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Zeros back in high demand

TAX TIP: Zero dividend preference shares offer a solution to wealthy investors keen to avoid 50 per cent income tax. But they're rather thin on the ground
June 12, 2009

The split capital investment company sector is back on the radar, with zero dividend preference shares - 'zeros' - looking very attractive to wealthy investors following the forthcoming increase in the highest rate of income tax to 50 per cent.

Zeros pay no dividends and are hence not subject to income tax, but are subject to capital gains tax at a rate of 18 per cent. With investors having an annual capital gains allowance of up to £10,100 before they pay any tax at all, that's £20,200 for a couple.

John Newlands, head of investment companies research at Brewin Dolphin, says: "The split capital concept is a simple and brilliant one. At its purest it means giving all the income returns to one shareholder and all of the capital gains to another. Top quality splits deserve a return to the spotlight."

But with over half of the splits sector due to reach the end of their fixed life over the next three years, investors looking to the long term have few options.

Tom Tuite-Dalton, analyst at Oriel Securities, anticipates that conventional investment companies may consider issuing zeros as a cheaper, more flexible form of finance in the wake of the credit crunch, quite apart from the potential increased attractions of the splits sector from a tax planning perspective.

However, so far, new issues of zeros seem to be coming from the splits sector itself, with Ecofin Water & Power Opportunities marketing a zero share, alongside JZ Capital.