Something for everyone....

...or seeking the best of both worlds as they say. Following on from my post on Investment Trusts I thought I would offer up a reasonably dull idea which tries to offer income and capital growth in a complicated structure which means it is actually on a discount unlike similar more conventional trusts.

It offers a yield of just under 5% from a fairly conventional portfolio of large and mid cap UK equities and corporate bonds. It has around 10% gearing via bank debt which costs it 3.15%. They have 75% of the full years dividend in revenue reserves so they should be able to continue to edge the dividend up in line with or slightly ahead of inflation assuming UK equities still produce some underlying dividend growth. This was the general expectation in the document with yesterdays post.

The structure is complicated as they describe it in the annual accounts as follows:

The Company has a capital structure comprising A shares and B shares.
In addition, the Company has a bank loan.

The Company’s capital structure offers shareholders the opportunity to receive quarterly returns in the form
of either dividends, capital repayments, or both, to suit their own particular circumstances.

The Company has two classes of shares: A shares and B shares. The rights of each class of shares are
identical, save in respect of the right to participate in dividends and capital repayments. Irrespective of these
rights, the net asset value attributable to each class of shares is the same.

Only A shares carry a right to participate in dividends paid by the Company. B shares are not entitled to
dividends but each B share instead carries the right to receive a capital repayment at the same time as,
and in an amount equal to, each dividend paid in respect of A shares.

For certain shareholders, there may be tax or other advantages in receiving a capital repayment rather than
a dividend. Dividends paid on the A shares will be taxed on receipt in the normal way for dividends. Capital
repayments received on B shares will fall to be taxed in accordance with the rules relating to the taxation
of chargeable gains (see further information below) for non-corporate holders (including individuals).

It is the Company’s policy to maintain the ratio of A shares to B shares (excluding shares held in Treasury)
within the range 72.5 : 27.5 and 77.5 : 22.5.

These two securities can be traded together in the form of a unit with each unit consisting of three A shares and one B share.

The B shares are just like any other ordinary share except that, instead of dividends, B shareholders receive
capital repayments, so B shareholders will receive the same amount of cash on a quarterly basis as A
shareholders, but when it comes to the tax on these capital repayments there are potential benefits.
Effectively, no UK tax is due on receipt of the capital repayments. So a higher rate taxpayer, for example,
will not be liable on receipt to the additional income tax that would normally be applicable on receipt of a
dividend. This is because the capital repayment is taxed under UK Capital Gains Tax (‘CGT’) rules rather
than Income Tax rules for non-corporate holders (including individuals). It is only when the B shares are
disposed of that the capital repayments received need to be taken into account as part of the CGT
disposal calculation. From 22 June 2010, a flat rate of Capital Gains Tax has applied of 18 per cent on
disposals (28 per cent for higher and additional rate taxpayers). If the shares continue to be held until
death, no CGT arises in respect of the capital repayments. The value of the holding will, however, be taken
into account for Inheritance Tax purposes, if applicable.

Summary & Conclusion
If I haven't lost you already this one is a fairly conservative and conventional type of mixed UK portfolio which is wrapped in a complicated wrapper which offers some gearing and tax advantages too, perhaps. The attractions are a 5% yield which should grow with or slightly ahead of inflation. It has performed well in the first 5 years to 31 March 14, it delivered 56.8% v 47% for the Capped FTSE All Share, although the past is no guide to the future.

The charges have come down this year to 0.75% per annum and they have dropped the performance fee too and the Units are currently trading on around a 10% discount which as I say is unusual for this type of trust and towards the top end of its range. If you have got this far and still want to know what it is then open the Advent Calendar Window below.

Click for an Income fund at a 10% discount.