Open-Ended Investment Companies (OEICs)

An OEIC provides a means of investing in a managed portfolio of stocks.  An OEIC is a collective investment just like a Unit Trust where your money is pooled together with that of other investors to create a portfolio of assets. An OEIC is also sometimes referred to as an ICVC (Investment Company with Variable Capital).

By investing in a range of equities, corporate bonds, gilts or cash, the fund manager has discretion to move money from one asset to another in the light of prevailing market conditions within the terms of the fund’s objectives. An OEIC provides you with a similar level of protection to a Unit Trust, but is governed by company law rather than trust law. The main difference is that OEICs have a corporate structure and offer shares rather than units.  All funds are overseen by an independent body known as the Depositary.

Some OEICs are “umbrella” OEICs, which have several different sub-funds within them. Each sub-fund has different investment objectives.

One of the key features of an OEIC is that there is only one price at which you either buy or sell your shares, which means charges are detailed clearly and separately. Additionally, the structure of sub-funds within one umbrella OEIC means it is easier to switch investment funds. 

Dividends paid from an OEIC are subject to income tax. Dividend distributions on equity funds carry a tax credit.  If you are a basic rate or non tax payer there is no further income tax liability.  Higher rate tax payers have a total liability of 32.5% on dividend income and the tax credit reduces this to 22.5%, whilst additional rate taxpayers have a total liability of 42.5% reduced to 32.5% after the tax credit is applied.

Any interest from fixed interest funds (corporate bonds, gilts and cash) is paid net of 20% tax.  Non taxpayers may reclaim this tax, but basic rate taxpayers cannot.  There is a further liability of 20% for higher rate taxpayers and 30% for additional rate taxpayers.

All funds are exempt from tax on capital gains realised within the fund.  Personal gains on OEICs are subject to capital gains tax at 18%, or 28% depending on your taxable income.  However, you have an annual capital gains tax allowance, which is currently £10,600, before there is any tax liability.

There are two forms of shares – these are accumulation and dividend reinvestment shares. Accumulation shares do not pay out any dividends, but instead the “income” of the fund is added to the capital cost of the investment. You are still required to disclose this notional income on your tax return and you may be liable to higher or additional rate income tax as a result.

Under dividend reinvestment shares the cash dividend is not paid to you, but instead the net payment is used to acquire further shares in the fund. This means that the capital cost of the original shares is not affected but the number of shares increases. Because the shares are new acquisitions then each is treated as a separate asset.

THE SMALL PRINT

Past performance is no guide to future performance. Please remember that the value of an investment may fall as well as rise and an investor may not get back the full amount invested. Tax rules and regulations are subject to change.

To find out which OEIC is suitable, please contact us.