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There are two key aspects when it comes to investments – the products – what you hold your investments in – and the assets, the underlying investment holdings.

The value of the investments and the income they produce can fall as well as rise and you may not get back as much as you put in.

Unit Trusts

Unit trusts are collective funds that allow private investors to pool their money in a single fund so that they are able to spreading their risk across a range of investments, get the benefit of professional fund management and reduce their dealing costs.

Unit trusts can be cautiously invested and therefore can suitable for cautious investors. On the other hand – they can also be invested in highly speculative asset classes, in which case they are only suitable for speculative investors; individuals who understand that there is a risk of high volatility.

Unlike investment trusts, unit trusts are open-ended and different trusts have different objectives such as income or growth, small or large companies and geographical regions.

Investment Trusts

The price of the investment trust shares is dependent on two factors; the value of the underlying investments and the popularity of the investment trust shares in the market.

This second point applies to investment trusts but not open-ended investment funds or life assurance investments. This is because investment trusts are closed-ended funds.
When it comes to economics – if there is a high demand for something but limited supply, the price inevitably goes up. If you own investment-trust shares and there are lots of people queuing up to buy them, you can sell them for more money. On the other hand, if nobody seems to want them, you will have to lower the price until someone is prepared to buy. Investment trust shares do not simply reflect the value of the underlying investments – they also reflect their popularity in the market.

Open Ended Investment Companies (OEICs)

OEICs are hybrid investment funds – a combination of investment and unit trusts. They are companies that issue shares on the London Stock Exchange, using money raised from shareholders to invest in other companies.

Unlike investment trusts, where the share price would raise when demand is high, they are open-ended which means that when demand for the shares rises more shares are issued. The price of OEIC shares is determined by the value of the underlying assets of the fund.

Investment Bonds

Investment bonds are designed to produce medium to long-term capital growth, but can also be used as a means of generating income. To do this, you would pay a lump sum to a life assurance company and this is invested for you until you cash it in or die. If you cash in the bond during the first few years, you will most likely incur a financial charge.

Any growth in investment bonds is subject to income tax but this is automatic.
Investment bond tax can be broken down into the following:

  • Non-taxpayers
    Non-taxpayers will not have to pay any further income tax but cannot reclaim any tax either.
  • Basic-rate taxpayers
    As a basic-rate taxpayer you will not normally have to pay any further income tax.
  • Higher-rate taxpayers
    If you withdraw more than 5% of the original investment amount within year, or  if you have made a profit when you cash in the investment – you may be liable to pay more income tax.

Depending on your circumstances, the overall amount of tax you pay on investment bonds may be higher than on other investments (like a unit trust, for instance).

Offshore Investment Bonds

Offshore bonds benefit from ‘gross roll up’ – which means that the investments within the bond grow virtually free from income tax and capital gains tax; although, it is important to note that there may be tax to pay when you take benefits from the bond.

Venture Capital Trusts

VCTs exist to encourage investment in small companies that are not listed on a recognised stock exchange. VCTs are themselves companies listed on LSE. HMRC approval is needed and if approved, VCTs offer 30% income tax relief (set against actual income tax) whilst being free from capital gains tax and free from corporation tax.

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