Investment trusts

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8. Split capital trusts

Most ITs are fairly straightforward: you buy ordinary shares, and hope to get income and/or capital growth from them.

Split Capital Trusts are more complicated, because within a single IT there are two or more types of share giving different types of benefit and carrying different levels of risk and, unlike normal ITs, Splits have a pre-determined wind-up date - usually 7 to 10 years from launch.

Why on earth create such a monster? In fact the thinking behind Splits is quite ingenious. The idea is that a single trust can accomodate the requirements of two types of investor in one fund, and provide better performance for both investors than they would be able to achieve if they invested in separate funds.

»   Example

It works like this:

• Ian Illingworth has £10,000 to invest and wants to get maximum income from it. He buys 'Income Shares' in the Split.
• Colin Casey has £10,000 to invest and wants to get maximum capital growth from it. He buys 'Capital Growth Shares' in the Split.
• The Split invests their pooled money and during the lifetime of the trust pays out all the income to Ian. At the end of the Split's life, when the capital value of the fund has risen to, say, £60,000, it pays Ian back his £10,000, and pays £50,000 to Colin.

How have Ian and Colin benefited?

• Ian has benefited because he has for 7 years received the income on £20,000 even though he only invested £10,000.
• Colin has benefited because he has received the capital growth on £20,000 even though he only invested £10,000 and, being a higher-rate taxpayer, it has suited him very well not to have received any income on his £10,000 in that time.

Basically, it is as if Ian said to Colin 'You have the capital growth on my £10,000' and Colin said to Ian 'Fine, I'll give you the income on my £10,000 in return.'

There are many other classes of share within Splits, and the thinking behind them gets progressively more complex. If you are interested in what they have to offer it is essential to get specialist advice.

1. What are investment trusts? 2. What does an IT do? 3. Difference from unit trusts 4. IT specialisation 5. Tax advantages 6. Discounts: the share price of ITs 7. Gearing 8. Split capital trusts 9. Warrants 10. Ways of investing in an IT 11. Factors to consider when choosing an IT 12. Where to find information about ITs 13. Conclusion