![](/uploads/1/2/7/1/127187895/550789477.png)
A unit trust is a common business structure where the business is a venture between several unrelated interests. Beneficiaries have a fixed interest in all the property that is the subject of the trust.
A unit trust differs to a discretionary trust as the beneficiaries’ rights to income and capital are subject to the discretions on the part of the trustee. But, why is it used? And when? This article will concisely outline what exactly is a unit trust, and unpack its advantages.
Establishing a Unit Trust
There are a number of key people and documents involved in the establishment of a unit trust.
Trustee
The trustee is normally a shelf company, set up specifically to act for the unit trust. Unitholders appoint the trustee, and their powers are contained within the trust deed. The trustee legally owns the trust and may be held personally liable for any debts incurred whilst as the trustee. This is an attractive structure because of a company’s perpetual existence. That is, managing the unit trust is not complicated by the trustee’s “death” or an inability to manage its own affairs.
Unit Trust - Fixed Establishment Kit This Kit has been prepared by Maddocks. Introduction: Understanding the structure of the Trust The Unit Trust - Fixed structure The Cleardocs Fixed Unit Trust in this document package is a trust under which:. “ordinary” units of the one class are created and issued to the unit holders.
Beneficiaries
The beneficiaries of a unit trust are usually referred to as “unitholders.” Unitholders have fixed rights to the trust’s income and capital.
Trust Deed
The trust deed is a document that outlines the:
- unit trust’s purpose;
- rights and obligations of the trustee and unitholders;
- the trustee’s powers;
- identities of the parties;
- process of selling units; and
- process of closing the unit trust.
What is a Unit?
A unit is a piece of property. It entitles its unitholder to a specific amount of the income and capital of the unit trust. The amount is fixed and is determined at the time that the units are issued. Or, at a time otherwise agreed by the unitholders and the trustee. Because the rights are recognised as a form of property, they can be bought and sold. The unitholder’s entitlement to future payments of income and capital assigns a value to the unit. This means that other people are prepared to pay and acquire the unit from the unitholder.
What is the Difference Between a Unit and a Share?
On its face, it can be difficult to distinguish between a unit in a unit trust and a share in a company. They are both considered pieces of property. A share, however, does not grant the shareholder any legal or equitable interest in the company’s assets.
On the other hand, a unit grants its unitholder a proprietary interest in all the property under the trust. A unitholder also has an equitable interest in the unit trust’s underlying capital and income.
The amount’s character as capital or as income in the unitholder’s hands when distributed to a unitholder under a trust deed will depend on its character in the trustee’s hands.
Unit Holders’ Agreements
Unrelated parties typically use unit trusts to co-own assets. It is then important to have a unitholders’ agreement. This agreement outlines each unitholder’s rights and obligations in respect to one another. In this way, a unitholders’ agreement is similar to a partnership agreement.
Tax Advantages of a Unit Trust
Unit trusts do not, generally, have the asset protection advantages for unitholders that discretionary trusts have for beneficiaries. But they are an attractive business structure because of the income tax advantages.
A unit trust, unlike a company, is not a separate taxable entity and as such, the trust’s income or capital is distributed pre-tax. Another advantage is that the trustee’s creditors are not able to look to trust property in the event of the trustee’s insolvency. This is because property held on trust lies outside that which is available to satisfy the trustee’s creditors. Unit trusts are also subject to a lesser level of regulation, meaning that the trust’s financial results may remain confidential, and its accounts do not need to be audited.
Key Takeaways
A unit trust is an attractive structure to use in the conduct of business because of the income tax advantages it presents. It is important though first to speak with your accountant about whether a unit trust is the most appropriate business structure for your financial circumstances. If you have any questions or need assistance in setting up your unit trust, you should speak with one of LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
Thanks!
We appreciate your feedback – your submission has been successfully received.
About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Privacy Policy Snapshot
We collect and store information about you. Let us explain why we do this.
What information do you collect?
We collect a range of data about you, including your contact details, legal issues and data on how you use our website.
How do you collect information?
We collect information over the phone, by email and through our website.
What do you do with this information?
We store and use your information to deliver you better legal services. This mostly involves communicating with you, marketing to you and occasionally sharing your information with our partners.
How do I contact you?
You can always see what data you’ve stored with us.
Questions, comments or complaints? Reach out on 1300 544 755 or email us at [email protected]
View Privacy Policy A unit trust is a form of collective investment constituted under a trust deed.A unit trust pools investors' money into a single fund, which is managed by a fund manager. Unit trusts offer access to a wide range of investments, and depending on the trust, it may invest in securities such as shares, bonds, gilts,[1] and also properties, mortgages and cash equivalents.[2] Those investing in the trust own 'units' whose price is called the 'net asset value' (NAV). The number of these units is not fixed and when more is invested in a unit trust (by investors opening accounts or adding to their accounts), more units are created.[1]
In addition to the UK, trusts are found in Fiji, Ireland, the Isle of Man, Guernsey, Jersey, New Zealand, Australia, Kenya, Namibia, South Africa, Singapore,[3] Malaysia and Zimbabwe.
- 2Structure
- 7References
Different investment structures[edit]
There are a number of collective investment schemes — Unit Trust, Open-ended investment company, Mutual fund, Unit investment trust, Closed-end fund — with similar objectives and/or names, sometimes confused with each other. Variations include open-ended and closed-ended, business trust or management company/corporate structure, Actively managed or un-managed.
In the UK there are generally two types of open-ended, actively managed investment companies:[4]
- Unit Trusts - which are organized as a business trust where the legal owner of the underlying assets is the trustee and the investors/unit-holders are beneficiaries. Unit Trusts have a 'bid–offer spread', i.e. the investor pays more to buy units of the trust then they receive when they sell them—a difference that can vary and goes to the trust management as a profit.[4]
- Open-ended investment company - which have a company, not trust, form. They also have a single price for purchase and sale of units (no bid–offer spread), making them similar to European SICAVs and U.S. mutual funds.[4]
In Western Europe there are
- SICAV - (société d'investissement à capital variable) is an open-ended collective investment scheme common in Western Europe, especially Luxembourg, Switzerland, Italy, Spain, Belgium, Malta, France and the Czech Republic.[5]
- SICAF - (Société d'Investissement À Capital Fixe) is similar to a closed-end fund.[6]
In the United States
- Mutual funds - in the form of open-ended, actively managed funds have traditionally been a very popular form of collective investment. Like Unit Trusts, their investors are unit-holders, and there are not a finite number of units in issue. Units could be increased or decreased depending on the net sales and repurchase by existing unit holders. Unlike Unit trusts they are limited liability companies where investors are like shareholders in a company.[7] While open-ended mutual funds do not have a bid–offer spread, they may have 'loads' (sale charges) and other fees paid to fund management.
- Closed-end funds - a collective investment model based on issuing a fixed number of shares which are not redeemable from the fund.[8] Even more different from a unit trust, investors own shares rather than units. They buy and sell the shares on the stock market, rather than from the fund itself. New shares are not created by managers to meet demand from investors.[9]
- Exchange-traded funds (ETFs) - also traded in the market and not bought and redeemed from the fund, but unlike closed-end funds the price is not completely determined by the valuation of the market, and trades in a narrow range very close to its net asset value, because the structure of ETFs allows major market participants to redeem shares of an ETF for a 'basket' of the fund's underlying assets.[10] (More than US$2 trillion were invested in ETFs in the United States between when they were introduced in 1993 and 2015.)
- Unit investment trust - an exchange-traded fund with a fixed (unmanaged) portfolio of securities and a fixed life-span before it liquidates and distributes its net asset value as proceeds to the unit-holders. Despite its similar name and being a trust, it differs from a unit trust in being closed-end, un-managed, and having a termination date.[11]
Structure[edit]
- Unitholders are the owners of trust property and the trustee administers the trust.
- The trustee has a fiduciary duty to ensure that unit holders are treated equally.
- The fund manager is appointed by the trustee to manage the investment of the trust assets.
- The fund manager runs the trust for a management fee and sometimes for a performance fee.
- Trust profits are either distributed to unitholders as income or reflected in the unit prices as capital gain when sold.
- The trustee ensures the fund manager keeps to the fund's investment objective.
- The trustee or fund manager can appoint a custodian to safeguard the trust assets.
- The trustee is required to maintain a registry to allow the transaction of units.
Open-ended[edit]
Unit trusts are open-ended; the fund is equitably divided into units which vary in price in direct proportion to the variation in value of the fund's net asset value. Each time money is invested, new units are created to match the prevailing unit buying price; each time units are redeemed the assets sold match the prevailing unit selling price. In this way there is no supply or demand created for units and they remain a direct reflection of the underlying assets. Unit trust trades do not have any commission.
Bid–offer spread[edit]
The fund manager makes a profit in the difference between the purchase price of the unit or offer price and the sale value of units or the bid price. This difference is known as the bid–offer spread. The bid–offer spread will vary depending on the type of assets held and can be anything from a few basis points on very liquid assets like UK/US government bonds, to 5% or more on assets that are harder to buy and sell such as property. The trust deed often gives the manager the right to vary the bid–offer spread to reflect market conditions, with the purpose of allowing the manager to control liquidity. In some jurisdictions the bid–offer spread is referred to as the 'bid–ask spread'.
![Unit trust online Unit trust online](/uploads/1/2/7/1/127187895/938039634.jpg)
To cover the cost of running the investment portfolio the manager will collect an annual management charge or AMC. Typically this is 1 to 2 percent of the market value of the fund. In addition to the annual management charge, costs incurred in managing and dealing the underlying assets will often be borne by the trust. If this is the case, the provider will extract revenue equal to the AMC without incurring any expenses managing the fund. This makes the charges in such vehicles lack transparency.
Mechanics[edit]
In a unit trust, units are managed within what is known as the 'Managers Box'. The Box Manager of the fund will make a decision at each valuation point whether or not to Create (add) or to Liquidate (Remove) units based on the final net sales and redemptions prior to the next valuation point where the Fund is priced on a 'Forward Basis', or at the actual valuation point where the fund is priced on an Historic basis. Forward pricing is the most common.
The underlying value of the assets is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs. Each fund has a specified investment objective to determine the management aims and limitations.
A unit is created when money is invested and cancelled when money is divested. The creation price and cancellation price do not always correspond with the offer and bid price. Subject to regulatory rules these prices are allowed to differ and relate to the highs and lows of the asset value throughout the day. The trading profits based on the difference between these two sets of prices are known as the box profits.
OEIC conversion[edit]
In the UK many unit trust managers have converted to open-ended investment companies (OEICs) in recent years. OEICs normally have a single price for purchase and sale, although recent regulatory change now permits dual pricing too, in line with unit trusts.
The motivation for conversion is often cited as a simplification and precursor to offering funds Europe-wide under EU rules.
More cynical observers may have noted that there is increased latitude to hide charges in the OEIC Dilution Adjustment (more commonly referred to as 'Swinging Single Price') whilst maintaining the veneer of simplification[citation needed].
History[edit]
The first unit trust was launched in the UK in 1931 by M&G under the inspiration of Ian Fairbairn.[12][13]The rationale behind the launch was to emulate the comparative robustness of US mutual funds through the 1929 Wall Street crash. The first trust called the 'First British Fixed Trust' held the shares of 24 leading companies in a fixed portfolio that was not changed for the fixed lifespan of 20 years. The trust was relaunched as the M&G General Trust and later renamed as the Blue Chip Fund [14]
By 1939 there were around 100 trusts in the UK, managing funds in the region of £80 million.[15]
Ways to invest[edit]
In the UK, units can be bought direct from the fund manager, held through a nominee account or through an individual savings account (ISA). It is also possible to invest via fund platforms.
From 1 January 1987 to 5 April 1999 it was also possible to invest via a personal equity plan (PEP) however these were discontinued and all PEP accounts automatically became stocks and shares ISAs on 6 April 2008.[16]
See also[edit]
Further reading[edit]
- Sin, Kam Fan (1998) The Legal Nature of the Unit Trust. Clarendon PressISBN0-19-876468-5
References[edit]
Notes[edit]
Citations[edit]
- ^ ab'What is a unit trust?'. money.co.uk. Retrieved 11 October 2017.
- ^'What is a 'Unit Trust - UT''. Investopedia. Retrieved 12 October 2017.
- ^Lee, Boon Keng and Ong, Andy. Personal Financial Planning in Singapore. INS communications PTE LTD, 1997. p. 120, ISBN981-00-9422-1.
- ^ abcRussell, Ray (2007). An Introduction to Mutual Funds Worldwide. John Wiley & Sons. pp. 10–12. Retrieved 12 October 2017.
- ^Akciová společnost s proměnlivým základním kapitálem (SICAV) – právní a daňová specifika EPRAVO.CZ| 8.4.2013
- ^'Luxembourg SICAV / SICAF'(PDF). seic.com. 2012. Retrieved 12 October 2017.
- ^'Frequently Asked Questions. Chapter 6 Products - Securities Market. 6.8.2 What are the differences between mutual funds and unit trusts?'. HKEX. 2009-08-31. Retrieved 11 October 2017.
- ^Lemke, Lins and Smith, Regulation of Investment Companies, §9.05 (Matthew Bender, 2014 ed.).
- ^'Closed-End Fund Information'. SEC.gov. U.S. Securities and Exchange Commission. 2013-01-16. Retrieved 2015-12-16.
- ^Investopedia (2015-05-28). 'What is the difference between an ETF's net asset value (NAV) and its market price?'. Investopedia. Retrieved 2016-12-10.
- ^Lemke, Lins and Smith, Regulation of Investment Companies, §4.03 (Matthew Bender, 2014 ed.).
- ^Thornhill, Jo (22 April 2001). 'Happy Birthday unit trusts'. ThisIsMoney. Archived from the original on 19 August 2014. Retrieved 8 March 2017.
- ^'Notes & Comments, The Fixed Trust:'. The Glasgow Herald. 23 April 1931. p. 12. Retrieved 8 March 2017.
- ^'M&G Investments. History'. mandg.com. Retrieved 12 October 2017.
- ^For more details of the trust origin of the unit trust and its relationship with American mutual funds, see Sin, Kam Fan (1998). The Legal Nature of the Unit Trust. Clarendon Press. ISBN0-19-876468-5.
- ^'Personal Equity Plans'. hmrc.gov. Archived from the original on 25 May 2011.
External links[edit]
- The FCA regulates unit trusts in the UK under their CIS (Collective Investment Scheme) rules.
- The Unit Trust Website on the Net
Retrieved from 'https://en.wikipedia.org/w/index.php?title=Unit_trust&oldid=931758566'
![](/uploads/1/2/7/1/127187895/550789477.png)