Authorised investment funds (AIFs): structure, arrangement and tax status of funds: return of equalisation
At the end of the distribution period the trustee distributes the income to all the unit holders and returns the equalisation to the Group II unit holders. A unit holder who has purchased Group II units during the period will therefore receive a distribution made up of two amounts:
- income which has accrued from the date of purchase, and
- capital which represents the return of the equalisation element.
The effect is that income is distributed to unit holders in proportion to the time of ownership of the units in the distribution period.
Returned equalisation is not part of the income distribution and is a capital receipt that, in the unit holder’s hands should be deducted from the cost of the units for CGT purposes (see CG57705).
A unit holder who sells units will receive a single capital sum which will include an amount in respect of the income accrued to the date of disposal.
A trust has two unit holders A and B.
The capital value of the trust is £1000 and income accrues at 8% per annum throughout the distribution period, which is six months.
After three months C decides to purchase a unit and the price to be paid is £510. (This is made up of £500 capital value plus £10 reflecting the accrued income - £1000 x 8% x 3/12 x 1/2 = £10.) The £10 is the ‘equalisation’ payment and this amount is paid by the manager to the trustee and retained in the distribution account.
At the end of the distribution period the amount available for distribution is £60 made up of £50 income (£1000 x 8% x 6/12 + £500 x 8% x 3/12) and £10 ‘equalisation’.
Each unit holder receives £20 but A and B each receive £20 income having held their units throughout the distribution period and C receives £20 of which £10 is income (reflecting the three months which C held a unit) and £10 is the returned ‘equalisation’, a capital sum.
Note that in practice calculations would be done on a daily and not a monthly basis.