Invesco Perpetual UK Smaller Companies (IPU ) is offering to return £17m of capital to compensate shareholders for the double-digit discount at which its shares trade.

The £177m listed fund has taken the unusual step of choosing a special dividend to return up to 10% of its capital, rather than use share buybacks or a tender offer.

Chair Bridget Guerin said the board opted for this method as the least expensive way to return a relatively small sum. A tender offer would cost the company more in stamp duty, she said.

The payment, which shareholders must elect to receive, will be treated as income for UK tax purposes rather than as a capital gain. Deutsche Numis analyst Ewan Lovett-Turner said this made it less attractive to private investors holding the shares outside a tax-free wrapper such as an ISA or Sipp.

The company, which has a 4% dividend policy, will pay the additional dividend at a price of 97.5% of net asset value. This effectively gives investors a partial exit at a 2.5% discount compared to the 13% discount at which the shares trade. 

It will be paid in mid-September if shareholders approve the proposals at a general meeting next month.

The trust, one of the smaller and more highly discounted trusts in its sector, announced it was considering a return of capital in May, a month before its triennial continuation vote last month. This passed with the support of 93% of votes.

It is a favourite with private investors with retail platforms making up almost 23% of the shareholder register, while wealth managers Brewin Dolphin and Charles Stanley hold 8% and 6% respectively on behalf of their clients, according to Bloomberg data.

The shares traded sideways at 453p after the announcement on Friday morning, but have gained 3.8% this week.

Under fund managers Jonathan Brown and Robin West, the portfolio has delivered five-year returns to date of 17%, while the shares have gained 9%, trailing the Deutsche Numis Smaller Companies including AIM excluding investment companies benchmark’s 22%. 

The trust’s largest sector weightings include industrials, consumer discretionary and financials, which respectively make up 34%, 29% and 12% of assets.

The largest individual positions are financial services company JTC (JTC), at 4.3% of assets, printing company 4imprint (FOUR), at 3.9%, and food packaging business Hilton Food (HFG), in which it is 3.3% invested, according to the June factsheet.

Separately, the board also declared a first quarterly dividend of 3.85p per share in its financial year. This will be paid on 2 August.