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Investment Advice – Collective Investments

What are Collective Investment Schemes?

A collective investment scheme allows a large number of people to ‘pool' together their savings and to appoint an investment manager to act collectively on their behalf. The investment funds may typically invest into gilts, bonds and equities depending on the type of scheme and the remit of the fund manager.

The Benefits of Collective Investments

Investors in collective investments can reduce the risk of investing by spreading the risk of their investment as the fund manager will be able to purchase a far greater number of investments than the individual investor. In this way, the effect on the collective investment fund caused by one particular investment performing badly is low, as it forms only one small part of a much larger investment portfolio.

Different Types of Collective Investments

UK based collective investments come in a number of forms. These are:

• Unit Trusts
• OEIC's
• Offshore Funds

Unit Trusts

A unit trust scheme is legally a trust, having a trustee and beneficiaries. The unit trust constitutes a pool of investments ('the scheme property') made up of the contributions of investors. The pool of investments is divided into equal portions called units, and unit trust investors hold a number of units depending on how much they have contributed. The investors in the unit trust are beneficially entitled to an undivided share of the investments subject to the trust and are referred to as unit holders. The price of units is determined by the managers of the trust (usually on a daily basis) at the current market value of the investments held in the fund.

There are three parties to a unit trust: the manager, the trustee who must be unconnected to the manager, and the unit holders who are the trust beneficiaries.

http://www.hmrc.gov.uk/collective/scheme-types.htm - top#top

Open-ended Investment Company (OEIC)

An open-ended investment company (OEIC) is a collective investment scheme that is structured as a company. OEIC's are usually authorised by the Financial Services Authority and for tax purposes they are treated the same as a unit trust.

OEIC's have been run successfully for several years outside the UK, but it only became possible to operate an OEIC here after 1997.

As OEIC's are run as an investment company, rather than a trust fund, there is no ‘trustee' like there would be for a unit trust. Instead, the company has a depositary to hold its securities, and this has similar duties to the trustee for a unit trust.

http://www.hmrc.gov.uk/collective/scheme-types.htm - top#top

Offshore Funds

It is also possible for a collective investment to be set up in jurisdictions outside of the United Kingdom. These funds are usually referred to as offshore funds.

Common locations of offshore investment funds include the Isle of Man, Bermuda, Jersey and Guernsey. Generally, they will be of the form of either a unit trust or an OEIC.

These funds are not subject to UK tax rules. However, a UK taxpayer could be liable to tax on the investment returns.

Tax implications of Collective Investments

Collective investment schemes that are authorised in the United Kingdom are usually taxed as either

• Dividends, or
• Interest.

Any dividend paid by a UK collective investment (unit trust or OEIC) are treated the same as the dividends declared from ordinary company shareholding in the United Kingdom.

Interest that is paid by a UK authorised collective investment is treated in the same way as interest on a bank, or building society. However if you are resident in the UK for tax purposes you cannot arrange for interest to be paid on a gross basis. Any tax due must be paid and deducted before you receive the interest.

For more information on the tax implications of collective investments please follow this link

http://www.investmentuk.org/FactSheets/UT/default.asp

If you are considering investing it is important to remember that the value of your investment and the income generated could fall as well as rise and that there is no guarantee you will get back more than you invested.