Income units and accumulation units

Hi all, probably a silly easy question.

Looking at a Gia to pay a regular income to a client.

If this is solely invested in income funds/units... does the income paid out crystallise any gains towards the clients CGT exemption?

Or would a fund that has the name"income" within the fund but is accumulation units.... I'm assuming this would go towards the CGT allowance?

Many thanks 😁

Comments

  • SA96SA96 Member
    edited February 17

    Whether a fund is income or accumulation doesn't affect the taxation. What matters is whether the fund pays dividends or interest. Even if you accumulated any dividends paid out, these would still be subject to tax.

    If the funds are paying dividends then they will be taxed as dividend income. The first £2,000 will be within the allowance, but the remainder would be subject to dividend tax at 7.5% , 32.5% or 38.10%.

    Funds that pay interest distributions are subject to the usual taxation.

    CGT doesn't come into it as you're not selling units.

    Without getting into the whole value vs growth debate, you may wish to reconsider your selection of income funds. There's nothing stopping you from opting for growth funds (which have performed significantly better) and selling units strategically in order to generate an income, this approach would utilise the CGT allowance. Dividend tax would also be none/minimal, many growth funds don't pay dividends. Individual companies like Tesla and Amazon reinvest their profits.

    The only danger of the growth approach is that you may be forced to sell units during a market downturn in order to generate an income. One way of covering this drawback is having a year's worth of income as a separate cash pot. Take February last year for example, you could have stopped selling units in the funds and allowed their price to recover, while taking the required income from the cash pot.

    Please note that the above could be redundant if the rumoured changes to CGT come into force!

  • Thank you so much!

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