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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

Since 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

Since 6 April 2018 individuals have a £2,000 dividend allowance within which dividends are received with no further tax liability. Dividends received in excess of this allowance are subject to income tax at the 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. From 6 April 2017 interest is paid gross. A nontax payer has no further liability. A BRT has to pay 20% if the amount is not covered by their Personal Savings Allowance (£1,000 2019/20), a HRT is taxed at 40% if the amount is not covered by their Personal Savings Allowance (£500 2019/20) and an ART is taxed at 45%.

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 is taxed like a fixed interest fund as described above. However, if the property fund distributes a dividend, the dividend is taxed as for a UK equity fund.

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 (£12,000 for 2019/20). 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. 

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.

This article is based on Old Mutual Wealth’s interpretation of the law and HM Revenue & Customs practice as at March 2019. 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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