What's the difference... 27 June 2007 at 9:15AM edited 30 November -1 at 1:00AM in ISAs & Tax-free Savings 1 reply 553 views

savingpennies

between investmen trusts and unit trusts?
Pleas bear with me for the long preamble.

I've been following the 'Am I mad' thread posted by Lynzpower and it's raised a couple of questions. One is what is the difference?

My DDs (13 & 15) started talking about shares as they have just come into some money - it began with their favourite retailers and then they decided that having all their eggs in one shopping basket was not a good idea and thought they ought to buy in electricity ('everybody needs this'), mobile phones ('everybody had one and always wants a better one'), banks ('they always make loads of money'), etc.

I thought that their discussions were an obvious learning opportunity and that perhaps they could pick the shares from a list through Halifax sharebuiler account or an investment trust - but what would be best bearing in mind their ages and the amount about 2K. I'd like them to be able to track their investment. We also thought it might be best if this money was invested in mine or OH's names. OH is HR tax payer I'm basic rate. so avoiding tax would be nice.

Mr_Mumble

On the tax question; you would effectively pay 25% tax on dividend payments if the investments were in your husband's name. So a dividend payment of 4% would be reduced to 3% in your husband's name.

The effective dividend tax rate is zero if the shares are in your name. So a dividend payment of 4% means you would receive 4%.

Its highly unlikely there would be any other tax to pay with the capital gains tax allowance threshold at £9,200. If you have property that isn't your primary residence then it could become a factor, if you sell this property.

I'll take a stab at the investment trust (IT) and unit trust (UT) differences, check out these links if my explanation is gobbledegook!

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingMoney/SavingsAndInvestments/DG_10013712
http://www.iii.co.uk/articles/articledisplay.jsp?article_id=4527208&section=Planning&catEnforce=YourStories

The main differences are:

1.
Unit Trusts are trusts not listed on the stock exchange. If you invest in a UT you are a unit holder.
Investment Trusts are companies listed on the stock exchange. If you invest in an IT you are a shareholder.

While a Unit Trust is usually valued at a set time once a day the Investment Trust can change in value while the stock exchange is open.

2.
Unit Trusts are open-ended. i.e. if someone wishes to buy units the fund manager can create new units by buying the underlying assets. If someone wishes to sell units the fund manager can cancel units by selling the underlying assets.
Investment Trusts are close-ended. i.e. there are a fixed amount of shares. If someone wishes to buy shares this will effect the share price not the underlying assets.

This effectively means:

3.
The price of a unit in a Unit Trust is the same as the price of the underlying investments.
The price of a share in an Investment Trust usually differs from the price of the underlying investments.

If you buy a unit trust you know the value of the unit is tied to the value of the assets held by the unit trust. Investment trust share prices can trade at a premium or discount to the value of the underlying assets.


There are many other differences that are slowly being eroded. Unit Trusts (and the similar OEIC and SICAV fund types) traditionally could not invest in more specialist asset classes such as property, hedge fund and private equity. The rules are now being relaxed so unit trusts can invest in them.

Investment trusts often use gearing (borrowing money to invest). Some also "short" (bet a stock will go down in price). Again, government rules are being relaxed and some unit trusts can now employ such trading techniques.