Tax treatment on dividends

RomfordNavy wrote: »

First time I have had to put investment dididends on my tax return so a little unsure:

1. Dividend from Fundsmith includes "Income distribution" + "Equalisation" = "Total Income distribution", which of these do I include on my tax return calculation as Net dividend income received?
2. I am correct in thinking that Dividend Income Distribution is net and therefore:
   Tax = Net / 90 * 10
   Gross = Net / 90 * 100

Thanks,

1)
Only the income distribution part of the total cash received is taxable income.

The 'equalisation' bit relates to the fact that part of your holding was not owned for the full period since the last dividend point, and so although they are giving you the same cash per share as they give to every other shareholder, some of the cash you'll receive is income that had already been earned by the fund before you even owned the shares in it. As a result (due to the fact that part of the price you paid to buy your new shares was buying the cash dividends that the fund has already earned from its underlying portfolio companies), when it gets to dividend payout date and they send £x cash per share to every shareholder, your cash receipt is not taxable income. The equalisation bit is theoretically just a return of a piece of your purchase price.

The way to look at it is: that equalisation money they give to you is really just giving you back some of the cash that you had originally paid to buy your share.

So, the bit they describe on the tax voucher or consolidated income statement as "equalisation" instead of income, should not be declared by you as taxable income. That bit is instead just a return of part of your cost you had originally paid for the investment. As such, you would take it off the cost of investment when you ultimately calculate any capital gain or loss on selling your investment, but you wouldn't describe it as dividends in your tax return, because it's not income at all. Just a cash payment returning some of your capital.

2)
Any UK dividend income you receive is not, these days, presumed to be net of a 10% tax credit. Instead the whole amount received (the bit described as "Income distribution" and not "equalisation" in your statement) is wholly taxable. You do not need a special tax credit on it as they already give you a £2000 allowance to receive dividends at 0% tax, and only charge you 7.5% thereafter if your income is within the basic rate band.