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A split verdict

Industry experts say split-caps could return to the fore as high earners look to shield themselves from the high income tax sting unleashed in the Budget.

The collapse of split capital investment trusts at the start of the decade left many in the IFA industry caught holding the baby last time they recommended “low risk” zero dividend preference shares so are they likely to be in a hurry to recommend them this time round?

JP Morgan vice president of product development for investment trust Richard Plaskett says splits got some terrible press in the early 2000s but the structures were pushed too far.

He says: “There was lots of gearing in these things, they were investing in each other and it created a perfect storm which combined with markets falling meant that people lost an awful lot of money.

“But I think they have still got their good points especially in a world where capital gains tax is taxed at 18 per cent and income will be taxed at 50 per cent if you’re a very high rate taxpayer under the new regime.”

Hargreaves Lansdown investment manager Ben Yearsley says: “Zeros are obviously much more attractive but on the other side of the split cap you’re going to have an income share and who wants that? Traditionally in a split-cap you would have an ordinary share class and a zero and the ordinary share class would be quite high yielding.

“If you issue more from one side you’re going to have a quite high yielding share class and you could end up with a large amount of income and no-one to buy it.”

Kohn Cougar managing director Roddy Kohn says: “One of the good things which often comes out of these calamities is that regulation tightens and therefore the prospects of a repetition of the fiddles that were being conducted within the industry are far less. In that context it makes them a safer investment for high net worth investors.

“Nonetheless the complex structure of split capital investment trusts is one area which historically people struggle to get their heads around. I think there’ll be a lack of appetite in general by IFAs to get involved in the split capital sector after the last fiasco.”

Would you recommend using a split-cap to your clients?

Let me know your thoughts by clicking on the comments link below.


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There is one comment at the moment, we would love to hear your opinion too.

  1. Richar Brown, Managing Director, Moneynotion Limited 19th May 2009 at 12:05 am

    Doing things because they’re good for tax is foolish if the underlying business reason is not up to much or if the investor can’t grasp the basis of his investment.

    It’s important that investors should understand their money, at least in part, and even sophisticated investors have had trouble understanding splits.

    In my view, this is another accident waiting to happen.

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