Unit Trusts vs OEICs vs Investment Trusts

Overview

Collective investments allow investors to pool money and access diversified portfolios.
The three main UK structures are:

• Unit Trusts (Authorised Unit Trusts – AUTs)
• Open‑Ended Investment Companies (OEICs)
• Investment Trusts (ITs)

All fall within the broad definition of a collective investment scheme under FSMA 2000 s237, but not all are FCA‑regulated.

Regulatory Framework

Authorised Investment Funds (AIFs)

• Governed by the FCA Collective Investment Scheme Sourcebook (COLL)
• Tax rules mainly in:
• Authorised Investment Funds (Tax) Regulations 2006
• Corporation Tax Act 2010 (CTA 2010)
• Taxation of Chargeable Gains Act 1992 (TCGA 1992)

Investment trusts are FCA‑regulated for sales and distribution purposes but they are not AIFs as they are closed companies.

Structural Comparison

Key Differences at a Glance

Note: No corporate investor may hold more than 10% of a Property Authorised Investment Fund (PAIF real estate funds).

Fund‑of‑Funds vs Manager‑of‑Managers

Fund‑of‑Funds

• Lead fund invests in other retail funds
• Can be fettered (same provider) or unfettered (mixed providers)

Manager‑of‑Managers

• Lead manager appoints specialist managers to run segments of the portfolio
• Underlying holdings are direct investments, not other funds

Shared features

• Extra layer of charges
• Tax treatment identical
• Switching inside the “outer shell” does not trigger CGT for investors
• Capital gains within the structure are sheltered

Taxation of Individual Investors

5.1 Income Tax on Distributions

Dividend distributions

• Covered by the Dividend Allowance
• £500 from 2024/25
• Previously £5,000 → £2,000 → £1,000
• Tax rates:
• Basic rate: 8.75%
• Higher rate: 33.75%
• Additional rate: 39.35%
• Basic and higher rates rise by 2% from April 2026

Interest distributions

• Paid gross
• Taxed as savings income
• Rates:
• 20%, 40%, 45%
• Rising to 22%, 42%, 47% from April 2027
• Personal Allowance, Starting Rate for Savings, and Personal Savings Allowance may apply

5.2 Capital Gains Tax

• No CGT on switches within a fund‑of‑funds or manager‑of‑managers structure
• CGT arises only when the investor disposes of their units/shares
• Exception:
• Switching between OEIC sub‑funds counts as a disposal (unless held inside a wrapper structure)

6. Taxation of Corporate Investors

6.1 Dividend distributions

• Most UK‑source dividends received by companies are exempt
• AIF distributions are streamed:
• Dividend‑derived portion → exempt
• Remainder → treated as received net of 20% tax, with credit available
• Repayment capped at the AIF’s own corporation tax liability

6.2 PAIF distributions

• PAIF dividend distributions are fully exempt
• Corporate streaming does not apply

6.3 Interest‑paying funds

• Non‑micro entities taxed under loan relationship rules:
• Annual taxable gains/losses include interest + value movements
• Micro‑entities:
• Interest taxed annually
• Capital taxed only on disposal

6.4 Capital gains

• Companies pay corporation tax on gains
• Differences from individuals:
• No 30‑day share matching rule
• No annual exempt amount
• Indexation allowance available up to 31 Dec 2017
• If loan relationship rules apply → CGT rules do not apply

FAQs

What is the main difference between open‑ended and closed‑ended funds?

Open‑ended funds (unit trusts, OEICs) create or cancel units based on investor demand.
Closed‑ended funds (investment trusts) issue a fixed number of shares traded on the stock market.

Why are investment trusts allowed to use gearing?

Because they are companies with a fixed capital structure, enabling them to borrow to enhance returns.

Do switches between sub‑funds trigger CGT?

• OEIC sub‑fund switches: Yes
• Switches inside a fund‑of‑funds structure: No

Are all three structures ISA‑eligible?

Yes.

Which structure is FCA‑regulated?

Unit trusts and OEICs.
Investment trusts are companies listed on the stock exchange and not FCA‑regulated as AIFs.

Do corporate investors pay tax on fund dividends?

Generally no, due to dividend exemption rules—except for the non‑dividend portion of AIF distributions.

Do funds themselves pay capital gains tax?

Authorised funds (unit trusts and OEICs) are CGT‑exempt.
Investment trusts are also structured to avoid CGT at fund level.

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