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Where Taxpayers and Advisers Meet

Equalisation questions: Three scenarios

rmdr2
Posts:1
Joined:Wed Jan 29, 2020 12:33 pm
Equalisation questions: Three scenarios

Postby rmdr2 » Wed Jan 29, 2020 1:53 pm

Afternoon all

I have a couple of questions about completing an HMRC tax return for an individual on a small number of investments held outside of an ISA.

I understand the basics of equalisation, but everything I am able to find on the internet only really talks about equalisation at the point of purchase, i.e. if a unit is purchased between ExDiv dates, how much of the next dividend should be treated as income, and how much should be treated as return of capital (equalisation) for CGT purposes. So far so good.

However, I have some questions on the tax treatment of investments to which I cannot find the answer online. If anyone can please help, it would be much appreciated! If there are any official (HMRC?) references to support the answers - even better

In order to bring the scenario's to life, all the below scenarios assume:
• No market movements of underlying holdings - only dividend accrual
• A semi-annual dividend payment of £6
• ExDiv dates of 01Jan and 01Jul
• Div payment dates of 01Mar and 01Sep
• A £102 investment in a unit on 01Mar (one third the way through the dividend accrual period)

Scenario A: Purchase and hold of an INCOME unit (the easy one)
• Unit purchase of £102 on 01Mar (one third the way through the dividend accrual period)
• Next dividend (£6) received of which £4 is treated as income and £2 is treated as return of capital (equalisation)
• Income tax due on £4
• Adjusted purchase price for CGT purposes = £102 - £2 = £100

Question 1: is this correct?


Scenario B: Purchase and sale of an INCOME unit in same dividend accrual period
• Unit purchase of £102 on 01Mar (one third the way through the dividend accrual period)
• Unit sold 2 months later (01May) for £104 (two thirds of the way through the same dividend accrual period)
• Investor is not entitled to, nor have they received any income from the unit

Question 2: What is the correct tax treatment in Scenario B
(a) Is this a pure capital gains tax liability on the £2 earned. Equalisation is ignored as no entitlement to or dividend received.
(b) Equalisation is applied on the purchase, but not the sale: CGT charge of £104 - £100 = £4
(c) Equalisation is applied on the purchase AND the sale: CGT charge of £104 - £102 = £2… in which I would need to be in receipt of two equalisation certificates (one each for the purchase and sale)
(d) Something else


Scenario C: Purchase and sale of an ACCUMULATION unit spanning an ExDiv date
• Unit purchase of £102 on 01Mar (one third the way through the dividend accrual period)
• Unit sale of £107 on 01Aug: 5 months later after the end of the first dividend accrual period (01Jul), but before the dividend payment date (01Sep)

Bearing in mind this is an accumulation unit and, therefore, the holder would not actually receive the dividend (to which they are somehow entitled for tax purposed?), should equalisation be applied and, if so, how?

Question 3: What is the correct tax treatment in Scenario C (sorry, I have no idea)

Apologies for what might be dumb questions, but I haven't been able to find answers.

Many thanks in advance

Rmdr2

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