21st June 2018

Prudential: Thoughts about OEICs and Unit Trusts

Open Ended Investment Companies (OEICs) and unit trusts are collective investment schemes – a form of investment fund that enables a number of investors to ‘pool’ their assets and invest in a professionally managed portfolio of investments, typically gilts, bonds, equities and perhaps property. Helen O’Hagan, Technical Manager at Prudential explores. 

Back to basics

There are many different ones to choose from in a wide variety of sectors. A client will buy units in a unit trust or shares in an OEIC however they are both taxed in the same way for an investor.

How is the income paid?

Depending on the type of asset that the fund is invested in, it will typically either pay out dividends or interest. If the investments comprise 60% or more in interest yielding assets it will be an interest OEIC or unit trust. The income is classed as savings income for tax purposes.

How is the income taxed?

In the hands of an individual dividend distributions are taxed as follows –

The first £2,000 of dividends are taxed at 0% then-

• 7.5% for dividends in the basic rate band
• 32.5% for dividends in the higher rate band
• 38.1% for dividends in the additional rate band

Interest is paid gross and is taxed as savings income as follows –

A 0% starting rate applies to savings income up to £5,000 (it does not apply if an individual's taxable non-savings income exceeds their personal allowance plus £5,000)

There is also a tax free personal savings ‘allowance’ of £1,000 (reduced to £500 if any of the individual's income is taxed at the higher rate). After that the rates are -

• 20% for basic rate tax payer
• 40% for higher rate tax payer
• 45% for additional rate tax payer

Read the full article here. 

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