739 Taxation of unit holders in undertakings for collective investment

Summary

This section sets out the taxation regime for investors in authorised unit trusts, UCITS and designated investment companies. The section complements section 738 which provides the tax regime for these entities themselves where they do not come within the tax regime provided by section 734.

Under section 738 the entity itself suffers an annual tax charge at the standard rate of income tax on a measure of income and gains. An individual who is a unit holder in such an entity is not liable to any further tax whether on payments received from the entity or on the proceeds of disposal of units.

A corporate unit holder, on the other hand, on the receipt of a payment is treated as having received an amount which has been subjected to tax at the standard rate of income tax. A credit is given for this tax. Similarly any chargeable gain accruing to a corporate unit holder from the disposal of units is treated as an amount of gain from which capital gains tax at the standard rate of income tax has been deducted.

Details

(1) Payments made on or after the 6th of April 1994 by an undertaking for collective investment are tax free in the hands of a unit holder who is an individual but are liable to corporation tax in the hands of a corporate investor. In the case of a corporate investor, the investment income from the undertaking is grossed up at a 30 per cent rate of income tax, the grossed up amount is liable to corporation tax and a credit is allowed for the income tax treated as having been deducted from the gross amount.

(2) Where the units are held by a company in the course of a financial trade (for example, banking) the charge under Case I of Schedule D in respect of investment returns from an undertaking for collective investment is the “regrossed” amount of the income attributable to the investment return. The regrossing is at the rate of tax applied to the investment returns of the undertaking itself. Where the investment returns are dividends, the entire payment received is regrossed. Where, however, the investment return is a profit or gain on a disposal of units by the unit holder, whether to the undertaking or to a third party, only the profit element of the payment received is regrossed. The regrossed amount is charged under Case I or Case II, as appropriate, and credit allowed. The construction of “A” in the formula in subsection (2)(d) is amended to reflect the increase in the applicable rate from the standard rate of income tax to 30 per cent.

(3) Gains on the disposal of units by individuals are exempt from capital gains tax where the units were acquired on or after the 6th of April, 1994. If the units were acquired before the 6th day of April, 1994 the appreciation in value up to that date will be a chargeable gain.

(4) Gains on the disposal of units by corporate investors are regrossed at the rate of 30 per cent before being brought into the company’s profit computation in accordance with section 78. The tax treated as having been deducted from the gross amount is allowed as a credit.

(5) In determining whether units were acquired before or after the 6th day of April, 1994, account is to be taken of the date of acquisition by a person who is treated as having disposed of them to the current owner on a no gain no loss basis.

(6) There is no charge on unit holders’ income receipts or capital gains referable to units in an undertaking which started after 25 May, 1993.

Relevant Date: Finance Act 2019