Taxation of OEICs and Unit Trusts
Dividends
These are subject to income tax in the same way as dividends from equities. The first £5,000 of dividend income in each tax year is tax-free. Sums above that will be taxed at 7.5% for nontax payers and basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers.
Dividend allowance changed to £2000
Not applicable to dividends paid to trustees but dividends that fall within the standard band rate of £1000 will only be taxed at 7.5%
Interest
In order to pay interest distributions, a unit trust or OEIC must hold at least 60% of its investments in interest bearing investments, such as gilts and corporate bonds.
Interest payments are paid gross.
- The interest payments are classed as savings income and can be used under the personal savings allowance (PSA). The PSA is a tax free allowance that varies in size depending on your tax status.
- Example:
- For a basic rate tax payer the PSA is £1,000 so if the distributions fall within this allowance there will be no tax to pay. Any distributions that do not fall within the PSA are taxed at the basic rate of income tax – 20%.
- For a higher rate tax payer the PSA is £500 so if the distributions fall within this allowance there will be no tax to pay. Any distributions that do not fall within the PSA are taxed at the higher rate of income tax – 40%.
- There is no PSA for additional rate tax payers so any distributions will be taxed at the additional rate of income tax – 45%.
Capital Gains Tax (CGT)
- Everyone has a capital gains allowance of £11,300 for this tax year.
- Gains are calculated by deducting the original cost from the sales proceeds.
- Loses can be deducted.
- Units held on 31st March 1982 are deemed to have an acquisition cost equal to the market value on that date.
- Non tax payers and basic rate payer will pay 10% capital gains tax.
- A higher rate taxpayer and additional rate taxpayers will pay 20% Capital Gains Tax.
- If held within an ISA when sold the proceeds can be tax free.
Annual exempt amount has changed to £11700
Questions - Use Your Note Taker To Jot Down Ideas / Calculations
1. Richard, who is a higher rate taxpayer, receives a dividend distribution of £11,800 from his unit trust
holding. Assuming he has no other dividend income, what amount of income tax will he need to pay
on this distribution?
a) £510.
b) £3,835.
c) £2,720.
d) £2,210.
D)
The annual dividend allowance is £5,000, so first deduct this from the dividend distribution amount
= £6,800. The dividend tax rate for higher rate tax payers is 32.5% so multiply £6,800 by the dividend
tax rate giving a tax liability of £2,210.
2. Nigel, a higher-rate taxpayer, receives a dividend distribution of £9,540 from his unit trust holding,
his only equity investment. How much Income Tax will he need to pay on this distribution?
a) £340.50.
b) £1,475.50.
c) £1,816.00.
d) £3,100.50
B)
He has no other equity investments so will have no other dividend income so first deduct the £5,000
dividend allowance from the distribution to get £4,540. As a higher rate tax payer there will be
32.5% tax to pay on dividends – so calculate 32.5% of £4,540 to get the figure for how much tax is
due (£1,475.50).
3. Bill & Sally made gains of £22,000 and £35,000 respectively from their OEIC holdings. Neither has
made any other gains or losses in the 2017/18 tax year. If Bill already has taxable income of £18,000
and Sally has taxable income of £60,000, what is their combined Capital Gains Tax liability on these
gains?
a) £5,810.
b) £9,200.
c) £6,880.
d) £3,440.
A)
Use the tax tables if needed to determine tax status.
Bill – First, deduct the annual exempt amount for CGT from the gain – £22,000 – £11,300 = £10,700.
He is a basic rate tax payer and therefore will be liable to 10% CGT – so multiply the taxable gain by
10% = £1,070.
Sally – First deduct the annual exempt amount for CGT from the gain – £35,000 – £11,300 = £23,700.
She is a higher rate tax payer so CGT is taxed at 20%. – multiply the taxable gain by 20% = £4,740.
Add the two taxable amounts together and you get £5,810.
4. Michael’s unit trust is invested in a UK Equity Income fund. Joseph’s open ended investment
company is invested in a UK Corporate Bond Fund. In respect of the income distributions they
receive from their investments it is TRUE to say that:
a) Michael’s will be paid with no tax deducted, and Joseph’s will be paid net of 20%.
b) Michael’s will be paid net of 10% and Joseph’s will be paid net of 20% tax.
c) both will be paid with no tax deducted.
d) both will be paid net of 20% tax.
C)
non equity unit trusts can pay interest (must hold 60% in interest bearing assets) – this
interest is paid gross
- Further study text reading: Pages 194-197