Understanding the taxation of OEICs and unit trusts
Up to 30 CPD minutes
Module description
Introduction
OEICs (Open Ended Investment Companies) and unit trusts are commonly used collective investments and share the same tax treatment. They form part of many client investment portfolios and advisers need a thorough understanding of how they are taxed, both on distributions and on disposals.
This module should take around 30 minutes to complete. Once you have completed all the sections there is a short self-assessment quiz to check what you have learned and a CPD certificate for up to 30 minutes can be claimed.
This module should take around 30 minutes to complete. Once you have completed all the sections there is a short self-assessment quiz to check what you have learned and a CPD certificate for up to 30 minutes can be claimed.
Outcomes
On completion of this module you should be able to:
- Explain how investors are taxed on income from equity and non-equity funds
- Determine the tax liability due on gains from disposals of OEICs and unit trusts
- Describe how the share matching rules operate if the same shares are sold and repurchased within 30 days
Learning material
This module explains the different taxes applicable to collective investment schemes; whether inside the fund, on income generated, when investment returns are shared or on death.
CPD minutes: up to 30
Read the taxation of OEICs and unit trusts guideOpens in new windowCPD minutes: up to 30
Post learning assessment
Question 1
Delia is invested in a long-term Growth OEIC, which holds less than 60% in cash and fixed interest securities. Which statement is true about the income distributions?
a. These are taxed as interest. Delia may be able to use her Personal Savings allowance to cover any tax liability
b. These are treated as dividends. Delia may be able to use her Dividend allowance to cover any tax liability
c. These are treated as a capital gain. Delia may be able to use her capital gains tax annual exemption to cover any tax liability
d. No further tax is due, as any liability has already been covered by the fund manager
a. These are taxed as interest. Delia may be able to use her Personal Savings allowance to cover any tax liability
b. These are treated as dividends. Delia may be able to use her Dividend allowance to cover any tax liability
c. These are treated as a capital gain. Delia may be able to use her capital gains tax annual exemption to cover any tax liability
d. No further tax is due, as any liability has already been covered by the fund manager
Question 2
Dev invested £10,000 in an ethical unit trust, buying 5,000 income units. Six months later, he bought another 5,000 units when the price was £1.90. Dev recently switched to the accumulation version of the same ethical fund, when the value of his holding was £24,000.
What is the capital gain created by the switch?
a. Average cost is £2.20 per unit (10,000 units = £22,000). So gain was £2,500
b. Average cost is £1.95 per unit (10,000 units = £19,500). So gain was £4,500
c. Average cost is £2.00 per unit (10,000 units = £20,000). So gain was £4,000
d. No gain – as Dev was switching to different share class within the same fund
What is the capital gain created by the switch?
a. Average cost is £2.20 per unit (10,000 units = £22,000). So gain was £2,500
b. Average cost is £1.95 per unit (10,000 units = £19,500). So gain was £4,500
c. Average cost is £2.00 per unit (10,000 units = £20,000). So gain was £4,000
d. No gain – as Dev was switching to different share class within the same fund
Question 3
Judith sells 1,000 shares in an OEIC on 1 February when the price was £9.50 per share. She originally acquired the shares when they were valued at £5.00 per share. She repurchases 1,000 shares in the same fund on 1 March for £9.60 per share. Which of the following statements is correct?
a. Judith has a capital gain of £100
b. Judith has a capital gain of £4,500
c. Judith has a capital loss of £100
d. There would be no capital gain if she repurchased them via her ISA
a. Judith has a capital gain of £100
b. Judith has a capital gain of £4,500
c. Judith has a capital loss of £100
d. There would be no capital gain if she repurchased them via her ISA
Check your answers
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Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.