One of the benefits of owning shares in an investment trust is that it can trade in and out of its investments without incurring capital gains tax.
To see the benefit of this, consider this example:
Two investors invest in a company called Going Far plc, one a private investor who invests direct, and the other through an investment trust:
| Private Investor | Investment trust |
|---|---|
| A private investor buys shares in Going Far plc June 1st 1999 at £1.00 per share. | The manager of the investment trust spots the potential in the same company and buys shares for his fund at the same price of £1.00 on the same day. |
| By March 20th, 2000 they have risen to £1.50, he thinks they are now overvalued and wants to sell them. | He too realises in March that the shares are overvalued at £1.50 and decides to sell. |
| But he has already used up his entire annual CGT exemption on other gains, and knows that if he sells before the year end he will have to pay tax on the gain. | Since the investment trust does not pay CGT, he executes the sale straight away and realises a profit per share of £0.50 |
| He decides to wait til the new financial year in April when he will have a new exemption. Unfortunately, when he comes to sell in April, the share price has fallen back to £1.20. | The owners of shares in the investment trust benefit indirectly through the increase in the value of the trust's assets. They don't incur any tax liability unless and until they sell their shares in the trust, and even then they only incur tax on their gain in the trust's shares, not on all the individual transactions carried out by the trust. |
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