Finally, investment trusts allow easy access to a range of alternative assets, from property to infrastructure projects, private equity to specialist debt. This is due to their closed-ended structure, which enables them to invest in assets that are highly illiquid without ever having to worry about satisfying redemptions.
The advantages of the closed-ended structure for illiquid assets became obvious to many advisers in the weeks following the EU referendum, when many open-ended property funds were forced to suspend trading.
In the third and fourth quarters of 2016, the most popular investment trust sector for adviser platform purchases was Property Direct – UK.
Reits and VCTs
Real estate investment trusts (Reits) and venture capital trusts (VCTs) are similar to investment trusts, but have different tax rules.
Reits are investment companies that buy properties, rent them out, and distribute at least 90 per cent of this rental income to their shareholders.
This income is taxed at an individual’s marginal income tax rate, not as a dividend (unless the Reits bshares are held in a pension or Isa, in which case no tax is payable). Reits are tax-efficient because they don’t need to pay corporation tax on the rental income.
VCTs are investment companies which offer tax breaks to their investors and are only allowed to invest in small UK companies. They typically distribute income from their capital profits and any income they distribute is tax-free.
How to access investment trusts
The 321 investment trusts (excluding VCTs) listed on the London Stock Exchange can be bought on all major adviser platforms except Cofunds and Old Mutual.
Popular platforms with advisers who use investment trusts include Alliance Trust Savings, Ascentric, FundsNetwork, Novia, Nucleus and Transact. Most of these platforms allow investment trusts to be held in adviser-generated model portfolios.
Charges for transacting and holding investment trusts on platforms vary. The Association of Investment Companies (AIC), working with platform specialists the lang cat, has produced a summary of these charges to help advisers find the most cost-effective platforms to hold investment trusts for clients with different sizes of portfolio.
Stamp duty of 0.5 per cent is payable on purchasing investment trust shares. This does not apply to investment companies that are based outside the UK (even if London-listed).
Common worries with investment trusts
Despite the big increase in advisers using investment trusts since the retail distribution review (RDR), the fact that the majority still don’t use them suggests there are lingering concerns. Here are some of the major worries.
