CG57705 - Unit trusts: dividend equalisation payments

A unit holder may receive an equalisation payment at the end of the first distribution period in which they buy new units. New investors are not entitled to any share of the unit trust’s income which arose before they bought their units. However, at the end of each distribution period the manager allocates the same amount from the income of the fund to each unit. To compensate for this an equalisation payment is added to the cost of new units. This is the amount of income that has arisen up to the date of purchase. Because these payments are included in the amount available for distribution they are effectively repaid to the purchaser. The purchaser’s dividend voucher at the end of the first distribution period should show the amount of the returned equalisation payment. This payment is not income. It should not be treated as a capital distribution, see CG57800+. 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 the eventual disposal.