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What Is A Split Capital Investment Trust?

The world of the split capital investment trust was first concieved in the 1960s. The plan was to split ownership of assets into two forms - capital shares and income shares.

The split capital investment trust would be set up with a specific end date in mind at the outset. This is usually no more than ten years. All income paid out and a pre-determined capital repayment at closure would be paid to income shares, whilst the remainder of the capital - hopefully including lots of growth - would be paid to the capital shares are closure.

Needless to say, this has not been enough for the complex minds at play in the markets and since then there have more developments, otherwise known as 'financial innovations'...

At the top of the pecking order comes zeros - more fully known as zero dividend preference shares. As the name suggests, they have a preference to any capital at the end of the life of the trust but receive no dividend income. Any borrowings with a charge will be repaid first.

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A zero is issued at the start of the life of the trust with an initial value. By the end of the trust that value will have grown (compounded) at a pre-set annual rate.

However, because it is possible to trade zeros on the London Stock Exchange, their value will often not correspond exactly with the current growth rate. Since they have no income element, it follows that a zero would be taxed as capital gains to the investor. Since most - apparently around 99 percent - of UK residents will never pay any Capital Gains Taxes, this has advantages to the private investor.

Next in line come income shares. These days there are several sorts with different charachteristics. We do not want to shy away from explaining an area of finance, but in our experience this is a very complex part of the split capital market. If you are planning to purchase any split capital investment trust shares - and specifically income shares - we recommend that you take very specialised advice. There will not be many investment or financial advisers with the required specialised knowledge, but that is who you need to find!

Capital shares are considered to be quite high risk investments. In theory, they should perform excellently as they benefit from capital growth and potentially the impact of borrowed money which has been well invested. However, the capital repayment is made when the trust is wound up and capital shares are repaid after other classes of share. So not only are there no guarantees, but it is possible to make a total loss!

There are also, rather oddly, packaged units. These units are mixture of income, capital and zero shares which in total resemble something akin to an ordinary share! A cynic might argue that this is just a way for higher fees to be earned by city companies and trust management - though we could not possibly agree with such a sentiment...

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In the early 'noughties' - around 2002 - the split capital investment trust market had something of a meltdown in confidence. The issue essentially related to trusts investing in other trusts stock. Rather like the Lloyds of London problems this meant that much of the market was highly interrelated and any one problem would rebound through dozens of trusts. This meant that investors found it almost impossible to understand or accurately value their holdings.

On a separate note, this is clearly a problem with human nature and small illiquid markets... Do these problems sound familiar? Does the mention of 'funds of hedge funds' or the derivates meltdown of 2008 provide any reminders?

This video interview of a fund manager will help to explain some of the work and operations of these trusts.

Clearly, such a problem did not impact all trusts, but a loss of confidence is infectious.

To read more, please visit:

What Is An Investment Trust?

Understanding Investment Trust Regulations

What Are The Investment Trust Sectors?

Learn Some Basic Investment Trust Information

How Does Investment Trust Net Asset Value Work?

How Do Investment Trust Share Buybacks Work?

What Is An Investment Trust Savings Scheme?

How Much Are Investment Trust Annual Charges?

What Are The Different Investment Trust Share Classes?