The Internal Taxation position of the main types of UK Investment Products.

A forgotten tax?

The rates of personal taxation (and tax reliefs) applicable to individuals who hold products such as ISA's, Unit Trusts or Personal Pensions is quite widely known, and is frequently a deciding factor when choosing to use one product rather than an alternative product.

However, a factor that is often ignored or understated is that many investment funds held within different product wrappers also suffer internal taxation within the fund itself. Like personal taxation, the rates and types of taxation applicable differ between different types of products (surprise, surprise).

As we had difficulty locating a comparison of these products, we decided to create a comparison matrix from scratch.

As you will see, there are some differences between Life Insurance Funds (accessible via Investment Bonds), Unit Trust & OEIC Funds, Investment Trusts and Personal Pensions. This 'hidden' layer of taxation will impact the returns that you receive and/or the amount of capital growth within the specific investment fund.

In general, Life Funds suffer the heaviest taxation, while Offshore Bonds and Personal Pensions suffer the least internal taxation. However, does this mean that you should invest all your spare cash in Offshore Bonds and Personal Pensions? Not quite, as this ignores the personal tax liabilities that could be applicable to a holder of one of these plans. In reality, even an onshore bond can be a suitable investment for a certain class of taxpayers in certain circumstances.

	UK Investment Bond	Offshore Investment Bond	Investment Trust	Unit Trust	OEIC	ISA	Personal Pension
[Taxation of:]

UK Dividends	Received net of 10% tax credit. No further tax payable	Received net of 10% tax credit. No further tax payable	Received net of 10% tax credit. No further tax payable	Received net of 10% tax credit. No further tax payable	Received net of 10% tax credit. No further tax payable	Received net of 10% tax credit. No further tax payable. Tax credit no longer reclaimable	Received net of 10% tax credit. No further tax payable. Tax credit no longer reclaimable
Non-UK Dividends	Usually received net of local withholding taxes. Corporation Tax payable at 20% on grossed up dividend. Some credit may be given for tax already paid if double taxation agreement in place.	Usually received net of local withholding taxes. No further tax payable	Usually received net of local withholding taxes. Corporation Tax payable of up to 30% on grossed up dividend. Some credit may be given for tax already paid if double taxation agreement in place.	Usually received net of local withholding taxes. Corporation Tax payable at 20% on grossed up dividend. Some credit may be given for tax already paid if double taxation agreement in place.	Usually received net of local withholding taxes. Corporation Tax payable at 20% on grossed up dividend. Some credit may be given for tax already paid if double taxation agreement in place.	Usually received net of local withholding taxes. No further tax payable. No reclaim allowed.	Usually received net of local withholding taxes. No further tax payable
Other Income	Corporation Tax payable at 20% on interest and Bond income, and 22% otherwise	No tax payable	Corporation tax payable at up to 30%	Corporation tax payable at 20%	Corporation tax payable at 20%	No tax payable. Reclaim permitted where tax deduced at source on UK income.	No tax payable

Capital Gains	Can be reduced using indexation allowance	No tax payable (usually)	No tax payable	No tax payable	No tax payable	No tax payable	No tax payable
Tax payable in directly held assets	Corporation Tax payable at 20% on gains	No tax payable (usually)	No tax payable	No tax payable	No tax payable	No tax payable	No tax payable
Tax payable where assets are held in other collective investment schemes	Deemed annual disposal of assets but gain / loss spread over seven year period.	No tax payable (usually)	No tax payable	No tax payable	No tax payable	No tax payable	No tax payable


Personal Tax liabilities applicable to holders of these investments


	UK Investment Bond	Offshore Investment Bond	Investment Trust	Unit Trust	OEIC	ISA	Personal Pension
Income Tax

Nil Tax-Payer	No income tax payable, as long as the 'top-sliced' gain does not push the investor into the higher-rate tax band.	No tax payable, as long as gain does not push the taxpayer into any tax bands.	No tax payable on dividends. No refund of tax credit.	No tax payable on dividends. No refund of tax credit. Possible tax refund if the UT pays interest (from cash and bonds funds), not dividends	No tax payable on dividends. No refund of tax credit. Possible tax refund if the OEIC pays interest (from cash and bonds funds), not dividends	No tax payable on dividends or interest payments. No refund of tax credit.	25% of fund can be taken tax-free at retirement age. No further tax on income secured from the residual pension funds.
10% Tax-Payer	No income tax payable, as long as the 'top-sliced' gain does not push the investor into the higher-rate tax band.	Gain taxable at 10%	No tax payable on dividends.	No tax payable on dividends. No refund of tax credit. Possible tax refund if the UT pays interest (from cash and bonds funds), not dividends	No tax payable on dividends. No refund of tax credit. Possible tax refund if the OEIC pays interest (from cash and bonds funds), not dividends	No tax payable on dividends or interest payments.	25% of fund can be taken tax-free at retirement age. 10% Income Tax on income secured from the residual pension funds.
20% Tax-Payer	No income tax payable, as long as the 'top-sliced' gain does not push the investor into the higher-rate tax band.	Gain taxable at 20%	No tax payable on dividends.	No tax payable on dividends. No refund of tax credit. No further tax to pay if the UT pays interest (from cash and bonds funds), not dividends	No tax payable on dividends. No refund of tax credit. No further tax to pay if the OEIC pays interest (from cash and bonds funds), not dividends	No tax payable on dividends or interest payments.	25% of fund can be taken tax-free at retirement age. 20% Income Tax on income secured from the residual pension funds.
40% Tax-Payer	Gain assessed at 20% (40% less 20% tax taken within the fund). Where a gain pushes a basic-rate taxpayer into the higher band, the rate will be pro-rated between 0% and 20%	Gain taxable at 40%	The grossed up dividend is assessed at the special higher rate at 32.5%, with a 10% tax-credit	The grossed up dividend is assessed at the special higher rate at 32.5%, with a 10% tax-credit. Interest payments (from cash and bond funds) are assessed at 40%, with a 20% tax credit.	The grossed up dividend is assessed at the special higher rate at 32.5%, with a 10% tax-credit. Interest payments (from cash and bond funds) are assessed at 40%, with a 20% tax credit.	No tax payable on dividends or interest payments.	25% of fund can be taken tax-free at retirement age. 40% Income Tax on income secured from the residual pension funds.




Pensioners entitled to age allowance should be aware that dividend or income payments from Unit Trusts / OEICS / Investment Trusts to calculate will be taken into account to check whether the income limit is exceeded. 5% withdrawals from Investment Bonds are not taken into account when calculating age allowance income limits, but any chargeable events resulting from Investment Bonds are assessed against the limits.

Capital Gains Tax

From the above products, only Unit Trusts / OEICS / Investment Trusts are liable to a Capital Gains Tax charge in the hands of individuals.
Indexation Relief is available for assets held prior to 31 March 1998. Taper relief is available for assets held since April 1998. The Annual CGT Exemption is available to offset the gains. The gain is added on top of an individuals income and taxed accordingly.

If you have any comments about the accuracy of this table, please let us know.

NOTE: This document is intended to provide a brief overview of the subject. It should not be read as a recommendation to use any particular product, as it does not take into account individual circumstances and attitudes.