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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:

  1. The products (the wrappers or ‘pots’ that you hold your investments in)
  2. 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


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. Example: If the investment trust is made up of £50m of investors’ money and £50m of borrowing then the total fund available for investment is £100m.Say the value of the fund goes down by 10% as a result of losses in the stock market – the value of the overall fund falls from £100m to £90m.

However, bear in mind that the borrowing is still £50m, therefore the remaining £40m belongs to the investors.

So, although the overall fund went down by 10%, the investors’ money part has actually gone down by 20% (i.e. from £50m to £40m). Gearing boosts gains, but it also magnifies losses.

Not all investment trusts are geared and deciding whether to borrow and when to borrow, is a judgement the investment manager makes. A gearing figure of 100 means that an investment trust is not geared. Any figure over 100 shows the proportion of its total investments that is borrowed. For example, a gearing figure of 120 means that borrowed money amounts to one-sixth of a trust’s total investments.

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. Unlike investment trusts, they are open-ended which means that when demand for the shares rises the manager just issues more shares. With an investment trust, if demand exceeds supply, the response may be a rise in the share price. The price of OEIC shares is determined rather differently, with the key factor being the value of the underlying assets of the fund.

In contrast to unit trusts, there is no bid/offer spread, so the price of the shares should be the same whether you are buying or selling. OEICs have been popular on the continent but were only launched in the UK in 1997.

The direct tax treatment of OEICs is established by the Authorised Investment Funds (Tax) Regulations 2006 (SI2006/964) which came into force on 1 April 2006. OEICs are one class of authorised investment fund (AIF) as defined by the regulations and authorised unit trusts (AUTs) constitute the second major class of AIF.

In broad terms, the gains of an OEIC are not subject to Corporation Tax and shares in an OEIC, like units in a unit trust, are treated in the same way as other shares. It also means that provisions in the Tax Acts and TCGA 1992 which are generally applicable to companies but which do not apply in relation to authorised unit trusts – for example, the group relief rules – do not apply in relation to OEICs.

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 putting money in a savings account. Some investment bonds offer a guarantee but this will cost you more in charges.


  • Any growth in investment bonds is subject to income tax. The investment will pay tax automatically while it is running so, if you are a:
  • non-taxpayer – you will not have to pay any further income tax but you cannot reclaim any tax;
  • basic-rate taxpayer – you will not normally have to pay any further income tax; and
  • higher-rate taxpayer (or close to being one) – if you withdraw more than 5% of the original investment amount in a year or you have made a profit when you cash in the investment, you may be liable for more income tax.
  • Depending on your circumstances, the overall amount of tax you pay on investment bonds may be higher than on other investments (like a unit trust, for instance).But there may be other reasons to prefer an investment bond. For example:
  • it may be that the policy can provide a tax-deferred income
  • Or you may want to set up the investment within a trust as part of your inheritance tax planning

If there is not a good reason to take out an investment bond, you may be better off using a different investment with a lower tax liability

Offshore Investment Bonds
Offshore bonds benefit from ‘gross roll up’ which means that the investments within the bond grow virtually free of income tax and capital gains tax. But, there may 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
There are not suitable for new investors.

  • VCTs have been available since 6th April 1995. They exist to encourage investment in small companies, not listed on a recognised stock exchange. VCTs are themselves companies listed on LSE. HMRC approval is needed, and if approved, VCT offer:
  • 30% income tax relief (set against actual income tax, irrespective of rate paid)
  • Free from capital gains tax
  • Free from Corporation tax VCTs are only available to private UK investors, aged 18+. Only new ordinary shares, with no preferential rights and no redemption within 5 years. The maximum investment in each tax year is £200,000


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