-
Unit trusts are pooled or collective investments, offering the
smaller investor the chance to join with others to get the benefit
of economies of scale and professional investment management. Units
are sold to investors by the unit trust manager at the offer price,
and bought back at bid price, the difference including the initial
charge. Additionally there will be an annual management charge.
The number of units will vary as new unitholders invest and existing
unitholders encash.
-
Most funds are allowed to have a bid/offer spread of around 10%
but competitive forces normally mean that funds will quote spreads
of 5-6%. However, fund managers are able to move within the larger
band to their advantage depending on the demand for units. If demand
is strong then the manager can push the bid/offer spread up to the
top of the permitted band (known as an offer basis) and conversely
if sellers are in the majority they can move the bid down towards
the bottom of the band (a bid basis) and the offer price will be
some 5-6% above this.
-
Many unit trust providers are changing existing unit trusts into
OEICs which have a single pricing system. Single pricing is used
in the rest of Europe.
-
No more than 5% of the fund value can be invested in any one asset,
and holdings of a particular share may not exceed 10% of the total
issue. The investment objectives will be supervised by Trustees,
and set out in the governing trust deed. The deed must be approved
by the Financial Services Authority (FSA).
-
Unit trusts generally invest primarily in equities, and often specialise
in a particular sector or geographical area. Dividends are paid
to unit holders, reflecting dividends received on the underlying
investments. They are liable to income tax, and are subject to the
same tax treatment as dividends on direct shareholdings.
-
Unit holders receive a tax credit of 10% along with their net distribution
(dividend). Non taxpayers are unable to reclaim the 10% tax credit.
10% taxpayers have no further tax to pay. 22% taxpayers, by concession,
are deemed to receive a tax credit and no further tax is payable.
40% taxpayers have a further liability to pay. Where the addition
of the tax credit and the net distribution to their income takes
a basic rate taxpayer into the higher rate band further tax is payable.
-
The unit trust does not itself pay tax on its capital gains, but
on encashment, any gain made by the investor is subject to capital
gains tax, under normal CGT rules, including the annual exemption
and indexation/taper relief as appropriate.
-
Unit trusts are available as lump sum investments, or through regular
savings schemes, which allow monthly investments to be made.
-
For a unit trust to be eligible for cross-border selling within
the EU it must be open ended, with at least 90% of assets in transferable
securities such as shares, government stocks or bonds. If these
requirements are satisfied, such a unit trust would be termed an
Undertaking for Collective Investments in Transferable Securities
(UCITS).
-
For those who want diversity of asset backed investment and a spread
of risk, plus the alternative of regular or lump sum contribution,
this type of contract might be a useful alternative to investment
trusts, bonds and perhaps maximum investment plans.
In 1999, managed unit trusts were introduced. These can invest in
UK equities, overseas equities, cash, commercial property and fixed
interest stocks.