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Error in Dividends accounting? #9
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Thanks for filing this! Dividends are a tricky one. I'll look into this. Does indeed look a bit wonky here! |
@tellme-why - do you have a theory on how your suggested transactions should be calculated by any chance? I'm just trying to work out even how the best way to account for this case is. It's clearly doing something wrong right now - I just am wondering the best way to account for these transactions. |
Hi @mattjgalloway thank you for your reply and your work! :) I see one potential issue with the code:
I created a more straightforward test case to play with and spot the error: input output TAX YEAR DETAILSTAX YEAR 2019/2020
TAX YEAR 2020/2021
TAX YEAR 2021/2022
Let's now change the amount of 1/6/2022 dividend from 0 to 10: input Result: TAX YEAR DETAILSTAX YEAR 2019/2020
TAX YEAR 2020/2021
TAX YEAR 2021/2022
|
sorry not sure why the site formatted my response in big/bold - anyway I hope it's readable.. :) |
Hi @tellme-why, thanks for the reply! To be honest, this is why I largely try to avoid accumulation funds! Income class funds only attract capital return that needs accounting for, but those are much easier to work out what to do as you're just lowering the acquisition cost. The problem with how the logic works currently is that I just made dividends simply raise the acquisition cost. But you've proven that has a pretty obvious edge case :(. I'm not sure I fully agree that it's related to fiscal year though. It's more that if the dividend happens after a sale, then that dividend cannot affect anything about the previous sales. The problem I'm having with trying to work out how to account for it, is how best calculate how to apportion dividends amongst FUTURE sales only. It seems a complete minefield tbh! |
Hi @mattjgalloway thank you very much for your reply - and apologize - I incorrectly phrased my comment "lowered the 104 section acquisition cost" whilst it should have been "increased the 104 section acquisition cost" as you suggested. Unfortunately, the calc complexity does not go away if you only own Overseas Distributing Funds. In fact, it becomes more complex! Overseas Distributing Funds do accrue Excess Reportable Income "ERI" that is deemed (and accumulated) within the fund, i.e. is a non-cash event. This shall be treated as an "Accumulating unit Dividend Event", although it's normally much smaller than a normal distribution. With these funds, you then have to keep on check both Distributions and ERI. Distributions may classify as income or Dividends depending on fund holding<40% bonds - some online fund supermarkets may not separate them out - so you need to DIY .. :( Hence I assume people avoid complexity and take the hit not claiming back this incurred cost. Whether people -or even accountants- understand what ERI is - and the fact you have to pay Income/Divi tax on it it's another matter. Yes the issue may be related to dividend arising after the sale; this is more prominent for funds rather than shares as funds deemed distributions can happen 6 months after the reporting period end. One may sell just after the reporting period end - and have 6 months to go before getting to the distribution event. You end up paying income / divi tax on the distribution but have no CG to claim the cost against anymore? |
@tellme-why Oh wow ERI OK that's something new for me actually. I will read more about it! I'll also keep thinking how best to account for all this stuff in the calculations by the way. Back to your example, but I'll add another sell event after the dividend:
I am guessing this is clear that we would apportion Then let's get sneaky and add some more sales:
Again, I think clear, we apportion What if we then add a buy that B&Bs with the final sale:
Do we then need to not apportion the dividend to this sale? Because it matches against the buy, so those shares sold are not in any way ones that were part of the dividend right? Then I start thinking what about if you add in things like multiple dividends, selling part of a section 104 holding in between those 2 dividends. The maths just starts to completely blow my mind. I simply cannot think of how best to handle all this!! |
@mattjgalloway here is an example of ERI https://www.vanguardinvestor.co.uk/investing-explained/general-account-tax-information I quote the top left section "If you hold Vanguard Irish-Domiciled funds (including our ETFs) (also known as reporting funds) in your Vanguard general account, then you may need to declare something called "Excess reportable income". An example of fund may be a plain vanilla FTSE 250 ETF that is IRL domiciled - rather than GB domiciled - hence attracts the additional complexity of ERI. You avoid ERI if you hold only funds with ISIN commencing by "GB", but you loose variety - Vanguard do not have decent ETF for FTSE that are "GB".. I have to think your 3 steps above are all correct! |
@tellme-why Sorry for not updating here. I have on-and-off been thinking about how to handle all this. I might need to significantly refactor how the offsetting for dividends and capital return works. But I'll do it if necessary. I'm just wondering now about case like this:
I guess the logic here is easy and we can just accumulate the two dividends to be a total of £20 allowable expenses on the disposal on 1st May. Then what about not a full sale:
I guess the logic here is again easy and we say it's half the dividends go to that sale, so £10 allowable expenses on the disposal on 1st May. Then what about:
The first disposal seems clear at £10 allowable expenses on the sale on 1st May again. And then second disposal has £15 allowable expenses because of the remainder from the first two dividends, and the whole of the third dividend. Then what about:
We have a B&B match there (1st March disposal, 3nd March acquisition). The B&B has a dividend in the middle. In this case I would say there's no dividend to match onto for that B&B disposal. But here's the kicker... what about:
Here you've got a dividend that does match with the shares bought in the acquisition on 3rd March. And so you would assume you account for that by having allowable expenses of £5 on the disposal on 1st March. But you'll notice there you've gone across a tax year. So if you did the tax return before you received that dividend on 1st May, you would not account for that dividend and then would do it later. Or even, you could have more and more dividends coming in for those shares in perpetuity which surely would have to be accounted for on that B&B'd disposal. Options I can see:
@tellme-why - this is the bit I'm struggling with. Do you have any thoughts here? It's the B&B that makes things confusing! |
Hi @mattjgalloway , thank you very much for coming back on this. I think that:
Quote: I think this is correct; but assume you had DIVIDEND 1/5/2022 for 12 (in lieu of 10 of your example), this is tricky because DIVIDEND for 2 shares would have been allowed expenses to the SELL 1/3/2022 FOO 5 10 0, which however is kind of gone that year because you have already filed the tax return. This is similar to having the disposal of all shares on 4/4/2022, but then getting a Dividend in the new tax year. Since all shares have been disposed of, the only way to recover that Dividend as the allowable cost is to do it manually in the next tax year? Sorry if I didn't get your example - in fact I learned about B&B rule to stay clear of it, but if I haven't understood your point - please write back and I will be happy to look into it again. FYI I previously posted into https://community.hmrc.gov.uk/ - they take a few days to respond and at times responses are not super accurate - but one can get some free help there.. |
I'm not sure I agree that the "DIVIDEND 1/5/2022 for 10 shares" doesn't matter with the disposal "SELL 1/3/2022", given it's B&B. Because the SELL 1/3/2022 is matching with the BUY 3/3/2022. And the "DIVIDEND 1/5/2022" is most definitely for those shares bought on 3/3/2022. On the matter of a dividend affecting a previous year's tax return if things go over a tax year - the more I think about it, the more I think that actually that's the case and you should amend a tax return. I had a similar issue once where I realised that if you have an ex-div date in one tax year, but payment in next tax year (very easily done) then you probably will not get the value for equalisation payment until after your tax return is due. I posted about that here: https://www.reddit.com/r/UKPersonalFinance/comments/nt3r2k/cgt_on_fund_sale_with_equalisation_where_sale/ This really is a) fun, b) messy! But anyway - I think I have quite a lot to go on here. One thing I'd like to do @tellme-why is to write some unit tests for these cases we're talking about. If you have any bandwidth to write out the calculations for some of these cases, I'd really appreciate it. If not I'll just request that you look over what I write for the calculations just so that we're aligned! |
Hi @mattjgalloway thank you for your reply and apologize for late response. Sorry I still don't get the B&B rule, I need to read it more; in this edge case made things a bit more complicated to untangle. I'll try to pin down some more test cases.. Thanks! |
I checked with HMRC who advised: |
Hi,
I found your code very helpful to validate my calculations.
I may have spotted an error. If you run this test example you'll notice that the 20/21 Capital gain is 1533, whilst it should be 1647.
The error arises from the code taking into account the 27/5/2021 dividend which is incorrect. The only dividend to be subtracted from 20/21 capital gains is the 28/5/20 dividend. The 27/5/2021 dividend QTY is net of the 20/12/2020 sale, so there is no proportion of the 21/12/2020 Divi to be allocated to the 20/12/2020 sale.
BUY 18/5/2019 TESTFUND 117.4812 170.24 0
BUY 20/4/2019 TESTFUND 117.1097 170.78 0
BUY 13/6/2019 TESTFUND 29.6701 168.52 0
SELL 14/9/2019 TESTFUND 0.288 179 0
DIVIDEND 28/5/2020 TESTFUND 263.973 696.53
SELL 28/12/2020 TESTFUND 77.2161 194.26 0
DIVIDEND 27/5/2021 TESTFUND 186.7569 389.08
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