What is a unit trust?
A unit trust (UT) is a collective investment scheme where investors essentially pool together money which is then held on trust and invested into a portfolio that will hopefully earn a return on investment.
UTs can be authorised or unauthorised with investors in each being treated slightly differently for tax purposes. Given that your client is an individual and with the eligible investor rules under unauthorised UTs, it seems likely that your client has invested into authorised UTs and therefore, our answer will be based on this assumption.
Income v accumulation units
The holding of units in UTs entitles the investor to a share of the investments within the UT. Investors may own income or accumulation units. A key difference between the two is that with income units, the investor is typically paid income whereas, with accumulation units, income is not paid but is automatically reinvested into the fund. The reinvestment does not generate new units for the investor, but the value of existing units is increased.
The client appears to be holding accumulation units. Although no dividend was physically received by your client, the amounts reinvested automatically will still be taxable as if it had been distributed to him (see IFM03120).
If the dividend has been subject to income tax, or would have been subject to income tax but for relief, the notional dividend may be treated as allowable expenditure for CGT purposes on disposal of the units (s99B TCGA 1992, see also CG57707)
For further commentary on the above, see Croner-I guidance at 15360 and 328-950. HMRC have their general guidance at IFM03300.
