Unit trusts and OEICs

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15. 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.

If you are one of their unitholders, 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.
• New top rate taxpayers from 2010 will have to pay even more tax. From April of next year, when the new band comes into effect, they are to be taxed at 42.5% of the grossed up dividend, of which 10% has already been paid.

To go back to our example. Since they are assumed to have paid 10% already, higher rate taxpayers are liable for a further £20 (on top of the £8.89 already paid at source), leaving them with £60 net.

Likewise, again taking into account the 10% already paid, the new top rate taxpayers next year will be liable for a further £28.80 (on top of the £8.89 already paid at source), leaving them with £51.20 net.

Investors who held their units and shares in PEPs and ISAs were able to reclaim the tax credit through the fund managers, but this exemption lapsed on 6th April 2004.

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