What is an investment company? What is the difference between an investment company and an investment trust? We look at these questions below.
What is an investment company?
Legislation makes a distinction between ‘investment companies’ and ‘companies with investment business’ that initially separated the two types of entities. However, this is not so clear since the legislation was changed on 31 March 2004. Companies with investment business and investment companies are now differentiated by the former having investments as part or all of its business, while the latter has investments as their whole or main business, which is an overlap, and the terms are sometimes used interchangeably. Nowadays, an investment company need not make all of its income from its investments.
However, the two terms can be told apart by how their tax is handled. An investment company can make use of share loss relief, the deduction of capital loss when disposing of its shares. Sometimes, a company meets the definition for both, but one must be careful in making this call as the two differ by the extent of their investments.
What is not an investment company?
Some savings banks are not included under the definition of investment companies. A trading group’s holding company is not labelled an investment company. It can be identified by, firstly being a group that includes more than half of its subsidiaries; secondly, its main business is trade; and thirdly, its core business being the holding of shares in its subsidiaries.
Again, taxation rules indicate the differences between trading companies and investment companies. Certain revenue expenses can be deducted from a trading company’s tax. On the other hand, investment companies can gain tax relief from the costs of handling investments.
What is the difference between an investment company and an investment trust?
Investment trusts and investment companies are very similar. Both pool money so investors have an easier time investing in the stock market. Investment companies are limited to a predetermined number of shares available for investment at any time. Thus, they are known as closed-ended. Clients trade shares on the stock market. Investment trust is a term that dates back to the 19th Century, when early examples were established as legal trusts.
Closed-ended entities, like investment companies and investment trusts, are not constrained by money moving in and out of the company at a rapid rate. This enables investment companies to make investments in items such as property, private companies, and infrastructure which are slower to be bought and sold. The advantage of this is that they can obtain higher returns and income than open-ended funds.
The Basics of Investment Trusts
Investment trusts have some similarities with Open-Ended Investment Companies (OEIC) and unit trusts. However, investment trusts form a combination of many investments sold as a product. Many individuals have investment savings in an investment trust. This is run by a fund manager whose job is to invest money for these individuals in property, bonds, and shares to bring about an increase in their clients’ portfolios.
Investment trusts trade in the same way as any other share. They are traded on the London Stock Exchange. They have a wide range of possible investments to choose from in a portfolio. The cost of investment trusts is approximately 0.65% per annum. Investment trusts can be found on any popular platform and have a good record of increasing clients’ wealth over a period of time. Investors may receive dividends from investment trusts, thus gaining a steady income from their portfolios.
There are many different types of investment trust options. For example, trade can be made in global markets or limited to shares in small businesses. Some investment trusts focus on set themes, such as renewable energy.
Investing with an investment company can result in higher returns for investors.
