Income or Accumulation for the not so young.

[raybarrow]

Hi Folks,
As part of our five year plan I have been slowly moving to more Passive Tracker investing and thinning out those HYP shares that never really recovered from the banking crash. I’ve just turned 75 and statistically I should ‘pop my clogs’ before Mrs B. Whilst I find the investing interesting, Mrs B doesn’t, but she has seen the benefit of it over the years. So I would like to leave her with a setup that will look after itself, more or less. ISAs (cash & investments) maxed, both have good company pensions etc.
The ‘accepted wisdom’ is any investments in an ISA make them accumulating, as any tax, CGT is irrelevant, and any non-ISA investments, make them Income to make the tax, CGT more manageable on a yearly basis.

Non-ISA Income units. You have the freedom to reinvest where you want, but you have to make that effort. It can be costly to reinvest small amounts of income. Tax and CGT easier to manage as is done as a yearly exercise.
Non ISA Accumulation units. They are reinvested automatically which may be good or not depending on the price at the time. No input needed. Tax and CGT can be a little more challenging although these days with a good investment platform, the end of year reporting is detailed down to which box(es) on the Self Assessment form to put the amounts in.
ISA Income and Accumulation units. The only difference I can see is that you can ignore the tax and CGT as the ISA excludes them from the tax system.

I’m just wondering what other people do when trying to ease the way for a remaining spouse who is happy to just let the investments ‘happen’ and maybe myself as I become less capable. Hopefully I have another 10+ years but…

Cheers,
Ray.

[DrFfybes]

Hi Folks,
The ‘accepted wisdom’ is any investments in an ISA make them accumulating, as any tax, CGT is irrelevant, and any non-ISA investments, make them Income to make the tax, CGT more manageable on a yearly basis.

Non-ISA Income units. You have the freedom to reinvest where you want, but you have to make that effort. It can be costly to reinvest small amounts of income. Tax and CGT easier to manage as is done as a yearly exercise.
Non ISA Accumulation units. They are reinvested automatically which may be good or not depending on the price at the time. No input needed. Tax and CGT can be a little more challenging although these days with a good investment platform, the end of year reporting is detailed down to which box(es) on the Self Assessment form to put the amounts in.

Ray.

The reason you hold Income units outside an ISA is because the CGT calc is more difficult. The notional dividend that is automatically reinvested in Accumulation units can be added to the original purchase price to reduce the gain when you come to sell them. However you must keep track of this, which can become tiresome over a few years.

If you have Income units and then set the income to automatically reinvest (usually available at a minimal dealing charge) then on all the platforms I've used this reinvestment cost is automatically added to the cost of the total investment in that asset and thus the average price per unit is automatically updated for you.

And at 75 with maxed ISAs and good pensions, unless you have plans for this accumulating wealth, you might want to consider taking the non ISA income as income and spending it or passing it on as it won't be subject to IHT

Paul

[JohnB]

Simplest policy is a single world tracker ETF of course. Outside an ISA you'd expect to be running down the fund, so reinvestment is not an issue, accept the dividends and sell units to match your expenditure/ISA transfer. Inside the ISA have the ACC version.

Of course getting to that point will be a right capital gains tax muddle, you will be struggling to avoid CGT with allowances £6k falling to £3k. Focus on that, as your spouse will not appreciate the calculations. Perhaps leave things with complicated histories and high gains alone, so they become part of your estate.

[AndrewInDevon]

“The ‘accepted wisdom’ is any investments in an ISA make them accumulating, as any tax, CGT is irrelevant, and any non-ISA investments, make them Income to make the tax, CGT more manageable on a yearly basis.”

I’ve just set up my portfolio and done the opposite of this conventional wisdom! My investment account is based on accumulation class funds with distributing classes in my ISA.

My reasoning is….firstly,I’ve invested in growth shares in my investment account and these generally have lower yields anyway, so most of my gains should be liable to lower CGT. Secondly, while I will pay 39.35% tax on the dividend converted to accumulation shares, I can manage the timing and value of the 20% CGT when I chose to chystalise a gain. CGT also has a marginally higher tax free allowance (£6k this year, £3k next year v £1k for dividends).

I should add that my strategy isn’t driven by tax but it’s informed by it. I’ve just retired so plan to use the income in the ISA account to supplement my pension. Whereas my investment account is for growth and I don’t plan to make any drawings for 6 or so years.

[scrumpyjack]

Small point, but make sure any ISA charges are set to be paid out of the taxable account. That way you can have everything in the ISA set to accumulate without the need for any cash flow in the ISA to meet charges.

[DrFfybes]

I’ve just set up my portfolio and done the opposite of this conventional wisdom! My investment account is based on accumulation class funds with distributing classes in my ISA.

My reasoning is….firstly,I’ve invested in growth shares in my investment account and these generally have lower yields anyway, so most of my gains should be liable to lower CGT. Secondly, while I will pay 39.35% tax on the dividend converted to accumulation shares, I can manage the timing and value of the 20% CGT when I chose to chystalise a gain. CGT also has a marginally higher tax free allowance (£6k this year, £3k next year v £1k for dividends).

I should add that my strategy isn’t driven by tax but it’s informed by it. I’ve just retired so plan to use the income in the ISA account to supplement my pension. Whereas my investment account is for growth and I don’t plan to make any drawings for 6 or so years.

I can understand low yield outside the ISA, there is a seperate thread on that elsewhere.

2 questions...

1) Why take money from your ISA? Leaving the income in there, selling unsheltered assets to the same value and using that as the Income, then rebuying within them within the ISA using the ISA income will effectively increase your ISA contributions by the amount not withdrawn.

2) Why aren't you using Income units outsde the ISA with Dividend auto reinvested (unless Inc units not available). Your strategy of having Acc units makes absolutely zero difference to how much tax you will pay, just how hard it will be to calculate it correctly.

Paul

[EthicsGradient]

“The ‘accepted wisdom’ is any investments in an ISA make them accumulating, as any tax, CGT is irrelevant, and any non-ISA investments, make them Income to make the tax, CGT more manageable on a yearly basis.”

I’ve just set up my portfolio and done the opposite of this conventional wisdom! My investment account is based on accumulation class funds with distributing classes in my ISA.

My reasoning is….firstly,I’ve invested in growth shares in my investment account and these generally have lower yields anyway, so most of my gains should be liable to lower CGT. Secondly, while I will pay 39.35% tax on the dividend converted to accumulation shares, I can manage the timing and value of the 20% CGT when I chose to chystalise a gain. CGT also has a marginally higher tax free allowance (£6k this year, £3k next year v £1k for dividends).

I should add that my strategy isn’t driven by tax but it’s informed by it. I’ve just retired so plan to use the income in the ISA account to supplement my pension. Whereas my investment account is for growth and I don’t plan to make any drawings for 6 or so years.

Most people are, I think, talking about when you have the same investment available in both income and accumulation versions - an OEIC, or an ETF (not all are available in both, of course), and, having chosen the investment, you then have the choice of which version.

The tax you pay on each version, outside an ISA, is the same (at the start, anyway); but an accumulating version automatically reinvests, effectively, causing an extra CGT calculation with each distribution. To avoid the increasingly-complicated calculation, many prefer an income version here. In an ISA, many see their investment as long-term, and often they have decided on a proportion (or all of it) in that fund, and an accumulation version is the most convenient way of roughly sticking to that proportion without any effort.

You, on the other hand, appear to be thinking about dissimilar investments, and where to place them, for which the tax rates may well be a consideration. Also, a basic rate taxpayer pays slightly more (10%) on CGT than dividends (8.75%), so their calculations are different.

2) Why aren't you using Income units outsde the ISA with Dividend auto reinvested (unless Inc units not available). Your strategy of having Acc units makes absolutely zero difference to how much tax you will pay, just how hard it will be to calculate it correctly.

Wouldn't the dividend reinvestment (auto or not) produce exactly the same calculation for CGT (and have the same effect on future income)?

[Alaric]

1) Why take money from your ISA? Leaving the income in there, selling unsheltered assets to the same value and using that as the Income, then rebuying within them within the ISA using the ISA income will effectively increase your ISA contributions by the amount not withdrawn.

I think it usually makes sense to run down unsheltered assets rather than withdraw cash from an ISA. CGT might sometimes be a reason not to.

[DrFfybes]

2) Why aren't you using Income units outsde the ISA with Dividend auto reinvested (unless Inc units not available). Your strategy of having Acc units makes absolutely zero difference to how much tax you will pay, just how hard it will be to calculate it correctly.

Wouldn't the dividend reinvestment (auto or not) produce exactly the same calculation for CGT (and have the same effect on future income)?

I does, however your trading platform usually automatically increments the total purchase price each time as you buy more units so your average price is much easier to calculate. Unless I'm wrong it will be Average purchase price which the OP requires for CGT calcs?

Paul

[DrFfybes]

I does, however your trading platform usually automatically increments the total purchase price each time as you buy more units so your average price is much easier to calculate.

Paul

Hell's teeth - having just checked, with II it doesn't. It increments the purchase cost for manual purchases, but not auto ones. Or at least it doesn't increment it fully - For ATST I have a book cost higher than the initial purchase on the contract note, but not as high as it should be if all the reinvestments were added in. At least it is easy enough to check with the new popup box. Looking on HL they give you the "weighted average" price paid for an investment, although that appears to somewhat less than the actual average now I come to check closely, I wonder if it excludes fees and stamp duty. Ho hum.

[raybarrow]

Hi Guys,
Thansk for the comments. I think I know where I want to end up.
The other thing that 'drove' these thoughts was a recent house sale of parents house and the CGT cost/implications of that, bit of an eye opener. All dealt with now but seeing that the CGT allowance drops again next year to a level that might need watching. £12300 to £6000 to £3000 - we can see where this is going. I can't believe that in my head the end of the tax year is 'only' about seven months away. Time accelerates as you get older.
On the subject of spending the income, as I said we can live comfortably off our pensions so maybe a few more mini breaks are in the offing. When does the holiday season start for pensioners - oh yes now!

Thanks again,
Ray.

[DrFfybes]

When does the holiday season start for pensioners - oh yes now!
.

IME when you stop work you on't have time for holidays

[raybarrow]

Hi DrFfybes,

IME when you stop work you on't have time for holidays

Yes, when I worked for a living I had to have a work's diary. To be honest it was hardly used. Now I'm retired I have to keep a diary, but I can always make room for a mini-break.

Ray.

[raybarrow]

Hi Folks,
Just had confirmation from Interactive Investor that they will change units in my trackers from Income to Accumulation and vice versa free of charge. That makes life easier.
Ray.

[JohnB]

Good, and the HMRC internal manual confirms such a switch is considered a share reorganisation and does not trigger a capital gain.

[GeoffF100]

Lots of the comments in this thread apply only to UK domiciled funds. Different rules apply to overseas domiciled funds, which include all ETFs AFAIK and a majority of Vanguard OEICs. Do not forget Excess Reportable Income.

[raybarrow]

Hi,
Good call about different types of funds having different criteria.
My funds are bog standard UK. Shares were all in GBP till Mrs B acquired some US Dollar shares by takeovers/mergers. Notably Liberty and Ball Corp but we plan to get rid of those anyway when the time is right (If there is such a thing as the right time).

Ray.