Acc Equalisation - AJ Bell

DairyQueen

I just checked my AJ Bell SIPP and noted that they are reporting an increase in the cost of funds I purchased in October last year.

After a little snooping around I found transactions dated 31st May. They appear to relate to equalisation of Acc units.

The funds (all Vanguard) went ex div on 1st April with a pay date of 31st May.

In each case the accumulation distribution value is higher than the equalisation value. The difference between the two values has, in the case of each fund, been added to the 'cost' of purchase on the portfolio summary page. The number of units is unchanged.

Having just read-up about this, I understand that equalisation of Acc units in a SIPP is not material to the fund performance. I'm at a loss to understand why AJ Bell have added this figure to the cost of purchase. I thought that equalisation was about the tax treatment of capital versus income if you bought between two dividend dates, and sometimes this required a 'return of capital'. If this is the case why has my purchase cost increased rather than decreased?

I knew zero about equalisation until around an hour ago so chances are that I'm misunderstanding the whole concept. Could anyone enlighten me please?

ColdIron

No I think you've got the hang of it pretty much, well done. I think different platforms will handle this differently but it's just a display thing, you wouldn't base your tax return on it. For instance I think that Charles Stanley Direct call this 'tax cost' in an attempt to more clearly present gain through growth without accumulated income. I haven't looked at their figures in detail for a while but my recollection is that they add the dividends to your base cost and deduct the equalisation. You are seeing a net increase because the income exceeded the equalisation in this case. AJB are probably doing something similar, I wouldn't get hung up about it, they are just trying to being helpful, treat it as advisory

londoninvestor

DairyQueen wrote: »

In each case the accumulation distribution value is higher than the equalisation value. The difference between the two values has, in the case of each fund, been added to the 'cost' of purchase on the portfolio summary page. The number of units is unchanged.

If you hold accumulation funds outside a SIPP or ISA, the difference between the distribution value and the equalisation value is subject to income tax as a dividend. For CGT purposes, that dividend is then treated as being reinvested in the fund, so it adds to the purchase cost. (That's in your favour and ensures the same return is not subject to both income tax and CGT.)

Not relevant if it's in a SIPP or ISA of course, since there is no CGT. At least AJ Bell are giving you the calculation that would be right for your CGT calculation if this were an unwrapped account - unlike HL who do it wrong for all accumulation funds in all accounts. (But I'm sure I've bored on about that on another thread...)

londoninvestor

ColdIron wrote: »

I haven't looked at their figures in detail for a while but my recollection is that they add the dividends to your base cost and deduct the equalisation.

The right treatment from a CGT perspective is:

• Accumulation funds: add dividend to base cost, ignore equalisation
• Income funds: ignore dividend, subtract equalisation from base cost
• Then for offshore funds, do the above and add excess reportable income to base cost

DairyQueen

Thanks both for the helpful info. It's comforting to know that I can ignore the revised 'cost' figures. The only nuisance factor being that the fund performance now reported on Youinvest is incorrect.

jsinc

https://forums.moneysavingexpert.com/discussion/2370299/cgt-calculation-for-accumulation-units

bowlhead99

DairyQueen wrote: »

Thanks both for the helpful info. It's comforting to know that I can ignore the revised 'cost' figures. The only nuisance factor being that the fund performance now reported on Youinvest is incorrect.

It's not really 'incorrect' though, depending on the purpose for which you're using the data. If I'm understanding what you're saying, it is showing you what the fund is now worth compared to the total of [what you had originally invested in cash plus what income has been received and invested]". Effectively an unrealised gain calculation at a snapshot point in time. Yes your 'costs' are no longer your exact cash contributions but for many people such contributions have likely happened over a variety of dates and the only way you get to see what you put in when (to perform meaningful growth analysis) is by looking at your cash statements anyway.

But the measure of success of your portfolio is not what unrealised gains you are sitting on. If you had sold everything and replaced with new assets tomorrow, all those new assets would appear to have zero performance during your ownership, but that wouldn't tell you if they are the right things to hold. The measure of whether your SIPP is allocated in line with your objective is whether you hold enough or too little or to much of each asset, by comparison with your model (target) allocation.

Not whether something is up by 30% because you held it a long time, while something else is only up 28% because they increased your cost basis for you when auto investing the dividend internally in the fund, and something else is only 10% up because you only had it a short time, and something else is only 5% up because you added some more to it last week at current prices and diluted the apparent gains.

Really your overall performance across your entire portfolio is what you have put into the SIPP when, vs what the SIPP is now worth. For individual fund-level performance, the current price vs your purchase price is largely irrelevant (as it will be dragged around by quirks such as whether you happened to buy it at a fortuitous time or how recently you added to it). You can look at the fund on an independent website to see how it has *actually* performed in particular periods without being distracted by what you happened to pay on the dates that you happened to be a buyer.

What shows on your personal stockbroker or fund platform's website is just a distraction, a quick and dirty ready reckoner, and can lead to emotion-based investing if you take it too seriously. As such, doesn't really matter if it's off by a few percent here and there over multi year periods. Perhaps its best use is for the occasional simplistic tax calculation as a rule of thumb before you do the real calcs. In that sense perhaps it's useful if AJ Bell do take proper account of the internally re invested dividends that can be added to your cost base for CGT calcs. If using a SIPP where there are no CGT docs anyway, that's not a concern. So if you don't like the way AJ Bell do the tracking you can do it your own way on an independent spreadsheet or piece of paper. Then you can use all the tools you might actually want for investment appraisal - IRR, holding period, cash multiple, volatility etc - none of which the typical fund platforms choose to record or publish for you within your account.

DairyQueen

Thanks for your usual sound advice BH. It threw me to see the 'cost' of my funds suddenly increase but it provided an opportunity to learn about equalisation.

I'm using trustnet and spreadsheets to consolidate management of the portfolio but have found it helpful to do a quick reconciliation to each platform/wrapper's valuation. There have been other corporate actions that needed to be added to the consolidation so I tend to keep an eye on platform detail.

Going DIY has definitely kept the grey cells bubbling. It's been a steep learning curve but I now feel confident that I understand the basics and, hopefully, I'm prepared for the next market crash.

bowlhead99

DairyQueen wrote: »

I'm using trustnet and spreadsheets to consolidate management of the portfolio but have found it helpful to do a quick reconciliation to each platform/wrapper's valuation. There have been other corporate actions that needed to be added to the consolidation so I tend to keep an eye on platform detail.

The key point there is each platform's *valuation*. Not the cost, which is historic and not relevant for decision making anyway.

As you mention, the equalisation process didn't change your number of units so the valuation shouldn't be anything other than what you expected it to be. It's only the cost which is being presented on a different basis to be more useful for your capital gains tax reporting (if you were doing gains tax reporting, though in this type of account, you're not)

Going DIY has definitely kept the grey cells bubbling. It's been a steep learning curve but I now feel confident that I understand the basics and, hopefully, I'm prepared for the next market crash.

Good luck with that... it probably takes going through a few crashes, to accept them!