325 to pay), and 38.1% for 45% taxpayers ( = £381 to pay).

That's the bad news.

The good news is that the reinvested dividends can be added to the base cost for CGT purposes.

So the CGT calculation is:
Net proceeds of sale = £11,500.00
Cost £10,000 + £205 = £10,205.00

Net gain = £1295.00

If total gains for the year are below the threshold (currently £11,300) there is no CGT to pay.
If the £1295 was the only gain for the year of sale, it is well below the threshold, so the gain is exempt.
If, however, the total of all gains was £15,000.00 in the tax year, the gain made to buy the Christmas present would be taxed at 18% for basic rate taxpayers and 28% for higher rate taxpayers.

I hope that helps.
3 users thanked Alan Selwood for this post.
Money Spider on 13/01/2018(UTC), Joe 90 on 15/01/2018(UTC), Helen on 28/04/2018(UTC)
Money Spider
Posted: 12 January 2018 20:04:40(UTC)
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Another good post Alan, but CGT rates (other than on residential property) were changed to 10% (Basic Rate) and 20% (Higher Rate) starting from 2016-17.

This means that if you are a Higher Rate taxpayer, then you would pay less tax if you invest in and sell growth stocks (20% CGT) rather than invest in income stocks (32.5% Dividend Tax). After all allowances etc.

Shetland
If you hold your non-ISA, non-SIPP investments with Hargreaves Lansdown, then look at the Spring Report that they send you each year in May. Look in the section "Schedule of Unit Trust Dividends" (it comes after the 'Consolidated Tax Certificate'). This will show you ALL your TAXABLE dividends that you have received in your Fund & Share Account (including those paid by ACC funds). This, of course, is 'after the event' (it's for the tax year just ended). However, it does ease filling out your Self Assessment forms.

I keep a "Dividends Forecast" spreadsheet throughout the year that helps me account for and manage my dividends/income tax. For the few ACC OEICs that I haven't sold I can forecast the next year's likely dividend payment reasonably accurately. It certainly helps in planning the likely CGT position before a sale.

HTH
Alan Selwood
Posted: 12 January 2018 22:38:56(UTC)
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Sorry, Money Spider, I must have looked at an old CGT page on the Gov.Uk website when quoting the 18% and 28% figures.

I believe that the rest is correct.

(Remember my starting comment, that I have never been trained in tax!)
Money Spider
Posted: 13 January 2018 10:58:07(UTC)
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No problem Alan - allowances and rates seem to change every year as the 'Chancellor of the Day' has a fiddle with them. I regard everything posted on this site as being intended as a helpful suggestion and offered with the best of intentions. Every reader should check themselves/do their own research before making any decisions.

I too am not trained, nor professionally qualified in: tax, financial planning, law, investment or pensions. However, I am a great believer that in most cases an intelligent person can seek out and understand most of what is needed to make their own decisions. It is on this basis that I post here, but CAVEAT EMPTOR. ;-)

Anyone who is unsure, or who needs specialist help should seek the advice of a professional - there are good ones!
2 users thanked Money Spider for this post.
Mickey on 13/01/2018(UTC), Joe 90 on 15/01/2018(UTC)
Joe 90
Posted: 20 January 2018 11:34:55(UTC)
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Thanks Money Spider and Alan. Very interesting and useful for me as relative tyro investor, approaching retirement and making plans.

Is it correct to say that if only a part of a holding is sold, the increased acquisition cost used in Alan’s example Is simply apportioned pro rata across the entire holding at the point of sale? If not, I can envisage this becoming horrendously complicated particularly if the holding had been built up over a period of years!
Money Spider
Posted: 20 January 2018 12:18:16(UTC)
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@ Joe 90

Yes. Apportion the increased cost (the accumulated income in the ACC units) across the whole holding. Using Alan's example above, if only half of the holding is sold, then

Sale proceeds = £11,500/2 = £5,750
Cost = (£10,000 + £205)/2 = £5,102.50
Net gain = £647.50

When reporting income and costs, income is usually rounded-down to nearest £ and costs are rounded-up to nearest £.

Like most things relating to tax and pensions, they initially look more complicated than they really are. However, I would agree that there are too many rules and it should be less complicated.
1 user thanked Money Spider for this post.
Helen on 28/04/2018(UTC)
Alan Selwood
Posted: 21 January 2018 10:55:19(UTC)
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The other point to remember with part-sales is that when you do a further sale, you need to start from the date of previous sale, look at the revised base cost of the residual units that this transaction created, add on their accumulated income from the following day onwards, to establish a new revised base cost per unit/share, then deduct the total from the net proceeds of sale (if selling all) or from those units/shares sold on a pro rata basis.
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