ACC OEIC fund equalization

itwasntme001

If i bought a bunch of ACC funds, say vanguard, baillie gifford, fundsmith, legg mason etc, do i need to worry about whether the equalization was done properly within the first year since purchase?


Lindsell train is INC only but i never received any equalization payments for this fund within the first year of purchase, should i have?


Just worried my broker did not do things properly with regards to this.

Linton

You dont get extra income from equalisation. The first dividend is split during the tax calculation, between equalisation (return of capital) and dividend. You should see how much of the dividrnd was equalisation in the annual tax statement. It applies to Acc funds as well.


If you put the funds in a ISA or pension you dont need to worry about such matters.


I would be very surprised if any mainstream platform was not fully au fait with equalistaion. If they werent I am sure HMRC would put them straight.

itwasntme001

Linton wrote: »

You dont get extra income from equalisation. The first dividend is split during the tax calculation, between equalisation (return of capital) and dividend. You should see how much of the dividrnd was equalisation in the annual tax statement. It applies to Acc funds as well.


If you put the funds in a ISA or pension you dont need to worry about such matters.


I would be very surprised if any mainstream platform was not fully au fait with equalistaion. If they werent I am sure HMRC would put them straight.

Understood, so for the ACC funds, it would just get reinvested whether actual dividends or return of capital and if not in an ISA, i would need to worry about the cost base and dividends being correctly calculated according to this split between dividends and return of capital?


For Lindsell train i never received any equalization payment, just pure dividends (according to broker transaction history) - can i assume the dividends i got includes a part that is the return of capital or should i have received a separate amount for the equalisation?

bowlhead99

itwasntme001 wrote: »

If i bought a bunch of ACC funds, say vanguard, baillie gifford, fundsmith, legg mason etc, do i need to worry about whether the equalization was done properly within the first year since purchase?

You should assume the equalization was done properly by the fund house. There is no reason to suspect that the whole bunch of fund managers all got it wrong. They have hundreds of thousands of investors between them.

The way fund equalization works is:
Say a fund share was valued at 100p at the start of the year and 105p at the end, and all of that valuation growth was due to the fund receiving 5p of dividends from its investee companies. With no growth of underlying asset values to confuse matters. That 5p will generally get distributed to the fund's investors at end of year, because the fund is supposed to distribute all its income.

If you buy in between dividend points (say 60% of the way through the period), you might need to pay 103p to buy your shares, instead of 100p at the start of the year, because some dividends have already been earned by the fund and the fund is sitting there with a bunch of cash in the bank at the time you want to buy in for a share in all of its assets. The 3p earned by the fund so far is not your taxable income; the income belongs to the people who were in the fund at the time the income happened. You have paid for your share of the bank account when giving them the 103p per share. You only start to earn taxable income from the point you buy the fund shares.

At the time a distribution is made at the end of the year, for (e.g.) 5p a share, they will give you the 5p a share cash just like they give everyone else 5p of cash... but as an owner of 'new shares', part of the cash they are giving you is not income for you, it is instead a return of part of your initial capital investment. So you would get told on a tax voucher that the 5p represents (e.g.) 2p of income and 3p of equalisation money, and the equalisation money reduces your cost per share down from 103p to 100p. It has effectively stripped out the 'purchased' income and given it back to you in cash so that you are left with just the underlying assets in the fund, not the pile of cash, for a lower cost than you'd originally seen on your contract note.

However, for ACC funds you have already told them you don't want any cash payments. So the 3p they were going to give back to you to reduce your cost of investment down to 100p is reinvested in the fund, increasing your cost of investment to 103p again, back where you started. And the 2p of income they were going to give you is also reinvested in the fund, so now your cost of investment in the fund is 105p, because the fund used 2p of your taxable income to buy more underlying investments for you.

I can't see any obvious reason why the equalization in the ACC funds would not be done 'properly' by the fund manager, but as equalisation in ACC funds is an 'in and out' (i.e. they simultaneously give you your money back and then reinvest that money, for nil effect on your investment cost and no cash changing hands), there doesn't seem to be much to worry about.

Obviously you have to hope that what they told you was taxable income (reinvested) for the first year [2p in the above example] was really correct, as you will not see it in cash, only on your tax statements, and you do need to increase your investment cost for tax purposes by that 2p.

Lindsell train is INC only but i never received any equalization payments for this fund within the first year of purchase, should i have?

Just worried my broker did not do things properly with regards to this.

For Lindsell train i never received any equalization payment, just pure dividends (according to broker transaction history) - can i assume the dividends i got includes a part that is the return of capital or should i have received a separate amount for the equalisation?

Generally there is equalisation on most INC funds but depending on timing and how many net new subscribers they got in the year, there may not be much.

Are you sure you never received any equalisation payments or could they have been itemised within the dividend voucher and you didn't think to check? With most platforms the associated cash will typically arrive in your cash account in one lump, even if it represents both divs and equalisation.

Otherwise perhaps it could be the case that this LT fund (if it is one of their non-UK ones) does not run an equalisation process.

itwasntme001

Thanks Bowlhead - according to the tax statement there was nothing (for Lindsell Train Global) that was part of equalization - all the income i received is part of dividends. So i can only assume Lindsell Train Global do not have an equalization process. If it does however, then either the tax statement is incorrect or i did not actually receive equalization so i have been short changed.

Linton

itwasntme001 wrote: »

Understood, so for the ACC funds, it would just get reinvested whether actual dividends or return of capital and if not in an ISA, i would need to worry about the cost base and dividends being correctly calculated according to this split between dividends and return of capital?

You would not need to worry about it, just use the numbers given by the platform. The equalisation part is treated as return of capital and so not subject to tax and the rest is a standard taxable dividend.

For Lindsell train i never received any equalization payment, just pure dividends (according to broker transaction history) - can i assume the dividends i got includes a part that is the return of capital or should i have received a separate amount for the equalisation?

You can assume that it is all included in the standard dividend as long as the dividend you received matches the divi rate X number of units. Equalisation doesnt have any physical reality, its a concept solely used for tax calculations.


NOTE for those who want to know what equalisation is....


Dividends are added to the fund continuously but only taxed when they are paid out to unit holders, for the sake of the explanation, once a year. So say you bought the fund 6 months into the tax period. The first dividend you receive 6 months later will include all dividends the fund has received in the previous year but you only held the fund for the second 6 months. It would be too difficult to pay different dividends to different people and impossible for ACC funds. So should you be taxed on dividends received when you did not hold the fund?



The dividends received before you bought the fund are classified as "equalisation" and the rest as taxable dividends. The value of the equalisation is included in the unit price as soon as the dividend is received so it is part of what you bought and is simply being returned to you from capital. It is therefore non taxable.

bowlhead99

itwasntme001 wrote: »

Thanks Bowlhead - according to the tax statement there was nothing (for Lindsell Train Global) that was part of equalization - all the income i received is part of dividends. So i can only assume Lindsell Train Global do not have an equalization process. If it does however, then either the tax statement is incorrect or i did not actually receive equalization so i have been short changed.

You will not have been short changed if you received the same amount of cash distribution as everyone else on that date. You can find the distribution and equalisation figures on LT's website.

Tom99

bowlhead99 wrote: »

You only start to earn taxable income from the point you buy the fund shares

I thought the equalisation/dividend split was the average of every buy in the dividend period not a personal calculation so if you bought the day before the ex-div date you will still end up with taxable dividend income, say a 50/50 split for a frequently traded fund?

bowlhead99

Tom99 wrote: »

I thought the equalisation/dividend split was the average of every buy in the dividend period not a personal calculation so if you bought the day before the ex-div date you will still end up with taxable dividend income, say a 50/50 split for a frequently traded fund?

You are right of course, but when explaining it to someone who is not familiar with the process it is easier to simplify the concept, and imagine that you have a period when you 'didn't earn the money' before you bought in, and then you buy in at a relative high price which includes that 'bought income', and then get some of it back as an equalisation payment when everyone else gets their 'properly earned' income. That's why the process exists.

In reality, most funds will just add up all the shares that don't qualify for the full period's dividend payment, and average them all out - so that on a fund paying dividends semiannually, the guy with 90 days ownership gets the same mix of dividend and equalisation return as someone with 30 days ownership or 150 days ownership etc. The mix is rarely actually 50:50 because it does depend how many 'shares that didn't qualify for the full payment' are actually in issue.