Unit trusts and OEICs

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17. Capital Gains Tax

Unit trusts and OEICs are not themselves liable for Capital Gains Tax (CGT) on internal realised gains. This allows the fund managers to trade in and out of shares without having to worry about the tax implications.

Investors in a trust, however, are liable for CGT on gains they make when they sell their units (or shares in the case of an OEIC).

• The chargeable gain is the difference between what you paid for the units and what you sell them for.
• Until April 2008, you could reduce the gain on units bought between 31st March 1982 and 5th April 1998 by using 'indexation'. Indexation increased the acquisition cost (including charges) by a small multiple for every month that you held an asset between those dates and so reduced the gain.
• Units bought after 5th April 1998 used to be subject to 'taper relief' (until April 2008), which also reduced the size of the gain chargeable to CGT but in a different way. If you sold your units within two years, the entire gain was chargeable. Thereafter, the proportion of the gain that was chargeable declined by 5% for each further year that the asset was held until it reached 60% after 10 years. So, if you bought units in 1999 and you sell them in 2011 making a profit of £20,000, only 60% of that £20,000 was chargeable.
• The rate at which you pay CGT depends on your level of income. If you have overall realised capital gains of more than the prevailing annual exemption after indexation and taper relief, the surplus is added to your income and taxed as income from savings.

There are three other points to remember:

1. A fund switch even within the same 'umbrella company' is treated as a disposal for CGT purposes.
2. When considering whether or not your gains exceed the annual exemption, remember that gains from unit trusts or OEICs cannot be taken in isolation. They must be added to gains realised from all other asset disposals in the tax year.
3. 'Bed and breakfasting' - the practice of selling an investment holding to crystallise a gain before it exceeds the annual CGT exemption and then buying it back the next day - no longer works! HMRC's 30-day rule makes it ineffective. Don't worry why. Just remember that the loophole has been closed.

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