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HMRC internal manual

Corporate Finance Manual

Understanding corporate finance: the legal and regulatory framework: collective investments

Collective investments

A collective investment is a form of investment fund that enables a number of investors to ‘pool’ their assets and invest in a professionally managed portfolio of investments, typically gilts, bonds and quoted equities. Some investments, however, may be in unquoted investments or property. In effect, investors in such schemes are able to spread or reduce the risk that is associated with investment in such assets as well as gain the benefits of professional management. The reduction in risk is achieved because the wide range of investments in a collective investment scheme reduces the effect that any one investment can have on the overall performance of the portfolio.

Collective investments are regulated in the European Union through its directive on undertakings for collective investment in transferable securities (UCITS), which aims to protect investors and collective investment products to be sold throughout the EU once they have been authorised in one member state.

In the UK such products are authorised by the FSA. The rules applying to such schemes are set out in the Collective Investment Scheme sourcebook (COLL) in the FSA Handbook. Certain types of unregulated scheme may only be promoted to professional investors.

Authorised investment funds

Open ended investment companies (OEICs) and authorised unit trusts are the best known types of collective investment schemes and are referred to as authorised investment funds (AIFs). See the Company Taxation Manual (CTM48100) for further details.

Collective investment schemes based outside the UK are referred to as offshore funds.

See also the Savings and Investment Manual (SAIM6000) on the tax treatment of unauthorised unit trusts.

Investment trusts

Investment trusts are in fact limited companies with a fixed capital structure incorporated under company law.

Investment trusts invest in a broad range of shares and securities and use professional managers to oversee their investments. So buying shares in investment trusts offers investors one way to diversify their portfolios, spread risk and gain access to this professional management.

See CTM47100 for more details.

Venture capital trusts

A venture capital trust (VCT) is a company, broadly similar to an investment trust, which has been approved by HMRC and which subscribes for shares in, or lends money to, small unquoted companies. Under the VCT scheme, VCTs and their investors enjoy certain tax reliefs.

The VCT scheme is designed to encourage investment in small unquoted companies. Individuals invest by holding shares in a VCT. The VCT invests in a spread of small unquoted companies, enabling investors to spread their risk, just as they do by holding shares in an ordinary investment trust company.

See the Venture Capital Schemes Manual (VCM60000) for more details.