In this week’s Q&A, Vivienne Chung, adviser at Croner-i VIP Tax Team, explains the tax implications when dividends are reinvested in unit trusts
My client is a UK resident individual and has sent me a broker’s statement with some details of his investments.
He owns some units in a UK unit trust, and it refers to a dividend on the statement, but he never received this dividend because it was automatically reinvested into the unit trust. He is insistent that this should not be taxable since he never received the money as it was put back into the fund. Is the income assessable?
What is a unit trust?
A unit trust (UT) is a collective investment scheme where investors essentially pool together money which is then held on trust and invested into a portfolio that will hopefully earn a return on investment.
Unit trusts can be authorised or unauthorised with investors in each being treated slightly differently for tax purposes.
Given that your client is an individual and with the eligible investor rules under unauthorised unit trusts, it seems likely that he has invested into authorised unit trusts and therefore, this answer is based on this assumption.
Income v accumulation units
The holding of units in unit trusts entitles the investor to a share of the investments within the trust. Investors may own income or accumulation units.
A key difference between the two is that with income units, the investor is typically paid income whereas, with accumulation units, income is not paid but is automatically reinvested into the fund.
The reinvestment does not generate new units for the investor, but the value of existing units is increased.
The client appears to be holding accumulation units. Although no dividend was physically received by your client, the amounts reinvested automatically will still be taxable as if it had been distributed to him (see HMRC manual IFM03120).
If the dividend has been subject to income tax, or would have been subject to income tax but for relief, the notional dividend may be treated as allowable expenditure for capital gains tax (CGT) purposes on disposal of the units (s99B TCGA 1992, see also CG57707).
For further commentary, see Croner-i guidance at 15360 and 328-950. HMRC general guidance is available at IFM03300.
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