Help understanding equalisation units & accumulation distrubution

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?

londoninvestor

IanManc wrote: »

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.

@IanManc, were your dealings with HMRC perhaps before 2008?


Since 2008 (i.e. for a disposal in the year 2008-9 or afterwards), there isn't really the concept of different cohorts of shares with different base prices. All your holdings of the same share comprise the same pool (a "section 104 holding") and the base cost of a disposal is the average cost of acquisition of the pool. You don't need to treat different parts of your holding as having different cost prices - nor indeed do you have the choice to, even if it would be to your advantage.


It might be more complicated though if you acquired some units in the 30 days after selling others.


And all that said - with accumulation funds you don't acquire any more units on a dividend date. The dividend (and equalisation) simply remain inside the existing units. And that would tie to Rich99 seeing 0 units, but some non-zero GBP amount on the broker statement.


As bowlhead99 says, the dividend on accumulation funds is taxable as income tax, and potentially reduces your CGT by being added to the cost basis of the holding. The equalisation simply washes out, both economically and tax terms.


(For income units on the other hand, equalisation is a real cashflow that comes back to you, and you need to deduct it from your cost basis accordingly, and potentially end up paying more in CGT.)

Rich99

Blimey this has got complicated! I'm almost at the point where I'll just accept that I don't understand it, and can live with that fact (in response to a Q above, yes, its an ISA). However I'd like to have 1 more stab at explaining what I don't get:

In various places you've explained it as things being re-invested (because it's an Acc fund) or re-valued to compensate for having bought into things halfway through the dividend period. That's fine. What I don't get is that nothing has actually changed. I still paid the same amount of money (nothing has appeared back in the Isa), and I still have the same number of units.

The only thing that can possibly change is the value of the units - so is it simply a reflection of some underlying changes made in the value of the units?

londoninvestor

If you think of your accumulation unit as a "box", it contains mostly shares, and a bit of cash. Those both contribute to its total value.

During the year*, those shares will pay dividends, so that box will have a bit more cash and that too forms part of its value. Conversely, the fund manager will at times buy some more shares with surplus cash. At the end of the year, as you say, you still have the same number of units.

This so far is all in line with your understanding. And that would be the whole story - if it wasn't for dividend tax.

HMRC requires you to pay tax on the dividends that came into that unit while you owned the unit, even though they have never come as a cashflow out of the "box" into your bank account. If you owned it at both the start and the end of the year, then the tax is due on the amount X of all the dividends that arrived during the year - the fund manager will tell you how much.

But, if you bought that unit part way through the year, that amount X needs to be split (and again it's the fund manager's job to do so) so as to exclude the amount Y of dividends that came in before you bought - because you don't pay tax on those. You didn't meaningfully receive them, they were just there when you arrived to buy that unit.

Y is the equalisation on your statement, and X-Y is the dividend you need to pay tax on. Ideally the "accumulation distribution" number on your statement would be X-Y, but I suppose the broker could also report X and expect you to calculate X-Y. (HL reports X-Y as "dividend" and Y as "equalisation", but I'm not sure about YouInvest.)

The only number that you ever need to actually use is X-Y.

Income units don't work quite the same, because in that case the cash is actually paid to you out of that "box", and you do need to care about both X-Y (for income tax) and Y (for CGT). But hopefully that helps as far as accumulation units are concerned.


* Assume for the sake of this discussion that the fund accounts for its dividends once a year. It's often 6-monthly or quarterly, but the principles are the same.

Rich99

Got you - I think I now understand as much as I need to!! Thanks!

simoneva

Tom99 wrote: »

[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]

You can't ignore equalisation. You have to deduct it from your purchase price. When you sell the amount relevant for CGT is increased by the equalisation payments so you pay tax on it. And the dividend payment on an "acc" unit is not added to the purchase price. It is taxed as income just like any other dividend on income units.

londoninvestor

simoneva wrote: »

You can't ignore equalisation. You have to deduct it from your purchase price. When you sell the amount relevant for CGT is increased by the equalisation payments so you pay tax on it.

Correct for income units; not correct for accumulation units.

In the case of accumulation units, the equalisation is a wash, as Tom99 explained in post #11 - your equalisation amount is reinvested in the fund. So let's say your equalisation is £5. The £5 "return of capital" would decrease your cost by £5, but it's exactly offset by the reinvestment of that money, which increases your cost by £5. Net effect zero.

londoninvestor

simoneva wrote: »

And the dividend payment on an "acc" unit is not added to the purchase price. It is taxed as income just like any other dividend on income units.

It is taxed as dividend income, but it is also added to the purchase price, because you've reinvested it and not taken it as cash.

simoneva

londoninvestor wrote: »

Correct for income units; not correct for accumulation units.

In the case of accumulation units, the equalisation is a wash, as Tom99 explained in post #11 - your equalisation amount is reinvested in the fund. So let's say your equalisation is £5. The £5 "return of capital" would decrease your cost by £5, but it's exactly offset by the reinvestment of that money, which increases your cost by £5. Net effect zero.

I think we are ending up with same numbers but the offset method above is over complex. If you ignore the equalisation then you also have to ignore the first dividend payment. It is much easier in a few years when you are calculating the base price to just add up all the dividends invested and deduct equalisation. This calculation will also be the same for both income and accumulation shares.