Notional dividends in accumulating trusts e.g VWRP

[Mike Wylde]

I'm not sure if this is just a UK quirk.

Accumulating trusts such as VWRP notify you of a notional dividend. This dividend is not available to you as cash, and it is not used to buy extra shares in the trust. It is instead added to the cost base of the trust, thereby increasing the total value of the trust and the value per share as the number of shares doesn't increase.

I cannot find a way of recording this in Money.

You can't treat it as a dividend as you don't get the money (although it has to go in your tax return as income.)

You can't treat it as reinvestment because it's not buying extra shares.

You need to add it to the recorded cost base of the existing shares (otherwise you would pay CGT as well as income tax on it when you come to dispose of the holding.)

Anyone got a solution please?

(PS in fact I hold this in a pension plan so the tax complications are not a concern, it's just a matter of my records.)

[Ameridan (microsoftmoneyoffline.wordpress.com)]

See my reference page https://microsoftmoneyoffline.wordpress.com/how-to-record-stock-splits-mergers-and-spinoffs/

[Ameridan (microsoftmoneyoffline.wordpress.com)]

I added an example to show this works (Cal questioned the process).

[Cal Learner]

 I see now.

If I buy a security for  £10000, and I receive a  £100 notional dividend, I want the security to now have a basis of  £10100. That is an increase in basis.  I would expect to report  a £100 dividend for taxes. 

In Microsoft Money, a negative ROC increases basis. A positive ROC decreases basis. 

[Bill Hackney]

I’m also based in the UK.

For taxable accounts (as you flag, this is a bit of a red herring for non-taxable accounts such as SIPPs and ISAs) you need to increase the tax base cost by the amount of the accumulated dividend.  The only way I’ve found to do that in the UK version of Money is to enter a NEGATIVE Return Of Capital transaction, WITHOUT entering an account to receive (or pay) the cash side of the transaction (per the guidance from American).  So, if the accumulated dividend/distribution is £100, you enter it will as a -£100 return of capital transaction.

That will show the correctly increased tax base cost/book cost in the Portfolio Manager.  Note however that Money doesn’t then always correctly calculate the realised gain/loss when the shares/units are sold.  Always double check the figures produced by some of the Money reports.

The issue is further complicated if you hold “Group 1” units.  If you purchased units during the last distribution period, they will likely be characterised as Group 1 units.  When you purchased them the price will have included an element of “income equalisation” (explained further below).  When you get the first distribution following your purchase, you get that amount repaid as a distribution of capital - and equalisation payment.  If you hold income(INC)/distribution units, yet get paid that amount as cash.  But if you hold accumulation units, it is “distributed” (in the first instance) but then immediately reinvested in the fund (but you don’t get any more shares/units).

Group 1 units become Group 2 units following the first distribution, so there shouldn’t be any further equalisation amounts showing for subsequent distributions/accumulations.

So, say you held Group 1 units in the INC/distribution class, you might get £80 as the income distribution and £20 as the equalisation repayment of capital.  In Money, you would record a £80 dividend paid in cash, and a £20 return of capital paid in cash.   The tax base cost would be reduced by £20, as a result of the return of capital transaction in Money.

But if you had acquired Group 1 units in the ACC class, you would see distribution details which showed that a £80 dividend had been accumulated, and a £20 equalisation amount had been repayable but had been retained within the fund and also accumulated.  Hence you ONLY need to record a NEGATIVE return of capital transaction for the £80 income distribution, to increase the tax base cost by £80.  You can ignore the equalisation because, in the first instance, it reduces the tax base cost by £20, but then immediately increases the tax base cost by £20 because it has been retained and reinvested in the fund.

It’s all a bit confusing because in the INC class you use a return of capital transaction to reduce the tax base cost by the amount of equalisation, but in the ACC class you use a negative return of capital transaction to increase the tax base cost by the amount of the income distribution.

To make my life easier, I try to hold INC units in my taxable accounts and ACC units in my SIPP or ISA!

[Bill Hackney]

Just to add, Ameridan's approach also deals with how you can record the distribution for the purposes of Income Tax on the distribution (noting that there is no Income Tax on the equalisation payment, as that is a repayment of capital), if you later want to produce a report for Income Tax purposes.  TBH, I don't bother with that step in my non-taxable accounts (SIPPs, ISAs) because it seems rather pointless as there are no tax reporting requirements/no tax to pay (I also don't bother recording the equalisation payment/its accumulation as a return of capital transaction, given that there is no Capital Gains Tax to pay in these accounts) .  I also suspect that it may distort the return calculations (TR All, Ann. Ret.) shown in the Portfolio Manager - as income has simply been rolled-up within the fund, the income is already reflected in the unit price.  Hence, assuming that there haven’t been any further transactions since the original purchase, the correct way to calculate total return would be ((current value - initial value) / initial value), whereas including the phantom distribution would make it ((current value - initial value + income) / initial value), potentially showing a higher and inaccurate return.  Albeit I appreciate that also having the reinvestment of the distribution as a return of capital transaction would then make the calculation ((current value - initial value + income - return of capital) / initial value) ..... ignoring any time weighting/money weighting of the income and return of capital amounts, and with the income and return of capital amounts cancelling each other out if they have the same value.  Hence in order to get accurate return numbers, you either have to enter both the income distribution and its reinvestment (as a negative ROC transaction), or neither of them.

As I mentioned, as these are cashless transactions on ACCumulation units, you can make them cashless by deleting out the "Transfer to:" account.  But Ameridan's suggestion of having two transactions which zero out each other out in your cash account will work as well, if you are happy to have two phantom cash transactions in that account. 

On the subject of the TR All and Ann. Ret. calculations, it would be interesting to know if any members of this group have any insight into the calculations that sit behind those calculations.  I've always assumed that they are relatively simple money-weighted returns (IRRs) rather than being time-weighted returns (TWRs), but it would be interesting to understand how the timing of each transaction (Buy, Sell, Dividend, Return of Capital, etc) is taken into account in the calculations, particularly if there is a Buy, followed by a partial Sell, followed by another Buy, followed by another partial Sell.  The calculations appear to produce very odd results when there is a Buy, followed by a total Sell, followed by a Buy.  I would expect the returns which then show to only be based on the second Buy and the value of that shareholding (including any dividends received since that Buy), but it appears to me that the returns produced by the previous holding which was sold in its entirety are also rolled into the calculations.  Hence where there are partial Sells I’m not sure how accurate the returns are.

[Mike Wylde]

I'm having odd problems with group messages. The first reply I saw was Bill Hackney's, I didn't see the earlier ones until today. I tried twice to reply and both times it was rejected as spam. So I'll start again, first with thanks to all posters.

Re Ameridan's page, as I read it this will end up with the number of units/shares held being increased. That isn't the case I'm looking at. In VWRP (for example) the number of shares does not increase, only the total base price. You can't do a dividend reinvest transaction with quantity zero.

Bill's reply seems to cover this by only making the negative return of capital. I had considered this but didn't realise you could do that without choosing a cash transfer account. That would seem to solve the problem re base price. So it puts the capital gain right but it understates the income.

What would happen if you entered the notional dividend as a normal cash dividend, not reinvesting, then make the negative ROC with the cash account as the transfer source? Without an experiment I can't quite work out whether this would put it right, or is possible!

I'm not sure if that is what Bill suggests in his second post, I think it may be. I need to study that more thoroughly.

I agree with Bill's points that some of Money's return calculations in reports are going to be flawed, particularly where there are multiple transactions in the shares, not just one buy, and equalisation is also a complication.

The whole matter is a bit academic in that I would only hold shares of this type in a tax exempt account (but the way the UK is going at the moment, who knows for how long we shall have any of those!)

However I would like to see figures in my portfolio view that match those in statements from my nominee account holder.

Mike

MSMoney is still irreplaceable!

[Cal Learner]

Re Ameridan's page, as I read it this will end up with the number of units/shares held being increased. That isn't the case I'm looking at. In VWRP (for example) the number of shares does not increase, only the total base price. You can't do a dividend reinvest transaction with quantity zero.

Ameridan does not suggest a RevinvestDividend. He suggests a Dividend to go with the ReturnOfCapital. That makes no change in units/shares, but an increase in basis of those existing units.

[Ameridan (microsoftmoneyoffline.wordpress.com)]

My original article did specify Reinvest Dividend, but upon setting up the example, I discovered the discrepancy, so I edited the article to specify Dividend instead.

[Mike Wylde]

Ah, I think we're all singing from the same hymn sheet now, that's great. Thanks again everyone.