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Split capital investment companies

Investment companies that offer more than one type of share to meet different investment needs

Split capital investment companies (splits) are generally just like other investment companies – they own and manage a portfolio of investments, and you can invest by buying shares in the company. The difference is that they offer two or more different types of share, to suit different investors.

Splits can be complex and you should not invest in them if you don’t understand the risks. It may help to get financial advice.





The first splits: income versus capital growth

Splits first started in the 60s. They were investment companies that ran for a set period of time, after which the assets were all sold. They issued two classes of share:

  • income shares meant the shareholder got the income generated from the company’s investments during its lifetime
  • capital shares meant the shareholder got part of the lump sum when the assets were sold off at the end

Investors could therefore concentrate on either capital growth or income by buying whichever share suited them best.

Why invest in a split?

Splits have several advantages:

  • they can provide for a range of investment needs
  • if you want to invest for a set time, they can give you a specific date for when the investment in the portfolio will be sold and your money returned to you
  • some share classes have no income associated with them, so there's no income tax to pay.  They can also be useful if you have unused capital gains tax allowances or capital losses

Limited life and wind up

At least one class of share in a split is likely to have a limited life – this means that at a set date the company will need to sell off some or all of its assets and distribute the money to those shareholders.

If the whole company has a limited life this triggers a wind up procedure – the end of the company. At wind up, the company:

  • sells off its assets
  • pays off any debts, such as bank loans
  • distributes what’s left over to the shareholders according to the rules of the different types of share

If you’re not looking to get your money straight away, the investment company will often give you the opportunity to continue your investment in a new investment company or some other funds. This is known as a ‘rollover’ and will normally be done in a tax-efficient way.  If you take the cash option, capital gains tax may be payable.

You don’t have to hold on to your shares until the wind up date. You can sell them at any time, as you would with other types of share.

Order of priority

Each split works differently. One of the most important things to understand before you buy is the order of priority and entitlement. This means the set sequence of who receives what, and when.

For example, a split might have two types of share, one that pays out a pre-determined amount (say £1) per share, and one that pays an amount that depends on how well the company does. The shares paying the predetermined amount would usually have priority – on wind up, the money for them would be taken out first, and then the other shareholders would get whatever was left over.  Bear in mind, though, that there is no guarantee that the company will be able to pay the full £1 per share, in which case other types of share might get back nothing.

As a rule, the lower in the order of priority the share, the riskier it is.  This is because other shareholders need to be paid first, meaning that there may not be any money to pay any returns to shares lower down.

Below is a summary of some of the common share types and the priority they might have – but remember, each split is unique, and you should understand exactly how yours works before you invest.

Zero dividend preference shares

  • The redemption value is set in advance. Even if the company performs better than expected, people who have ZDPs won’t get anything above what was initially agreed.
  • People with ZDPs aren’t guaranteed to get the redemption value; if the company performs poorly they might get less, or even nothing.
  • Usually people with ZDPs are entitled to payment at wind up before other shareholders (after any debts have been paid). The other shareholders split the amount left over.
  • 'Zero dividend' means that zeroes don't provide income, so there's no income tax to pay. Any profit on the sale or redemption of a zero is taxable as a capital gain. This makes them tax-efficient for people who pay income tax but who don’t make full use of their annual capital gains tax allowance.

Income shares

  • Income shares aim to provide shareholders with regular returns in the form of share dividends.
  • There are several different options for income shares. They give shareholders the right to some or all of the company’s distributable income, for example:
    • up to a particular target income
    • a percentage of the income the company generates
    • all the distributable income generated by the company
  • Some income shares also entitle shareholders to part of the company's capital on wind up. This is usually a predetermined amount, as in a ZDP.
  • If the company performs poorly there’s no guarantee that you’ll receive either an income or capital growth.
  • Income share entitlements depend on the structure of the company. They usually get top priority for the income revenue and the predetermined capital amount.
  • You will be liable to income tax on dividends from income shares.

Ordinary income shares

  • Ordinary income shares are higher risk than other shares, but offer a higher potential for income and capital growth.
  • Ordinary income shares are normally entitled to all the distributable income of the company.
  • They also entitled to all leftover assets on wind up of the company, after every other share type has been paid off – they’re the lowest priority. This means if the company does well, ordinary income shareholders are likely to do very well, but if it does badly, and barely has enough to pay what it owes to the other types of shareholder, they may get no capital back at all.
  • You will be liable for income tax on dividends from income shares, and capital gains tax on the capital growth.

Capital shares

  • Capital shares are one of the highest risk types of share, providing the possibility of a high level of capital gains but no income during their life. They entitle shareholders to all leftover assets on wind up of the company, after every other share type has been paid off – they’re the lowest priority. If the company does well, capital shareholders can do very well indeed, but if it does badly, and barely has enough to pay what it owes the other types of shareholder, they get nothing at all.
  • You are liable to capital gains tax on the capital growth from capital shares. They don’t give an income, so there’s no income tax to pay.


Some splits arrange for a combination of their share classes to be traded together in what is known as a 'unit'. The combination varies depending on the company.