I am preparing income accounts as part of an Estate account. This Estate contains a large investment portfolio. The problem is that income is paid and then is clawed back into the capital account by way of what is termed ‘equalisations’. How do others record these transactions on Estate accounts?
Claire Flood
Claire Flood Solicitors
Equalisation represents monies returned as a result of pricing adjustments on purchases of unit trusts. It is generally paid with the
first dividend after the purchase. The amount deemed to be equalisation is a reduction in the book cost of the holding as it essentially reflects a lower purchase cost. So if you received a total sum of £125 split as to £25 equalisation and £100 dividend after
a purchase of a holding that cost £2,000 then the purchase price should be adjusted down to £1,975 and the £100 dividend reflected as a receipt in the income account.
Jenny O’Neill
Trust Manager
Womble Bond Dickinson
Claire
Equalisations only appear in the first period after such a unit trust investment has been acquired and are a return of capital that effectively reduces the base cost; the ‘equalisation’ element is not income nor is it taxable - the relevant dividend voucher should show the split.
The reasoning behind them is similar to accrued interest on the purchase and sale of fixed interest securities, whereby everyone gets the same cash pay out for a period, but if you have only held the investment for a part of that period you should not be entitled to the whole period’s income.
Maxine Higgins
Citroen Wells
Equalisation payments are not income. They represent a return of the initial capital paid, and the value should be deducted from the base cost for the investment. See https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg57705.
Duncan McGowan
Stevens & Bolton
Thank you.
Kind regards,
Claire Flood
on behalf of
CLAIRE FLOOD SOLICITORS
Authorised and regulated by the
Solicitors’ Regulation Authority
SRA No: 137966
Just to add that Equalisation payments are often reinvested immediately, that is the cash is not received but reinvested/accumulated back into investment. In such cases it cancels itself out and does not need to be shown (deduct from base cost on receipt and add back on reinvestment.
Liz Jones
Wheawill and Sudworths ltd
Thank you.
Kind regards,
Claire Flood
on behalf of
CLAIRE FLOOD SOLICITORS
Authorised and regulated by the
Solicitors’ Regulation Authority
SRA No: 137966