Make-ups to measure

Split-capital investment trusts are for the investor with a specific purpose in mind. Fiona Monro explains how they work

ARE you looking for steady income with the prospect of capital growth over the long term? Or do you require a lump sum in, say, five years with no income in between? Or perhaps you are looking to squeeze the maximum amount of income out of limited capital.

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.

Income shares

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.

Capital shares

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.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

News
The two faces revealed by the ultraviolet light
newsScholars left shaken after shining ultraviolet light on 500-year-old Welsh manuscript
News
Rosamund Pike played Bond girld Miranda Frost, who died in Die Another Day (PA)
news
Arts and Entertainment
books
News
newsHow do you get your party leader to embrace a message and then stick to it? With people like this
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Marketing Manager - B2B, Corporate - City, London

    £45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Neil Pavier: Commercial Analyst

    £50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

    Loren Hughes: Financial Accountant

    £45,000 - £55,000: Loren Hughes: Are you looking for a new opportunity that wi...

    Sheridan Maine: Finance Analyst

    Circa £45,000-£50,000 + benefits: Sheridan Maine: Are you a newly qualified ac...

    Day In a Page

    General Election 2015: The masterminds behind the scenes

    The masterminds behind the election

    How do you get your party leader to embrace a message and then stick to it? By employing these people
    Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

    Machine Gun America

    The amusement park where teenagers go to shoot a huge range of automatic weapons
    The ethics of pet food: Why are we are so selective in how we show animals our love?

    The ethics of pet food

    Why are we are so selective in how we show animals our love?
    How Tansy Davies turned 9/11 into her opera 'Between Worlds'

    How a composer turned 9/11 into her opera 'Between Worlds'

    Tansy Davies makes her operatic debut with a work about the attack on the Twin Towers. Despite the topic, she says it is a life-affirming piece
    11 best bedside tables

    11 best bedside tables

    It could be the first thing you see in the morning, so make it work for you. We find night stands, tables and cabinets to wake up to
    Italy vs England player ratings: Did Andros Townsend's goal see him beat Harry Kane and Wayne Rooney to top marks?

    Italy vs England player ratings

    Did Townsend's goal see him beat Kane and Rooney to top marks?
    Danny Higginbotham: An underdog's tale of making the most of it

    An underdog's tale of making the most of it

    Danny Higginbotham on being let go by Manchester United, annoying Gordon Strachan, utilising his talents to the full at Stoke and plunging into the world of analysis
    Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police

    Steve Bunce: Inside Boxing

    Audley Harrison's abusers forget the debt he's due, but Errol Christie will always remember what he owes the police
    No postcode? No vote

    Floating voters

    How living on a houseboat meant I didn't officially 'exist'
    Louis Theroux's affable Englishman routine begins to wear thin

    By Reason of Insanity

    Louis Theroux's affable Englishman routine begins to wear thin
    Power dressing is back – but no shoulderpads!

    Power dressing is back

    But banish all thoughts of Eighties shoulderpads
    Spanish stone-age cave paintings 'under threat' after being re-opened to the public

    Spanish stone-age cave paintings in Altamira 'under threat'

    Caves were re-opened to the public
    'I was the bookies’ favourite to be first to leave the Cabinet'

    Vince Cable interview

    'I was the bookies’ favourite to be first to leave the Cabinet'
    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat