UK tax on investments in unit trusts, OEICs and investment trusts

Unit trusts, investment trusts and OEICs are treated in much the same way as other share investments for capital gains tax purposes.

There are, however, a number of quirks and capital gains tax calculations can be quite tricky. In this section we will explain in plain English how you calculate your capital gains tax if you sell a unit trust, investment trust or OEIC holding.

The Nature of the Asset

The first point to note is that if you invest in a unit trust the nature of the underlying assets is ignored. For example, if you invest in a gilt fund your capital gains are not exempt from tax, unlike direct investors who pay no CGT when they sell. This is an important point to remember. Unit trusts and other funds offer tremendous benefits but they may result in you qualifying for less tax relief or having profits taxed that would otherwise be exempt.

Accumulation Units vs Income Units

Unit trust investors who want to reinvest their annual income distributions can choose between Accumulation units or Income Units. If you hold accumulation units you do not receive income distributions. Instead the income is reinvested automatically, raising the value of your existing units.

In contrast, if you invest in income units and reinvest your income, these are treated as new purchases.

This used to be an important distinction in terms of maximising taper relief but now that taper relief has been withdrawn the main benefit of accumulation units is that they are generally easier to handle when completing your tax return.

Umbrella Funds

If you invest in an umbrella fund which allows you to switch from one fund to another, such switches are treated as disposals and will give rise to capital gains tax.

Monthly Savings Schemes

Many funds offer a monthly saving scheme and this is an attractive way to invest gradually in the stock market. However, it also means you have lots of separate asset purchases which simply means that you'll need to keep careful records of the purchases to ensure you correctly calculate the acquisition cost.

When you come to sell your units you have to first apply the share matching rules to identify which units have been sold.

The basic rule, remember, is that the 'New 1985 Pool' now applies to provide an averaged cost basis.

Once you've identified the base cost you can then calculate your capital gain.