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    • kheimon
    • By kheimon 13th Jan 19, 12:42 PM
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    kheimon
    Taxing reinvested income on unit trust
    • #1
    • 13th Jan 19, 12:42 PM
    Taxing reinvested income on unit trust 13th Jan 19 at 12:42 PM
    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
Page 1
    • 00ec25
    • By 00ec25 13th Jan 19, 12:54 PM
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    00ec25
    • #2
    • 13th Jan 19, 12:54 PM
    • #2
    • 13th Jan 19, 12:54 PM
    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
    • By kheimon 13th Jan 19, 1:00 PM
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    kheimon
    • #3
    • 13th Jan 19, 1:00 PM
    • #3
    • 13th Jan 19, 1:00 PM
    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
    • By tg99 13th Jan 19, 3:29 PM
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    tg99
    • #4
    • 13th Jan 19, 3:29 PM
    • #4
    • 13th Jan 19, 3:29 PM
    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
    • By londoninvestor 13th Jan 19, 6:18 PM
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    londoninvestor
    • #5
    • 13th Jan 19, 6:18 PM
    • #5
    • 13th Jan 19, 6:18 PM
    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.
    Originally posted by tg99
    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
    • By kheimon 13th Jan 19, 6:19 PM
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    • #6
    • 13th Jan 19, 6:19 PM
    • #6
    • 13th Jan 19, 6:19 PM
    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
    • By kheimon 13th Jan 19, 6:22 PM
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    kheimon
    • #7
    • 13th Jan 19, 6:22 PM
    • #7
    • 13th Jan 19, 6:22 PM
    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
    • By londoninvestor 13th Jan 19, 6:28 PM
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    • #8
    • 13th Jan 19, 6:28 PM
    • #8
    • 13th Jan 19, 6:28 PM
    Not that it strictly matters to my investment objectives, but I didn't know about this! Thanks!
    Originally posted by kheimon
    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
    • By tg99 13th Jan 19, 6:45 PM
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    • #9
    • 13th Jan 19, 6:45 PM
    • #9
    • 13th Jan 19, 6:45 PM
    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.
    Originally posted by kheimon
    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
    • By Heedtheadvice 13th Jan 19, 11:05 PM
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    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
    • By londoninvestor 13th Jan 19, 11:36 PM
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    londoninvestor
    Outside all income is taken into account and forms part of your tax calculation, reinvested or not.
    Originally posted by Heedtheadvice
    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).
    Last edited by londoninvestor; 13-01-2019 at 11:47 PM.
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