inheritance question

Fatbritabroad

jamesd wrote: »

That 30% is once every five years vs nil for the ISA.

Your 2 assumption is nowhere near close to reality. It's commonplace for VCTs to operate a policy of buying shares at 5% or 10% below NAV. This discount policy is something to check when considering a VCT. It's 5% for my own largest holding. Total management and other costs for the six months to September 2017 were 1.2%. After costs gains for shareholders were about 1.3 times the total costs. No exits of investments and that's where significant profit can come.

For comparison here are the costs for the first five ISA-eligible micro-cap funds turned up by Google, unlike the VCT platform costs have to be added: 0.74% OCF, 1.81%, 2.81%, 1.68% and 1.59% OCF. Those before platform fee costs are mostly lower. But not close to enough lower to make your assertion accurate.

VCTs mostly do invest in unquoted companies but it's not uncommon to hold some quoted companies as well, either because an invested company wemt public or just to use otherwise uninvested money.

Since you have those inaccurate beliefs its unsurprising that you don't like the idea of VCTs. And since I own them and see the real numbers it should be unsurprising that I think they can be useful.

Thanks both for your comments. Before there is pistols at dawn would you agree James d that vct and eis are only useful once you have exhausted traditional investment allowances? Or is this too simplistic?

jamesd

Fatbritabroad wrote: »

Thanks both for your comments. Before there is pistols at dawn would you agree James d that vct and eis are only useful once you have exhausted traditional investment allowances? Or is this too simplistic?

No, I wouldn't agree with that. There are substantial differences in how returns are made and the tax treatments that cause me to think that a mixture is likely to be better, with me personally looking to buy enough in VCT or maybe EIS investments so that HMRC has to refund most of the income tax I pay. But I also make heavy use of pension salary sacrifice, typically around the AA worth, and more mixed ISA use now, including substantial withdrawing from ISAs for better prospects elsewhere.

For me:
1. the pension bit has partly been influenced by closeness to being 55 and I no longer have more than a few months to wait before I can withdraw 25% of the after employer, NI and tax relief money. In general I try to sacrifice down to minimum wage if the AA lets me.
2. next is VCT use to cover remaining income tax bill, investment interest via P2P has been substantial.
3. then ISA. I like to use the allowance but withdrew more than 50k in recent years. I expect I'll net use the whole allowance for a few years but a potentially interesting BTL property approach made to me might change that.

For my largest VCT holding here are the actual numbers so far:

a. purchase cost per share after tax relief, 43,383 shares, £0.5002, £21,700. Tax relief was £9,300.
b. current NAV £0.655, current NAV value £28,415.87.
c. dividends paid £4,864.24, £0.112 per share currently held.

So currently I'm at 4864.24 + (28415.87-21700) - 5% discount policy cost of 1420.79 = 10,159.32 vs 9,300 tax relief.

About the same again due in dividends before the five years are up. Assuming that happens I'll have made around 15,023 of which only 9,300 is tax relief. A very sedate 18.5% over five years, 3.4% compounded annually, on the undiscounted purchase price. But that extra 9,300 is still money already in my pocket and invested and making money as well.

This is for a boring asset-backed VCT at the lower end of the risk range, not a star performer.

jamesd

Fatbritabroad wrote: »

pistols at dawn

Heh, I prefer just supplying real numbers that show that even after selling discount policy I'm up by more than the tax relief. It won't be an exciting investment but it wasn't supposed to be.

grey_gym_sock

jamesd wrote: »

Your 2 assumption is nowhere near close to reality. It's commonplace for VCTs to operate a policy of buying shares at 5% or 10% below NAV. This discount policy is something to check when considering a VCT. It's 5% for my own largest holding.

ok. agreed that a discount control policy can make a VCT more attractive. the spreads on VCTs are also quite large (usually, several percent), so should presumably realistically be expecting to sell out at a few % bigger discount than the buyback target.

Total management and other costs for the six months to September 2017 were 1.2%. After costs gains for shareholders were about 1.3 times the total costs. No exits of investments and that's where significant profit can come.

ah, but are there also performance fees? (which might not be triggered if there were no exits.) my impression (i could be wrong) was that performance fees were the norm with VCTs. whereas they are very easily avoided with S&S ISAs.

For comparison here are the costs for the first five ISA-eligible micro-cap funds turned up by Google, unlike the VCT platform costs have to be added

yeah, i always select micro-cap funds using google

it's true that micro-cap funds (or investment trusts) are the nearest ISA-able investment to what VCTs hold. however, those of us who are allergic to costs are not going to be holding much of our S&S ISAs in micro-cap funds.

platform costs apply to ISAs, but should be minimal (as a percentage) for anybody with enough investments to consider VCTs at all, because we should be using fixed-rate platforms.

overall, IMHO there is no reason for a large S&S ISA to cost more than 0.5% in on-going charges (and it could be less).

i'm not sure what a fair average on-going cost for a VCT would be. but it needs to include any performance fees.

also, you don't mention initial charges, which barely exist for S&S ISAs now, but i believe do still exist for VCTs. another 2% or 3%?

Since you have those inaccurate beliefs its unsurprising that you don't like the idea of VCTs. And since I own them and see the real numbers it should be unsurprising that I think they can be useful.

my knowledge is a bit so-so, i agree. but you seem to be ignoring certain costs (performance fees and initial charges). i'm not sure what the overall picture is, yet.

you do keep on mentioning how your returns have been higher than charges, which is not relevant to VCT vs ISA. (it would be more relevant to VCT vs cash.) as a simple broadbrush approximation, we could assume that all equity-based investments have about the same expected returns, before all charges and tax effects. which means we can ignore returns when comparing VCTs to S&S ISAs.

jamesd wrote: »

This is for a boring asset-backed VCT at the lower end of the risk range, not a star performer.

that is interesting. that is the kind of VCT i was considering seriously a few years back (before i decided against).

a risk here is that the government claims it's providing tax bungs for VCTs to encourage risk-taking, and these VCTs are not following along with the spirit of that idea. the rules may be tightened up against risk-averse VCTs. and this may even affect VCTs you've already put money into.

are you just swapping some investment risk for regulatory risk?

jamesd

An ISA could cost far less but then it wouldn't be using an investment that has anything like the costs involved in investing in very small companies. If you're going to try arguing that VCT costs are high you need to at least try to look at reasonably comparable investments. That's micro-cap and P2P. Quite a bit of my own money is in P2P and there it's normal for more than half of costs paid by a borrower to go to the P2P firm. VCTs aren't cheap but they are cheaper than that and both still deliver worthwhile results, in spite of the high costs inherent in dealing with small firms.

I didn't need to split out the initial charge because it was already included when I gave the price paid and number of shares owned. It's normally in the 2-5% range and discounts are normally available for existing shareholders, buying early in the VCT season and via brokers.

I gave the total management cost that would have included any performance fees. This VCT many years ago and maybe under a different manager had a higher value for performance fee calculations than it does now. No performance fees will be payable until that high water mark has been exceeded. It looks as though that might happen in a few years. You're right that there are normally performance fees and those are part of the costs that reduce the investor total return to whatever it ends up being.

Naturally I mention gains above just the tax, since sometimes people suggest that all VCTs do is return the tax. Similarly, you made assertions about spread and charges vs tax relief and it's useful to illustrate that it isn't so.

It appears that I'm on track for about 3.4% compounded plus initial tax relief and gains on investing that, from quite low risk asset backed investing. Just treating it as an investment with tax gains as part of the returns that's 3.4% plus 5.4% = 8.8% a year compounded plus the effect of reinvesting the initial relief. Considering the low volatility investment vs say the bit over 5% plus inflation minus costs of the UK market, or less via bonds, I remain happy with my choice.

jamesd

Regulatory risk merits a post of its own. The rules on permitted new investments have been changed many times, most recently as part of the Patient Capital Review last autumn. Firms adjust what they do to comply with the relevant rules. That can and does cause changes in where new money can go during the minimum five year holding period. Or could require more, say for a VCT known for management buyouts when funding those was banned in the previous batch of changes.

I do think that at the lower risk end of the VCT spectrum there's some swapping of regulatory risk instead of other investment risks.

Rheumatoid

If your username is an indication of your physical condition, I would spend some of it on a Gym membership otherwise you might not live to spend this investment.

Fatbritabroad

Rheumatoid wrote: »

If your username is an indication of your physical condition, I would spend some of it on a Gym membership otherwise you might not live to spend this investment.

Haha i did. Still probably a stone overweight but i was 16 stone and 5 foot 7. Now 13 and rock climb 3x a week. It was actually a name i picked for trip adviser to write a review and just kept it. I also used to use Staypuff3d

grey_gym_sock

jamesd wrote: »

An ISA could cost far less but then it wouldn't be using an investment that has anything like the costs involved in investing in very small companies.

the question is: why invest in very small companies, when it's so much more expensive than investing in large and medium (and even small-ish, depending on how you define small) companies?

some would argue: because the expected returns on very small companies are higher than big and medium companies, by a big enough margin to justify the higher costs.

which would be debatable.

but that's not your answer - at least: that doesn't appear to be what you're going for with VCTs. your answer appears to be that you can go for something with lower return but lower risk, by choosing certain kinds of VCTs.

we've seen good years for shares over the last few years. not surprisingly, your results from VCTs are lower than big-cap shares would have given, and with higher costs. but would they hold up better than (at least: lose less money than) big-caps in a bear market, or a recession?

that must all depend on the nature of the asset-backing for these VCTs, which i admit i know nothing about. (because without the asset backing, one would have to expect very small companies to be more fragile than bigger companies.)

going back to my earlier claim, that the 30% tax incentive would be roughly cancelled out by the combined effect of higher charges and exit at a discount to NAV ... from your figures, i think i could revise that to: most of it will be cancelled out.

jamesd

If you pretend that other options have no cost, the total of costs (not just charges) and spreads over five years above that is about 20%. Non-management ongoing costs are about 0.7% a year of that.

If you pick the closest available comparator for this VCT the effect of cost is below zero because the VCT is cheaper than asset-backed P2P..

If you compare to the average of the five micro-caps (equity, not secured) those would cost 8.63% plus platform costs and spread. Assuming 0.2% a year for the platform for a circa 30k holding that's 9.63%.

So even using all costs, not just charges, it doesn't get to more than about a third of the initial tax relief if you use something reasonably comparable. And if you choose the closest comparator for this one, its nil.

So you can claim most but only by using comparators that aren't really comparable.