Help understanding equalisation units & accumulation distrubution

Rich99

Hi, I've just started dabbling in investments, via a youinvest account, and have bought some Acc fund shares. I've got 2 entries on my account that I don't understand - Equalisation Acc Units, and Accumulation Distribution. Both have 0 units, but a value in GBP. Having googled, I'm not really any the wiser. Can anyone explain it to me in simple terms? What are these, and why are they 0 units?

ColdIron

Essentially you have paid for the dividends accrued so far from the underlying holdings because you bought between ex-dividend dates. This is reflected in the increased unit price. It would be unfair to expect you to pay tax on these so that money is returned to you as a 'return of capital' or equalisation payment. Dividends from the underlying holdings that accrue since your purchase will be distributed as a dividend to you. If you don't purchase any more of the fund you won't get any more equalisation payments and all distributions will be dividends. If you do buy more you'll probably receive another split of equalisation/dividends for the new purchase on top of the dividends from your original purchase

masonic

Funds invest in underlying shares, some of which pay dividends, so the fund collects all of that income over a period and periodically declares its own distribution. A consequence of this is that when you buy into the fund, unless you buy on its ex-dividend date, there will be some income factored into the price of the units you buy. This income forms part of the next distribution declared by the fund. However, as it was earned before you bought in, you have no entitlement to it as income. Therefore, equalisation results in you receiving a return of capital equivalent to this income (which is equal to the premium you paid to invest in the fund - as this price includes accrued income).

To achieve this, funds have Group 1 and Group 2 units. You initially hold Group 2 units, which are entitled to the same distribution as the Group 1 units, but as mentioned some of the distribution is treated as a return of capital and is therefore not income for tax purposes. With income units, you will see this in your dividend payment, but for Acc units, it's necessary to get a tax statement showing the breakdown. After the first distribution, Group 2 units become Group 1 units and accrue income normally.

Edit: I guess what your provider is showing by those entries is the breakdown of income and equalisation (return of capital) for tax purposes - since your income is reinvested. Hence both are 0 units and you probably haven't received any actual payment.

Tom99

[FONT=Verdana, sans-serif]At the end of the year you will get a tax certificate from Youinvest and in the 1st year after you buy the Acc units, under dividend distributions you will see an 'equalisation' amount and a dividend 'payable' amount.[/FONT]
[FONT=Verdana, sans-serif]You can ignore the equalisation amount but the dividend payable amount needs to be added to your purchase price for CGT purposes and also declared as a dividend for income tax purposes.[/FONT]
[FONT=Verdana, sans-serif]In subsequent year there will only be a dividend payable amount unless you have bought more units in that fund.[/FONT]

Rich99

OK, so I *think* I understand roughly what those things are. But why are they shown if they are 0 units? If they are 0 units, then there's no extra cash in the Isa, and I've not got any extra units of the fund, so what's the practical effect of them?

masonic

Rich99 wrote: »

OK, so I *think* I understand roughly what those things are. But why are they shown if they are 0 units? If they are 0 units, then there's no extra cash in the Isa, and I've not got any extra units of the fund, so what's the practical effect of them?

I covered that bit in my "Edit:" above. I think this is just your platform's way of showing you the breakdown - since your units are Accumulation, this all happens in the internal accounting of the fund.

bowlhead99

IanManc wrote: »

Don't ignore the equalisation amount. It is a return of capital, and so it reduces your acquisition cost for CGT purposes.

Acc fund though?

If it was an Inc fund you would be getting an actual cash distribution. They would be telling you that (e.g.) they are sending you £10 of distribution just like they are sending £10 to every other investor who owns that same number of shares; BUT actually only £4 is the real dividend piece you earned since being in the fund, and the other £6 is money that's being returned to you because when you initially bought in you were paying to buy the assets of the fund which already included the dividends earned up to that point, so now you are getting £10 out, only £4 is taxable dividend income for you and £6 is simply a return of cost.

In that situation you pay your taxes (if necessary) on your £4 income, and the £6 return of cost is kind of like a negative purchase; your acquisition cost is now lower and the cash is back in your hand.

That's an Inc fund.

But in an Acc fund, when they do the same exercise, there is no payout, right? Everything gets reinvested internally within the fund.

The £4 is still taxable income, so you pay your taxes (if necessary) and you record that you have now invested that further £4 into the fund for the purposes of tracking your cost for CGT. Effectively you have received a dividend income payout (income goes up) and redeployed it into the fund (cost of investment goes up). So when you later sell the Fund that you bought for £100 at a sales price of £200, you think - aha, actually I physically paid £100 at first, but then I received £4 income which I had them reinvest for me behind the scenes, so my real cost of what I am selling now is £104, and my capital gain is £200-104 = 96 not 100. If you didn't adjust your cost upwards for the reinvested dividend, you would be paying income tax and capital gains tax on the same £4.

But in an ACC fund, what happens to equalisation payment - that 'return of cost' £6 - which you would have received in cash if it was a distributing fund? You don't get it back in cash, they retain it, just like they retain the dividend income component. So you don't need to reduce your cost base for CGT purposes. Effectively they are saying, remember you bought these shares for £100 earlier in the year, well actually you can have £6 back because you overpaid for the assets, but actually you can't because you said you wanted everything to accumulate with no payouts to you, so we're going to reinvest that £6 for you into more portfolio assets. Your cost is £100 minus the £6 plus the £6 reinvested so it's still the original figure £100.

(Well, the original figure of £100 is now £104 really because it was adjusted upwards for the £4 reinvested dividends, but what I mean is there's no net adjustment up or down for the equalisation piece).

So, not sure why on an ACC fund you would be allowed to reduce your investment cost base down by the amount of the equalisation 'returned' to you, unless your very next step was to increase it back up again by the full amount of those equalisation funds 'reinvested' by you: for nil net effect. As Tom99 said, it's easier just to ignore the equalisation bit if you are using an ACC fund. You can just record the total dividend number as your income and your cost increase, and not do anything with any separate equalisation bit that was declared to you, because you didn't receive it - and if you reduced your cost base for it as a virtual return of cost, you would have to increase your cost base for it as a virtual investment, one second later.

Unless I have the wrong end of the stick somewhere.

masonic

IanManc wrote: »

Having once had my tax returns audited by HMRC and having sat through an inspector going through my CGT computation sheets with a fine tooth comb - and finding nothing wrong eventually - I now no longer have Acc units as the computations I would have to show are too complicated to bother with, and I only have Inc units. And I don't buy or sell often either, because I want a simple life filling in simple forms, and being generally left alone.

I hope I've explained this well enough. :grinheart

So, presumably the equalisation translates to additional Group 1 accumulation units being held by the investor treated as a separate acquisition to the purchase of the Group 2 units? Or is the equalisation paid out even for Acc units?

Tom99

IanManc wrote: »

Hello Bowl! Yes you have got the wrong end of the stick a bit.

I'll clarify what I was saying.

If you have Inc funds then you reduce the base cost of your units by the equalisation you have received.

If you have Acc units you do the same.

Why?

Because if you are holding your units unwrapped - which is the situation we're talking about, and so have to keep records - then when you sell your units you will have to file CGT Pages to HMRC if you have made capital gains above the annual allowance, or if you have sold assets worth more than 4X the annual CGT allowance.

When you show the gain you have made on the units bought with the equalisation payment then you take as the base cost the price they were bought at with the equalisation payment. You have to show your computations.

If you don't deduct the equalisation payment from the base cost of the original units from which the equalisation payment derives then the computation of gain or loss will go wrong, as the equalisation payment will have been used in the base cost of two separate cohorts of shares, which is incorrect.

Having once had my tax returns audited by HMRC and having sat through an inspector going through my CGT computation sheets with a fine tooth comb - and finding nothing wrong eventually - I now no longer have Acc units as the computations I would have to show are too complicated to bother with, and I only have Inc units. And I don't buy or sell often either, because I want a simple life filling in simple forms, and being generally left alone.

I hope I've explained this well enough. :grinheart

[FONT=Verdana, sans-serif]But you then add the equalisation back to your acquisition cost because the sum has been reinvested.[/FONT]
[FONT=Verdana, sans-serif]With an Acc Fund neither the equalisation payment nor the dividend buy more units, you will always have the same number of units you originally bought.[/FONT]
[FONT=Verdana, sans-serif]So using Bowlhead99's example either:[/FONT]
[FONT=Verdana, sans-serif]100 – 6 + 6 + 4 = 104[/FONT]
[FONT=Verdana, sans-serif]Or just:[/FONT]
[FONT=Verdana, sans-serif]100 + 4 = 104[/FONT]

bowlhead99

Tom99 wrote: »

[FONT=Verdana, sans-serif]But you then add the equalisation back to your acquisition cost because the sum has been reinvested.[/FONT]
[FONT=Verdana, sans-serif]With an Acc Fund neither the equalisation payment nor the dividend buy more units, you will always have the same number of units you originally bought.[/FONT]
[FONT=Verdana, sans-serif]So using Bowlhead99's example either:[/FONT]
[FONT=Verdana, sans-serif]100 !!!8211; 6 + 6 + 4 = 104[/FONT]
[FONT=Verdana, sans-serif]Or just:[/FONT]
[FONT=Verdana, sans-serif]100 + 4 = 104[/FONT]

Yes. Where I think the confusion arises is:

If you were investing where equalisation as a concept didn't exist, the total amount appearing on the 'dividend accumulation statement' that we get for the year would be a simple £10 of dividends. We know that we must add our auto-reinvested money onto our initial cash cost of investment to get our true cost base for the CGT calc on disposal... and so some people will learn that as: "In an Acc fund nothing is paid out so the total accumulated amounts off that statement you received have been reinvested on your behalf ; which means you must add on all the accumulation amounts to your base cost to get your allowable CGT cost".

And then actually we do know that the concept of equalisation does exist, and it's easiest to understand with Inc funds where you can see the cash movements, and when we see it in those funds the mantra that we commit to memory is: "Equalisation amounts represent your capital being returned to you, and so when you get the equalisation money back your investments have not really cost as much as your initial cash outlay; which means you must deduct all the equalisation amounts from your base cost to get your allowable CGT cost".

When we find ourselves in a fund that has equalisation (6 equalisation and 4 divs for 10 total 'distributions') AND is accumulating (so we don't physically get any of the 10 'distributions' shown on the voucher).... if we learned the rules exactly as the above... we would say:

i) initial base cost 100

ii) "you must add on all the accumulation amounts to your base cost to get your allowable CGT cost"; OK, add 10, CGT cost now 110

iii) "you must deduct all the equalisation amounts from your base cost to get your allowable CGT cost"; OK, deduct 6, CGT cost now 104


104 is the correct place to be at the end for CGT cost.




However, some people haven't learned it like that because depending what funds they've been using, maybe they never had equalisation amounts before. So in that original fund which didn't have equalisation, where they got 10 of pure dividends accumulated and reinvested on their behalf, instead of "you must add on all the accumulation amounts to your base cost to get your allowable CGT cost", the mantra they have learned is: "you must add on all the accumulated dividend income to your base cost to get your allowable CGT cost"

When they have learned it like that, and they come across the equalising accumulating fund they will say, let's do this:

i) Base cost 100

ii) "you must add on all the accumulated dividend income to your base cost to get your allowable CGT cost"; OK, I can see my accumulated dividend income is 4 so add 4 to my base cost and my CGT cost must be 104

iii) hmm, what next ????

Then a friendly fellow like IanManc will come along and say that HMRC told him he must always deduct equalisation to get to the fair CGT allowable cost, no matter whether it is ACC or INC.

So for point (iii) they might say OK, I was at 104, now I suppose I should deduct 6 to get to 98.

But this leaves them in the wrong place. They're at 98, instead of the correct place of 104 that they had already reached by stage 2 using their method.

The reason they are in the wrong place is because they have taken off 6 for equalisation amount 'returned' to them, and added on 4 for the dividends 'reinvested' for them, but they have not added on 6 for the equalisation amount that was 'reinvested' for them. We know the equalisation amount must have been reinvested, because they never got any cash, as it's not a distributing fund... but it is missing from their calc - it is only coming out and not going back in again.

So they would need to do another stage:

iv) add back reinvestment of equalisation proceeds, £6, taking the £98 up to £104 which is where they were already at, at stage (ii)
- - -
The two methods (100, 110, 104) or (100, 104, 98, 104) amount to the same thing, ultimately reaching an invested cost of 104 for CGT purposes. With the second method you could of course stop at stage (ii) instead of bothering with (iii) and (iv) where (iii) and (iv) are going to be equal and opposite effects.

But I suspect this is why Tom99 would say :-

"In an Acc fund, make sure you add the dividend figure (£4) from your accumulated dividends voucher on to your CGT cost, but you can ignore the equalisation stuff mentioned on the voucher as it is just in and out. The correct figure for CGT is £104".

While IanManc would say :-

"In an Acc fund, make sure you add all the accumulation amounts(£10) from your accumulated dividends voucher on to your CGT cost... but don't forget to deduct the equalisation amount (£6) from your CGT cost otherwise you are double counting £6 of cost (if you claimed £110 as the cost); the correct figure for CGT is £104".

You are getting to the same place.

However I'd be interested if Ian was actually saying that the CGT cost is something other than 104 as then I have clearly misunderstood where you're coming from

AnotherJoe

Is this in an ISA?


Yes - It doesn't matter
No - Why the heck not?