Cash unit trusts to pay more tax

About 100 cash-style unit trusts will pay investors less after the Budget decision to lift the tax on interest payments from 22.5 to 25 per cent to bring them in line with normal deposit accounts.

The extra tax will give an advantage to cash and bond funds authorised offshore in centres like Dublin and Luxembourg, where investors will continue to pay 20 per cent tax on the interest.

Judy Delaforce, product development manager at Fidelity, estimates the change will cut the yield on an average cash fund by more than 3 per cent. The Association of Unit Trusts and Investment Funds plans to fight the proposal which, it says, will create enormous problems, especially in funds invested in cash and other equities.

Dividends from UK equities are now taxed at 20 per cent; on mixed funds the unit trust company will have to separate the income from the two sources. The Inland Revenue aims to raise about pounds 5m a year from the extra tax.

Simon Smith, tax specialist at Autif, said: 'The sheer complexity of the regime will cost millions of extra pounds in administration and systems developments.'