The difference is that with a split capital investment trust they offer two or more different types of share, to suit different investment needs – typically income, capital growth, or a combination of the two.
Splits can be found in a variety of sectors, from UK equity income through to private equity.
Annabel Brodie-Smith, communications director of the Association of Investment Companies, says split capital trusts have different share classes with different objectives and these share classes have an order of payout to shareholders on wind up.
While all splits have more than one share class, Ms Brodie-Smith says the number and type of share classes will vary between different companies and each split works differently.
She says: “One of the most important things to understand before you buy is the order of priority when it comes to paying money back to shareholders and entitlement.
“In other words, there is a set sequence of who receives what, and when.
“For example, a split might have two types of share, one that pays out a pre-determined amount (say £1) per share, and one that pays an amount that depends on how well the company does.
“The shares paying the predetermined amount would usually have priority on wind up (split capital companies tend to have a fixed life of around 10 years, although you don’t have to invest in them from launch).
“The money for the share class first in line of priority would be paid out first, and then the other shareholders would get whatever was left over.
“Bear in mind, though, that there is no guarantee that the company will be able to pay the full £1 per share, in which case other types of share might get back nothing.
“As a rule, the lower in the order of priority the share, the riskier it is. This is because other shareholders need to be paid first, meaning that there may not be any money to pay any returns to shares lower down.”
It is important that advisers understand whether the split capital investment trust has any financial gearing (bank debt), Ms Brodie-Smith says.
This is because banks always get priority before shareholders in the pecking order when money is being paid to shareholders at wind up, she says.
So Ms Brodie-Smith says it is important to understand that if a split capital trust has bank debt then the bank will be paid first.
