Investment trust or investment company? The former is a term often used; the latter - on the other hand - isn’t, but should be. So what‘s the difference?
The difference rests on a technicality. Both are closed-end funds with a fixed number of shares in issue, so they aren’t subject to inflows and redemptions. And in both cases, the sole purpose of the company is to invest shareholders’ funds.
However, an investment trust is actually just one kind of investment company. And to be so, it must meet specific requirements laid out in Section 842 of the Income and Corporation Taxes Act 1988, which state that:
An investment trust:
--Cannot invest more than 15% of total assets in one single company
--Must be resident in the UK
--Cannot be controlled by fewer than 5 people
--Must quote its ordinary shares on the London Stock Exchange
Although the Act has since been amended several times, it still states that investment trusts meeting these requirements do not have to pay tax on gains realised from the sale of their investments. This can be an important and useful benefit as it removes the possibility of double taxation when - as an investor – you later sell your investment trust and must pay tax on any gain.
An investment company, on the other hand, is a term used to describe any closed-end investment company - of which an investment trust is one. As well as including investment trusts that meet the criteria of Section 842, the term also includes companies that are incorporated outside of the UK and listed on other exchanges.
It is also worth adding that Section 842 does not allow investment companies to invest in bonds or direct property. Investment companies which invest in direct property and bonds have therefore tended to reside outside the UK for tax reasons: if they were UK resident, they would be liable to pay tax on any gains: put simply, double taxation for the investor.
The trade body for closed-end funds recognised the broader aspect of closed-end investing when, in 2006, it changed its name from the Association of Investment Trust Companies to the Association of Investment Companies. Today, there are 567 investment companies listed in the UK, of which 326 are investment trusts.
As such, the tab on our website that signals the location of our data, tools, research and commentary on these investment products is labelled 'Investment Trusts' but you'll also come across references to 'closed-end funds' to reflect the correct terminology and the broader universe of closed-end funds that now exists in the UK. In particular, we refer to our Closed-end Fund Research team as just that because they research and rate more than just investment trutss. Please visit our Investment Trust Education Centre for more information.
