Investment funds pools the capital of many individual investors to invest in one or more types of underlying financial securities. In the UK, investment funds are either open-ended investments companies (‘OEICs’) or Unit Trusts.
Investment funds typically hold shares (which pay dividends), bonds (which pay interest) or a mixture of both. These dividends / interest payments are forms of income. The type of share (in the case of OIECs) or unit (in the case of Unit Trusts) you hold determines how this income is treated.
With income shares/units, income from the fund is paid out to investors in cash. Investors can use these distributions as an income source or cash could be reinvested in the relevant fund or elsewhere. Distributions from income shares/units will be treated as taxable income, unless the investment was held within a tax-free wrapper (E.g. Stocks and Shares ISA).
With accumulation shares/units, no income is paid out to investors in the fund. Instead, all income is retained within the fund and reinvested. This has the effect of increasing the price of the units in the fund. Whilst investors are unable to draw an income from these shares/units, they will benefit from a capital gain on disposal of their shares/units. Upon sale of the shares, the capital gain would be subject to capital gains tax, unless the investment was held within a tax-free wrapper (E.g. Stocks and Shares ISA).
Buying accumulation shares/units is generally more convenient and cost effective for investors who intend to reinvest any income distributions.