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Split Capital Trusts (Share classes (Income share (Appropriate for those…
Split Capital Trusts
Share classes
Annuity income shares
Similar in nature to retirement annuities with investors making lump sum investment in return for a regulated high yield
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Income share
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Returns on these shares are generally considerably higher than those available on bank deposit accounts however without capital growth
In theory, shareholders ought to receive all of their capital back at winding-up, but more often than not they do not as it should be understood that shareholders are committing to a limited company which could become insolvent before the official winding-up date
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The amount of money an income shareholder will receive at winding up depends on how well the SCT performs
Income received is generated from the underlying assets, notably dividends derived from the underlying equities themselves
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Capital shares
Shareholders will receive all or most of the capital appreciation at winding up - they will receive the remaining assets after liabilities have been settled and all other shareholders have been paid
Most appropriate for investors seeking capital appreciation and are not suitable for those who are less risk averse
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May receive considerable returns in contrast to ZDPs who will receive as a maximum the predetermined amount or less
After payment of all other share classes, there could be nothing remaining
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Reasons for investing
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There is a specific date when the SCT will be wound up. Investors know that at this date they should receive some form of distribution or the opportunity to roll over into a new SCT with a new life span
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Some share classes have no income associated with them, consequently there is no income tax liability. They can also be useful if there is an unused capital gains tax allowance to offset capital losses
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Procedure on winding up
On a set date it will be necessary to sell some or all of the assets and distribute the proceeds to this particular shareholders
In the event that the whole company has a finite life, this will activate a winding up procedure as set out in the SCT's own articles - regulation that would typically use the following protocol
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At the conclusion of the SCT there is a strong likelihood that the provider will offer another opportunity for shareholders to reinvest their money in a new split capital trust which is effectively a roll over and which will be executed in order to reduce tax liabilities particularly for higher rate tax payers
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Income sharehodlers receive the returns generated from the company's investments during its lifetime
Capital shareholders will receive a proportion of the lump sum when the assets are realised after the expiry
Investors should not make any financial commitment unless they understand the potential risks and rewards fully. Prior to making any investment, it would be prudent to seek advice from an IFA
In order to assess ITCs and SCTs an investor has to be able to determine the level of gearing and work out from this the asset cover: the number of times that the value of investments held covers the total amount of borrowings