Unit trusts and OEICs

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16. 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 a PEP or 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%

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.

1. What is a unit trust? 2. What is a unit? 3. The trust deed and scheme particulars 4. The people behind a unit trust 5. Charging structure of unit trusts 6. Pricing of units - FSA rules on maximum offer price 7. Pricing of units - FSA rules on minimum bid price 8. Pricing of units - in practice 9. Pricing of units - historic and forward pricing 10. OEICs - Open Ended Investment Companies 11. Shares in OEICs 12. OEICs - pricing 13. OEICs - charges 14. Taxation of unit trusts and OEICs - Introduction 15. Tax treatment of dividends from equity funds 16. Tax treatment of coupons from non-equity funds 17. Capital Gains Tax 18. Tax shelters 19. Investment powers of fund managers: 'eligible investments' 20. Diversification 21. Fund classification: risk gradings 22. Selecting a fund: Defining your objectives 23. Selecting a fund: Active vs passive 24. Selecting a fund: lump sum vs regular savings 25. Selecting a fund: Past performance 26. Where to buy unit trusts and OEICs 27. Buy with or without advice? 28. The mechanics of buying 29. The mechanics of selling 30. Share exchanges and fund switches 31. Investor protection 32. Conclusion

• Exchange-Traded Funds