Taxing reinvested income on unit trust

kheimon

I am invested in this closed-end unit trust: Fundsmith Emerging Equities Trust (FEET)

I hold their shares on an investment platform, and was never paid a dividend. That's hardly a surprise: by design, the fund doesn't have income distributions and reinvests all dividends.

I understand, however, that HMRC regards dividends reinvested within accumulation funds as... dividend income, that should be taxed as such. How on Earth am I supposed to know how much income to report for this unit trust?

Thanks

00ec25

hmmm, given what you say the fund does have income distributions, they are reinvested in the fund the same as any other accumulation fund would operate


as for finding out how much, you have ask them. They must have sent an annual notice anyway surely

kheimon

They must have sent an annual notice anyway surely

If "they" are the fund managers (Fundsmith), they can't/don't know who I am and therefore can't send me anything.

If you're indeed talking about the investment platform, in their annual tax certificate they didn't provide any information whatsoever about this fund. I suppose they would've worked out the CGT if I had sold the shares, but I just held them.

tg99

FEET is an investment trust not an OEIC or unit trust and as such you only pay income tax on distributions paid to investors. It is not an Accumulation Fund.......Investment trusts, unlike unit trusts/OEICS/some ETFs, do not have Inc and Acc versions.

londoninvestor

tg99 wrote: »

FEET is an investment trust not an OEIC or unit trust and as such you only pay income tax on distributions paid to investors. It is not an Accumulation Fund.......Investment trusts, unlike unit trusts/OEICS/some ETFs, do not have Inc and Acc versions.

That's correct.

To a point in the original post, note that in a strict sense, FEET doesn't "reinvest all dividends". As a UK authorised investment trust, it cannot reinvest more than 15% of the dividends it receives. However, it can use the 85% to pay expenses and fees, and this leaves nothing left over to distribute. The net economic effect is just the same as if the trust did indeed reinvest all its dividends and pay expenses from capital.

(That would change if the expenses got lower, or the dividends got higher - but you can probably rely on it for the foreseeable future given that Terry Smith tends to invest in growth-oriented rather than income-oriented stocks.)

kheimon

Many, many thanks for clearing this up, tg99.


While I understand the difference between open-end and closed-end, and the notion of premium/discount, I have serious issues wrapping my head around the various forms of collective investment schemes and especially their taxation. I hope this complexity is somewhat justified.

kheimon

To a point in the original post, note that in a strict sense, FEET doesn't "reinvest all dividends". As a UK authorised investment trust, it cannot reinvest more than 15% of the dividends it receives. However, it can use the 85% to pay expenses and fees, and this leaves nothing left over to distribute.

Not that it strictly matters to my investment objectives, but I didn't know about this! Thanks!

londoninvestor

kheimon wrote: »

Not that it strictly matters to my investment objectives, but I didn't know about this! Thanks!

No problem It's a bit pedantic in the case of FEET, but worth having at the back of your mind when looking at ITs generally.

Some ITs (e.g. City of London) take the strategy of keeping some of the dividend income, not to reinvest, but to have in reserve for future years and pay it out if the yield of the underlying investments dips, so investors get a smoother dividend stream over time.

tg99

kheimon wrote: »

Many, many thanks for clearing this up, tg99.


While I understand the difference between open-end and closed-end, and the notion of premium/discount, I have serious issues wrapping my head around the various forms of collective investment schemes and especially their taxation. I hope this complexity is somewhat justified.

No problem. Give your comment above, it may also be worth making sure you are aware of the concept of “excess reportable income” and the need to declare this if applicable for any offshore reporting funds (including ETFs) you hold outside of a tax wrapper. (You may already be aware but from my experience many people are not even if they have a good knowledge of collective investment funds.)

Heedtheadvice

....and the next question is do you hold these inside or outside a tax free wrapper such as an ISA or pension?


Very much a simplification but.....

Inside no tax implications. Outside all income is taken into account and forms part of your tax calculation, reinvested or not. There are chances that lowish levels of divi income result in no further tax.

londoninvestor

Heedtheadvice wrote: »

Outside all income is taken into account and forms part of your tax calculation, reinvested or not.

For unit trusts/ OEICS/ ETFs, yes. What's taxable is the underlying income received, minus any expenses that are charged against income - and it's taxable whether it's all distributed (as in UK-domiciled income units), all retained (as in accumulation units), or a mixture of both (as in foreign-domiciled distribution units that have non-zero excess reportable income).

For investment trusts (like the one being discussed here), no - what's taxable is the dividend that is actually distributed. That could be nothing (as in this case); it could be less than the underlying dividend income received into the investment trust; or it could be more (particularly if reserves are used to pay part of the dividend).