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        Updated: April 06, 2024

        Tax on Unit Trusts

        Need information about unit trusts tax? Find out how it works and how to avoid paying over the odds in our guide.

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        Unit trusts are one of the most popular types of collective investment schemes available in the UK. By pooling your money together with lots of other investors you can gain access to a particular type of asset class, geographical region or industry sector.

        This article takes a closer look at what tax may be due on any funds held within unit trusts when you receive an income distribution or eventually come to cash in your investment.

        Are unit trusts taxable?

        Yes, they are. In the UK any income distributions or capital growth from unit trust investments could be subject to either income and/or capital gains tax. The amount of tax you may potentially be liable for depends upon the type of share class you have chosen and the level of income or capital growth you have received.

        When you invest in unit trusts there are generally two types of share class (or units) available which allow you to choose whether you would prefer to have any income from the fund paid out to you or for it to be reinvested. These are known as:

        • Income shares (units)
        • Accumulation shares (units)

        Unit trusts made up of income shares will pay regular distributions to investors either as interest or dividends (depending on the types of assets within the fund). If you prefer, you can choose to have any income distribution reinvested.

        Unit trusts which hold accumulation shares do not distribute any income, instead it is automatically reinvested within the investment fund for capital growth purposes.

        If you’d like to know more about how unit trusts work give us a call on 0808 189 0463 or make an enquiry and we will arrange for an expert to get in touch.

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        How is income tax paid on unit trusts?

        Whether a unit trust investor receives interest or dividend payments is determined by the mix of underlying assets held within the fund. This will also decide how much income tax may be potentially liable.

        If more than 60% of the underlying investments within a unit trust are made up of cash or interest-bearing securities (such as UK gilts or government bonds) then any income distributions will be treated as interest payments. If it is less than 60% then all income distributions will be treated as dividends.

        If you receive dividend distributions, the good news is you’re given a £2,000 dividend allowance (current tax year – 2021/22), therefore, all income paid below this amount will be taxed at 0%. Any dividend income paid above this amount will be taxed as follows:

        • 7.5% (for basic-rate taxpayers)
        • 32.5% (for higher-rate taxpayers)
        • 38.1% (for additional-rate taxpayers)

        If you receive income distributions as interest this will be paid to you gross and will be taxed as savings income, which means the first £5,000 could be taxed at 0% ( starting rate for savings in the current tax year – 2021/22).

        This rate allowance reduces by £1 for every £1 you earn as non-savings income over your personal allowance ( currently £12,570), therefore, it does not apply to anyone earning over £17,570.

        However, basic-rate taxpayers can use their tax-free personal savings allowance of £1,000 (current tax year). This reduces to £500 for higher-rate taxpayers and £0 for additional-rate taxpayers. Any income distributions paid above these amounts will be taxed as follows:

        • 20% (basic-rate taxpayers)
        • 40% (for higher-rate taxpayers)
        • 45% (for additional-rate taxpayers)

        If you’d like to know more about how income tax is payable on unit trusts get in touch and we will arrange for an advisor we work with to contact you directly.

        How is capital gains tax paid on unit trusts?

        Capital gains tax may be liable on any profits made on either accumulation or income-based unit trusts depending upon the amount of capital gains realised once a chargeable event occurs, such as:

        • Cashing-in your full investment
        • Making a partial withdrawal
        • Switching between unit trust investment funds

        As with income distributions, you are entitled to an annual tax-free allowance, which for the current tax year (2021/22) is £12,570. This means you are only liable for overall gains which exceed this amount.

        Calculating capital gains tax on unit trusts – examples

        The rate used to calculate the amount of capital gains tax you may be liable for depends upon the income tax band you fall within, based on your taxable income and any capital gains over and above your tax-free allowance.

        If this amount places you within the basic-rate tax band, you will pay 10% tax on any capital gains. For higher-rate and additional-rate you will pay 20%.

        For example, if your taxable income is £25,000 and your overall capital gains, after deduction of the tax-free allowance is £600, you would pay £60 capital gains tax (10%) on your gain as your overall income is below the basic-rate threshold (£37,500 in the current tax year).

        However, if your total taxable income was £40,000 then you would fall within the higher-rate band and be liable to 20% tax on any capital gains over your tax-free allowance which, in the example above would mean a tax payment of £120.

        How do I work out the capital gains tax on a partial withdrawal of a unit trust?

        The capital gains tax rates, as outlined above, apply regardless of whether you are making a full or partial disposal, therefore, the same equation regarding the addition of any gain onto your overall taxable income would be used in either instance.

        Working out any potential capital gains tax liability on unit trusts can be quite complex – this is where we can help. The advisors we work with can provide the expert knowledge required in this area and can help you work out what, if any, capital gains liability you may have.

        Give us a call on 0808 189 0463 or make an enquiry and we will arrange for an expert to get in touch.

        Are unit trusts taxable if held within an ISA?

        No they’re not. Any unit trust held within an individual savings account (ISA) is free of income and capital gains tax.

        For the current tax year you’re allowed to invest up to £20,000 within a stocks and shares ISA which would offer the option of investing within a range of unit trusts, depending upon your personal attitude to risk.

        If you’d like to know more about how best to use your ISA allowance, get in touch and we will arrange for an advisor we work with to contact you.

        Speak to a financial expert

        Whilst unit trusts can be quite a popular investment option it’s important to have a good understanding of how they’re treated for tax purposes. The advisors we work with can help you better understand how these types of investment are taxed before you make any final decisions.

        All advice is free and any information is always given in the strictest confidence. Call us on 0808 189 0463 or make an enquiry to get started.

        Ask A Quick Question

        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in unit trusts. Ask us a question and we'll get the best expert to help.

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        Richard Angliss

        Richard Angliss

        Finance Expert

        About the author

        Richard Angliss has made a career in financial services which stretches over 40 years.

        His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.

        For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.

        At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.

        With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them.  Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.

        He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.

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