Investment Trusts
What are they?
Investment trusts are public limited companies,
which invest in the shares of other companies to
make profits for their own shareholders.
Who are they for?
Investment Trusts are a type of collective
investment scheme appropriate for individual
investors or Trustees of a pension scheme who are
looking for an opportunity of investing in a
professionally managed portfolio of stocks and
shares efficiently and at reasonable cost.
How do they work?
Being a collective investment
vehicle, investor’s money is pooled with that of
other savers to achieve better buying powers. As an
Investment Trust is a public limited company, it has
it’s own independent Board of Directors whose role
it is to look after the best interests of the
investors. Typically an Investment Trust will hold
the shares of between 50-100 companies. These
companies will be independent of the interests of
the investment trust directors.
Like other public company
shareholders, investment trust shareholders have the
right to:
- A vote at shareholder meetings;
- Receiving dividends
- Receive a share of the capital when the
trust is wound up
An investment trust has the power
to borrow additional capital through the issue of
secured and unsecured loan stock. These borrowings
are used to buy additional investments for the
fund. A trust with a high level of borrowing
relative to its share capital is said to be highly
geared.
A highly geared fund can produce
exceptional returns in rising stockmarkets, since
all profits above the fixed interest on the loan are
available to shareholders.
A number of trusts are split
level trusts. They sell income shares, which carry
entitlement to all the net income on the fund; and
capital shares, which carry entitlement to the full
capital value of the fund when it is wound up.
All investment trust shares are
bought and sold on the stockmarket. Their bid and
offer prices depend on market demand. The market
price can be, and often is, less than the net asset
value of each share. When this happens, the shares
are said to be trading at discount to net asset
value. Occasionally, the share price (particularly
of income shares) can rise above the net asset
value of the share. The shares are then said to be
trading at a premium to net asset value.
In simple terms, net asset value
is the market value of all the assets in the fund
divided by the number of shares on issue.
Investments can be made on a
single contribution or monthly basis. One of the
attractions of regular saving is known as ‘pound
cost averaging’. The effect if this is that,
because the investment drip feeds into the Trust
each month, it avoids the risk of buying all the
shares in one go when the price is high.
Tax situation
The company pays no corporation
tax on capital gains made on its investment
portfolio.
The investor receives dividends
net of tax. Non tax payers and basic rate taxpayers
have no further tax to pay (up to higher rate
threshold) but higher rate taxpayers pay an
additional liability. The tax credit is
non-refundable.
The investor can be subject to
capital gains tax on disposal of investment trust
shares.
Whatever your financial advice requirements are,
you can be assured that Ashton Hoyle are well
positioned to provide an innovative answer and we
look forward to speaking to you on any financial
matter. Contact us now
to see how we can help.
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