capital gains<\/a> on any disposals.<\/p>\nIn other words, equalisation just means you pay a bit less dividend tax but a bit more capital gains tax. The tax man will get you one way or another.<\/p>\n
Note that equalisation applies to UK authorised funds \u2013 for example, OEICS and unit trusts \u2013 but not generally to ETFs.<\/p>\n
Group 1 and Group 2<\/h3>\n You may occasionally see reference to Group 1 and Group 2 units.<\/p>\n
Group 1 units are those you bought during the current dividend cycle.<\/p>\n
Once the XD date is reached, your Group 1 units become Group 2 units.<\/p>\n
The equalisation rate per unit is calculated by the fund manager based on what they reckon Group 1 holders on average paid for the accrued income versus Group 2 holders.<\/p>\n
But this is just an average. Every Group 1 holder gets the same equalisation rate regardless of when they bought the units.<\/p>\n
So the equalisation for investor A who bought on the last XD date is the same as the equalisation for investor B who bought the day before the current XD date.<\/p>\n
Back to Bertie\u2019s money<\/h2>\n Finally, back to the original question. Does it matter if you invest pre-XD or post-XD?<\/p>\n
The table below compares the two scenarios: buying pre-XD and buying post-XD.<\/p>\n
We\u2019ll assume an investment of \u00a3100,000, a distribution yield of 2%, an equalisation for Group 1 units of half the total distribution, an initial price of 100p, and a final price of 103p:<\/p>\n\n\n\n\nPre-XD<\/strong><\/td>\nPost-XD<\/strong><\/td>\n<\/tr>\n\nPurchase date<\/td>\n 31\/03\/2026<\/td>\n 01\/04\/2026<\/td>\n<\/tr>\n \nPurchase price<\/td>\n 100p<\/td>\n 98p<\/td>\n<\/tr>\n \nUnits<\/td>\n 100,000<\/td>\n 102,040<\/td>\n<\/tr>\n \nDividend<\/td>\n \u00a31,000<\/td>\n \u00a30<\/td>\n<\/tr>\n \nEqualisation<\/td>\n \u00a31,000<\/td>\n \u00a30<\/td>\n<\/tr>\n \nSale date<\/td>\n 31\/03\/2027<\/td>\n 31\/03\/2027<\/td>\n<\/tr>\n \nSale price<\/td>\n 103p<\/td>\n 103p<\/td>\n<\/tr>\n \nSale proceeds<\/td>\n \u00a3103,000<\/td>\n \u00a3105,100<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\nYou end up with roughly the same returns in both cases: Pre-XD gets some income, but post-XD gets more capital gain.<\/p>\n
The extra \u00a3100 gain for the post-XD case is offset in the pre-XD case by the early \u00a32,000 distribution in dividend and equalisation, which can be reinvested elsewhere for most of the following year.<\/p>\n
In tax terms, the difference between the scenarios looks like this:<\/p>\n\n\n\n\nPre-XD <\/strong><\/td>\nPost-XD<\/strong><\/td>\n<\/tr>\n\nTaxable dividends<\/td>\n \u00a31,000<\/td>\n \u00a30<\/td>\n<\/tr>\n \nTaxable capital gains <\/td>\n \u00a34,000<\/td>\n \u00a35,100<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\nThe pre-XD taxable capital gain is \u00a34,000 because the \u00a31,000 equalisation must be deducted from the purchase price.<\/p>\n
In summary then, there is negligible difference in the returns you get, but when investing pre-XD you are swapping some capital gains tax for dividend tax.<\/p>\n
Does that make much difference? Depends on your tax situation.<\/p>\n
Tax impact of going ex-dividend<\/h3>\n The table below shows the approximate difference in the tax you pay for various tax situations. (There is no case for 0% capital gains tax as the \u00a33,000 capital gains allowance is more than used up by the gains in either scenario):<\/p>\n
\n
\n
\n\n\n\nTax Situation<\/strong><\/td>\n Dividend Tax Rate<\/strong><\/td>\nCGT Rate<\/strong><\/td>\n Pre-XD vs Post-XD<\/strong><\/td>\n<\/tr>\n\nNil-rate taxpayer<\/td>\n 0%<\/td>\n 18%<\/td>\n Pre-XD saves ~\u00a3200<\/td>\n<\/tr>\n \nBasic-rate taxpayer<\/td>\n 10.75%<\/td>\n 18%<\/td>\n Pre-XD saves ~\u00a390<\/td>\n<\/tr>\n \nHigher-rate taxpayer<\/td>\n 35.75%<\/td>\n 24%<\/td>\n Post-XD saves ~\u00a390<\/td>\n<\/tr>\n \nAdditional-rate taxpayer<\/td>\n 39.35%<\/td>\n 24%<\/td>\n Post-XD saves ~\u00a3130<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n<\/div>\n<\/div>\nI\u2019m using the new 26\/27 dividend tax rates as dividends are taxed in the tax year in which the payment falls and not necessarily the XD date.<\/p>\n
(As an aside, who decided we needed tax rates specified to two decimal places?)<\/p>\n
If you\u2019d held on to the investment for longer, then there would also be a difference in when<\/em> you pay the tax.<\/p>\nThe initial dividend tax must be paid for this tax year whereas the capital gain tax could be deferred until later tax years by not selling.<\/p>\n
Price fluctuations<\/h3>\n There\u2019s a lot of detail I\u2019ve glossed over.<\/p>\n
Most notably, I\u2019ve assumed that, on the XD date, the unit price of the fund drops by the same amount as the dividend paid.<\/p>\n
In reality, it will not be the same, as it will also be affected by fluctuations in the prices of the assets in the fund.<\/p>\n
In scenario two you are buying a day later. Might the price change on that day have a bigger effect than the different tax rates? Who knows<\/a>.<\/p>\nOr maybe the price goes down over the year, so the bigger capital gain becomes a smaller capital loss.<\/p>\n
So what?<\/h2>\n Some of you may enjoy the thought of saving a few quid in tax with some judicious ex-dividend timing.<\/p>\n
I suspect that most, though, will be thinking that this is all just noise when considered against investment returns \u2013 and you\u2019re probably right.<\/p>\n
So whilst it\u2019s worth knowing exactly how you\u2019ll be taxed on dividends if you have assets outside of a tax wrapper, it\u2019s probably not a good idea to spend time trying to game the tax system at the risk of losing investment gains.<\/p>\n
But, looking on the bright side, I think we can all agree that stuffing all the investment fun stuff \u2013 dividends, tax, and equalisation \u2013 into just one short article is a joy to behold.<\/p>\n
You\u2019re welcome!<\/p>\n<\/p><\/div>\n