What an investment trust is

An investment trust is a company that pools money from many investors and uses it to buy a diversified portfolio of stocks, bonds, property, or other assets. The trust is then listed on a stock exchange, which means you can buy and sell shares in it like you would any other publicly traded company. The value of your shares moves up and down based on the performance of the assets the trust holds and what other investors are willing to pay for those shares.

Investment trusts are closed-ended funds, meaning the trust issues a fixed number of shares at launch and does not continuously create new ones the way open-ended funds do. This structure has real consequences for how the trust trades and what you pay to own it.

In the UK, investment trusts are regulated by the Financial Conduct Authority (FCA) and must follow rules about diversification, borrowing, and disclosure. They are distinct from REITs, which are real estate investment trusts with their own tax treatment and regulatory framework.

Key Takeaways

  • Investment trusts are closed-ended companies listed on stock exchanges where you buy and sell shares like any other stock.
  • The share price can trade above or below the net asset value of the underlying holdings, creating a discount or premium that affects what you actually pay.
  • Investment trusts can borrow money to invest, which magnifies both gains and losses compared to open-ended funds.
  • Dividends from investment trusts are taxed as income, and capital gains are taxed when you sell shares, depending on your personal tax situation.

How the share price differs from asset value

An investment trust's share price and the underlying value of its assets are not the same thing. The net asset value (NAV) is what the trust's holdings are worth divided by the number of shares. The share price is what buyers and sellers agree to pay on the stock exchange on any given day.

When demand for the trust's shares is high, the share price can rise above the NAV — this is called trading at a premium. When demand is low, the share price can fall below the NAV — this is called trading at a discount. A trust trading at a 10% discount means you are buying £1 of assets for 90p. A trust trading at a 10% premium means you are paying £1.10 for £1 of assets.

This discount or premium matters because it affects your actual cost and your potential return. Buying at a discount can work in your favour if the discount narrows over time. Buying at a premium means you start with a built-in loss unless the assets themselves grow enough to offset it.

Borrowing and leverage in investment trusts

Investment trusts are permitted to borrow money to invest, a practice called gearing or leverage. If the trust borrows at 3% and invests the borrowed money in assets returning 7%, the extra 4% goes to shareholders. But if the assets fall in value or return less than the borrowing cost, losses are magnified.

The amount a trust can borrow is limited by regulation and by its own trust deed. A trust might be geared at 20%, meaning it has borrowed an amount equal to 20% of its equity. During market downturns, gearing amplifies losses, so a trust that is heavily geared will fall faster than one with no borrowing.

You can find a trust's gearing level in its annual report or factsheet. Comparing gearing across trusts in the same sector helps you understand the risk profile — a highly geared trust is a more volatile investment than an ungeared one holding similar assets.

Dividends and income from investment trusts

Investment trusts pay dividends from the income their assets generate — interest from bonds, dividends from stocks, or rental income from property. Some trusts retain earnings to reinvest; others distribute most of what they earn. The dividend yield (annual dividend divided by share price) varies widely depending on the trust's strategy and the assets it holds.

Many investment trusts are designed to deliver growing income, meaning the dividend is intended to rise year on year. This is possible because trusts can hold back some earnings in good years and use them to maintain or increase the dividend in weaker years. This smoothing mechanism is one reason some investors favour investment trusts over open-ended funds.

The dividend is paid to you as income, taxable at your marginal rate. If you hold the trust in an ISA or pension, dividends are tax-free. If you hold it in a general investment account, you pay tax on dividends above your personal savings allowance.

Tax treatment when you sell shares

When you sell shares in an investment trust for more than you paid, you make a capital gain. Capital gains tax applies to the profit, though the rate and allowance depend on your personal circumstances and whether you are a basic-rate or higher-rate taxpayer. In the 2024/25 tax year, you have an annual capital gains tax allowance before tax is due, but this varies year to year.

If you sell at a loss, you can use that loss to offset other capital gains in the same year or carry it forward to future years. Keeping records of your purchase price and sale price is essential for calculating the gain or loss accurately.

Holding an investment trust in a stocks and shares ISA or a self-invested personal pension (SIPP) means you pay no capital gains tax on profits when you sell. This tax shelter is one reason many long-term investors use these wrappers for investment trust holdings.

Investment trusts versus open-ended funds

The main structural difference is that investment trusts issue a fixed number of shares, while open-ended funds create new units whenever someone invests and cancel units when someone withdraws. This makes investment trusts trade on an exchange like stocks, with a bid-ask spread and a price that can diverge from asset value.

Open-ended funds are priced once daily at the net asset value, so you always know exactly what you are paying. Investment trusts can borrow; most open-ended funds cannot. Investment trusts often have lower ongoing charges because the fixed share count spreads costs across a stable asset base, whereas open-ended funds incur costs from constant buying and selling of units.

Investment trusts also tend to have longer investment horizons and more active management strategies. Open-ended funds are often passive index trackers. Neither structure is inherently better — the choice depends on your goals, time horizon, and preference for transparency and cost.

How to research and compare investment trusts

Investment trust factsheets, published by the trust manager, show the current NAV, share price, discount or premium, gearing level, dividend history, and holdings. The annual report contains audited accounts, the manager's commentary, and detailed information about strategy and performance.

Websites like the Association of Investment Companies (AIC) publish data on all UK-listed investment trusts, including performance tables, discount and premium history, and sector breakdowns. You can compare trusts within the same sector to see which have lower charges, better dividend growth, or more stable discounts.

Before buying, check the trust's investment objective, the manager's track record, the charges (annual management fee plus any performance fee), and whether the trust's strategy matches your goals. A trust with a 15-year track record of growing dividends tells you more than one year of strong returns.

Frequently Asked Questions

Can the share price of an investment trust fall to zero?

The share price can fall significantly if the underlying assets lose value, but it cannot fall below zero because you own shares in a company, not a leveraged derivative. However, if the trust is heavily geared and assets fall sharply, losses can exceed what you invested. This is why understanding gearing and diversification matters.

What happens if an investment trust runs out of money?

Investment trusts do not "run out of money" in the way a bank account does. If the value of assets falls, the NAV per share falls and the share price adjusts. If the trust is wound up, assets are sold and proceeds are distributed to shareholders. This is rare and usually happens only if the trust is very small or the manager decides to close it.

Are investment trusts safer than stocks?

Investment trusts are diversified portfolios, so they are generally less volatile than owning a single stock. But they are not risk-free — the assets inside can fall in value, and gearing magnifies losses. A trust holding bonds is less risky than one holding emerging market stocks, but both are subject to market risk.

How often should I check the discount or premium?

The discount or premium changes daily as the share price moves. If you are a long-term holder, checking it quarterly or annually is usually enough. If you are trading actively or considering buying a trust, checking the current discount and its historical range helps you decide whether the price is attractive relative to the assets.

Can I hold an investment trust in a pension or ISA?

Yes. Investment trusts can be held in a stocks and shares ISA, a self-invested personal pension (SIPP), or a general investment account. In an ISA or pension, dividends and capital gains are tax-free. This makes these wrappers particularly tax-efficient for investment trust holdings.