Common share types for split capital investment trusts

Listed below are the common share types for split capital investment trusts:

1) Zero dividend preference shares (’zeroes’ or ‘ZDPs’) have a limited life. They aim to give investors back a certain amount of money when the investment company winds up – called the redemption value.

The redemption value is set in advance. Even if the company performs better than expected, people who have ZDPs won’t get anything above what was initially agreed.

People with ZDPs are not guaranteed to get the redemption value; if the company performs poorly they might get less, or even nothing.

Usually people with ZPDs are entitled to payment at wind up before other shareholders (after any debts have been paid). The other shareholders split the amount left over.

‘Zero dividend’ means that zeroes do not provide income, so there is no income tax to pay. Any profit on the sale or redemption of a zero is taxable as a capital gain. This makes them tax-efficient for people who pay income tax but who don’t make full use of their annual capital gains tax allowance.

2) Income shares aim to provide shareholders with regular returns in the form of share dividends.

There are several different options for income shares. They give shareholders the right to some or all of the company’s distributable income, for example:

a) up to a particular target income;

b) a percentage of the income the company generates; and

c) all the distributable income generated by the company.

Some income shares also entitle shareholders to part of the company’s capital on wind up. This is usually a predetermined amount, as in a ZDP.

If the company performs poorly there is no guarantee that you will receive either an income or capital growth.

Income share entitlements depend on the structure of the company. They usually get top priority for the income revenue and the predetermined capital amount.

You will be liable to income tax on dividends from income shares.

3) Ordinary income shares are higher risk than other shares, but offer a higher potential for income and capital growth.

Ordinary income shares are normally entitled to all the distributable income of the company.

Shareholders are also entitled to all leftover assets on wind up of the company, after every other share type has been paid off – they’re the lowest priority.

This means if the company does well, ordinary income shareholders are likely to do very well, but if it does badly, and barely has enough to pay what it owes to the other types of shareholder, they may get no capital back at all.

You will be liable for income tax on dividends from income shares, and capital gains tax on the capital growth.

4) Capital shares are one of the highest risk types of share, providing the possibility of a high level of capital gains but no income during their life. They entitle shareholders to all leftover assets on wind up of the company, after every other share type has been paid off – they are the lowest priority.

If the company does well, capital shareholders can do very well indeed, but if it does badly, and barely has enough to pay what it owes the other types of shareholder, they get nothing at all.

You are liable to capital gains tax on the capital growth from capital shares. They do not give an income, so there is no income tax to pay.

5) Some splits arrange for a combination of their share classes to be traded together in what is known as a ‘unit’.

The combination varies depending on the company.