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Can accumulation units avoid age allowance?

Investment | Investment Trusts Helpful? 7

Asked by zircon, submitted 26 September 2012.

Open Quote I am retired and rely on investment income, a large portion of which comes from income paying unit trusts.

This income uses up my tax age allowence and I wondered if accumulation units would still be subject to the rules in respect of the units addded each tax year, in other words are they treated as if they were dividends. If they do not count then I could take income by selling units but avoid affecting my age allowence.

Does this sound feasable?. I realise this is a tax question Justin but I hope it falls within your remit and might be of general interest.
End Quote

Answered by Justin on 27 September 2012

I'm afraid the taxman treats accumulation units in the same way as income units, so you have to pay income tax (if due) in the usual way and it counts towards your age allowance - even though you don't physically receive the income.

The unit trust manager or platform you hold the funds through will send an annual tax certificate detailing the amount of income paid by the accumulation unit fund(s), so you can use this when sorting out your tax affairs.

A simple way to avoid the income eating into your age allowance is to hold the funds in ISAs, as ISA income does not count towards the age allowance. I appreciate you may already be fully using your annual ISA allowance (£11,280) but if not you could sell funds and repurchase within a stocks & shares ISA. However, bear in mind that selling funds may trigger gains, so be careful not to exceed your annual capital gains tax (CGT) allowance of £10,600 if you want to avoid paying tax. Note: when selling accumulation units make sure you deduct all the income received (via higher unit prices) to avoid being double taxed.

Another option is to hold growth funds and strip out gains as an income. Provided you stick within your CGT allowance the gains will be tax-free, although this is obviously a higher risk strategy as whereas income tends to be fairly consistent gains are unfortunately less so.

I suppose the problem will be reasonably short lived in any case given the Government is effectively abolishing the age allowance by freezing it at current levels and accelerating personal allowance increases .


Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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