ISA Investment Trusts
Whether you’re looking to capitalise on your cash or save for a sizeable retirement nest egg, a stocks and shares ISA could provide you with the opportunity to grow your cash in the long-term. But which assets should you invest in, and is an investment trust right for you?
In this article, we take a look at what an investment trust is, how it works within an investment ISA, the tax advantages of doing so, and much more. Read on to get started, or click a link below for more information about that subject.
What is an investment trust?
An investment trust is a type of pooled investment vehicle which invests in a spread of diversified, underlying assets including bonds, equities and properties. Because you pool your money with other investors, the fund manager has more opportunity to scale up the investments. Over a longer period, they have the potential to return higher rates compared with unit trusts and open-ended investment companies.
However, when seeking out an investment trust, it’s important to be aware of the risks and if the profile matches your investment goals. By working with a financial advisor, you can side-step the uncertainty and get tailored advice and products from a financial advisor who is regulated by the Financial Conduct Authority (FCA).
Closed-ended vs open-ended funds
The biggest difference comes down to availability. With an open-ended trust, a fund manager can create new units to invest in and they are often bought and sold on demand, though there are only a limited number of shares available with a closed-ended fund. Both are initially offered through an initial public offering (IPO) before they feature on the stock market.
How do they work?
Investment trusts are publically listed as companies on the London Stock Exchange and sell a fixed number of shares on the open market. Because of this, they have ‘two layers of activity’: the trust level, and the stock market level. They can be invested in a range of regions and sectors and can focus assets such as dividends, commercial property and high-risk markets, for example.
Once a fund manager sets a number of shares available to buy, they are resold and bought on the stock market. Each trust has its own goals and strategies, so the right investment trust for you will be different depending on whether you want capital growth (increased value of assets), income, or both.
Funds in an investment trust can increase or fall in value depending on how well the stock market is performing, which is why fund managers aim to diversify the trust with a variety of assets from different sectors of the stock market.
Below, we explain some of the key features of investment trusts in more detail.
Premiums and discounts
The value of investment trusts can rise and fall depending on the stock market, so you could end up with less than you originally started out with. The market dictates the share price, so if it falls below the net asset value of your investment, this is trading at a discount. When the price moves above the value, it’s trading at a premium.
Gearing is when a trust manager borrows money to invest, therefore potentially boosting the performance of your investments. While the fund will have to pay back this money with any interest, the investment growth within the account is retained. For example, if a manager borrows a certain amount and gears by 15%, a £2,000 investment could increase to £2,300.
However, this method is considered high-risk, as the success of gearing depends on the current state of the stock market – if it falls, you could make a loss.
In the event that the market stumbles, investment trusts can top up an investor’s dividends by putting aside up to 15% of income made in a good period. This is known as ‘revenue rescue’ and you can use it to help balance out your income.
Yes. A stocks and shares ISA is a tax-efficient wrapper which can hold a variety of investments, including investment trusts, which are still invested on your behalf by a fund manager within an ISA. Many ISA providers offer various investment trusts to invest in, ranging from low to high-risk, so you should decide beforehand what level of risk you’re comfortable with.
The amount of assets you invest in could affect your ISA’s performance. Typically, the fewer companies you invest in through this type of ISA, the more risk you may be exposed to as you’re essentially ‘putting all your eggs in one basket’.
For example, if the stock market stumbles, you could make a loss on your investments. A diversified portfolio, on the other hand, is made up of numerous investments from different areas of the global stock market, so if one area stumbles, another could flourish. Not only would you be offsetting risk, you could increase your returns.
If you’re unsure about what level of risk you’re comfortable, which ISA provides the best investment trusts or for any other related questions, seek the help of a financial advisor. Not only can they offer tailored financial advice, they can also find you the right ISAs to match your requirements.
Is it more tax-efficient to hold an investment trust in an ISA?
Absolutely. If you purchased an investment trust outside of an ISA, you would be subject to capital gains tax on any interest and/or investment returns the fund made. However, any profits you make through a stocks and shares ISA are exempt from UK tax charges – and you don’t have to declare your ISA holdings on a tax return.
Are there any other accounts I can hold investment trusts in?
Yes, if you don’t want to buy and sell shares from an investment trust directly, you have three account options to choose from:
- Stocks and shares ISA
- Individual savings account
- Self-invested personal pension (SIPP)
Both the ISA and SIPP protect your investment trust from tax charges. However, the maximum amount you can invest in ISAs per year is £4,000 and for SIPPs it’s £40,000 (both for the tax year 2019/2020). If you max out these accounts, you can invest via a basic saving’s account, though any income or capital gains will be taxed.
Potentially. Whether or not you could make a bigger profit through this type of ISA will likely boil down to many factors, including:
- How well the assets held within your ISA fare on the stock market
- How the stock market is performing overall
- How much you invest each month, or year (up to £4,000 per year)
- How long you intend to invest for (five years is recommended for this ISA)
- What your charges are (transaction costs and account management, for example)
- What the predicted rates of return are
Also bear in mind that while you can invest more money into a SIPP each year, should you need to withdraw the money before you reach 55, HMRC could tax the funds withdrawn by 55%. If you plan on buying and selling your trusts directly, you would need to watch the stock market closely to ensure that you wouldn’t walk away with less than what you’d started out with.
Sort of – while you can’t simply move your investment trust into an ISA, instead you would have to sell your investment trust then buy the same one back through your stocks and shares ISA. This is known as ‘Bed and ISA’. Beware of any charges you may incur during this transaction. Speak with a financial advisor for more information about this process.
No, you do not have to get an investment trust solely through a stocks and shares ISA. You can arrange to invest only in an investment trust, or if you do opt for a stocks and shares ISA, you don’t have to pick an investment trust as they can be made up of a multitude of different assets.
Speak to an expert
With so many providers offering stocks and shares ISAs – which all offer different assets to invest in – deciding which one to go with can be daunting.
However, the ISA products you come across on comparison sites may only display promoted offers, so you could be missing out on your perfect match.
Luckily, this is where an independent financial advisor can help. Because they have ‘whole-of-market’ access, they are not biased to any particular company, so they can search the market to find an ISA which matches your exact criteria.
These experts – like the ones we work with – can help identify the best stocks and shares ISAs with potentially high-yielding investment trusts to enhance your ISA’s portfolio scope for future growth.
Want to find out more? Make an enquiry or call us on 0808 189 0463 and we’ll put you in touch with a UK financial advisor for a free, no-obligation chat.