How is a company-owned UK collective taxed?

Gains

If more than 60% of the value of the underlying investments is represented by investments which make interest distributions (eg debt, deposit or fixed interest type investments) then the collective will be taxed under the loan relationship rules.

However, where the underlying investments are more than 40% equity-based and make dividend distributions, the loan relationship rules will not apply. The collective will benefit from a gross roll-up basis on capital gains inasmuch as any capital gain will not be chargeable until the gain is actually realised. It is also a requirement that the underlying equity investments do not fall below the threshold at any time, ie 40%.

Realised gains would benefit from Retail Prices Index (RPI) indexation relief (which is still available to corporate investors) – but bear in mind that a fund switch would be a disposal for tax purposes.

Income

There would be no corporation tax liability on that part of a UK dividend treated as franked investment income. Any distributions received that are treated as unfranked investment income (including income automatically reinvested through accumulation units) could be liable to additional corporation tax on an arising basis. This is because the requirement is based on the whole company accounting period and not just at inception.

A tax certificate will accompany any dividend payments and will normally provide the dividend distribution details. However, to identify any unfranked element (where additional tax may be due) there will be a requirement to review the actual fund manager’s report and accounts. This information is usually available from the fund group’s own website.