Changing unit type
If you’re already invested, you may want to think about changing from one type of unit to the other. For example, if you’re approaching retirement and want to move from accumulation units to income units to supplement your pension income. There may be charges involved, and the risks of market movement, when changing units, so check with your fund provider and the platform you’re using to buy or sell your fund.
If you’re holding the investment outside a stocks and shares ISA or cash ISA, remember that changing the type of units you hold amounts to selling one type to purchase the other. This sale may trigger a capital gain and if this exceeds your annual allowance then you may incur capital gains tax.
Buying the accumulation share class would mean that your income from the investment fund would remain in the fund and be reinvested with no charge. This wouldn’t automatically be the case if you chose to re-invest the income received from income units.
Relative performance between unit types
In the long term, even though the performance of the income and accumulation units may be similar, the effect of compounding will make a difference, because you’re reinvesting income instead of spending it. If the fund steadily appreciates, the profit on the reinvested income will mean the growth of the accumulation units will be greater than the total return from the income units – growth plus distributed income – though of course, you won’t have the income to spend.
When a fund is held in a tax-efficient account like an ISA or SIPP, there’s no income tax, capital gains tax (CGT) or dividend tax to worry about. However, outside these types of account, you need to be aware of the implications of your choice of units. Income that’s ‘rolled up’ into your accumulation units is known as a ‘notional distribution’ and is taxable in the same way as the distributions from income units.
Any dividends that are automatically reinvested can be used against your dividend income tax-free allowance, which is £1,000. That means that if total dividends received/reinvested is more than this amount, you may have tax to pay. For income-paying funds where the income is classed as interest, you wouldn’t pay tax up to the new £1,000 interest allowance for basic rate taxpayers. The allowance for higher rate taxpayers is only £500 and additional rate taxpayers have no allowance at all. Remember, this covers all interest that you receive on cash as well as investments, and once the interest you receive exceeds your allowance, it’s subject to income tax.
When you come to sell accumulation units, you’ll pay CGT on any increase in value that exceeds your annual CGT allowance – 2023-24. CGT will be payable on the value of the accumulation units when they’re sold, minus the original investment and any income that has been accumulated.
This means holders of accumulation units should keep a record of all the notional distributions described above, so they can adjust the calculation when they sell their holding, to work out the proportion of their sale proceeds that represents a capital gain.
Please bear in mind that tax rules can change in future and their effects on you will depend on your individual circumstances. Also, remember that whether you buy accumulation or distribution units, they, and any income from them, can fall in value and you may get back less than you invest.