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Split caps set to get boost from Budget tax attack

Split-capital trusts could become more popular as wealthy investors seek to reduce exposure to Budget income tax changes, says JP Morgan vice-president of product development for investment trusts Richard Plaskett.

He acknowledges the negative associations of split caps from earlier this decade but says that zero dividend preference shares may appeal to high-earners who face 50 per cent tax on income next year. Plaskett previously worked at Aberdeen Asset Management from 2001-07 during the split-cap debacle.

He says: “There are a lot of wealthy people who want to pay less tax and they can buy zeros which give them capital gains treatment rather than income. You can create very tax-effici- ent portfolios and as those tax changes come into effect, they are going to become much more popular again.”

Investment trusts can issue zeros offering investors no dividend but a guaranteed fixed level of capital growth instead of borrowing from banks.

Plaskett says some investment trusts may start to issue zeros if they struggle to renew bank facilities.

WINS analyst Simon Elliott says a well covered ZDP issue is one option for structural gearing but adds: “Many conventional investment trusts will be wary of issuing ZDPs due to the ramifications of being recategorised as a split-capital investment trust.”

Association of Investment Companies director general Daniel Godfrey says: “We would not reclassify something that had two classes of shares as anything other than a split but if people developed new ways of categorising in the split sector for zeros which are more secure or have higher levels of cover, then that is something we would look at.”

Intethic technical director Jonathan Purle says: “There will be some reluctance, given what has happened in the past, but IFAs will be better educated on them on this occasion.”

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