View on Aberdeen Asian Income C Shares?

Question
I've read recently that the Aberdeen Asian Income Trust is launching C-shares which will trade at a lower premium than the existing shares - about 2%, just under 1/3 of the premium on the existing shares according to an article on Trustnet.

The article said that the money will be invested by 28 June 2013 at the latest, presumably in the same companies as the existing shares but it doesn't explain. It also says that "they will convert to ordinary shares on an NAV for NAV basis".

I decided I don't really understand and wondered if you would kindly explain!

Would you consider this an opportunity to invest, and is it ever sensible to buy an IT that is trading on a premium? Answer
When investment trusts want to attract more money under management, they need to issue more shares. But unlike unit trusts, they can't simply create extra units/shares on demand, it needs to be via a formal share issue - with 'C' shares the usual route to doing so.

C shares are a short term home for new subscriptions. Once money is raised and invested, then the C shares are converted into ordinary shares in the main investment trust. Why go to all this bother? It makes life much simpler - the shares can be offered at a fixed price then converted at the prevailing price later on, plus it avoids affecting the performance of the existing investment trust by suddenly injecting a whopping amount of cash and existing investors partly having to foot the bill for stamp duty and dealing charges on new investments purchased.

The potential advantage of buying C shares is avoiding the current premium to net asset value of around 7% on the Asian Income Trust. In English this means the shares currently cost about 7% more than the value of the underlying investments, largely because it's a popular trust with more buyers than sellers - hence the extra share issue.

When the C shares are converted into ordinary shares (due by 28 June 2013 at the latest), they will buy those ordinary shares at net asset value, not the prevailing share price, hence avoiding any premium there might be at that time. However, this will be partly offset by an initial charge of around 2% (slightly less if fully subscribed) when buying C shares to cover the costs of issue.

Should you buy C shares instead of the existing ordinary shares? If you want to invest now, it's arguably worthwhile in order to avoid paying a premium for the existing shares, even after the initial charge on C shares. But bear in mind the fund won't be fully invested immediately, which could drag short term performance versus the ordinary shares if markets rise meanwhile. And, if you weren't otherwise planning to invest now, the existing premium to net asset value may well decline by the time the C shares are converted, due to greater supply of shares.

There's little reason to avoid investment trusts at a premium provided you're confident the premium won't fall, by much at least. This is very difficult to predict, but in simple terms if the trust is likely to remain popular (most likely thanks to strong performance) then a premium will likely remain - notwithstanding the possible impact on the C share issue.

You can read full details of the Aberdeen Asian Income Trust C Share issue in the prospectus here.

Read this Q and A at http://www.candidmoney.com/questions/question765.aspx

Avoid continuous payment authorities?

Question
I feel that there may be a case for banning the use of "Continuous Payment Authorities" in the UK.

They can be subject to aggressive marketing tactics, for instance, when an online, an goods retailer website may offer you a £10 discount if you sign up to an associated discount saver type website to get future discounts on all kinds of goods . But unbeknown to the unsuspecting customer who trusts the retailer, on the associated site, buried away in the small print there will be a trial offer for a limited period and then a deduction of £10 per month for membership of the associated discount website.

If you do not check your emails or your bank statements in detail this can cost a lot .I did not find it when I checked my monthly direct debits and standing orders because it was a Continuous Payment Authority and these are not listed alongside these other payment methods on the banks website I do not like Continuous Payment Authorities and I do not knowingly sign up for them but I got caught nevertheless. Answer
I agree that continuous payment authorities are open to abuse.

Continuous payment authorities (CPAs) are similar to direct debits but apply to debit and credit cards rather than a bank account and, vitally, they are not subject to the protection offered by the direct debit guarantee scheme (which essentially says you must be notified in advance if the amount, date or frequency of direct debit changes).

Finding out whether you have any set up is really a case of trawling debit/credit card statements for regular payments - far from satisfactory. And, if you have any annual insurance policies that you pay be debit/credit card be especially careful as these are more often than not setup via CPAs.

If you want to cancel a CPA then in theory your bank/credit card company must do so if you ask them (as per the Payment Services Directive). In practice it seems banks are sometimes reticent to do so and there's confusion over whether they're obliged to do so (despite the law...). So the first point of call should perhaps be the company taking the payments - ask them to stop taking payments (although you'll need to fulfil any outstanding payments/obligations as per the contract you agreed to, if relevant). If the company is difficult then ask your bank/credit card company to cancel. And if that fails take your complaint to the Financial Ombudsman Service (FOS), although even they appear to have a chequered history of upholding CPA complaints - all in all the whole thing seems rather a mess.

Best to avoid CPAs in the first place wherever possible - companies offering free trials etc that require you to provide your credit card details will almost certainly be entering you into a CPA. And, if you have some, watch your debit/credit card statements like a hawk to ensure the company only takes what's owed.

Read this Q and A at http://www.candidmoney.com/questions/question762.aspx

Can I setup bare trust myself?

Question
Can I setup a Bare Discounted Gift Trust without using an intermediary? Simple passing on of monies to two children but I would like to manage the investment fund myself and make changes as necessary. Where can I find appropriate wording for the the Trust document?Answer
Yes, you can.

However, for something that should be straightforward bare trusts cause an immense amount of confusion with little definitive guidance on what you actually need to do to set one up. Some fund managers/platforms/brokers provide a form and some don't. And HMRC doesn't require notification via the usual 41G trust form, but does state you need to write to them with details. In practice I doubt many people are doing this correctly and I also doubt HMRC cares that much - this is hardly the preferred route for big tax evaders.

If you want to write your own I'd use this Abbey form as a template (it may be an old form, but the wording remains valid). Then send a letter to your tax office informing them.

Bear in mind that placing the investments in a bare trust means they're taxable as the child's and count as a gift (both likely positive), although the child can't take ownership until they're 18.

Another, potentially simpler, option would be to use Junior ISAs. These avoid the hassle of trusts, are not taxable and can't be accessed by the child until age 18. The annual contribution limit is currently £3,600 per child, which may be split between cash and investments. However, there's a slight complication if any of your grandchildren already have a child trust fund (CTF), as this means they can't open a Junior ISA. CTFs will likely be merged into Junior ISAs at some point, meanwhile existing CTFs may also be topped up by up to £3,600 a year.

Read this Q and A at http://www.candidmoney.com/questions/question760.aspx

How will fund platform charges change?

Question
May I ask a question in respect of using fund plaforms to hold investment portfolios.My wife and I hold our equity and fixed interest interest investments on Hargreaves Lansdown's Vantage platform. These are in the form of unit trusts.

H/L's customer service is impeccable, however we make all our own investment decisions and are aware other platforms offer a cheaper way of holding unit trusts through rebating most or all of the trail commissions. We are attracted by Cavendish who use Fundsnet work and seem to offer a much more attractive deal than H/L.

Next year new rules come into effect in respect of rebating trail commission and we are wondering if it would be wise to hold fire on transfering until the exect position is clearer. There are cost implications in making the transfer and would take time to recoup this cost in higher rebates not with standing any change in the rules on rebates.

The other isssue is in regard to the business model of Cavendish Online. I understand they are a small business indeed I have read they only employ 4 people and I wonder if their business model is secure and likely to endure. We would hate to be faced with having to move to another platform with the cost implications etc.
In these circumstances what would your advice be Justin in respect of:

a) waiting until the situation on rebate of commissions becomes clearer,

b) do you have a view on Cavendish On Line and their longer term stability or on other offerings such as
Alliance Trust?.

I realise it may be difficult to address the second question for obvious reasons but any general guidance would be appreciated.

By the way Justin your web site is excellent and I often visit it to cover basic points and opinion on investment. Answer
Thanks for the kind words re: the site, glad you find it helpful.

There are two big issues that could affect fund platform pricing. The first is the FSA banning platforms from receiving payments from fund managers, due to implemented by the end of 2013. The second is the potential banning of sales commissions on execution only transactions (i.e. via discount brokers when you don't receive advice), which I suspect the FSA will implement over the next year or so, although nothing definite as yet.

It's simplest to illustrate the potential impact of this with a an example.

Let's assume a fund charging 1.5% a year. Hargreaves Lansdown (HL) likely receives about 0.25% of this as a platform fee from the fund manager and another 0.5% as trail commission, so receives about 0.75% a year in total (in practice the figure appears to be a bit higher). From this HL typically rebates about 0.1-0.2% as a loyalty bonus and pockets the rest to pay for its service and turn a very healthy profit.

Assume fund manager payments are banned then we'd expect the annual fund charge to fall to 0.75%. HL would then charge customers directly for using its platform. If HL is to maintain its margin I'd expect an annual fee of around 0.6%, but I've no idea what it'll actually be in practice. The main point is there'll inventively have to be an explicit fee of some sorts, although that doesn't mean overall cost will necessarily change from now.

All fund platforms will be in the same boat, so very interesting to see what will happen. The likes of Alliance Trust Savings have arguably already built in this type of pricing, as they rebate all commissions and platform fees in favour of explicit annual and dealing fees - generally a very good deal for modest to larger sums if you don't trade very frequently.

Cavendish Online is an interesting example as it currently offers a full commission rebate and collects just 0.05% a year (i.e. £5 per £10,000 invested) from FundsNetwork as its fee. However, the FundNetwork platform fee is currently paid by fund managers, once this is banned you'll likely have to pay FundsNetwork directly. FundsNetwork's current 'unbundled' model charges 0.25% plus £45 a year (potentially £45 more than currently if our example fund charge falls to 0.75%). However, too soon to tell how the Cavendish Online deal would be affected, I suspect they'll negotiate a waiver on the £45 FundsNetwork fee to leave clients more or less on the same overall deal as now - we'll have to wait and see.

Is it worth waiting to see how charges potentially change before transferring? I suspect you'll need to stay put for up to a year for new charging structures to unfold, so tot up whether the commission saving over that time would outweigh the transfer costs (there should be no cost to sell your funds then transfer cash across and reinvest at the other end, but HL charges £30 per fund is you want to transfer across 'as is'). If it's marginal I'd stay put for now, else if you'd still end up saving then there seems little downside to transferring if you feel it's the right decision for you.

As for Cavendish Online's business model, it's firmly in the pile them high and sell them very cheap category. Margins are wafer thin, but Cavendish keeps a tight lid on costs (hence minimal staff) and appears to be a profitable business. I doubt they'll ever rival HL's c£150 million annual profit, but equally I'd be surprised if they ever went bust based on their current proposition.

In any case, because Cavendish Online is simply a discount broker and not the platform owner there's little risk involved. If they did go bust your money would remain unscathed with FudsnNetwork, although you'd have to appoint another discount broker as agent - and based on current competition the deal may end up more expensive than via Cavendish.

In the case of platform owners such as Alliance Trust Savings there is potentially a bit more risk, albeit still small overall. For more details see my article concerning nominee accounts.

Read this Q and A at http://www.candidmoney.com/questions/question759.aspx

Tax on barn conversion?

Question
I own a house with a barn attached to it. This used to be used for storage from the main house, a basic gym and basic sleeping accommodation whenever kids pals stayed overnight. I am now converting this barn into a family home which will be sold to help pay off divorce debt. How can I avoid paying tax on any profit, which may be £100.000?

Also, the separation and sale of the barn from the main house will reduce the value of my main house - does this have tax implications?Answer
Provided the barn qualifies for private residence relief you shouldn't have any capital gains tax to pay on profits from the sale.

You can read HMRC's guidance here, but the key point seems to be whether your garden/grounds are less than half a hectare (1.24 acres).

If so, then the barn will likely be viewed as part of your main residence (assuming the house you're referring to is your main residence) hence should be exempt from capital gains tax. If your grounds exceed half a hectare then whether the barn qualifies for relief depends on whether it's 'needed for the reasonable enjoyment of your dwelling house as a home'.

The answer to the latter question is obviously not black and white. Given it doesn't sound like an integral part of your home HMRC might argue the answer is no, although you could obviously counter argue. If private residence relief is not allowed then you should be able to deduct the costs of conversion from any gain made on the barn.

Probably worth talking to an accountant with expertise in this area for more definitive guidance, but I hope the above points you in the right direction.

Read this Q and A at http://www.candidmoney.com/questions/question758.aspx

Does capital gains tax affect income tax?

Question
As I understand it dividends are 'top sliced' on one's income, ie the 10% rate only applies if the total taxable income falls below the higher rate threshold of just under £35K. If in a particular year capital gains tax is chargeable does this mean that the dividends are assessed after the CGT or is CGT not considered income (though it is taxed as such under the 'simplified' system)? Thanks againAnswer
The 10% dividend tax rate for basic rate taxpayers is cancelled out by the attached 10% tax credit, so basic rate taxpayers have no further tax to pay. The logic behind this is that companies pay corporation tax on the profits from which dividends are paid, so applying basic rate to dividends would effectively result in double taxation (it's a shame HMRC doesn't apply this concept to things like inheritance tax!).

Higher rate taxpayers pay extra tax at a rate of 32.5% on the gross dividend (i.e. with the tax credit applied), which works out an extra 25% tax on the dividend received.

The illustrate the maths:

Suppose you receive a 90p dividend. The 'gross' dividend is 100p leaving basic rate taxpayers with a 10p liability (10% of 100p), which is cancelled out by the 10% tax credit, so no tax to pay. A higher rate taxpayer owes 32.5p less the 10p tax credit, leaving a 22.5p tax bill, equal to 25% of the 90p dividend received.

If you have capital gains, they are notionally added to your income for the purpose of assessing the rate(s) at which the gains will be taxed, but it won't affect the tax position of your income.

Read this Q and A at http://www.candidmoney.com/questions/question754.aspx

Can I arbitrage my mortgage?

Question
I have a 62k interest only mortgage from LloydsTsb that currently only costs me £40.82 per month as its a lifetime tracker (currently 0.76%). The deal finishes in January 2013 consequently I have recently contacted the bank to ask what will happen then. Advice is that I will move to their SVR (which is currently 2.5%) and I will be asked whether I wish to continue with the interest only loan for a further 1, 3 or 5 years. I have the 62k available to pay off the mortgage which is earning interest in a Post Account currently paying 3.01%.

2.5% (although variable) seems cheap money to me and I wonder whether there is anywhere I use the money to earn more than the mortgage is costing me?

For background info I have a further 26k in cash ISA's and 73k in unit trusts through a financial advisor. The mortgaged property is worth around 250k and I am a 20% tax payer.



Answer
Shame your tracker mortgage deal is coming to an end, it's a great rate!

The highest savings account variable rates are currently around 3% before tax. Deduct 20% basic rate tax and you'll end up with 2.4%, slightly less than your mortgage SVR. You could use a cash ISA to receive tax-free interest, but given the annual £5,640 contribution limit the bulk of your £62,000 would have to remain outside the ISA.

Tie the money up for 3 years on a fixed rate and you can currently get in the region of 4% a year, equal to 3.2% after basic rate tax. Assuming the mortgage rate remains at 2.4% you'd make an annual profit of £496 on £62,000. Nice, but there's the risk that your mortgage rate could rise at some point and leave you out of pocket, especially if the fixed rate account doesn't allow early access to your cash (most don't). I'm not sure the potential profit merits taking the risk.

There's always the option to invest the money instead, but in the current climate I think that's probably too risky, even over five years, if you want to be sure of repaying the mortgage.

If you like the flexibility holding the cash gives you then maybe it's worth keeping it in an easy access account and more or less breaking even on the mortgage. Otherwise I'd consider removing the mortgage millstone by paying it off.

Read this Q and A at http://www.candidmoney.com/questions/question753.aspx

Impact of currency on overseas fund?

Question
I understand how currency swings can affect investments but I'm struggling to identify exactly which currencies I am exposing myself to.

For example, if a fund invests in a basket of Latin American stocks but the fund manager I buy from is based in the U.S., am I exposed to swings in the US Dollar against the Pound, a range of Latin American currencies against the Pound or a combination of both?Answer
Ultimately, the answer is with great difficulty. Even a UK FTSE All Share tracker can be affected by currency movements in so far as the many of the underlying companies have exposure to currency via exports or overseas operations.

But let's looks at the bigger picture which I think is what you're asking about. Here are a couple of examples.

Suppose you buy units in a US fund that invests in the UK stock market. You convert your pounds into dollars, which the manager converts back into pounds to invest. When selling units the manager receives pounds which are converted into dollars which you then convert back into pounds. Sounds confusing, but the bottom line is exchange rate movements don't really impact your fund value in this instance. You invest £1,000 at £1 = $2, i.e. $2,000 of units. The manager buys £1,000 of UK shares with the money. Suppose the exchange rate moves to £1=$1.5 then selling the shares gives $1,500 which is worth £1,000 when you convert back into pounds.

So buying a fund in another currency that invests in assets priced in your home currency is unaffected by movements in those two currencies (ignoring the underlying investments themselves, which may or may not be affected by currency movements as mentioned at the beginning of my answer)..

Let's now assume you buy a US fund that invests in European shares priced in euros. You invest £1,000 at £1 = $2 to give $2,000 of units which buys €1,500 of shares at $1 = €0.75. The manager sells the shares at $1 = €0.5 to give $3,000 which is converted into £2,000 at £1 = $1.5. So you've doubled your money because of currency movements.

Breaking this down, the dollar/euro movement increases value by 50% and the dollar/pound by a third, but as the dollar/pound movement applies to the 50% increased dollar amount (due to dollar/euro movement) the overall impact is actually two thirds (50% x 1.333).

Anyway, the bottom line is that both sets of currency movements have affected the fund's value without any change in the underlying share prices. So in your example you'd be exposed to movements in all three currencies.

Read this Q and A at http://www.candidmoney.com/questions/question751.aspx

Strategy for rising income in retirement?

Question
Can I ask your opinion on the following idea to maximise the income from my upcoming pension fund.

1. Take 25% tax free lump sum and invest in equity income funds within an ISA.

2. Opt to receive a level annuity.

3. Construct an annual budget as if I had opted for an escalating annuity, linked to the RPI, and invest the balance in equity income funds again within an ISA.

4. Repeat for subsequent years, gradually increasing the annual budget in line with the RPI, and continue to invest the remaining cash in the equity income ISA.

Answer
It sounds reasonable provided you're confident you can stick to your annual budget and are comfortable investing in stock markets.

For taxpayers, taking the 25% tax-free is generally a no-brainer, as it would otherwise be used to produce a taxable income.

Investing this money into equity income funds within an ISA will ensure the income generated is not taxable and does not count towards your increased age related income tax allowance (although the latter is being phased out by the Government in any case). But note, basic rate taxpayers don't save income tax on dividends within ISAs or pensions (blame Gordon Brown), as dividends are deemed to be paid net of basic rate tax which cannot be reclaimed - although higher and top rate taxpayers avoid any further tax in these wrappers.

Equity income fund dividend yields currently tend to be around 3-5% (net of basic rate tax), which is attractive in this low interest rate environment. However, bear in mind these things can change over time and if markets dive then the value of your ISA probably will too. On the plus side, dividends have a pretty good track record of keeping up with inflation, but I must stress this is over the longer term and short term dividend fluctuations or an inflationary spike could catch you out.

If there comes a time when the ISA income can't keep pace with your inflation-linked budget you'll have to consider either reducing your budget or dipping into ISA capital, neither especially pleasant.

You could take a look at the level vs index-linked pension calculator on our calculators page to get a feel for when the break-even point between the two types might be, although this assumes a constant rate of inflation which in real life willl undoubtedly vary.

Perhaps consider diversifying the ISA away from just equity income. For example, holding other assets such as fixed interest and property will reduce your reliance on the stock market for your strategy to work.

Alternatively, if your pension fund is large enough you might consider taking the 25% tax-free cash, leaving the balance invested and drawing an income (called an unsecured pension). You can read about the pros and cons of taking an unsecured pension on our annuities page.

Good luck.

Read this Q and A at http://www.candidmoney.com/questions/question750.aspx

Hargreaves Lansdown SIPP more competitive?

Question
Now Hargreaves Lansdown are introducing loyalty commission rebates on ther SIPP, do they move up your low cost SIPP comparison table for funds?
Answer
Hargreaves Lansdown (HL) has confirmed it will commence loyalty payments on its Vantage SIPP from 1 January 2013. This is good news for loyal HL customers, but won't be a game changer for those seeking the cheapest SIPP deals - as HL's rebates are not very generous. It's also disappointing that HL won't commence rebates for three months following the commencement - over which time HL will keep around £1.5 million that would otherwise be rebated.

I'll update my low cost SIPP comparison nearer the time, but in terms of overall cost I'd expect HL to get a bit closer to Bestinvest - who tend to give higher rebates than HL but still lag the very cheapest.

In its favour HL doesn't charge for a SIPP wrapper, but does charge £1 or £2 a month per fund that doesn't pay trail commission and a 0.5% annual charge on shares (capped at £200 a year), which includes investment trusts and ETFs.

Bottom line, even with rebates HL will still likely be well off the pace in terms of net overall cost for larger pension funds, but may suit investors with smaller pension pots where competitor annual fees can become relatively expensive.

HL also makes much of its service, which seems to receive generally good feedback. Whether this is worth paying for is obviously a personal choice

Read this Q and A at http://www.candidmoney.com/questions/question752.aspx