Make-ups to measure
Split-capital investment trusts are for the investor with a specific purpose in mind. Fiona Monro explains how they work
Sunday 22 October 1995
If the first option sounds like you, then it is more than likely that one of the many mainstream investment trusts will suit your needs, offering you income in the form of dividends and the potential for a capital gain when you decide to sell your shares. But if you fit the second or third descriptions, you may be interested in the shares of a split- capital investment trust.
These trusts can tailor an investment to your needs. They may appear complicated at first but behind their sophisticated structure lies a useful means of investing for a specific purpose.
Split-level investment trusts offer exposure to a single portfolio of investments just like normal investment trusts. The difference is that "splits" offer several different classes of share, each with a specific investment aim in mind. Splits were designed in the 1960s when taxation on investment income was heading for 98 per cent. They offered income shares that received all the income from the fund, and capital shares that received no income but shared the remains of the funds between them when the trust was wound up.
By the mid-1980s tax avoidance was less important, but the split-capital structure was recognised as a useful tool and the range of shares available extended from the original simple structures of income and capital shares to include zero-dividend preference shares and highly geared ordinary shares.
Split-capital trusts have a variety of make-ups, but they all have finite lives and offer some combination of the following:
Zero-dividend preference shares
These are a low-risk and predetermined investment. They offer a fixed capital return, paid when the trust is wound up. They have no entitlement to income, which means there is no income tax to pay. Their value at the end of the trust's life is not guaranteed, but they are the first shares to be paid out, and the trusts are designed to ensure that they will be "covered" when that time comes. They are suitable for cautious investors who need a fixed capital sum at a specific time.
Stepped preferences shares
These are similar to zero-dividend preference shares but they also offer a predetermined dividend during the life of the trust.
These are very diverse. They all offer high income but there the similarity ends. Some offer a predetermined capital return (redemption price) at the end of the trust's life.
Some have a fixed redemption price and an additional entitlement to a proportion of any extra capital remaining after the entitlements of other shares have been met. Others are similar to annuities, again offering high income, but repaying only a minimal capital sum when the trust is wound up, resulting in a marked capital loss.
Income shares are suitable for investors requiring high and rising income but who are less concerned about capital perfor- mance, and taxpayers can avoid tax by putting the shares in a personal equity plan (PEP). Non- working spouses looking for income-producing assets under separate taxation for married couples can also benefit.
Highly geared ordinary shares
They offer high income as well as an entitlement to assets remaining at wind-up, but only after preference shareholders have been paid their entitlement. So it is possible there will be little or nothing left for the ordinaries.
They are suitable for experienced investors who need to increase their income and can accept a capital risk in return for the potential of high gains.
These pay no income but offer the possibility of high capital returns. They receive all the remaining assets of the trust at wind-up after other shares' fixed capital entitlements have been met. Capital shares are suitable for experienced investors prepared to take the chance of receiving nothing, in return for the possibility of high capital gains.
Some split-capital trusts have arranged for a combination of their shares to be traded together in what is known as a "unit". This should not be confused with the unit in a unit trust. It will usually have all the characteristics of an ordinary share issued by a conventional investment trust but it is capable of being split into its component parts.
What happens when the trust is wound up?
During the life of the split trust all the various shares are traded on the Stock Exchange just like other shares. As well as reflecting the performance of their underlying investments, their price is also influenced by the stage the trust has reached in its life, the market's view of whether it is likely to be able to repay all the entitlements and whether it will have cash left over for the optional capital payments.
When a split is created a procedure is laid down for winding it up. Usually the shareholders will be asked to vote towards the end of its planned life on whether the trust is to be wound up or continued. Whatever they decide, classes of share with a predetermined wind-up value have the right (in nearly all cases) to take their cash at this point.
Split-capital trusts are complex, and the underlying mathematics can be fearsome. The Association of Investment Trust Companies (AITC) strongly advises anyone considering investment in a split to research the market carefully or, preferably, take professional advice from a stockbroker or independent financial adviser.
The annual reports of split- capital trusts include explanations of the qualities of the various classes of share. The AITC publishes free fact sheets giving information on various aspects of investment trusts. Telephone: 0171-431 5222.
q Fiona Monro works for the Association of Investment Trust Companies.
Customers paying up to £250 more on energy bills than they should every year
Has your Premium Bond won the £1million jackpot?
Midweek Money: The end (of the tax year) is nigh: act now
There are 'dark corners' of the investment and pensions industry, says Pension Minister
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
- 1 Home Office says Nigerian asylum-seeker can’t be a lesbian as she’s got children
- 2 What happens to your body when you give up sugar?
- 3 Drugs Live cannabis trial: Hash is less harmful than any other drug, expert claims
- 4 Turkish Airlines flight TK 726 crash-lands on Nepal runway amid dense fog
- 5 Apple and Google users being spied on for a decade because of 'Freak' security flaw
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Durham Free School: 'Creationism taught at' free school facing closure
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
Ukip would cut billions from Scottish budget to fund English tax cuts
End of the licence fee: BBC to back radical overhaul of how it is funded
Ukraine crisis: Top Chinese diplomat backs Putin and says West should 'abandon zero-sum mentality'
iJobs Money & Business
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...
£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...
£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...
Day In a Page
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads