UK Investment Trusts Guide (Best Trusts, Premium/Discount)

What Is an Investment Trust

An investment trust is a public limited company whose sole purpose is to invest in a portfolio of assets. Unlike unit trusts or OEICs (which are open-ended — the fund creates or cancels units as investors buy or sell), investment trusts have a fixed number of shares. Investors buy and sell shares on the stock exchange, and the share price is determined by supply and demand — not directly by the underlying asset values. This means the share price can differ from the Net Asset Value (NAV) per share.

The closed-end structure gives investment trusts unique advantages. They can invest in illiquid assets like property, infrastructure, and private equity because they do not face forced selling when investors redeem (there is no redemption — shares simply trade between investors on the exchange). They can also borrow money (gear) to invest additional capital, amplifying returns. And they can retain up to 15% of income in revenue reserves to smooth dividend payments in lean years — many trusts have paid rising dividends for decades.

Premium and Discount

The share price of an investment trust can trade above its NAV (a premium) or below it (a discount). A discount means you are buying the underlying assets for less than they are worth — an immediate 5-15% discount is common. Discounts arise because of market sentiment, sector unpopularity, poor performance, or the level of gearing. When sentiment improves, discounts can narrow, providing an additional return on top of the underlying investment performance.

Trusts manage their discount through various mechanisms: share buybacks (the trust buys its own shares in the market, reducing supply and supporting the price); tender offers (offering to buy back shares at or near NAV); and a discount control policy (some trusts commit to maintaining the discount within a specific range). Investing in trusts at a wide discount gives you a margin of safety — if the discount narrows, you benefit. But discounts can also widen, so be careful not to buy into a value trap. A persistently wide discount often signals fundamental problems with the trust or its sector.

Gearing

Gearing means the trust borrows money to invest more in its portfolio. If the portfolio returns more than the cost of borrowing, gearing amplifies returns for shareholders. If the portfolio underperforms, gearing amplifies losses. Typical gearing ratios are 5-20% of net assets. Net gearing (borrowings minus cash) is the true measure of leverage. Some trusts use structural gearing (long-term fixed-rate debt) and others use flexible gearing (short-term floating-rate debt).

In rising markets, a geared trust can significantly outperform an ungeared peer. In falling markets, the reverse happens. Gearing is most appropriate for trusts investing in assets with predictable returns (infrastructure, private equity, property) and less common in conventional equity trusts. When interest rates are high (as in 2022-24), gearing costs more, reducing the benefit. In 2026, with rates stabilising around 4-4.5%, gearing remains a meaningful factor. Always check the gearing policy and current level before investing.

Dividends and Income

Many investment trusts have excellent dividend track records. The Association of Investment Companies (AIC) maintains a list of "Dividend Heroes" — trusts that have increased their dividend for at least 20 consecutive years. Some have 40-50 year records. This is possible because trusts can retain up to 15% of their income each year in revenue reserves. In good years, they add to reserves; in lean years, they draw on reserves to maintain or grow the dividend.

Typical yields vary by sector: UK equity income trusts yield 4-5%, global equity income trusts 2.5-4%, property trusts 4-6%, infrastructure trusts 4.5-6%, and debt-focused trusts 5-7%. Dividends from UK investment trusts are subject to dividend tax rules (see our Dividend Tax guide), but if held in an ISA, all dividends are tax-free. For income-focused investors, investment trusts offer more reliable and often higher dividends than open-ended funds or ETFs.

Best UK Investment Trusts 2026

Global equity: Scottish Mortgage (SMT) — Baillie Gifford's flagship global growth trust, concentrated portfolio of 50-80 companies, early-stage investor in Tesla, Amazon, Moderna. F&C Investment Trust (FCIT) — oldest investment trust, founded 1868, global diversified portfolio, 0.97% OCF, 1.5% yield. Monks (MNKS) — Baillie Gifford global growth, less concentrated than SMT. Alliance Trust (ATST) — multi-manager global equity, 0.55% OCF, 2.3% yield.

UK equity: City of London Investment Trust (CTY) — Dividend Hero with 55+ years of increases, yield 4.9%, UK large-cap focus. Mercantile (MRC) — UK mid-cap focus, growth style. Infrastructure: Renewable Infrastructure Group (TRIG) — wind and solar assets, yield 5.5%. Greencoat UK Wind (UKW) — UK wind farms, yield 5%. Private equity: Pantheon International (PIN) — diversified global private equity, 3i Group (III) — direct private equity, strong long-term performance. Property: TR Property (TRY) — pan-European property, yield 4.5%.

Investing in Trusts

Most investment trusts can be held in an ISA or SIPP, making them tax-efficient wrappers. Dealing costs are the same as for shares — typically £5-£12 per trade. Many platforms offer regular savings plans (monthly investing from £25-£100) with lower dealing costs. Trusts can be compared to ETFs: ETFs are open-ended and track indices passively, while trusts are actively managed (mostly) and trade at a premium/discount. Fees are typically higher for trusts (0.5-1.0% OCF) than index ETFs (0.05-0.25%), but the active management and structural advantages may justify the cost.

Choose a platform that offers the trusts you want — some platforms do not offer all trusts. Consider a regular savings plan to dollar-cost average in. Monitor the premium/discount — buy when the discount is wide, avoid buying at a large premium. Read the annual report and the manager's commentary. Review your trusts annually to ensure the manager's approach still aligns with your goals. Investment trusts are best held long-term — the structural advantages compound over time.

Evaluating Investment Trust Performance

When evaluating an investment trust, look beyond the headline NAV return. Key metrics include: NAV total return (the trust's investment performance including dividends); share price total return (what shareholders actually received, affected by the premium/discount movement); discount or premium (current level and historical range); ongoing charges (OCF — typically 0.5-1.0%); gearing level (net gearing ratio); dividend yield and dividend cover; and revenue reserves (number of years of dividends covered by reserves). A trust with a wide discount might seem cheap, but the discount could widen further if the manager underperforms or the sector falls out of favour.

The Board of Directors is an important factor. The board is responsible for the trust's strategy, appointing and monitoring the manager, and managing the discount. A strong, independent board with good governance adds significant value. Read the annual report — the chair's statement, the investment manager's report, and the board's explanation of the discount management policy. Compare the trust's performance against its benchmark and peer group over 1, 3, 5, and 10 years. Also check the "cumulative performance" — the total return since the current manager took over. A consistent record of outperforming the benchmark over rolling 3-5 year periods is a good sign, but remember that past performance is not a guide to future returns. Regular reviews (at least annually) help ensure the trust remains fit for purpose as your investment goals evolve.

Sector-Specific and Specialist Trusts

Beyond broad equity trusts, the investment trust universe includes many specialist and sector-specific options that offer access to assets not easily available through open-ended funds. Property trusts (like TR Property, LXi REIT, Warehouse REIT) provide exposure to commercial, industrial, and logistics property. Infrastructure trusts (like 3i Infrastructure, International Public Partnerships, HICL Infrastructure) invest in PFI/PPP projects, renewable energy, and transport infrastructure — offering inflation-linked income streams. Private equity trusts (like Pantheon International, HarbourVest, HgCapital) invest in unquoted companies with the potential for higher returns but longer lock-up periods and higher risk.

Specialist trusts cover sectors like biotechnology (International Biotechnology Trust, Polar Capital Biotechnology), technology (Polar Capital Technology, Allianz Technology), healthcare (Worldwide Healthcare), and financials (Henderson Smaller Companies). These can offer targeted exposure to high-growth sectors but come with higher concentration risk and sector-specific volatility. Renewable energy infrastructure trusts (like Greencoat UK Wind, Renewable Infrastructure Group, NextEnergy Solar Fund) offer income from wind, solar, and other renewable assets. Debt-focused trusts (like TwentyFour Income, GCP Asset Backed Income) invest in secured loans and asset-backed securities, offering higher yields with different risk profiles. For investors building a diversified portfolio, adding one or two specialist trusts can enhance returns and provide exposure to assets with low correlation to equities and bonds — but they should not dominate the portfolio due to their higher risk profiles.

Investment Trusts vs Open-Ended Funds

The choice between investment trusts and open-ended funds (OEICs, unit trusts, ETFs) depends on your priorities. Investment trusts offer advantages: fixed capital (no forced buying or selling of assets when investors enter or exit — useful for illiquid assets like property and private equity); gearing (ability to borrow to invest); revenue reserves (smoothing dividend payments over time); and potential discount buying opportunities. Open-ended funds offer advantages: daily pricing at NAV (no premium/discount uncertainty); no gearing (most OEICs are ungeared — lower risk in volatile markets); typically lower fees (especially passive index funds and ETFs); and simpler to understand for many investors.

For most investors, a core portfolio of low-cost index ETFs or tracker funds combined with satellite holdings in carefully selected investment trusts (for specific sectors like private equity, infrastructure, or income) is a sensible approach. Investment trusts tend to be more suitable for long-term, patient investors who are comfortable with the premium/discount volatility and the complexity of gearing. They are particularly well-suited to ISAs and SIPPs because the tax shelter eliminates the dividend tax and CGT complications. Open-ended funds (especially ETFs) are better for shorter-term or more tactical positions, and for investors who prefer simplicity. Many investment platforms now offer both types, making it easy to build a diversified portfolio combining the best of both worlds.

FAQs

What is the difference between an investment trust and an ETF?

Investment trusts are closed-end (fixed number of shares, trade at premium/discount, can gear). ETFs are open-ended (shares created/redeemed, track indices, cannot gear, trade at or close to NAV).

What is a discount to NAV?

When an investment trust's share price is lower than the value of its underlying assets (NAV). If NAV is 100p and the share price is 90p, the trust trades at a 10% discount.

Are investment trust dividends tax-free?

In an ISA, yes — completely tax-free. In a GIA, dividends are subject to the same dividend tax rules as shares, with a £500 allowance.

What is gearing in investment trusts?

The trust borrows money to invest additional capital. This amplifies returns in rising markets and losses in falling markets. Gearing is typically 5-20%.

How do I buy investment trusts?

Through a stockbroker or investment platform, just like buying shares. They can be held in ISAs and SIPPs. Use a regular savings plan for monthly investing.