Equalisation Question

GeoffTF

Suppose that I buy 2,000 units in an OEIC and sell 1,000 of them before the next ex-dividend date. I then receive a dividend with an equalisation payment. I am taxed on the dividend as either income or a dividend, depending on the fund. I am required to subtract the equalisation payment from the CGT base cost. The question is do I:

(1). subtract it from the base cost of the original 2,000 units, or
(2). subtract it from the base cost of the remaining 1,000 units?

The 2,000 units that I bought are held to be indistinguishable members of a common pool. That would suggest that I cannot apportion the equalisation to only the units that I still hold on the ex-dividend date. That would suggest that (1) is the correct answer.

The dividend and equalisation payment that I receive clearly relate to the units that I held on the ex-dividend date. I am not receiving a dividend for units that I no longer own. If I am not receiving a dividend payment for the units that I no longer own, it cannot be said that part of that dividend payment is return of capital. There is also the issue that I might not receive the Consolidated Tax Certificate telling me what the equalisation payment was until after the deadline for submitting my tax return for the sale of the 1,000 units. This suggests that (2) is the correct answer.

By the way, many references say that the equalisation payment depends on the precise date that the units were bought. That is not the case. It is a fixed proportion for all Group 2 units for all holders of the fund, and is usually about half the dividend payment.

Linton

I am confused as to exactly what is happening......

I assume that some time after ex dev date-1 you buy 2000 units then before the next ex-div date-2 you sell 1000.  Then you receive a dividend - is that correct?

Surely the only dividend you received would be for the 1000 shares you held at ex-div date-2.  So the split between equalisation and true dividend should be based on the gap between ex-div date-1 and your purchase date. The fact that you held another 1000 units in the meantime is irrelevent.

Your tax return for the sale of the 1000 short-term units should simply be based on the purchase price and the sale price since you never received a dividend from them.

GeoffTF

Linton said:

I am confused as to exactly what is happening......

I assume that some time after ex dev date-1 you buy 2000 units then before the next ex-div date-2 you sell 1000.  Then you receive a dividend - is that correct?

Surely the only dividend you received would be for the 1000 shares you held at ex-div date-2.  So the split between equalisation and true dividend should be based on the gap between ex-div date-1 and your purchase date. The fact that you held another 1000 units in the meantime is irrelevent.

Your tax return for the sale of the 1000 short-term units should simply be based on the purchase price and the sale price since you never received a dividend from them.

Your understanding of the question is correct. I think you are right, i.e. the equalisation should be subtracted from the base cost of the 1,000 units that remained at ex div date-2. Any units that have already been sold should be irrelevant.

The equalisation per unit does not depend on the date between ex div date-1 and ex div date 2 at which the purchase was made. The equalisation per unit is the same for all purchase dates between ex div date-1 and ex div date-2. The HMRC internal manual says otherwise:

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg57705

That is not how the system works in practice, however. I would like a clear definitive statement on this question, but I am hard pressed to find one.

EthicsGradient

I don't think there's any doubt - the equalisation only applies to the 1,000 units you have retained. The other 1,000 that you sold are not part of the same pool - because you sold them, before the ex-dividend date. 

Linton

GeoffTF said:

Linton said:

I am confused as to exactly what is happening......

I assume that some time after ex dev date-1 you buy 2000 units then before the next ex-div date-2 you sell 1000.  Then you receive a dividend - is that correct?

Surely the only dividend you received would be for the 1000 shares you held at ex-div date-2.  So the split between equalisation and true dividend should be based on the gap between ex-div date-1 and your purchase date. The fact that you held another 1000 units in the meantime is irrelevent.

Your tax return for the sale of the 1000 short-term units should simply be based on the purchase price and the sale price since you never received a dividend from them.

Your understanding of the question is correct. I think you are right, i.e. the equalisation should be subtracted from the base cost of the 1,000 units that remained at ex div date-2. Any units that have already been sold should be irrelevant.

The equalisation per unit does not depend on the date between ex div date-1 and ex div date 2 at which the purchase was made. The equalisation per unit is the same for all purchase dates between ex div date-1 and ex div date-2. The HMRC internal manual says otherwise:

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg57705

That is not how the system works in practice, however. I would like a clear definitive statement on this question, but I am hard pressed to find one.

I dont think your interpretation of the CG manual is correct. I cant see any reference to the erqualisation per unit being the same.  The dividend is for all income received by the fund since the previous dividend.  But some of that income arose from units that the investor did not own at ther start of the period.  Therefore for tax purposes the relevent dividend is removed from those units and included with the purchase cost.  This is the equalisation. Obviously the nearer the purchase is to the previous ex-div date the less the equalisation since more of the dividend can correctly be assigned to the purchaser.

If there were multiple purchases of the fund during the period between dividends then each would give rise to different equalisation amounts.  I dont know but guess the tax statement just includes the total.

GeoffTF

Linton said:

GeoffTF said:

Linton said:

I am confused as to exactly what is happening......

I assume that some time after ex dev date-1 you buy 2000 units then before the next ex-div date-2 you sell 1000.  Then you receive a dividend - is that correct?

Surely the only dividend you received would be for the 1000 shares you held at ex-div date-2.  So the split between equalisation and true dividend should be based on the gap between ex-div date-1 and your purchase date. The fact that you held another 1000 units in the meantime is irrelevent.

Your tax return for the sale of the 1000 short-term units should simply be based on the purchase price and the sale price since you never received a dividend from them.

Your understanding of the question is correct. I think you are right, i.e. the equalisation should be subtracted from the base cost of the 1,000 units that remained at ex div date-2. Any units that have already been sold should be irrelevant.

The equalisation per unit does not depend on the date between ex div date-1 and ex div date 2 at which the purchase was made. The equalisation per unit is the same for all purchase dates between ex div date-1 and ex div date-2. The HMRC internal manual says otherwise:

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg57705

That is not how the system works in practice, however. I would like a clear definitive statement on this question, but I am hard pressed to find one.

I dont think your interpretation of the CG manual is correct. I cant see any reference to the erqualisation per unit being the same.  The dividend is for all income received by the fund since the previous dividend.  But some of that income arose from units that the investor did not own at ther start of the period.  Therefore for tax purposes the relevent dividend is removed from those units and included with the purchase cost.  This is the equalisation. Obviously the nearer the purchase is to the previous ex-div date the less the equalisation since more of the dividend can correctly be assigned to the purchaser.

If there were multiple purchases of the fund during the period between dividends then each would give rise to different equalisation amounts.  I dont know but guess the tax statement just includes the total.

You seem to agree with me about what the manual says, but it is not accurate. Here is a previous MSE thread on the topic:

https://forums.moneysavingexpert.com/discussion/6041399/acc-oeic-fund-equalization

Vanguard's platform helpfully provides the equalisation per unit whenever a dividend is paid (irrespective of whether I made a purchase). Here are Vanguard's numbers for Developed World ex UK for the last five years, with the dividend / equalisation ratios added:

Dividend    Equalisation
5.297577 2.667424 0.503517740280132 Max
6.015595 2.728720  0.453607664744718
5.388012 2.594024 0.481443619650439
5.506456 2.401503 0.436124977662584 Min
6.900794 3.121279 0.452307227255298
       Mean           0.465400245918634

That concurs with Tom99 and bowlhead99's experience. Vanguard just pays the dividends and provides a number for the equalisation per unit. Vanguard's consolidated tax certificates give an equalisation amount which concurs with the quoted equalisation per unit. The equalisation has always been about half the dividend, irrespective of when I bought between the two latest ex-dividend dates.

talexuser

If equalisation is a return of capital, then is it taxed as a capital gain? i.e. when you sell you should subtract the equalisation from your purchase price effectively increasing the gain?

EthicsGradient

talexuser said:

If equalisation is a return of capital, then is it taxed as a capital gain? i.e. when you sell you should subtract the equalisation from your purchase price effectively increasing the gain?

Yes - as the HMRC page linked to above says: "It is a return of the initial price paid and it should therefore be deducted from the price paid when computing the chargeable gain on the eventual disposal."