Unit Trusts

These are collective investments; that is an organised way of clubbing together with similar investors and sharing the risks and rewards between you.

Typically, a Unit Trust will invest the money that everyone has paid in, into a wide range of stocks and shares. The fund is divided into equal shares or Units, and an investor owns a certain number of these Units depending on how much of the fund they paid in to begin with.

Thus, all the investors need to know at any one time is how much each single Unit is worth and it is then a simple task to multiply number of units held by the current Unit price to see how much the overall investment is worth. When new people join in, or an existing investor wants to pay more in, more units are created for them, and these will be worth the same as the existing ones.

A wide range of stocks and shares can be held in a Unit Trust which, usually being linked to equities, is meant for the medium-long term (say 5 years plus). Specialist funds, such as Cash or Emerging Economies cater for the specialist investor who wishes / needs to take a high or low risk approach.

There is an excellent potential for growth to be achieved at a higher rate than normal deposit accounts, whilst reducing the risk through employing professional fund managers to select the appropriate investments for you.

Charges are normally levied to cover the expenses of the analysts who manage the investments on your behalf, as well as the cost of stamp duty on sales & purchases etc. One of the main costs is the Bid-Offer spread. This usually applies to investments in individual stocks & shares also, and is explained here for those who are curious. The net effect however, is that if you immediately cashed in an investment of, say £10,000, then you could only receive £9,500 back.

Unlike PEPs, Unit Trusts are not free of tax. However, any profit made on selling (all or some) of your Units can be set against your annual limit of £6,500. For many people therefore, no Capital Gains Tax is likely to fall on them. If, together with profits from certain other activities, your profits exceed this figure, then you may be liable to pay tax at your normal rate (min. 20%) on the excess. The rules on income from Unit Trusts are due to change in the new Tax Year, but at present the situation is mainly:-

• Non Tax Payers can claim back any tax paid on the income
• Lower Rate Tax Payers have no further liability
• Basic Rate Tax Payers have no further liability
• Higher Rate Tax Payers are likely to have to pay additional tax at 17%.

Unit Trusts can be held jointly and also on behalf of minors. As explained elsewhere, if a parent invests on behalf of a child, then the tax situation again changes if interest is earned which exceeds £100.

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