Becoming Familiar with Unit Trusts and OEICs

In this article we cover some useful facts about unit trusts and open-ended investment companies (OEICs) – of interest to those studying for the CII AF1, AF4, CF1, J10, R02 or R03 exams. The taxation of unit trusts is also a popular topic in both R06 and AF5.

This article is relevant to examinable tax year 2025/26.

Unit trusts and OEICs are both collective investments that allow client’s with small amount to invest to gain access to worldwide stock. Investors buy units or shares, each representing an equal share of a large portfolio, often containing 50–100 holdings. Unit trust assets are held by trustees and managed by fund managers, while OEIC assets are held by an independent depositary. Charges may include an annual management charge (AMC) and, in some cases, an initial or exit charge.

Unit trusts and OEICs are both open-ended investments. Units or shares are created when investors invest and cancelled when they sell back to the fund manager.

One of the major differences between them is the way they can be priced.  Unit trusts can quote a bid price and an offer price whereas OEICs only have a single price.

• The bid price is the price an investor receives if they sell the units back to the fund manager
• The offer price is the price an investor pays to buy units from the fund manager

The difference between the prices is called the bid-offer spread.

Usually, when we buy something we know what the price is.  Open-ended investments such as unit trusts and OEICs however are priced on a forward or on a historic basis.

• Forward pricing – where the price is calculated at the next valuation point
• Historic pricing – where the price is calculated at the last valuation point

Most fund managers use forward pricing, which means that when an order is placed to buy or sell units, the investor will not know exactly what the price is until the deal is finalised.

• If the fund is priced daily at say 1 pm, and an order is placed at 11 am, the transaction will be carried out after the fund is priced at 1 pm (at the new price).
• If an order is placed at say 3 pm, the investor would have to wait until the next day at 1 pm for that order to be executed (at the next day’s price).

The taxation of unit trusts and OEICs is the same as far as the investor is concerned. They may receive income either in the form of interest or dividends depending on the percentage mix of the assets within the fund. Where the fund is made up of more than 60% of cash, fixed interest securities or corporate bonds, the fund will be classed as a non-equity fund and income is treated as interest.  Where is it less than 60%  it is classed as an equity fund and income will be treated as a dividend

Dividends are paid gross:

• The first £500 is tax-free.
• Anything above that is taxed at the investor’s marginal rate (8.75%, 33.75%, or 39.35%).

Interest is paid gross:

• The personal savings allowance (PSA) can be used if available (although additional rate taxpayers do not get a PSA).
• Anything above this is taxed at the investor’s marginal rate (20%, 40%, or 45%).
• A non-taxpayer or basic-rate taxpayer may be able to receive up to £6,000 tax-free, made up of the £5,000 (0% starting rate band and the £1,000 PSA).

You should note that whether an investor chooses accumulation units or income units, the income is always potentially taxable regardless of whether it is actually taken or reinvested.

Capital gains tax (CGT) may be payable on profits from selling assets such as unit trusts and OEICs. After deducting the annual exempt amount (£3,000 for 2025/26), the remaining gain is taxed at 18% if it falls within the basic rate tax band, and 24% if it falls above the basic rate tax band

Grab the resources you need!

If you’re studying for your CII AF1 exam, and you want to feel confident on exam day, you’ll need to be prepared. Grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the AF1 calculation workbook taster now!

Alternatively, you can download taster resources for AF4, AF5, CF1, J10, R01, R02 R03, or R06 if you’re revising for any of those exams.