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Split capital investment companies

A type of investment company which issues more than one class of share with different entitlements to income and capital.

Investment companies that offer more than one class of share to meet different investment needs are called split capital investment companies.

In other respects, they are just like other investment companies – they own and manage a portfolio of investments, and you can invest by buying shares in the company.

Split capital investment companies sometimes have a limited life, which means they are wound up after a fixed date, the investments in the portfolio sold, and the cash returned to investors.  

Another important concept for split capital investment companies is order of priority. This means that there is a “queue” to receive the proceeds when the split winds up. Some types of share receive money before others, and those at the end of the queue will only receive money if all the other classes of share have received what is due to them.

Classes of share in a split capital investment company

A split capital investment company will normally have either two or three classes of share. These may include any of the following, listed in order of priority:

  • Zero dividend preference shares (known as zeros or ZDPs). Holders of zeros receive no income from the split capital investment company, only a capital gain when it is wound up. This is a fixed gain, and is paid before any of the other share classes receive anything. For example, zeros costing 100p may mature in seven years’ time, paying fixed proceeds of 140p. (Note that zeros are not risk-free, because zeroholders can only be paid if there is enough money in the investment company to do so. However, they are the lowest-risk class of share in a split.)
  • Income shares. These receive income from the investment company during its life. They may also receive part of a company’s capital on wind-up, usually a predetermined amount, as in a zero. They normally stand just behind zeros in the order of priority.
  • Ordinary income shares. If there are no income shares in the split capital investment company, it is likely that there will be ordinary income shares instead. These are normally entitled to all the distributable income of the company, and all the leftover assets on wind-up of the company, after other share types have been paid off. (There may, of course, be no leftover assets if the company performs badly.)
  • Capital shares. These are the highest-risk class of share in a split capital investment company. They provide no income and receive none of the company’s assets on wind-up until all other types of share have been paid. If the company does well, capital shareholders could make very large gains, but if it does badly, they could finish with nothing.
  • Units. Some splits arrange for a combination of their share classes to be traded together in what is known as a ‘unit’.

In the current market, the most common structure for a split capital investment company is to have two types of share: zeros and ordinary income shares. From the perspective of the ordinary income shareholders, the zeros offer a form of gearing [LINK TO ‘Gearing’], and are included in gearing figures you will find on the AIC website.

Rollover option

When an investment company winds up, it sometimes offers shareholders the opportunity to continue their investment in a new investment company or some other funds, as an alternative to receiving the cash proceeds. This is known as a ‘rollover’ and will normally be done in a tax-efficient way.

A rollover option can also be offered if a single class of share is nearing the end of its life. For example, a split may have ordinary income shares and zeros. The ordinary income shares do not have a limited life, while the zeros mature on a fixed date. When the zeros mature, the holders may be given a choice between receiving their money or rolling over their investment into a new issue of zeros, with a wind-up date some years in the future.

Tax planning

Split capital investment companies may be useful for tax planning purposes, because some classes of share (such as zeros) pay no income but can provide a capital gain.