The collapse of split-capital investment trusts at the start of the decade still leaves a bitter taste after thousands of investors found their money horribly exposed but could they now offer a solution to wealthy investors in a penal tax environment?
Despite their chequered history, JP Morgan vice president of investment trust product development Richard Plaskett believes split-caps could flourish with the growing appeal of zero-dividend preference shares among high-earners.
He says: “Splits got some terrible press in the early 2000s but the structures were pushed too far. 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 18 per cent and income will be taxed at 50 per cent if you are a very high-rate taxpayer under the new regime.”
Association of Investment Companies director general Daniel Godfrey says: “We have never said that splits were a bad thing, we have always thought they have a very significant place.
“Now we have this large and increasing gap between income and capital gains tax rates, there are stronger reasons to think they might become popular again.”
Splits issue different kinds of shares to meet different investor needs, and the different classes of share have varying rights and entitlements within a company.
Zeros are deemed the lowest-risk class of share in a split-cap as they have the first call on assets and deliver a predetermined capital return or redemption value when the fixed wind-up date of the trust is reached, provided sufficient assets are available.
In the early 2000s, the stockmarket slump meant these supposedly safe investments failed to perform and many funds ran out of cash.
But Bestinvest senior investment adviser Adrian Lowcock believes zeros will re-emerge with the shift in focus on capital gains. However, he adds: “Just because the market expands, it is still key for investors to separate the wheat from the chaff.”
Some advisers are more wary. Ruth Whitehead Associates principal Ruth Whitehead says the history of these products is “absolutely dire” and adds that most high- net-worth investors would still not be keen on using split-caps, irrespective of the income tax increase.
She says: “If anybody wanted to do a tax-avoidance scheme using split-caps, there would have been quite sufficient incentive with a 40 per cent tax rate to use them in the past and they haven’t. Would I recommend them to a client? No, I would not.”
Whitehead considers investors need to take an altruistic view on the tax hike for the sake of the greater economy.
She says: “My high-net-worth clients are pretty pragmatic about paying an extra 10 per cent. If everybody who is a higher-rate taxpayer uses a tax-avoidance scheme to avoid paying the higher amount, less money is going to go to the Revenue and the UK economy is going to recover more slowly.”