What is an OEIC and a Unit Trust?

Unit Trusts and Open Ended Investment Companies (OEICs) are run and regulated in a similar way, and you can hold them within an Individual Savings Account (ISA) wrapper or directly.

They allow you access to collective investment funds, also known as Mutual Funds, which in turn can invest in assets such as Equities, Corporate Bonds, Commercial Property and Gilts.

The fund is divided into units or shares, which are valued on a daily basis and reflect the underlying value of the fund.  This value will fluctuate on a daily basis with market conditions.

OEICs and Unit Trusts can be held directly with a Fund Manager such as Invesco Perpetual or Jupiter. However, it is now more common for them to be held on a Platform, or Fund Supermarket, as this allows access to a wide range of Fund Managers and Funds,.

When can it be used?

An OEIC or Unit Trust is generally used only once you have contributed the maximum possible amount to an ISA in the current tax year.

They are used for those that wish to invest for the medium to long term.

OEICs and Unit Trusts can provide both capital growth and income.

OEICs and Unit Trusts are used by those that wish to take advantage of the opportunity for tax-efficient investment through exploitation of the Capital Gains Tax (CGT) annual allowance.

How it works

An investment is made into an OEIC or Unit Trust and funds are selected based on an investor’s attitude to risk, their investment goals and taking into account whether income or capital growth is required.

Income (the yield, dividend or interest) from Unit Trusts and OEICs can be paid to the investor or accumulated within the fund and is paid net of basic rate tax.  Higher rate taxpayers will have to declare this income on their tax return and pay the difference between the tax deducted and either higher rate tax, in the case of interest, or 32.5% in the case of dividend income.  Non taxpayers can no longer reclaim the tax which has been deducted at source from dividend income but they can reclaim tax deducted from income that is classed as interest, e.g. such as that payable from a fixed interest fund or a fund holding a substantial proportion of interest-bearing assets such as corporate bonds.

When a Unit Trust or OEIC is surrendered, it is subject to capital gains tax.  However, each individual has the benefit of the annual allowance which is £11,300 for 2017/18. As long as the gain, together with any other gains you may have in the same tax year, is less than the allowance, there is no tax to pay.  Any gain in excess of the annual allowance, from an OEIC or Unit Trust will be taxed at either 10% or 18% depending on your other income.

Advantages

  • If gains are less than the annual CGT allowance then no tax is payable on surrender of the OEIC or Unit Trust, which can make an OEIC or Unit Trust highly tax efficient if withdrawals are planned correctly
  • A wide variety of funds are available to invest in, which means a portfolio of OEICs or Unit Trusts can be tailored to an individual’s specific needs
  • If an investment is made via a platform, a wide range of funds and Fund Managers will be available and can be held in one plan
  • There are no limits on the amount that can be contributed in a single tax year

Disadvantages

  • A non tax payer cannot reclaim the tax which has been deducted at source from dividend income
  • An OEIC or Unit Trust is not as tax efficient as an ISA

Next steps

If you wish to receive advice on the best route for you and your investments then please do not hesitate to contact us by completing the enquiry form on this page or by calling us on 0115 933 8433.