Help understanding equalisation units & accumulation distrubution

londoninvestor

simoneva wrote: »

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.

Are we perhaps using terminology differently?

So in my terminology, my holding might "pay out" (not literally pay, because it's an accumulation unit) a total £170, of which £120 is dividend and £50 is equalisation.

Then I owe dividend tax on £120, and my CGT cost basis has gone up by £120.

But perhaps in your terminology, you'd see this as a "dividend" of £170, and the equalisation of £50 has to be deducted to get the amount that is relevant for tax?

simoneva

londoninvestor wrote: »

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.

True but these are two separate transactions. Technically the reinvested dividend does not adjust the purchase price but is added to the total capital invested on the date the dividend is paid.

londoninvestor

simoneva wrote: »

True but these are two separate transactions. Technically the reinvested dividend does not adjust the purchase price but is added to the total capital invested on the date the dividend is paid.

True, "base cost" is a more precise way to describe it than "purchase price". The base cost is built up over multiple transactions, which can be both purchases and dividend reinvestments.

simoneva

londoninvestor wrote: »

Are we perhaps using terminology differently?

So in my terminology, my holding might "pay out" (not literally pay, because it's an accumulation unit) a total £170, of which £120 is dividend and £50 is equalisation.

Then I owe dividend tax on £120, and my CGT cost basis has gone down by £120.

But perhaps in your terminology, you'd see this as a "dividend" of £170, and the equalisation of £50 has to be deducted to get the amount that is relevant for tax?

As I see it (and I may be wrong so feel free to correct!)....

Units are bought just before ex-dividend date at 10. This falls to 8 plus 2 cash. Same for income and accumulation units. Equalisation is 2. So we adjust the base price to 8.

For income units we now have base price 8 plus 2 cash dividend.

For accumulation units we have base price 8 plus 2 dividend reinvested so total value 10. Hence as Tom said this offsets the equalisation.

When I come to look at my statement from the broker in 5 years time it shows a list of dividends including 2 for the first dividend. I am saying it is simpler to just add up investments+dividends-equalisation to get base price. This means you treat all dividends the same rather than offsetting; and the calculation for income and accumulation units is the same. This is simpler to understand. Same result I think.

londoninvestor

simoneva wrote: »

When I come to look at my statement from the broker in 5 years time it shows a list of dividends including 2 for the first dividend.

OK, got you. So if I had a payout of 2, and all of it was equalisation*, then HL would show me "dividend 0, equalisation 2". So I'd know that my dividend tax was 0 and my cost basis remains at the 10 that I paid.

You're saying that in the exact same scenario, your broker shows you "dividend 2, equalisation 2"? In which case, yes you need to do some subtraction to get to your tax position. Whereas I can completely ignore "equalisation 2" because in some sense HL have done the arithmetic for me.

This is what I was getting at in post #16 when I talked about X, Y, and X-Y.

* This wouldn't actually happen, even if you bought just before the ex-dividend date, because effectively the equalisation is averaged across all accumulation units in the fund that have been bought since the previous ex-div date. Those are the "Group 2 units" that masonic talks about in post #3.

londoninvestor

simoneva wrote: »

For income units we now have base price 8 plus 2 cash dividend.

I've only talked about accumulation units so far. But to clarify in this example for income units, in my (and HL's) terminology, that wouldn't be a cash dividend of 2 - it would be a cash payout of 2, comprising 0 dividend and 2 equalisation.

I agree that the base price is 8.

simoneva

londoninvestor wrote: »

OK, got you. So if I had a payout of 2, and all of it was equalisation*, then HL would show me "dividend 0, equalisation 2". So I'd know that my dividend tax was 0 and my cost basis remains at the 10 that I paid.

You're saying that in the exact same scenario, your broker shows you "dividend 2, equalisation 2"? In which case, yes you need to do some subtraction to get to your tax position. Whereas I can completely ignore "equalisation 2" because in some sense HL have done the arithmetic for me.

This is what I was getting at in post #16 when I talked about X, Y, and X-Y.

* This wouldn't actually happen, even if you bought just before the ex-dividend date, because effectively the equalisation is averaged across all accumulation units in the fund that have been bought since the previous ex-div date. Those are the "Group 2 units" that masonic talks about in post #3.

Ah maybe you are right. Actually I use HL but only income funds. Reading this thread is reminding me why I did that!

londoninvestor

simoneva wrote: »

Ah maybe you are right. Actually I use HL but only income funds. Reading this thread is reminding me why I did that!

OK, so if you use HL, and your funds are all income units, here's how to see it.

Go to "Stocks", click on the fund in question, then click the "Income History" tab. For each dividend date you'll see:

• a line item "UT Cash Payment" - this represents the dividend (in my terminology) and is the amount you need to pay income tax on
• a line item "Eql - UT Cash Payment" - this represents the equalisation

Note that the cash you've received is the total of those two numbers.

You'll also see that if from the "Stocks" tab you click on the fund in question, there will be a transaction called "Corp A" which reduces the base cost by the amount of the equalisation.

If you want to see that data across all funds, you can get there through the "Transaction History" tab too.

For accumulation units, HL in my view doesn't present the information so well, which perhaps makes your point for you You get what you need after the end of the tax year, but it's not so clear within the year.

simoneva

Hm. Have I got this right? I thought the equalisation was taxed as a capital gain by deducting from the purchase base cost.

For income tax I state the "dividend paid" figure on the annual statement.

For CGT I match equalisation transactions to the purchases to get my base cost. Can't do it exactly because the equalisation can appear 12 months later and there may be multiple purchases! So I estimate - not expecting HMRC to audit and if they did it would not be significantly wrong. I deduct the equalisation from the purchase price.

Tom99

simoneva wrote: »

Hm. Have I got this right? I thought the equalisation was taxed as a capital gain by deducting from the purchase base cost.

That is correct for Inc Funds but not for Acc Funds where you ignore the equalisation (or deduct it then add it back)