Income funds going ex-dividend?

sairy.gamp

A bit of advice please. I have recently bought into an Income fund that is going 'Ex-dividend' (quarterly) at the end of the month. Will i, as a unit holder on the imminent Ex-div date qualify for the full amount of that quarters dividend or just that payable for the time/days leading up to subsequent payment date that i have been a unit-holder in the fund?
Thank you.

bowlhead99

You would get the full pay-out of the standard £x.xx per share, if you've bought in before ex-dividend date.

However, your shares have not been held for the full period so some of the dividends since the last ex-dividend date were earned by the fund before you bought in - in other words, part of your purchase cost of the fund was just to pay for the income that was already sitting in the fund's bank account. So the full amount of the quarterly dividend wouldn't all count as 'taxable income' to you, because when they make the payout of £x.xx to you, part of what they are giving you is your own money coming back to you, which effectively just reduces the cost of your capital investment in the fund. 

When they make the distribution, although you get the full £x.xx, you will (eventually, perhaps not immediately depending on your platform) get a breakdown showing that it's £y.yy of dividend income and £z.zz of 'equalisation'.  The equalisation payment is reflecting the fact that they need to give all shareholders the same amount of money (so that everyone's share price or net assets per share moves by the same amount on ex-dividend day) but some people actually earned the income and some did not.

For simplicity, as they will have lots of new shareholders who had not held all their shares for the full period and are not going to do a completely personalised calculation for every holder -  they group all the 'new' shares together and apportion the income that was proportionately earned by that capital for the time period, over that number of shares. This means that it might be the case that your new shares were only issued (e.g.) 1 month before ex dividend date, but you get (e.g.) 3 months worth of pro-rata taxable dividend income allocation, while other new shareholders whose shares were issued 5 months ago are also given 3 months worth of income. But the amount of cash you get is same standard amount as everyone else who holds a share as it flips over to start trading 'ex-div' (i.e. the day at which the price no longer reflects entitlement to the forthcoming dividend cash)

lindabea

Thank you Bowlhead99 for this explanation.  I'd like to get a better understanding of the equalisation payment and how this would apply to the so-called group 2 shareholders.  So can I please ask you for some further help?
Prior to the VG LS fund went ex-div in April 20, I had 13 units which I bought in Jan 20;  the div price was 2.88 so I received 37.44.   They also told me that group 2 shareholders receive an equalisation payment of 1.2327.  I presume that I fall into group 2 as I did not hold the units since the previous ex-div date.  So, my question is what to declare for tax purposes - I know in my case there is no tax to pay as the div payment is well below the threshold, but if it was above £2000, how do I work out the div income? Using the figures quoted above as an illustration, and based on what I know so far, I don't think my income is 13*2.88.  I also don't think it is 13*1.2327, so that leaves the possibility of it being calculated as 13*(2.88-1.2327).   Would this be correct, and if I were to buy more units in say Jan 2021, how would this affect the equalisation payment declared in April 2021. Would it apply to all units or just the units purchased since the last ex-div date with (in my case), the original 13 units receiving the div payment as income only.

bowlhead99

lindabea said:

Thank you Bowlhead99 for this explanation.  I'd like to get a better understanding of the equalisation payment and how this would apply to the so-called group 2 shareholders.  So can I please ask you for some further help?
Prior to the VG LS fund went ex-div in April 20, I had 13 units which I bought in Jan 20;  the div price was 2.88 so I received 37.44.   They also told me that group 2 shareholders receive an equalisation payment of 1.2327.  I presume that I fall into group 2 as I did not hold the units since the previous ex-div date.  So, my question is what to declare for tax purposes - I know in my case there is no tax to pay as the div payment is well below the threshold, but if it was above £2000, how do I work out the div income? Using the figures quoted above as an illustration, and based on what I know so far, I don't think my income is 13*2.88.  I also don't think it is 13*1.2327, so that leaves the possibility of it being calculated as 13*(2.88-1.2327).   Would this be correct, and if I were to buy more units in say Jan 2021, how would this affect the equalisation payment declared in April 2021. Would it apply to all units or just the units purchased since the last ex-div date with (in my case), the original 13 units receiving the div payment as income only.

You received 2.88 for each unit, which was the amount of cash that everyone else received at that time. 

Vanguard are telling you that £1.2327 of each £2.88075 cash payment represents equalisation for group 2 recipients. So if all of your 13 units fall into the category of group 2 units that receives equalisation, it follows that £1.2327 out of each £2.88075 is equalisation and only £1.6480 of the £2.88075 represents taxable income.  The £1.2327 per unit is equalisation that can be considered a return of your investment cost, so it would reduce the cost of the 13 units for when you eventually need to consider a capital gains tax calculation some years down the line when you sell the units.

If you buy some more units next January, then when you get to next April and it goes ex-div, all your current 13 units and your new xx units will be in line to receive the  payment (imagine it is £3 per unit); but they will tell you that for new units some of the £3 is equalisation rather than taxable income. Perhaps it will be £2 of income plus £1 of equalisation, or £1 of income and £2 of equalisation. 

Either way, as your current 13 units will have been held by you for the entire period in which the Vanguard fund was earning the income, those 13 units will receive the whole £3 as income; but for the new xx units their £3 will not all be income, as they will be in the group of units whose cash represents a mix of dividend income and equalisation payments.  Your tax voucher, or consolidated tax statement report, should give the split for you.

lindabea

As always Bowlhead99, a very clear explanation, so thank you very much for that.  I especially like the bit about the consolidated tax statement giving me the split!!  It would appear that my assumptions were along the correct lines, but can you please confirm one more thing for me.   

In you reply, you make reference to 'capital gains tax calculation', can I ask if the same logic applies to calculating the dividend paid for income tax purposes.  What I mean is, would you still deduct the equalisation amount from the dividend amount to determine whether or not your investment has exceeded the £2000 dividend allowance. So in my case, the amount of taxable income I received as dividend is 13*1.648 = 21.42 and not the 37.44 that I actually received   

bowlhead99

Correct - you didn't receive £37.44 of dividends. You just have £37.44 of cash.   For your tax accounting, that £37.44 represents (13x £1.648) of dividend income and (13x £1.2327) of capital being returned to you. 

As about £16 of the £37 was not dividend income (it was a cash payment for a different reason), you wouldn't consider it all when calculating at whether you received over £2000 of income. Only the bit that's income, is compared against your income allowance. The return of capital isn't.

Instead you would just say you had got £16 of your cost back; you still have the same quantity of shares (13) so each of your shares have now cost you £1.2327 less than you had originally paid for them back in January.

lindabea

Thank you again Bowlhead99 -  your explanation is far better than all my google searches I made on this topic.  

bowlhead99

lindabea said:

Thank you again Bowlhead99 -  your explanation is far better than all my google searches I made on this topic.  

Your first google search should have been
https://www.google.com/search?q=inurl%3Amoneysavingexpert+bowlhead99+equalisation+tax

lindabea

bowlhead99 said:

lindabea said:

Thank you again Bowlhead99 -  your explanation is far better than all my google searches I made on this topic.  

Your first google search should have been
https://www.google.com/search?q=inurl%3Amoneysavingexpert+bowlhead99+equalisation+tax

Well - I'll be blown.  I'm completely gob smaked!!  I didn't realise you can do a search like that.  I searched for 'equalisation payment' and other combinations I could think of, and all I got was stuff from the likes of HL, oldmutualwealth,gov, willisowen  - none explained it in the way you have and in terms that I can understand.   

I also went into the link you provided - that got more complicated as you read on, but it gave me a deeper understanding.    I feel I now have a better understanding, so thank you again for all your help and guidance.