Authorised Investment Funds for individual investors: planning considerations

Authorised investment funds (AIFs) are usually constituted under two different legal forms:

• Authorised unit trusts (AUTs), and
• Open-ended investment companies (OEICs)
   

An investor may therefore own units or shares in an AIF. For the remainder of this article, the terms 'unit' and 'unit holder' should be read as equally referring to 'share' and 'shareholder' in an OEIC.

As explained in Authorised Investment Funds (AIFs) for Individual Investors AIFs do not pay corporation tax on chargeable (i.e. capital) gains. Instead, the investor is potentially liable to capital gains tax (CGT) on disposal of shares or units.

The rates for CGT in the 2024/25 tax year applying to individual AIF investors were:

• 10% for individuals where total taxable gains and income are less than the upper limit of the basic rate band. Then 18% from 30 October 2024 to 5 April 2025
• 20% for individuals in respect of gains (or any part of gains) above that limit. Then 24% from 30 October 2024 to 5 April 2025
   

The rates remain unchanged at 18% and 24% throughout as appropriate.

Autumn Statement 2025 confirmed that the Personal Allowance and higher rate threshold of £12,570 and £50,270 respectively will remain at these levels until 5 April 2031. Spring Budget 2021 originally froze these amounts through to just 5 April 2026.

Autumn Statement 2022 announced the Capital Gains Tax Annual Exempt Amount reduction from its 2022/23 level of £12,300 to £6,000 from April 2023 and to £3,000 from April 2024. No claim is required for the annual exemption. Any unused exemption may not be carried forward. The AEA will remain at £3,000 for 2026/27.

The Scottish and Welsh rates of income tax applies to non-savings and non-dividend income – the personal allowance and thresholds and taxes on savings and dividends remain a UK ‘reserved’ matter.

CGT has not been devolved (nor NIC, IHT nor corporation tax).

With regard to dividends received from an equity OEIC, note that the dividend ‘allowance’ was reduced in Autumn Statement 2022. In 2022/23 it was £2,000 but reduced to £1,000 effective from 6 April 2023 and then £500 from 6 April 2024 (£500 also for 2025/26 and 2026/27). This is exacerbated by fact that for the 2026/27 tax year dividend tax rates have been increased by 2% to 10.75% and 35.75% for dividends taxed at basic rate and higher rate respectively. They remain at 39.75% for dividends in the additional rate band.

There's a principle in income tax where clients can beneficially order their personal allowance. This means the individual can offset his/her personal allowance against whichever component of their income gives the best tax advantage. For example the general rule of thumb is to deduct the maximum personal allowance from non-savings, non-dividend income as this component suffers tax at the highest rates and enjoys no 0% bands which may apply to savings and dividend income. Also remember that dividends are taxed at a maximum rate of just 39.35%.

The same principle applies for CGT purposes. Clients can use their AEA in the way that's most beneficial for them. In 2024/25 we have pre 30 October gains and post 29 October gains meaning that clients could also decide which gains fell into any available basic rate band first.

Consider Colin who is a higher rate taxpayer. He triggers a pre 30 October 2024 gain of £9,000. After deducting AEA of £3,000 he has £6,000 of pre budget chargeable at 20%.

Now consider Carol, also a higher rate taxpayer. She triggers a pre 30 October 2024 gain of £6,000 and £3,000 post 29 October gain. She applies her AEA to the £3,000 post 29 October gain. Carol therefore only has £6,000 pre budget gains taxed at 20%.

In summary, Colin and Carol have the same CGT liability despite Carol triggering £3,000 of gain under the higher post budget rates.

Chargeable gains (or allowable losses) accrue on the disposal of assets. The word 'disposal' is not expressly defined in the Taxation of Chargeable Gains Act (TCGA) 1992, so must be given its natural meaning. Sales and gifts are both examples of natural disposals. Gifts to children, for example, may therefore give rise to a CGT charge. Similarly, gifts to trustees can create a CGT liability although 'hold over relief' may be available (S260 TCGA 1992) in certain situations. This is a complex area requiring professional advice. Note however that certain disposals are no gain / no loss disposals, where the asset is treated as passing from the transferor to the transferee at a value which results in neither a gain nor a loss accruing to the transferor. For example: transfers between husband and wife or between civil partners in a year of assessment in which they are living together

The result is that the recipient will inherit the asset's CGT 'history'.

The exemption for inter-spouse transfers can be used to ensure that gains are realised by the partner with the lower marginal CGT rate.

Neither indexation allowance nor taper relief apply to disposals of assets by individuals on or after 6 April 2008.

In broad terms a 'capital gain' is the amount by which the disposal value of a chargeable asset exceeds its acquisition value. Certain incidental costs (e.g. dealing fees, stamp duty reserve tax) are also deductible.

Where a chargeable asset is gifted (ie not a bargain at arm's length), the person making the gift is treated as disposing of the asset at market value, unless it is a no gain / no loss transfer.

S99 TCGA 1992 treats units in a unit trust as though they were shares in a company. The normal CGT rules which apply to shares apply to units in a unit trust.

One feature of shares is that unless they are numbered, and most shares are not, all shares of the same class in the same company are identical. The problem this causes can be illustrated quite easily.

To work out the capital gain it is necessary to know which units Alan sold and how much they cost.

Special 'share pooling' rules that average the cost  and the gain across a client’s share holding exist to deal with this problem.

Shares of the same class in the same company acquired at any time by a person in the same capacity will normally become part of the 'Section 104 holding'. The Section 104 holding is simply the share pool. However, shares that are identified with acquisitions under the 'same day' or 'bed and breakfasting' identification rules do not become part of the pool.

The Section 104 holding is a pool of qualifying expenditure as regards the number of shares in the holding.

The pool grows whenever further shares are acquired that enter the pool and reduces when there is a disposal of shares from the pool (shares identified in accordance with the first two bullet points below do not enter the S104 holding).

Legislation provides that disposals must be identified in the following order:

Applying these rules to the above example of Alan produces the following result:

Matching disposals against acquisitions on the same day and against acquisitions within the 30 days following the disposal are anti-avoidance rules to counter the practice of selling and buying back shares shortly afterwards simply to realise a gain, and increase the base cost for future disposals (or simply to realise an allowable loss). This works as follows:

The 'bed & breakfasting' anti-avoidance rules do not apply in the following situations:

• Repurchase after 30 days
• Repurchase of a non-identical fund
• Repurchase made by spouse
  
  

Repurchase within an ISA or pension

An individual is assessable to CGT on his or her total chargeable gains for the year of assessment reduced by:

• allowable losses
  
• the AEA.
   

The treatment of losses depends on whether they are:

• losses of the same year of assessment as the gains
• losses of earlier years of assessment.
   

The procedure is as follows:

1. Deduct any allowable losses accruing in the year of assessment from gains made in that same year – – even if the net chargeable gains fall below the AEA (losses which cannot be set against gains of the same year of assessment are carried forward and set against gains which arise in the future).

2. If the net gains under 1. above are more than the AEA and there are unused losses brought forward from a previous tax year then deduct those losses, but just enough to reduce the net gains to the AEA limit.

3. If there are still unused losses from a previous year after they have reduced gains to the AEA, they can be carried forward to future years.

There is no point – from a tax perspective – in crystallising a loss when net gains in that same year of assessment are within the AEA.

Losses crystallised in a year of assessment in which there are no gains will allow the full amount to be carried forward.

If one spouse or civil partner has realised gains in excess of the AEA and the other spouse has uncrystallised losses, consider an exempt inter-spouse transfer followed by a disposal.

As noted above, capital losses that can’t be used in the year of assessment in which they arise may normally only be carried forward. There is an exception, however. If an individual incurs capital losses in the year in which he or she dies, those losses must first be set against gains of the same year (even if this reduces the net figure below the AEA). Any surplus can be set against gains of the three preceding years – allowed against the gains of a later year before gains of an earlier year.