Equalisation for funds generating interest?

aroominyork

I have some funds in a GIA which I want to put into a money market fund (Royal London short term). The Inc. version pays interest twice a year. How is this treated for tax purposes? Is the first payment divided into taxable income for the period since purchase and non-taxable equalisation for the period before purchase, similar to dividends in an equity fund?

masonic

You will buy Group 2 units and these will contain accrued income in their purchase price. The distributions from Group 2 units contain equalisation (return of the capital premium you paid for the accrued income) and interest. Once the first distribution is received, Group 2 units become Group 1 units and further distributions are all interest. It's the same as for dividends as it is a feature of the fund structure rather than what is held within.

aroominyork

masonic said:

You will buy Group 2 units and these will contain accrued income in their purchase price. The distributions from Group 2 units contain equalisation (return of the capital premium you paid for the accrued income) and interest. Once the first distribution is received, Group 2 units become Group 1 units and further distributions are all interest. It's the same as for dividends as it is a feature of the fund structure rather than what is held within.

Thanks. And the credit on the first distribution will be split, on my GIA statement, into equalisation and interest?

GeoffTF

aroominyork said:

masonic said:

You will buy Group 2 units and these will contain accrued income in their purchase price. The distributions from Group 2 units contain equalisation (return of the capital premium you paid for the accrued income) and interest. Once the first distribution is received, Group 2 units become Group 1 units and further distributions are all interest. It's the same as for dividends as it is a feature of the fund structure rather than what is held within.

Thanks. And the credit on the first distribution will be split, on my GIA statement, into equalisation and interest?

You have not said which platform you are using. The Consolidated Tax Certificate should split the payment into interest and equalisation. If you have a Vanguard account, you get the equalisation rate for Group 2 units when the dividend is paid under Transactions > Corporate actions. You then multiply the number of Group 2 units that you hold by the equalisation rate to get the equalisation. That is a lot quicker than waiting for the Consolidated Tax Certificate.

aroominyork

Interactive Investor.

masonic

aroominyork said:

Interactive Investor.

Although my experience is not recent and things may have improved in recent years, I remember having quite a nightmare getting the right information out of Interactive Investor regarding Group 2 units and equalisation, so much so that it eventually came via the Financial Ombudsman Service.

aroominyork

For Inc. equities on ii, the transaction statement shows different credits for equalisation and dividend. No reason this should be any different, is there?

masonic

aroominyork said:

For Inc. equities on ii, the transaction statement shows different credits for equalisation and dividend. No reason this should be any different, is there?

I wouldn't have thought so. Hopefully in your case it will be correct

GeoffTF

aroominyork said:

Interactive Investor.

If it is tax sheltered account, the equalisation does not matter. If it is not, why do you not use low coupon gilts (e.g.TG31), which are more favourably taxed than bond funds.

aroominyork

GeoffTF said:

aroominyork said:

Interactive Investor.

If it is tax sheltered account, the equalisation does not matter. If it is not, why do you not use low coupon gilts (e.g.TG31), which are more favourably taxed than bond funds.

It is unsheltered and for funds from a gilt which is about to mature. The MM fund yields more so I'll use that up to PSA and a nominal gilt beyond. I am aware that when the base rate falls so will the MM yield.

GeoffTF

aroominyork said:

GeoffTF said:

aroominyork said:

Interactive Investor.

If it is tax sheltered account, the equalisation does not matter. If it is not, why do you not use low coupon gilts (e.g.TG31), which are more favourably taxed than bond funds.

It is unsheltered and for funds from a gilt which is about to mature. The MM fund yields more so I'll use that up to PSA and a nominal gilt beyond. I am aware that when the base rate falls so will the MM yield.

A money market fund will have a higher YTM, but probably not for long. VAGP had a YTM 3.8% on 30 November 2023, with 0.1% OCF, plus transaction costs which will include the cost of hedging:
https://www.vanguard.co.uk/professional/product/etf/bond/9442/global-aggregate-bond-ucits-etf-gbp-hedged-distributing
Currently TG31 has redemption yield of 3.69%:
https://www.yieldgimp.com/gilt-yields
You can get official historical yields from Tradeweb to do a comparison the same day. The gilt and VAGP are both AA-. so we would not expect the YTMs to be much different. Tax and costs may be more important here, depending on your circumstances.