Accumulation units and excess reportable income

Q: What mistakes should I avoid?

Leaving accumulated income off the return. The income is taxable even though no cash is paid, and HS284 ties the cost addition to income that is subject to Income Tax. Forgetting the addition on sale. Using only the original purchase price overstates the gain by the total of all notional distributions or reported excess income. Adding cash distributions to cost. IFM13373 is clear that sums actually distributed are ignored for base cost purposes. Using the wrong tax year for excess reportable income. The excess is treated as arising on the fund distribution date, six months after the period end, which often falls in a later tax year than the period itself. Once the base cost is right, the gain is calculated in the normal way, as described in how Capital Gains Tax is calculated. If HMRC opens a check into your return, tax investigation insurance pays your accountant's fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

When a fund keeps your share of its income and reinvests it instead of paying it out, you are still taxed on that income, and the amount taxed is then added to the Capital Gains Tax base cost of your holding. For accumulation units in UK authorised funds this is the notional distribution; for offshore reporting funds it is the excess reportable income. Leaving these additions out of the computation is one of the most common reasons investors overpay Capital Gains Tax when they sell.

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What is a notional distribution on accumulation units?

Many unit trusts and open ended investment companies offer income units, which pay out the fund’s income, and accumulation units, which do not. HMRC’s helpsheet HS284 explains that if you hold accumulation units the income is retained and reinvested automatically for you, which it calls a notional distribution. You do not receive any new units, but the value of your existing units is increased.

The fact that no cash reaches you does not stop the income being taxable. HMRC’s Investment Funds Manual at IFM03350 says that for an investor within the charge to income tax, dividend distributions from an authorised fund are treated in the same way as any other UK company dividend, and interest distributions are treated as interest. Since 6 April 2017 no tax is deducted from interest distributions. The fund manager’s annual tax voucher shows the amount accumulated for each unit, split between dividend and interest where relevant, and that figure goes on your tax return for the year. How it is then taxed depends on your other income, which is covered in our guide to how savings and dividend income stack.

Accumulation units are different from income units held in a reinvestment plan. CG57706 explains that where income units are bought through a regular saving scheme and the income is reinvested in new units, those new units are normal acquisitions. Their cost goes into the holding as a purchase in its own right, not as an addition to existing units.

Why does the notional distribution increase my base cost?

Without an adjustment you would be taxed twice on the same money: once as income in the year it was accumulated and again as part of the gain when you sell, because the reinvested income is reflected in the price of the units. HS284 deals with this directly. If you receive notional distributions that are subject to Income Tax, you are allowed the amount of those distributions as additional expenditure on your accumulation units.

CG57707 confirms that the notional distribution is treated as allowable expenditure where it is subject to Income Tax in the hands of the unit holder, and that this applies to both UK resident and non UK resident trusts. The addition follows the income charge, so the figure added should match the figure returned, or that should have been returned, as income.

HS284 also confirms that units in a unit trust are treated as if they were shares in a company, so the normal share identification and pooling rules apply. The general rules on what can be deducted are in our guide to allowable costs for capital gains.

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What is excess reportable income from an offshore fund?

Offshore funds that want UK investors to be taxed on gains as capital rather than income can apply for reporting fund status. HMRC’s guidance at IFM13310 explains that UK investors pay income tax on offshore income gains when they dispose of interests in non reporting funds, but Capital Gains Tax on gains from interests in reporting funds.

A reporting fund must make a report to its participants for each reporting period under regulation 94 of the Offshore Funds (Tax) Regulations 2009 (SI 2009/3001). IFM13326 explains that the report includes the sums actually distributed and the excess of the fund’s reported income over those distributions. That excess is what investors and advisers call excess reportable income.

For a fund that is not transparent for income purposes, such as an offshore open ended investment company, the excess is treated as an additional distribution to participants in proportion to their rights (regulation 94(1)).
For a transparent fund, such as certain unit trusts, the excess is treated as additional income of the participants (regulation 94(2)).

The excess is treated as made on the fund distribution date, which is six months after the last day of the reporting period, to participants who held an interest at the end of the period (regulation 94(4)). That date decides the tax year in which the income is returned. IFM13373 states that the excess is charged to tax under section 397A ITTOIA 2005, in the same way as sums actually distributed.

Reports sometimes arrive late. IFM13326 says that where a report is issued more than six months after the period end, taxpayers should already have included their best estimate of the excess and may need to amend their returns when the actual figures arrive. Our guides on estimated figures on a tax return and amending a tax return cover the process.

How does excess reportable income change the gain when I sell?

Regulation 99 prevents the double charge. IFM13372 explains that any sums specified under regulation 94 are treated as expenditure on acquiring the asset, allowable under section 38(1)(a) TCGA 1992. The expenditure is treated as incurred on the fund distribution date for the period concerned.

Two further points follow from IFM13372 and IFM13373:

Sums actually distributed to you are ignored when calculating base cost. Only the reported excess is added.
If an amount chargeable as income is received, or treated as received, after you have disposed of the interest, it is treated as received immediately before the disposal for the purposes of regulation 99, so it still counts towards the cost.

What does a worked example look like?

HMRC’s own example at IFM13373 shows the effect. Liz, a UK resident, bought 10,000 units in a Guernsey open ended investment company for £2.50 each and later sold them all for £4.50 each, receiving £45,000. The fund distributed 25% of its income and accumulated the rest, reporting the accumulated excess to investors each year. Over her period of ownership the reported excess totalled £9,060.

Item	£
Acquisition cost of units	25,000
Total accumulated reported income	9,060
Total base cost	34,060
Sale proceeds	45,000
Gain before reliefs (our arithmetic)	10,940

Without the addition, the gain would have been £20,000, and Liz would have paid Capital Gains Tax on £9,060 that had already been taxed as income.

Illustration only. The same logic applies to UK accumulation units. Suppose you buy accumulation units for £10,000 and your tax vouchers show notional distributions of £300, £320 and £350 over three years, each returned as income. If you then sell for £13,000, your cost is £10,970 and the gain is £2,030, not £3,000. The gain is then reduced by any annual exempt amount available.

How do equalisation amounts fit in?

When you buy into a fund part way through a distribution period, part of the price you pay represents income the fund has already earned. CG57705 explains that an equalisation payment is added to the cost of new units to reflect this, and is returned to the buyer with the first distribution. HMRC’s view is that this payment is not income and is not a capital distribution. It is a return of part of the price paid and should be deducted from the cost when computing the gain on the eventual disposal.

For offshore reporting funds the treatment depends on whether the fund operates full equalisation. IFM13328 and IFM13372 explain that where the fund reports equalisation to investors, the investor can deduct the equalisation amount from reportable income and must deduct it from the purchase price in the later gain computation. In HMRC’s example, Kofi bought 50 units at £12 each with an equalisation amount of £2 per unit and redeemed them at £18, giving a gain of £8 per unit rather than £6. Where the fund does not report equalisation, there is no deduction from income and no deduction from cost.

What records should I keep?

The additions to cost can be large over a long holding period and the evidence sits with the fund, not with HMRC. Keep:

every annual tax voucher for UK accumulation units, showing the amount accumulated per unit;
every annual report from an offshore reporting fund, showing the excess reported income per unit and the reporting period;
contract notes for each purchase, including any equalisation shown on the first voucher;
copies of the tax returns on which the income was declared, which support the claim that the income was charged.

What mistakes should I avoid?

Leaving accumulated income off the return. The income is taxable even though no cash is paid, and HS284 ties the cost addition to income that is subject to Income Tax.
Forgetting the addition on sale. Using only the original purchase price overstates the gain by the total of all notional distributions or reported excess income.
Adding cash distributions to cost. IFM13373 is clear that sums actually distributed are ignored for base cost purposes.
Using the wrong tax year for excess reportable income. The excess is treated as arising on the fund distribution date, six months after the period end, which often falls in a later tax year than the period itself.

Once the base cost is right, the gain is calculated in the normal way, as described in how Capital Gains Tax is calculated.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.