Collective investment schemes: unauthorised unit trusts: taxation overview
Taxation of unauthorised unit trusts
Part 9 Chapter 9 of ITA07 (ITA07/S504 to S506) sets out the income tax treatment of unauthorised unit trusts. Part 4 Chapter 10 of ITTOIA05 (ITTOIA05/S547-550) sets out the income tax treatment for unit holders within the charge to income tax and CTA10/PT9 does the same for unit holders within the charge to corporation tax. The rules about deduction of tax from payments made by the trustees to the unit holders are in Chapter 13 of Part 15 of ITA07. (See SAIM9000 onwards for the general rules on deduction of tax).
ITA07/S504(2) provides that the income arising to the trustees of an unauthorised unit trust is regarded as income of the trustees and not the unit holders. The income arising to the trustees is, therefore, assessed to tax in accordance with the various provisions of the Income Tax Acts that apply to the particular sources of income received by the trustees. Income tax is chargeable at the basic rate and not at the dividend ordinary rate or savings rate. The special trust tax rates on accumulated and discretionary income do not generally apply. The rules on tax credits and deemed income tax in ITTOIA05/S387, S399, and S400 also do not apply.
ITA07/S505 gives the trustees relief for the gross deemed payments to the unit holders (excluding relief for payments out of capital or income that is exempt from income tax), up to the trustees’ modified unrelieved total income for the year as defined in ITA07/S914 (see SAIM9060) that is chargeable to income tax.
Under ITA07/S941 the trustees are treated as making a ‘deemed payment’ to the unit holder representing the gross amount of the unit holder’s income calculated in accordance with ITTOIA05/S548 (SAIM6100), and are also treated as deducting basic rate income tax (a ‘deemed deduction’) from that payment for the tax year in which the payment is made.
Under ITA07/S942 income tax on the deemed payments (“the collectable amount”) is to be collected through the trustees’ self-assessment tax return. If deemed payments exceed the trustees’ modified unrelieved total income, the gross amounts of the deemed payments are reduced by the ‘trustees’ income pool’ for the tax year to arrive at the collectable amount. Where the amount of the income pool is greater than the sum of the of the gross amounts of the deemed payments the collectable amount is reduced to nil. See SAIM6140 for more details.
For tax years before 2007-08, the amounts termed ‘deemed payments’ were annual payments and tax was assessable under ICTA88/S350 on the excess of annual payments over the trustees’ total income as reduced by any uncredited surplus. See SAIM9050 for more details of the old rules on the deduction and collection of tax.
The unit holders
The unit holders are treated as receiving the deemed distributions as deemed payments, from which income tax has been deducted (ITTOIA05/S548). See SAIM6100 for more details.
Certain types of unauthorised unit trust scheme are excluded from these tax rules. These are enterprise zone schemes, pension funds pooling schemes, charitable unit trusts, limited partnerships and approved profit sharing schemes. See SAIM6150 onwards.