Taxation of investment funds

UK unit trusts and OEICs (open ended investment companies) are subject to corporation tax on investment income – although dividends are generally exempt – but not on capital gains.  Some types of fund are however “transparent” for tax purposes, meaning that all taxation is applied at the investor level.

Corporate investors must “stream” dividend distributions received from UK funds into “franked” (exempt dividend) and “unfranked” (taxable interest) components, and can reclaim the deemed tax credit on the “unfranked” element.  This is of particular benefit to tax exempt categories such as pension business or exempt business of a friendly society.

Accumulations of income made by UK funds are taxable for investors as if the income had been paid out but, to avoid double taxation, an uplift to the base cost of the investment for chargeable gains purposes is available.  Separate rules apply to offshore funds.

Corporate investors must identify whether a fund in which they are invested had over 60% of its investments in debt assets at any time, since this would cause the whole fund to be taxed as a loan relationship.