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Valuing Your Future
Ian McKeever & Co Consulting Actuaries
Market Views
Markets
Markets
Why should the government have to rescue banks?
The banking Crisis
The banking Crisis
Economic Views
The Economic Outlook
The Economic Outlook
Professional
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Issued by Ian McKeever & Co. Authorised and regulated by the Financial Services Authority in the conduct of investment business
What Government Borrowing means for you
What it means
What it means
High Rate Taxpayers 2
A Bit of Excitement
More Exciting And Tax Favoured Investments
The following investments are risky. By investing in them you could lose serious amounts of money. Before advising on them we would expect you to have substantial assets elsewhere in less risky investments and want you to be fully aware of the risks you are undertaking. If you want to make such investments it is well worth thinking through how you control your overall investment risk. Reading the section on risk is essential
However these investments do offer substantial tax benefits or substantial investment returns should things go well.
VCTs
VCTs are investment trusts that is to say that they invest in shares of other companies and their own shares are quoted on the stock exchange. The prices are determined by what other investors are prepared to pay for the shares. Once capital is raised no more shares are issued and they are therefore known as closed end funds.
VCTs are a particular kind of investment trust in that they invest 70% of their assets in the shares and loans of unquoted companies including those quoted on AIM. Investment in new issues of shares confers tax advantages.
1) Investments of up to £200,000 in the tax year 2008/9 will attract tax relief at 30%.
2) Dividends are free of tax even for people who purchased shares in the stockmarket market after issue.
3) Capital gains on the shares are tax-free.
4) The proceeds of investments realised by the trust can be distributed as tax-free dividends.
However, the initial tax relief can only reduce an investors tax liability to nil in the year of investment and cannot be carried forward. If the investor sells his shares within five years the initial tax relief is withdrawn.
Investments in unquoted companies are more risky than in more mature companies and VCTs tend to have higher management charges and performance fees for managers. Although in principle higher risk means higher reward, the existence of tax favoured vehicles for investing in such companies distorts the market somewhat by increasing the pool of investors which may be increasing prices and therefore reducing returns.
An investor wishing to buy VCT shares can either buy a new issue or buy existing shares in the market. Given that investing in new shares attracts tax relief at 30% and buying existing shares does not, an investor will only be willing to pay 70% of the asset value to buy existing shares. New shares are therefore likely to stand at a discount to asset value of around 30% and that will be reflected in the price that an investor will get for his shares if he has to sell them.
If an investor needs to realise his investment early he is likely to have to sell at a 30% discount and repay the tax relief he received from the Inland Revenue. An investor who realises his investment within five years is therefore likely to receive less than 40% of his initial investment after tax. An example is useful
An investor buys £100 worth of VCT shares and receives tax relief of £30 and so the net cost is £70.
He then needs the money. Issue expenses were 6% so the trust has assets of £94 in respect of those shares, which trade at a 30% discount, and so the shares are priced at say £66, which is what the investor receives. The investor then has to pay the Revenue back his tax relief of £30 out of that money and so he has £36 left. The net effect is that an initial investment costing £70 net of tax returns a net amount of £36 and the investor has lost half his money.
Once the shares have been in existence for a while other factors become more important in determining the price such as the success or otherwise of the manager and discounts may narrow, particularly if the trust is thought to be realising its holdings.
The following investments are risky. By investing in them you could lose serious amounts of money. Before advising on them we would expect you to have substantial assets elsewhere in less risky investments and want you to be fully aware of the risks you are undertaking. If you want to make such investments it is well worth thinking through how you control your overall investment risk. Reading the section on risk is essential
However these investments do offer substantial tax benefits or substantial investment returns should things go well.
VCTs
VCTs are investment trusts that is to say that they invest in shares of other companies and their own shares are quoted on the stock exchange. The prices are determined by what other investors are prepared to pay for the shares. Once capital is raised no more shares are issued and they are therefore known as closed end funds.
VCTs are a particular kind of investment trust in that they invest 70% of their assets in the shares and loans of unquoted companies including those quoted on AIM. Investment in new issues of shares confers tax advantages.
1) Investments of up to £200,000 in the tax year 2008/9 will attract tax relief at 30%.
2) Dividends are free of tax even for people who purchased shares in the stockmarket market after issue.
3) Capital gains on the shares are tax-free.
4) The proceeds of investments realised by the trust can be distributed as tax-free dividends.
However, the initial tax relief can only reduce an investors tax liability to nil in the year of investment and cannot be carried forward. If the investor sells his shares within five years the initial tax relief is withdrawn.
Investments in unquoted companies are more risky than in more mature companies and VCTs tend to have higher management charges and performance fees for managers. Although in principle higher risk means higher reward, the existence of tax favoured vehicles for investing in such companies distorts the market somewhat by increasing the pool of investors which may be increasing prices and therefore reducing returns.
An investor wishing to buy VCT shares can either buy a new issue or buy existing shares in the market. Given that investing in new shares attracts tax relief at 30% and buying existing shares does not, an investor will only be willing to pay 70% of the asset value to buy existing shares. New shares are therefore likely to stand at a discount to asset value of around 30% and that will be reflected in the price that an investor will get for his shares if he has to sell them.
If an investor needs to realise his investment early he is likely to have to sell at a 30% discount and repay the tax relief he received from the Inland Revenue. An investor who realises his investment within five years is therefore likely to receive less than 40% of his initial investment after tax. An example is useful
An investor buys £100 worth of VCT shares and receives tax relief of £30 and so the net cost is £70.
He then needs the money. Issue expenses were 6% so the trust has assets of £94 in respect of those shares, which trade at a 30% discount, and so the shares are priced at say £66, which is what the investor receives. The investor then has to pay the Revenue back his tax relief of £30 out of that money and so he has £36 left. The net effect is that an initial investment costing £70 net of tax returns a net amount of £36 and the investor has lost half his money.
Once the shares have been in existence for a while other factors become more important in determining the price such as the success or otherwise of the manager and discounts may narrow, particularly if the trust is thought to be realising its holdings.
The following investments involve a degree of risk. If you take risks you can expect a higher investment return. However because you are taking a risk you sometimes lose money in these investments. If you hit the wrong time in the market you can lose half or three-quarters of your original investment, although it is very unlikely that you will lose all the money you invest.
Markets generally recover eventually but not necessarily in the timeframe you need them to.
If you can afford to take the risk, taking that risk will generally be well rewarded. However you should see the pages which discuss risk in more detail. They discuss income and capital risk and ways of reducing the overall risk once you start making investments which have risk attached to them. If you are serious about investing you need a serious risk control strategy as discussed in the pages on risk.
Equities
The obvious risky investment is equities. There are advantages to a number of strategies. Tracker funds are likely to track the market and be as volatile as the market. They are a useful starter, as they take no views on which part of the market will do better than any other but the charges tend to be lower.
Having a portfolio of unit trusts is in some ways better as at any one time one sector will do better than another and by having a portfolio you are likely to build up capital gains which will enable you to take advantage of your capital gains tax allowance even when some of your investments are doing badly.
It seems obvious that you reduce currency risk by investing in the UK. However in my experience much of what I buy is grown or manufactured abroad and to a much greater extent than in the past we are part of a global economy. I therefore recommend a substantial investment overseas because that adds to diversification and reduces risk in the long term. It also increases the likelihood of having realisable capital gains somewhere in your portfolio in order to take advantage of your Capital Gains Tax allowance. However everyone is in the global economy and if things go badly stockmarkets world-wide can be affected. This is one of those times
Property.
As someone one said of land. "They don't make it any more". This is true but demand does fluctuate and property has had a good run over the last decade after many years of poor performance. It is a major asset class and should in the long-term form part of any portfolio.
Long Gilts and Long Index Linked Gilts
These are a play on long term interest rates and inflation. If interest rates rise long conventional Gilts will fall in value. If real yields rise long Index Linked Gilts will fall in value. Index-linked Gilts will benefit from rising inflation, which probably accompanies rising interest rates. However, if real yields rise as well this will not prevent their price falling.
If the preservation of capital values is your main concern short Gilts have much to recommend them as safe investments.
If you are saving for retirement it is safeguarding your future income that is the main concern. In that case long Gilts are probably the safest investment you can get short of getting long Index-Linked Gilts.
It is important to understand the difference between income and capital risk. If the risk to capital is the main priority, cash is the safe investment and long bonds are risky. If protecting your income is the main priority long bonds are the safe investment and cash is risky.
Markets generally recover eventually but not necessarily in the timeframe you need them to.
If you can afford to take the risk, taking that risk will generally be well rewarded. However you should see the pages which discuss risk in more detail. They discuss income and capital risk and ways of reducing the overall risk once you start making investments which have risk attached to them. If you are serious about investing you need a serious risk control strategy as discussed in the pages on risk.
Equities
The obvious risky investment is equities. There are advantages to a number of strategies. Tracker funds are likely to track the market and be as volatile as the market. They are a useful starter, as they take no views on which part of the market will do better than any other but the charges tend to be lower.
Having a portfolio of unit trusts is in some ways better as at any one time one sector will do better than another and by having a portfolio you are likely to build up capital gains which will enable you to take advantage of your capital gains tax allowance even when some of your investments are doing badly.
It seems obvious that you reduce currency risk by investing in the UK. However in my experience much of what I buy is grown or manufactured abroad and to a much greater extent than in the past we are part of a global economy. I therefore recommend a substantial investment overseas because that adds to diversification and reduces risk in the long term. It also increases the likelihood of having realisable capital gains somewhere in your portfolio in order to take advantage of your Capital Gains Tax allowance. However everyone is in the global economy and if things go badly stockmarkets world-wide can be affected. This is one of those times
Property.
As someone one said of land. "They don't make it any more". This is true but demand does fluctuate and property has had a good run over the last decade after many years of poor performance. It is a major asset class and should in the long-term form part of any portfolio.
Long Gilts and Long Index Linked Gilts
These are a play on long term interest rates and inflation. If interest rates rise long conventional Gilts will fall in value. If real yields rise long Index Linked Gilts will fall in value. Index-linked Gilts will benefit from rising inflation, which probably accompanies rising interest rates. However, if real yields rise as well this will not prevent their price falling.
If the preservation of capital values is your main concern short Gilts have much to recommend them as safe investments.
If you are saving for retirement it is safeguarding your future income that is the main concern. In that case long Gilts are probably the safest investment you can get short of getting long Index-Linked Gilts.
It is important to understand the difference between income and capital risk. If the risk to capital is the main priority, cash is the safe investment and long bonds are risky. If protecting your income is the main priority long bonds are the safe investment and cash is risky.
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