"Equalisation payments" for Accumulation funds

Qyburn

Hi,

I'm struggling to understand "equalisation payments" as applied to Accumulation funds.

If you pay say £1000 for a holding, and no payments are made back to you, what is the logic in treating the cost of that holding as say £990 as a result? In the real world if that holding is now worth £1050 then you've made a gain of £50, not £60.

Different with Inc funds where you actually receive that equalisation payment.

ColdIron

You probably know that equalisation payments represent the increased cost of the fund when you bought it due to dividends already accrued between ex dates that you did not earn (so should not be taxed as dividends). Essentially you have paid for them in the price

Earned dividends are taxed the same whether Acc or Inc, equalisation relates to your capital gain

With Inc units the first distribution is a mix of earned dividends (actual dividends) and unearned dividends (the equalisation payment). As the equalisation payment is a return of capital (actually paid out of the fund) it reduces the base cost so adds to your potential capital gain

With Acc units all the distributions are retained. When you sell you must reduce the apparent capital gain (proceeds minus cost) by the earned dividends but as there was no actual return of capital for the unearned dividends you can ignore them

As a rule of thumb

• Inc units: ignore dividends and account for equalisation payments
• Acc units: account for dividends and ignore equalisation payments