What are Shroder Oriental Income C shares?

Question
What are Shroder Oriental Income C shares now on offer?

I wonder if you can help as no one at Interactive Investor, Schroder nor Affinity could deal with the concept of 'C' shares being offered by this popular Investment Trust . Schroder Oriental Income have allocated current share holders ( in my case inside an ISA) with subscription shares which, I understand, for £1 can be converted into C shares. So really my query is what happens next once an investor has bought such C shares? Answer
C shares are simply a way for investment trusts to raise money.

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 premium to net asset value (around 3% on the Oriental Income Trust). In English this means the shares currently cost about 3% 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 C shares are converted into ordinary shares (in this case by 16 July) they 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 potential benefit may be partly offset by the net asset value of C shares being reduced to cover the costs of issue - in this example by about 1.4%.

Should you buy C shares instead of the existing ordinary shares? While they can avoid paying a premium for the existing shares, bear in mind the cost of issue and period the fund not be fully invested, which could drag short term performance versus the ordinary shares if markets rise meanwhile.

Read this Q and A at http://www.candidmoney.com/askjustin/897/what-are-shroder-oriental-income-c-shares

View on Capital Alternatives?

Question
Hi Justin, first and formost well done with the site, its been most useful.....

I wanted to find out if you had ever had dealings with Capital Alternatives, i have been approached by them in relation to an alternative investment which sounds very appealing (i have thier full proposal and can forward if you wish) however something tells me something isnt right.

The other alarming fact is that they obtained my details i suspect through Alternative Confidential which portrays it self as a consumer champion yet i am almost certain they generate lead for capital Alternatives as they ar ein the same office. The other factor concerning me is Premier Alternatives again seem to be in the same office and they offer investment products to brokers.

You assistance would be valuable as the offer the have given me seems very very good considering current market conditions......Answer
I haven't come across Capital Alternatives before so can't give you any feedback specifically about them I'm afraid.

However, a quick look at their website confirms they are not regulated by the FCA and I suspect the investments they sell are not either - personally I never consider such companies.

The Capital Alternatives website says ' Your investment will not be listed or dealt on any stock exchange. There is no guarantee that there will be a secondary market for your investment which may be difficult to realise.' which basically means there may never be a buyer for whatever they sell you - never a good position to be in.

As for the potentially devious way they obtained your contact details to subsequently cold call - this in itself should be enough to make you wary.

In recent years far too many aggressively sold unregulated investments that appeared 'too good to be true' turned out to be scams. So proceed with extreme caution when approached by such companies. if something goes wrong you'll have very little, if any, comeback.

Read this Q and A at http://www.candidmoney.com/askjustin/894/view-on-capital-alternatives

How can I hold cash in my pension and ISAs?

Question
I am concerned that the market is becoming overheated and think we are due a correction.

Most of my investments are held in an ISA wrapper or a self select drawdown SIPP. I obviously don't want to remove my investments from the ISA and can't remove them from my SIPP. Are there unit trusts which invest in deposit accounts so that the capital is not at risk?

And, if so, is it possible to hold these in an ISA or SIPP? I do not want to invest in corporate bonds or gilts as I believe these are equally at risk as equities.Answer
In the time it's taken me to answer your question (sorry) your fears have become partially founded..

The safest asset you can hold in your pension is cash, effectively a bank account linked to the SIPP. The downside, is that low cost SIPP providers pay next to no interest on such accounts, they make a tidy sum by pocketing the margin (between what the bank pays and what you receive) themselves,

You can usually earn a bit more using 'money market' or 'liquidity' funds. These typically buy bits of paper from other financial institutions promising returns - which is good unless the promises turn out to be hollow, in which case you could lose money (as happened to some of these funds during the credit crunch).

Otherwise, if you have a more expensive 'full' SIPP you can probably use a savings account of your choice, provided it allows pension investment (look for 'trustee' accounts). Rates will still be low (1-2%) in the current environment, but significantly higher than usually paid on low cost SIPPs. However, higher SIPP charges may well erode the difference.

It's rather harder in a shares ISA as you're only allowed to hold cash if you intend to invest it, plus any interest is taxed at 20%. But doing so for a few months is unlikely to cause a problem and is quite feasible if you use a platform, just be prepared to receive pretty much zero interest.

Money market funds are also normally prohibited by the '5% test', that is HMRC does not allow investments to be held in a shares ISA if they guarantee (or the nature of the investment is such) that any loss will not exceed 5% at any time in the next 5 years.

Read this Q and A at http://www.candidmoney.com/askjustin/892/how-can-i-hold-cash-in-my-pension-and-isas

Can I get a buy to let mortgage without an income?

Question
Is it possible to get a buy to let mortgage if you are not in full time employment ? I am 51 and have just retired having built up a share portfolio to provide me with an adequate income. I have also paid off the mortgage on my house which is probably worth about £150,000.
The house I would like to buy with a buy to let motgage is worth approximately £175,000 and I have funds for the sort of deposit lenders seem to require of around 35%.

Whilst I could sell some shares and buy the house and apply for a mortgage after I have a tenant in place, I do not want to do this, I really want the morgage to buy the house and then rent it out.

I have spoken to an Agent who has told me it should be possible to find a Tenant quite quicklyAnswer
It's common for buy to let lenders to require a valuation confirming that rental income will be at least 125% of the mortgage interest. Provided you can meet this then you're over the first hurdle.

The bigger issue might be that many lenders require proof of personal income too and link the maximum amount you can borrow to this.

I'm afraid I'm not buy to let mortgage expert, but I gather BM Solutions (part of Lloyds Bank) has recently relaxed the personal income requirement for experienced buy to let investors. And Mortgage Works has a reputation for being quire a flexible lender in this respect too.

I'd start by speaking to a mortgage broker, since the above mentioned buy to let mortgages are only available via brokers in any case. They should be able to give you a clear idea of how much you can borrow and how much it will cost. Just ensure the broker doesn't try to take you for a ride with their own fees - the mortgage lender will probably be paying them around 0.25% to 0.50% in any case.

Read this Q and A at http://www.candidmoney.com/askjustin/891/can-i-get-a-buy-to-let-mortgage-without-an-income

Can I hedge potential returns on a protected plan?

Question
I have a holding in NDFA Twin Option Kick out Plan Dec 07 (now Meteor) which will pay out 104% after 5.3.2014 if the FTSE 100 is over 5853.5 and the Nikkei 225 is over 12972.1. Both indexes are looking good at the moment but there are still 10 months to go and I am feeling nervous. Would it be possible to hedge my investment by buying an option at those index levels for next March?Answer
This plan promises to pay 18% a year with the option to end early on each plan anniversary if both indices are higher than their starting level - something that hasn't happened to date due to the Nikkei being lower. However, the Nikkei has surged over much of this, before falling back a bit of late, so you're in with a chance of a payout at maturity - equal to 18% a year x 6 years = 108% - provided both indices are above their starting level on 8 May 2014.

If either index is lower on 8 May 2014, you'll get back your initial investment in full at maturity provided neither index has fallen by more than 50% of the start level at any time during the 6 year term. Otherwise, you'll lose capital on a 1:1 basis based on the index which has fallen the most.

Could you hedge your bets? Difficult, as even if you buy an option it probably won't compensate for the 108% return you'll lose if either index is lower than its starting level. For example, let's assume you put £10,000 into this plan originally. You could buy an option giving you the right to sell the Nikkei at 12972 next May. if the Nikkei finishes at 12970 then you won't receive the 108% return on your £10,000, so you've lost out on £10,800 of growth, and the option will be almost worthless meaning you'd have lost money on that too. If the Nikkei plummets then your option would have more value, but still maybe not enough to cover your lost 108% return.

You could spread bet on the Nikkei (or FTSE), aiming to make a big profit if the index falls in value. But this is very high risk, if the index rises you could lose a significant amount of money, potentially wiping out the returns you would then probably get from the Meteor plan.

If any readers are smarter than me in this area, please post ideas below - I can't see a sensible way to hedge the gain that might be lost in the above example.

Meanwhile, fingers crossed the indices don't end up below the start level so you get your pay out.

Read this Q and A at http://www.candidmoney.com/askjustin/890/can-i-hedge-potential-returns-on-a-protected-plan

Are second hand VCTs tax-free?

Question
If you buy VCT shares in the market then you obviously don't qualify for the up-front tax relief. However, how are dividends treated? Should they be included in your tax return or, as I believe is the case with VCT shares that were subscribed for on issue, can they be simply left off it?

My reason for asking this is that some established VCTs seem to offer a pretty good (and relatively stable) yield based on the market price and (as part of a sensibly diversified portfolio) might provide an opportunity to get a good income stream.Answer
You raise a very good point - 'second hand' venture capital trust (VCT) shares continue to benefit from exemptions to tax on both dividends and gains. The only tax benefit you won't enjoy, versus investing in a new issue, is income tax relief on contributions.

Of course, dividends are never truly tax-free, they're paid out of taxable company profits and deemed to be received net of basic rate tax, which cannot be reclaimed. Nevertheless, this could still prove a useful tax saving for higher and top rate taxpayers. And there's no need to enter this income on your tax return.

However, bear in mind the (potentially high) risks of VCT investing. Aside from underlying investment risk, VCTs often trade with wide spreads between buying and selling prices - some of the smaller trusts can prove especially difficult to sell. On the plus side this means you might grab a decent deal when buying second hand, but expect to be hit when trying to sell in future.

Read this Q and A at http://www.candidmoney.com/askjustin/884/are-second-hand-vcts-tax-free

Best way to pass money to children to avoid IHT?

Question
What is best way to pass on assets which is over the threshold, i.e. £650,000, to children without incurring Inheritance tax?Answer
Let's start with the basics. Everyone's estate (i.e. net assets on death) is exempt from inheritance tax up to a threshold called a 'nil rate band', currently £325,000 until at least 2018. Amounts over this are subject to 40% inheritance tax.

However, married couples and civil partners can pass assets between each other free of inheritance tax and any unused nil rate band (as a percentage) on the first death can be transferred to the surviving spouse/civil partner, as you refer to.

Aside from a few allowances I'll cover in a moment, the only way to get assets outside of your estate is to give them away and live for at least 7 years. Furthermore, you can't continue to use assets, e.g. property, once given away unless you pay market value rent.

If you die within 7 years of making the gift it might be subject to taper relief, reducing the tax payable. However, since all (non-exempt) gifts within the last 7 years are offset against your nil rate band on death before other assets, taper relief is only likely to be relevant if total gifts (within the last 7 years) exceed your nil rate band.

If you don't want your children to have the assets right now you can gift them into some form of trust that will pass ownership to the children at some point in future. But again, you can't continue to use/enjoy the asset once gifted into trust.

There are various types of trust (read more on our inheritance tax page), although discretionary trusts tend to be popular since they offer lots of flexibility as to who gets what and when. However, potential inheritance tax benefits may be partly (or totally) offset by a 20% tax ('chargeable lifetime transfer') on transfers into a discretionary trust greater than the nil rate band followed by a further tax ('periodic charge') of 6% every 10 years. Capital paid out between periodic charges is effectively taxed on a pro-rata basis as an 'exit charge'.

Annual gift allowances include annual gifts totalling up to £3,000 (you can carry forward the previous year's allowance if unused) and as many (up to) £250 gifts per person that you wish to make. Wedding gifts of up to £5,000 per son or daughter are also exempt, as are gifts out of taxable income (not capital).

Investing in 'unquoted' companies, which includes AiM shares can mean the money falling outside of your estate after two years under business property relief rules. However, there is a list of criteria a company must meet to qualify - primarily it must not hold investments, including shares and land/property, And you'll need to keep holding the shares, as the relief is only granted when the 2 year holding period was during the 5 years immediately before death. Such investments can also prove high risk, so great care is needed.

Bottom line. If you can afford to give money/assets away forever to your children now and think there's a good chance you'll live for at least another 7 years then consider doing so. If you'd rather your children don't take ownership until a later date then consider using a trust, but beware of chargeable lifetime transfer/periodic charge taxes diminishing any potential inheritance tax saving if the gift (including other non-exempt gifts within the last 7 years) exceeds the nil rate band.

Read this Q and A at http://www.candidmoney.com/askjustin/883/best-way-to-pass-money-to-children-to-avoid-iht

Should I use more than one fund supermarket for safety?

Question
i have a Henderson Global Growth in an ISA and the AXA Framlington Health fund outside of an ISA, both held directly with the fund managers. I have also recently invested in Fidelity UK Smaller Companies through the Cavendish Online supermarket.

I feel I should re-register the first two investments via a supermarket/broker to reduce fund charges, but I am still unsure of the safety of using supermarkets and the fact that they own the nominee account tf things go wrong.

Can you advise on using supermarkets and whether to use the same broker or different brokers?Answer
There are basically two levels of risk (ignoring falling stock markets causing losses).

At the fund level your money is held by a 'custodian' (often a bank) separate from the fund manager, so even if the fund management company goes bust your money/fund holding should be unaffected. If fraud is committed, e.g. someone illegally dips their fingers into your fund, and the fund manager is insolvent hence unable to make good the loss, the Financial Services Compensation Scheme (FSCS) will step in and compensate for up to £50,000 of losses (per person per fund management company) provided the fund is authorised by the Financial Conduct Authority (FCA).

The above applies whether you hold funds directly with the fund manager or via a platform (another word for supermarket).

You're right that platforms normally use a nominee account to hold your cash and funds. Again, this must be ring fenced from the platform business, but if fraud takes place you could lose money. If such an instance if the platform is insolvent and unable to compensate the FSCS should step in and compensate for up to £50,000 per person per platform.

Provided the broker you use doesn't own the platform or ever hold your money then they shouldn't add any risk to the process. At worst, if they go bust you'll just have to appoint another broker as agent, which requires a simple letter or form, to continue receiving trail commission rebates if applicable.

Cavendish Online uses the Fidelity FundsNetwork platform/supermarket, which I'd rate as one of the safest based on Fidelity's financial strength. Personally I'd be comfortable holding more than £50,000 on Fidelity's platform. But since we can never say never, consider limiting your total holding to £50,000 per platform if you want peace of mind that you're fully covered by the FSCS.

Read this Q and A at http://www.candidmoney.com/askjustin/882/should-i-use-more-than-one-fund-supermarket-for-safety

Where to invest in troubled times?

Question
I have seen your recent posts that stock markets are being propped up by Central bank intervention. As the FTSE index is quite high now and could crash in the near future, I am looking at ways to reduce my riskier funds by investing in much more cautious funds, especially as I am not far off 60.

I have checked out some cautious funds (e.g. Investec Cautious managed) and notice that this fund manager lost money in 2008/9. Even though I am happy to accept a lower return on funds now, I do not want to lose money when a crash comes. Are there any ultra cautious funds around that offer reasonable returns and will return minimal loss should a crash arise?

Are gilts still a good bet now, even though the financial press seems to give a negative forecast on these?

Also, which are better in today's market and going forward: corporate bonds or strategic corporate bonds?

Thank you very much for any help you can give me on this.

I really enjoy your website.Answer
Stock markets are very difficult to predict, especially in the current fragile economic climate. However, reducing your portfolio risk may well be sensible, especially since you're approaching age 60 - there's little point taking excessive risk in retirement if you can afford not to.

Unfortunately the only investment where you can be pretty sure of not losing money is cash - and rates are currently low compared to inflation, other asset types and historical levels.

Most 'cautious' funds tend to be run along one of the following strategies:

1. Hold mostly gilts, corporate bonds and cash, with the balance held in stock markets.

2.As above, but also hold other assets such as gold (this is the approach taken by Investec Cautious Managed).

3. Run an absolute return strategy that tries to deliver positive returns regardless of markets, for example the manager might bet on share prices falling and profit if they do.

The trouble with all the above strategies is that none are immune to stock market downturns. Most cautious funds have some stock market exposure (Investec Cautious Managed around 40% as at end of April - last published data) and absolute return managers usually fail to deliver consistently positive returns (It's a very tall order).

That's not to say holding funds like these is a bad idea, but it's important to adjust your expectations as to how much protection they'll provide in a downturn.

If stock markets do crash then gilts, high quality corporate bonds and gold are likely to fare well - as these tend to be favoured assets when investors are nervous or panic. However, all are currently riding quite high, in part due to stock market uncertainty in recent years and central banks buying gilts (or equivalents) as a mechanism for pumping billions into economies. If the stock market doesn't crash and economic confidence grows it seems likely gilts, bonds and gold could all take a hit.

Which basically leaves us in a conundrum. How to take a cautious approach without resorting to just holding cash?

There isn't a magical answer I'm afraid.

In practice the most sensible approach is to probably combine a variety of investments, including cautious and absolute return funds and accept that you could lose money if markets crumble. Provided you're looking to remain invested for 10+ years chances are you'll ride through any downturns to still end up in profit overall long term.

However, if any readers have other strategies I'd be really interested to hear.

As for corporate bond or strategic corporate bond funds, the latter gives fund managers more flexibility. In simple terms high quality 'investment grade' corporate bonds tend to be more influenced by interest rates and inflation than higher yielding bonds, which are often more correlated (i.e. move in a similar direction) to stock markets. Most plain vanilla corporate bond funds invest largely in investment grade bonds while strategic bond funds invest in both, with the manager adjusting the proportion based on their outlook.

Strategic bond managers who get it right should outperform conventional bond funds, but obviously the reverse holds true as well.

Read this Q and A at http://www.candidmoney.com/askjustin/876/where-to-invest-in-troubled-times