Distributions from non-equity funds are treated as interest rather than dividends. They are subject to a 20% tax deduction at source unless the funds are held within a PEP or ISA.
Investors in non-equity funds within PEPs and ISAs retained the right to reclaim tax deducted at source after 6th April 2004.
Interest distributions made from non-PEP/ISA funds are liable to income tax even if they are reinvested in further shares or units.
The Equalisation Payment
Investors in unit trusts or OEICs are entitled to any dividends payable on holdings acquired before the ex-dividend (xd) date. The xd date is the cut-off point for entitlement to the next distribution. Units and shares acquired after the xd date (which falls two months before the actual distribution date) do not qualify for the next distribution.
If an investor buys units or shares before the xd date (i.e. 'cum dividend'), the buying price will reflect monies accumulated within the fund to pay the next distribution. When the units or shares go xd, the unit or share price usually falls to reflect the impending cash outflow from the fund.
Investors who have acquired units or shares cum dividend will usually receive an equalisation payment included in their first distribution. This represents a partial return of capital and is not taxable. The equalisation payment allows all unit or shareholders in a fund to receive the same distribution per unit/share.
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