For Total Peace of Mind

Risk Statements: The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Tax treatment varies according to individual circumstances and is subject to change. The FCA (Financial Conduct Authority) do not regulate tax planning and trusts.

Investment Fundamentals

There are two key aspects:

The products (the wrappers or ‘pots’ that you hold your investments in)
The assets (the underlying investment holdings)

The two should not be confused! For example, Unit Trusts are not in themselves ‘risky’ investment products. Unit Trusts can be cautiously invested, and if so, they are suitable for cautious investors. They can equally be invested in highly speculative asset classes, in which case they are only suitable for speculative investors, comfortable with potentially very high volatility.

For advice that takes account of your circumstances from experts who can clearly explain the most suitable investment products and assets, please contact us. For some summary information on investment products, read on…

Unit Trusts

Unit trusts are collective funds that allow private investors to pool their money in a single fund:

spreading their risk across a range of investments
getting the benefit of professional fund management
reducing their dealing costs.

Unit trusts are open-ended (unlike Investment Trusts) and different trusts have different objectives:

income or growth
small companies or large
geographical regions

Gearing

There is another difference that applies to investment trusts – they can borrow money to invest. This is called gearing. Gearing improves an investment trust’s performance when its investments are doing well. On the other hand, if its investments do not do as well as expected, gearing lowers performance.

For example, if a trust has £50m of investors’ money and £50m of borrowing, a 10% fall in the overall £100m fund leaves £40m belonging to investors after the £50m borrowing is accounted for. The investors’ money has therefore fallen by 20%. Gearing boosts gains, but it also magnifies losses.

Not all investment trusts are geared. An investment trust that is geared is a higher-risk investment than one which is not geared, assuming the same underlying investments.

Tax is like OEICs

Open Ended Investment Companies (OEICs)

OEICs are hybrid investment funds, like a cross between Investment and Unit Trusts. They are companies that issue shares on the London Stock Exchange. They use money raised from shareholders to invest in other companies and are open-ended, so the manager can issue more shares as demand rises.

The price of OEIC shares is principally determined by the value of the underlying assets. In contrast to unit trusts, there is no bid/offer spread, so the share price should be the same whether buying or selling.

The direct tax treatment of OEICs is established by the Authorised Investment Funds (Tax) Regulations 2006. In broad terms, gains of an OEIC are not subject to Corporation Tax and shares in an OEIC are treated in the same way as other shares.

Investment Bonds

Investment bonds are designed to produce medium-to-long-term capital growth, but can also be used to give you an income. You pay a lump sum to a life assurance company and this is invested for you until you cash it in or die. There will usually be a charge if you cash in the bond during the first few years.

The bond includes a small amount of life assurance and, on death, will pay out slightly more than the value of the fund. For most investment bonds, you take the risk of losing some money for the chance of making more than you could get from a savings account.

Tax

Any growth in investment bonds is subject to income tax. The investment will pay tax automatically while it is running. Non-taxpayers will not normally pay further income tax but cannot reclaim tax; basic-rate taxpayers will not normally pay further income tax; higher-rate taxpayers may be liable for more income tax depending on withdrawals and gains.

Depending on your circumstances, the overall amount of tax paid on investment bonds may be higher than on other investments. There may, however, be reasons to use a bond, such as tax-deferred income or placing the investment within a trust as part of inheritance tax planning.

Offshore Investment Bonds

Offshore bonds benefit from ‘gross roll up’, which means that investments within the bond grow virtually free of income tax and capital gains tax. There may, however, be tax to pay when you take benefits from the bond.

EIS’s and VCT’s invest in assets that are high risk and can be difficult to sell, such as shares in unlisted companies. The values of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account tax benefits.

Venture Capital Trusts

These are not suitable for new investors.

VCTs have been available since 6 April 1995 and exist to encourage investment in small companies not listed on a recognised stock exchange. VCTs are themselves companies listed on the LSE and HMRC approval is needed. If approved, they can offer 30% income tax relief, freedom from capital gains tax and freedom from Corporation Tax. VCTs are only available to private UK investors aged 18+ and the maximum investment in each tax year is £200,000.