Split capital trusts
Traditional investment trusts offer just one class of share, in which investors receive income in the form of dividends and if the share rises in price, capital growth. However, there are a number of trusts, called 'split capital' trusts, which can imbed a variety of share classes (detailed below).
Some share classes might focus on paying a dividend, whereas at the other end of the spectrum some might focus solely on capital growth and pay no income
Split capital trusts are launched with a fixed lifespan, at the end of which, all the underlying assets can be sold and proceeds paid out to each class of share in order of priority. The wind up is usually subject to a shareholder vote and therefore you are not guaranteed the trust will wind up or you will get your proportion of assets when you expect.
Note: Split capital trusts will not contain every class of share detailed below, rather a selection of the available share classes. Split capital structures vary and can be very complex, full details relating to the structure of the split capital can be found within the trust’s prospectus.
Split capital trusts might not be suitable for all investors - if you are unsure of their suitability please seek advice.
Zero dividend preference shares (ZDPs or zeros)
Zero dividend preference shares (zeros for short) offer capital growth with a predetermined redemption value, paid from the assets of the trust at wind-up. Zeros are the first class of share to be paid out when the trust is wound up, however any loans will need to be repaid first so returns still rely on the performance of the trust's investments and your capital is at risk.
Stepped preference shares
Stepped preference shares are relatively rare. Like zeros, they offer capital growth with a predetermined redemption value at wind-up. Unlike zeros, however, stepped preference share dividends should rise at a predetermined annual rate during the life of the trust. Returns will still rely on the performance of the trust's investments and neither capital nor income is guaranteed.
Income shares offer some of the highest gross yields of stock market quoted securities, though as with individual shares the yield is variable and not guaranteed. Income shares are entitled (with some exceptions) to all the income from the trust's assets until the winding-up date. If stepped preference shares have also been issued by the trust, the income shares receive the excess after payments to the stepped preference shareholders have been made.
Holders of the income shares are generally entitled to a final payment equal to the price at which the shares were first issued i.e. if the income shares were issued at £1 per share, the final payment would be £1 per share. However this will be dependent on sufficient monies being generated when winding up the trust. If insufficient monies are available, income shares will only be paid out a proportion of their issue value until all the trust's proceeds have been used up. Occasionally (and if there are sufficient proceeds) income shares may be entitled to a portion of any capital growth made by the trust. Income shares rank after preference shares (if issued) at wind up, but before capital shares.
Capital shares (with a few exceptions) pay no dividends. They do not have a pre-determined redemption value but instead are entitled to any assets remaining at the end of the trust's life after all the other classes of share have been paid. They are last in the order of priority. The success of capital shares is therefore dependent on the success of the managers in growing the assets of the trust over and above what is required to repay the other classes of share. This makes them a higher risk investment.
Income and residual capital shares
Income and residual capital shares (also known as ordinary income or highly geared ordinary shares) offer potential for a high and rising income plus a possible final payment at the winding-up date (after other prior ranking classes have been repaid). They have no predetermined value and are last in the order of priority. These shares offer the potential for high dividends and capital returns dependant on the success of the manager. This makes them a higher risk investment.
Some split capital trusts have arranged for a combination of their shares to be packaged together in what is known as a 'package unit'. Packaged units have all the characteristics of an ordinary share issued by a conventional investment trust, although in some cases the component classes of share can be separated out and traded separately.
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Please remember that the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. If you are unsure of the suitability of your investment please seek advice.