Split capital investment trusts

Split capital investment trusts issue multiple classes of shares, most commonly:

  • income shares that receive the dividends paid by the trusts' investments. There may be more than one class of income share with different characteristics
  • capital shares which do not receive any dividend, but which eventually receive all the capital gains made after paying off any debt and preference shares
  • zeros.

Some funds may have more than one class of share of each type: for example, a higher risk type of "geared" or "ordinary" income share, or "annuity" shares that have a high yield but pay back less when the trust is wound up than the price at which the share were issued.

The advantages of a split capital trust are:

  • Because investors can get more of their returns as capital gains or income, they can choose whichever would give them the more favourable tax treatment.
  • Income investors get the highest possible income, because they get the dividends paid on a greater amount of capital (the investment made by the holders of capital shares as well as their own) than a non-split income trust would have
  • Growth investors looking for long term capital gains get greater capital gains as they benefit from the capital gains on the capital invested by the holders of income shares as well as their own.
  • The other classes of shares provide variants on the above with different balances of risk and return: for example if there are both ordinary income shares and preference income shares, the holders of the latter get a lower return at a lower risk.

A split capital trust has should not be expected to produce better returns for any type of investor, because it has to compromise between the growth investing strategy that would suit the holders of capital shares, the income investing strategy that would suit the holders of the income shares and the conservative strategy that would suit holders of zeros.

The added complexity of how returns are distributed can make it harder for investors to assess how much risk they are exposed to than would be the case with a more straightforward fund.

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