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.
- 1 Cyclist who knocked down three-year-old girl says his life has been 'destroyed'
- 2 A politically correct lefty goes to see Top Gear live – you'll probably believe what happened next
- 3 Young Preston fan has play-off hero Jermaine Beckford's shirt stolen from him at Wembley - which then appears for sale on Gumtree
- 4 Isis burns woman alive for refusing to engage in 'extreme' sex act, UN says
- 5 Puerto Rico, island of lost dreams: People are leaving the debt-hit territory in droves as near neighbour Cuba's star rises
As a white man, I'm surprised more women aren't tweeting the hashtag #KillAllWhiteMen
Scotland may have to leave the EU even if it votes to stay in, David Cameron confirms
The day that Britain resigned as a global power
SNP fury as HS2 finds 'no business case' for taking fast train service to Scotland
EU referendum: David Cameron to deny EU migrants and under-18s the chance to vote
A nation of inequality: How the UK is failing to feed its most vulnerable people
iJobs Money & Business
£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...
£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...
£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...
£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...
Day In a Page
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
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