Unit trust & OEIC investment funds for ISA’s

A unit trust is a collective investment created under trust. The trust pools the money of numerous individual investors to create a fund with a specific investment objective - income, growth, or both.

A unit trust provides:-

  • Diversification of asset backed investments.
  • The opportunity to invest easily in specialist sectors and foreign markets.

An OEIC is an Open Ended Investment Company and came into being in the UK in 1997. They are collective investment vehicles but structured as companies rather than trusts.

The main advantage of OEICs for fund management groups is that they can be sold across national borders in the EU.
Like a unit trust, the OEIC itself must be authorised by the FCA before it can be promoted to the public in the UK.

Taxation of unit trusts and OEICs

The taxation of unit trusts and OEICs is identical as far as the investor is concerned.

They are:-

  • Liable for income tax on dividend and interest distributions
  • Liable for Capital Gains Tax on realised gains, subject to normal allowances

Income is normally distributed from unit trusts and OEICs on set dates in the year.
An income distribution from an equity fund is called a dividend. A distribution from a non-equity fund (e.g. gilt and corporate bond funds) is sometimes referred to as the coupon. Dividends and coupons have different tax treatments.

Tax treatment of dividends from equity funds

Unit trust and OEIC funds receive dividends from their underlying investments net of 20% corporation tax. They pass these dividends on to investors at the distribution dates, without incurring any more corporation tax.
You will receive the net dividend together with a tax credit of 10% of the gross dividend. So, if you receive a cheque for £80:

  • the gross dividend is £88.89
  • from which £8.89 (i.e.10%) has already been deducted at source

Depending on your personal tax position, you may or may not have to pay more income tax on your dividend:

  • Non-taxpayers and lower rate taxpayers don't have to pay any more but neither can they reclaim the tax credit
  • Basic rate taxpayers don't have to pay any more. The 10% tax credit is deemed to have covered basic rate tax liability.
  • Higher rate taxpayers do have to pay more tax. They are taxed at 32.5% of the grossed up dividend, of which 10% has already been paid.

Tax treatment of coupons from non-equity funds

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 an ISA.

  • Non-taxpayers can reclaim the full 20% tax deducted at source
  • Lower rate taxpayers (10%) can claim back 10%
  • Basic rate taxpayers have no further income tax liability
  • Higher rate taxpayers have to pay an additional 20%

Capital Gains Tax

Unit trusts and OEICs are not liable for Capital Gains Tax (CGT) on internal realised gains. This allows the fund managers to trade in and out of shares without having to worry about the tax implications.
Investors in a trust, however, are liable for CGT on gains they make when they sell their units (or shares in the case of an OEIC).

  • The chargeable gain is the difference between what you paid for the units and what you sell them for.
  • The rate at which you pay CGT depends on your level of income. If you have realised capital gains more than the annual exemption, the surplus is added to your income and taxed as income from savings.

Tax shelters

Both income tax and capital gains tax can be legally avoided by sheltering unit trusts and OEICs in an Individual Savings Account (ISA)

  • The maximum allowable investment into an ISA in the current tax year (2015/16) is £15,240.
  • Investors who hold their shares and units in ISAs lost their right to reclaim the tax credit on dividends on 6th April 2004.

The tax treatment is dependent on  individual circumstances and may be subject to change in the future.

 I.      A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
II.      Tax planning advice is not regulated by the Financial Conduct Authority.

Contact us for Investment Advice or for more Information...

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Tel: 0115 945 5199 between 8.30am and 5.30pm Monday to Friday - Email: info@davidburnell.co.uk

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