Taxation of Unit Trusts / OEICs
Income Tax
Equity distributions:
When income is received or accumulated it carries a 10% credit. For example, for every 90p of dividend paid to an investor, there is a 10% tax credit attached making a gross dividend of 100p.
A non taxpayer, starting rate taxpayer and basic rate taxpayer needs to take no further action. The 10% tax credit fully covers the liability. Non taxpayers cannot reclaim the tax credit from HMRC (Her Majesty's Revenue and Customs).
A Higher rate taxpayer needs to pay a further 22.5% of the net dividend – therefore, bringing the total liability to 32.5% of the gross dividend. For example:
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Dividend £90.00 Tax credit £10.00 Gross dividend £100.00 Less 32.5% higher rate tax on gross amount £32.50 Net dividend £67.50 Tax due £32.50 Less 10% covered by tax credit £10.00 Further 22.5% payable by investor £22.50 |
Interest distributions:
Income from fixed interest funds (such as Corporate Bond funds, Gilt funds etc) is treated differently to equity income. Distributions from fixed interest funds are paid net of 20% tax. For example:
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Interest £100.00 Less 20% tax £20.00 Net Interest distribution £80.00 · Non taxpayers can reclaim back the £20.00 tax deducted. · 10% starting rate taxpayers can reclaim half the tax (£10.00). · Basic rate taxpayers have no further liability. · Higher rate taxpayers are subject to a further 20% (£20.00) tax. |
Accumulated income
if no income is being taken and the dividend or interest is being reinvested in the unit trust/OEIC in accumulation units or reinvested income units, it still counts as being income for the investor and will be subject to the same tax treatment as income that is distributed.
Capital Gains Tax
Internal capital gains within the unit trust/OEIC are exempt from tax. Therefore, disposals of investments by the unit trust/OEIC are usually made without any tax liability.
However, capital gains may be payable on any profits made by a taxpayer who disposes of units/shares, though it is important to remember that each individual has an annual exemption, currently £9,200.
Also, it is important to remember that any losses realised on disposals can be offset against realised profits and that unrelieved losses can be carried forward indefinitely.