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Posted Wed, 12 Jan 2022 02:05:55 GMT by Edward
Hi, With an online UK retail investment platform I own distributing shares in a UK authorised unit trust/OEIC equity type, in the 2020/21 CTC the broker provided me with both dividends paid and equalisation figures. Reading the platform’s CTC and HMRC’s tax return notes (SA100 TRG6) I understand that I should declare the dividend paid as is (i.e. as received) in SA100 TR3 Box 5 “Other Dividend” not including (i.e. not subtracting from the dividend paid) the equalisation amount - is my understanding correct? As the equalisation amount is a return of capital, not income, I should eventually subtract the equalisation amount from the Section 104 Holding allowable cost (I invested in tranches) used in determining the eventual capital gain/loss when I will sell said investment. Again, is my understanding correct? If not, kindly tell me how to proceed. With another similar online provider I owned accumulation shares instead, in four different UK authorised unit trusts/OEICs, two are bond type so distributing interest and two equity type so distributing dividends. In the CTC they produced for 2020/21 the dividend and interest amounts to declare (in SA100 TR3 UK Income in Box 5 “Other dividends” and in Box 2 “Untaxed UK interest”) are respectively equal to dividend/interest received minus the respective equalisation amount in the first income allocation period after purchase. Is this correct? If so, as I sold these investments in 2020/21 in order to calculate the respective capital gains/losses would I need to alter allowable costs (again Section 104 Holding as I purchased in tranches) with the appropriate equalisation amounts? In calculating capital gains and losses incurred should I reduce or increase allowable costs by the respective equalisation amounts? As the shares are accumulation shares, given that equalisation amounts represent returns of capital, I think in this case increasing allowable costs with respective equalisation amounts makes logical sense. Kindly let me know whether my understanding is correct and how to best proceed. Thank you. Best regards Edward
Posted Fri, 14 Jan 2022 02:47:24 GMT by Edward
Hello, Having thought further about equalisation vis-a-vis UK authorised unit trust/OEIC shares in terms of dividend/interest distributions and capital gains/losses to declare in the SA tax return, irrespective of whether the shares are Accumulation or Income/Distribution class, as equalisation is a return of capital I should deduct it from the first distribution allocation following purchase to declare and also deduct it from the Section 104 Holding allowable cost used in calculating CGL on disposal. In a nutshell I think that it reduces the taxable dividend/interest amount in the first distribution period and increases by the same amount the taxable capital gain / reduces the declarable capital loss as appropriate. So for example: if I invest £1000 in an Equity type UK Auth. UT/OEIC with quarterly dividend distributions (Accumulation or Income Distribution either class), - at the end of the first quarter it pays (Acc or Inc) £5 dividend and declares £1.5 equalisation, - at the end of the second quarter it pays £4.25 dividend, - after which I sell my investment for £1010. In such a case in my tax return in this hypothetical explanatory case - at SA 100 TR3 Box 5 I would declare £7.75 dividend received (£5 -£1.5+£4.25) and - on SA108 I would declare a capital gain of £11.5 [£1010-(£1000-£1.5)]. Please let me know if this is the correct approach to apply equalisation amounts with regards to declarable distributions and capital gains / losses or if I should alter my approach with reference to my UK authorised unit trust/OEICs Accumulation shares and Income distribution shares as explained in my initial post. Thank you. Best regards Edward
Posted Mon, 17 Jan 2022 13:07:44 GMT by HMRC Admin 19
Hi,

There is an assumption that offshore funds are not involved.

Unit holders in authorised unit trusts (AUTs), and shareholders in open-ended investment companies (OEICs), may receive income as an interest distribution or a dividend distribution.

The CTC will make it clear whether the receipt is an interest or a dividend distribution.

Dividend distributions received are treated in the same way as any other UK dividend for Income Tax purposes.

The equalisation payment is not income and it should not be treated as a capital distribution. 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 eventual disposal.

You can find further information here:

CG57705 - Unit trusts: dividend equalisation payments

IFM03350 - Authorised investment funds (AIFs): taxation of investors within the charge to IT: distributions

IFM02230 - Authorised investment funds (AIFs): structure, arrangement and tax status of funds: equalisation

HS284 Shares and Capital Gains Tax (2021)

Thank you.
 
Posted Mon, 17 Jan 2022 14:01:47 GMT by HMRC Admin 24
Hi Edward,

There is an assumption that offshore funds are not involved.

Unit holders in authorised unit trusts, and shareholders in open-ended investment companies, may receive income as an interest distribution or a dividend distribution.

The CTC will make it clear whether the receipt is an interest or a dividend distribution.

Dividend distributions received are treated in the same way as any other UK dividend for income tax purposes.

The equalisation payment is not income and it should not be treated as a capital distribution. 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 eventual disposal.

CG57705 - Capital Gains Manual - HMRC internal manual - GOV.UK (www.gov.uk)

Investment Funds Manual

HMRC internal manual Investment Funds Manual

HS284 Shares and Capital Gains Tax (2021)

Thank you.
Posted Tue, 18 Jan 2022 00:58:36 GMT by Edward
Hello, thank you for the explanation and related links to my queries relating to UK AUTs/OEICs. I understand now that fund distributions (dividend/interest) to declare as investment income in the first allocation period are Dividend Group II distributions (equal to th efull dividend due to Dividend Group I minus equalisation) and full period dividend Group I for the following distribution periods. Once sold in calculating the capital gain/loss the allowable cost is reduced by the equalisation amount. In HS284 Shares and Capital Gains Tax (2021) that you suggested for further information, there is a section on "Accumulation units" which states that "If you hold accumulation units you will not receive distributions of income from the trust. Instead, the income is retained and reinvested automatically for you (a ‘notional distribution’). You do not receive any new units, but the value of your existing units is increased. If you receive notional distributions which are subject to Income Tax, you’re allowed the amount of these distributions as additional expenditure on your accumulation units" this seems to indicate that the allowable cost instead of being reduce by the equalisation amount is increased. Could you kindly clarify this point for me? Thank you. Regards
Posted Wed, 19 Jan 2022 14:02:41 GMT by HMRC Admin 2
Hi,

When a notional distribution includes an equalisation payment, then generally part of it is the dividend and the balance is equalisation.

The equalisation amount is treated as a return of part of capital and will therefore reduce the acquisition cost. This payment is not income. If the equalisation amount is reinvested along with the taxable income then no adjustment for the equalisation needs to be made to the cost of the shares for CGT purposes.

CG57707 - Unit trusts: accumulation units

Thank you.

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