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What is an investment trust?

An investment trust is a collective investment. When you buy shares in an investment trust, you pool your money with contributions from other investors. This pot of money is then used to buy a portfolio of investments, including assets and shares. 

A fund manager manages the day-to-day running of the investment trust, including deciding where to invest the fund and when to buy and sell assets. The trust’s board of directors usually appoints and monitors the fund manager. 

Investment trusts are similar to unit trusts in that they can be less risky than buying shares in a single company. This is because they spread the risk across several different companies, so if one underperforms, the performance of the others can help counteract any losses. But this doesn’t mean there’s no risk at all. The value of your shares can fluctuate depending on the stock market, which means you could get back less than you paid in.

There are differences between investment trusts and unit trusts: while unit trusts are ‘open-ended’ funds, meaning there are no limits to the number of ‘units’ available to buy, investment trusts are ‘closed-ended’. In essence, an investment trust has a fixed number of shares to buy, and fund managers don’t have to buy and sell shares to meet demand. This gives the fund manager more control as they can buy and sell when they believe the time is right. 

What do investment trusts invest in?

Investment trusts are publicly listed companies that invest in other companies' shares on their investors' behalf. They can invest in a range of different asset classes, such as:

• Equities/shares (e.g. utilities and banking)

• Currencies (e.g. pound sterling and US dollars)

• Fixed-income securities (e.g. corporate and government bonds)

• Property

Your money could be invested across several stock markets worldwide, or you could opt for an investment trust focusing on a specific geographical region or industry. 

Your fund manager will be responsible for making investment decisions, which should satisfy the trust’s objectives, including the type of assets it invests in and how much risk it takes. 

Do you pay tax on investment trusts?

Many UK investment trusts can be bought and held within a tax-efficient wrapper, such as an individual savings account (ISA) or self-invested personal pension (SIPP). Using these means your investment returns will be tax-free. 

However, both ISAs and SIPPs have annual allowances. You can pay up to £20,000 per tax year into an ISA and up to £60,000 into a SIPP. (Note: you usually pay income tax when you take money out of your pension beyond the 25% tax-free allowance.)  

If you don’t place your investment trust within an ISA or SIPP, you must pay tax on dividends and profits you earn. 

Dividends are a portion of a company’s profits paid to shareholders. Each individual in the UK has an annual dividend allowance of £1,000, but you have to pay tax on any dividends you receive above this limit. The amount due ranges between 8.75% and 39.35%, depending on your income tax band. You can find out more in our guide on how investments are taxed.

You will also need to pay capital gains tax (CGT) when you sell your shares for a profit if your gains have exceeded your CGT allowance, which stands at £6,000 for the 2023/24 tax year but will drop to £3,000 from 6 April 2024. 

The amount you pay is either 10% or 20%, depending on your tax bracket. 

Benefits of an investment trust

Some of the benefits of an investment trust are as follows:

• Diversified portfolio: Because investment trusts are a type of collective investment, you own shares in several companies, helping spread the risk. If one organisation fails, other firms can help balance out the loss

• Access to a wider range of investments: Investment trusts can invest in a wider range of investments compared to other funds, such as unlisted companies. This has the potential to increase returns

• Consistent income stream: Many investment trusts offer a reliable and consistent income stream 

• Actively managed: You have a fund manager in charge of running the trust who makes active decisions to help ensure investments are successful  

What is net asset value (NAV)?

The net asset value (NAV) is the value of all the assets the investment trust owns minus any debts or loans it has. 

Investment NAVs are often published daily. Comparing the NAV to the share price can indicate the demand for shares in the trust. If the share price of an investment trust is higher than its NAV per share, the trust is said to be trading at a premium, meaning there is strong demand for the shares. 

If the share price is lower than the NAV per share, it’s said to be trading at a discount, meaning the investment trust isn’t as popular. 

What’s gearing? 

Gearing is a process of borrowing money to invest in more assets. If shares are rising in value, this can potentially boost returns. But it can also magnify losses if share prices are falling. 

How much do investment trusts cost?

You might have to pay the following fees when using an investment trust:

• Management fees: The fund manager might charge an ongoing fee for their services, which could be between 0.2% and 0.5%

• Annual charges: You can expect to pay around 0.5% to 2% per year to cover the cost of investing in the funds

• Performance fee: You might have to pay a performance fee if the trust outperforms certain benchmarks, which could be as much as 20%

• Flat rates: Some investment funds charge a flat rate rather than a percentage fee, which may be more cost-effective if you’re investing a large sum. 

Always compare costs carefully when looking at different investment trusts.