Taxation of collectives held directly

This article looks at the taxation of a collective investment when owned directly by a UK resident investor and considers any additional liability which may fall on the investor.

Although there are multiple asset classes available for clients to invest in, we have focused on collectives investing in UK equity, fixed interest and property. We will consider the taxation of income and gains, realised and unrealised.

This article should be read in conjunction with ‘Advantages and disadvantages of a UK collective held by UK investors’.

Directly owned collective – income

Equity fund – dividends

With effect from 6 April 2016, UK dividends from UK equity funds and, distributions from offshore funds with more than 40% in equities made to UK investors, are no longer received with a 10% tax credit

Individuals now have a £5,000 dividend allowance within which dividends are received with no further tax liability.  Dividends received in excess of this allowance are now subject to income tax at the new dividend rates:

7.5% for a basic rate taxpayer (BRT)

32.5% for a higher rate taxpayer (HRT) and

38.1% for an additional rate tax payer*(ART)

Fixed interest fund

A fixed interest fund will typically be made up of gilts, corporate bonds or bank deposits. Alternatively it may be a mixed fund where the value of the underlying interest producing assets exceeds 60% of the fund. Interest is taxed at source at 20%. A non­taxpayer can reclaim the tax actually deducted. A BRT has no further income tax liability, a HRT is taxed at 40% on the gross interest so would be liable to an additional 20% income tax and an ART is taxed at 45% on the gross interest and so would be liable to an additional 25% income tax. 

Property fund

A property fund may pay rental income (known as a property income distribution or ‘PID’) or dividend income depending on the nature of the fund.

Where the income is a PID it suffers 20% tax deducted at source. A non­taxpayer can reclaim the tax paid. A BRT has no further liability, a HRT is taxed at 40% on the gross PID so would be liable to an additional 20%, and an ART would be liable to an additional 25%. 

Where the property fund distributes a dividend, the dividend is taxed as for a UK equity fund, as detailed above.

Directly owned collective – capital gains

The fund would suffer no capital gains tax on assets held within the fund. Realised gains would be subject to either 10% or 20% (or a mixture of both where the chargeable gain, when added to the individual’s other taxable income, straddles the higher rate tax threshold) after any available annual exemption has been applied (£11,100 for 2016/17). A fund switch would realise gains and give rise to a taxable event.

Personal representatives of deceased persons and most trustees suffer a flat rate of 20% on the entire gain.  Some trusts are entitled to an annual exemption of half of the rate applicable to individuals £11,100/2 = £5,550.  This is reduced where the settlor of the trust has set up more than one trust but is reduced to a minimum of £1,110 per trust.

Realised losses are set against current year realised gains or, if the losses are greater than realised gains, any excess can be carried forward, provided that the losses are registered with HMRC.

* Finance Act 2009 introduced a top rate income tax currently 45% for trusts and for individuals (referred to in this document as ‘additional rate taxpayers’) with income in excess of £150,000 from April 2010.

This article is based on Old Mutual Wealth’s interpretation of the law and HM Revenue & Customs practice as at April 2015. We believe this interpretation is correct, but cannot guarantee it. Tax relief and tax treatment of investment funds may change.

Old Mutual Wealth does not accept any liability for any action taken or refrained from being taken on the basis of information contained in this or any related article.

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