In 2023 we saw a wave of corporate activity in the investment trust sector, dominated by mergers and closures. Eight companies closed their doors, while four mergers took place, with a further four announced that are due to take place this year, according to the Association of Investment Companies.

WHY INVESTMENT TRUSTS MERGE OR CLOSE

Investment trusts might close or merge for a number of reasons. In some cases, it boils down to poor fund manager performance, or adverse market conditions. Investment trusts assets can also fall to a low enough level, or liquidity become so poor, that the trust is prevented from operating effectively.

Activist investors can play a role too. If a trust is trading at a healthy discount, there’s a profit there to be made by big investors buying shares and agitating for a wind-up, which would mean them receiving a sum closer to the net asset value of the trust and then moving on to the next target with their profits.

If a trust winds up the underlying assets don’t simply disappear of course, they are there to be sold off and the value returned to you, minus costs. The sale price might not be tip top seeing as trusts winding up are in effect forced sellers, and if the assets in question are large and illiquid there might not be a long queue of potential buyers.

If your trust closes then you need to redeploy your capital, so the main thing to do is to choose a new investment. This needn’t be an investment trust; it could be an open-ended fund too. Either way, look for a trust or fund with a similar investment strategy if you want to stay invested in the same area, and also pay attention to the pedigree of the manager. If you decide you want to look for opportunities in a different market, then the world is your oyster. If your trust was held outside of an ISA you might consider making the new investment within a tax shelter to protect future dividends and capital gains from tax.

If a trust is winding up there will inevitably be costs involved in the sale of a portfolio which will be borne by the shareholders of the trust. This might tempt you to jump ship early by simply selling your holding and getting it invested in a new fund or trust as soon as possible, but you do need to be careful here. If the trust is trading at a substantial discount you may benefit by waiting for the assets to be sold and the cash returned, as this could well be done at a price nearer to the net asset value. This is a bit of a judgement call if it’s a small discount, which may simply reflect the market’s assessment of what the closure costs will be.

TAKE A FRESH LOOK

If your trust merges, then you need to reassess the new investment proposition with a critical eye. It’s best to do this as if starting with a blank sheet of paper. Ask yourself if you would be keen to invest in the trust if you didn’t already have a holding in it as a result of the merger. If not, then it makes sense to reinvest your money in a fund or trust you have more confidence in. The key things to run your eye over are the investment strategy of the newly merged trust, the quality of the fund manager, and the annual charges. These may or may not be the same as the investment trust you held before the merger, but either way they are worthy of scrutiny.

Mergers and closures can also potentially open you up to tax, in particular capital gains tax (CGT). It’s important to note that tax implications are determined by your personal circumstances and if you’re in any doubt, you should seek professional advice. If you hold a trust outside a SIPP or ISA and it winds up and returns cash to you, then you are potentially liable to CGT if you have made a gain. Equally if it has made a loss you can usually use it to offset gains you have made elsewhere. This tax year investors have a £6,000 allowance for gains that can be made free of CGT, which is falling to £3,000 from 6 April.

MANAGING TAX LIABILITIES

If two trusts merge and you receive shares in a new trust, normally there wouldn’t be a capital gains tax liability at this juncture, but you would carry the cost of your original investment across to judge whether you have made a chargeable gain when you finally come to sell the new trust. If you get a combination of cash and shares as part of a merger, then there may be some capital gains tax liability on the cash element. If you sell out of a trust because it is merging, that counts as a liquidation and any gain will be potentially taxable.

Holding investment trusts in a SIPP or ISA is the best way to shelter them from tax, whether they are winding up or not. If you know a trust is winding up and are facing a large tax bill, you might consider transferring some of your holding to a spouse or civil partner beforehand, as this move doesn’t incur a tax charge.

That way you can use two capital gains tax allowances, and there may also be a benefit if they are a lower earner, as higher rate taxpayers get charged CGT at a rate of 20% on gains from shares, whereas this is only 10% for basic rate taxpayers. Clearly when an investment trust merges or closes you need to give some thought to the investment implications, but you might save yourself some pennies by considering your tax situation too.

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