Fund Which Has No RIsk And Pays Interest But As CGT - Could reduce tax

Joey122

Hi All,

I m not sure whether this has been discussed before but is anyone aware of a fund which pays a guaranteed amount of interest, takes no risk but gives this interest in CGT as opposed to interest.

I know there is fixed rate bonds in a fund which do this but you run the risk of interest rates moving against you.

What I would like to see is a bond fund which has floating rate behavior and therefore pays base rate plus a margin.

If not what is the closest I can get to a CGT return on a riskless fund?

I have look at few structured products which do this but they do have downside if the FTSE drops more then 50%

NDF Structured products are an example I know off

Joey122

Anyone with ideas?

macca64

Why do you think the FTSE will drop by 50% or more? Can't see it happening myself

Joey122

Well if you cant then go with this product

My question is :

What is the closest I can get to a CGT return on a riskless fund?

Does anyone know?

Dunstoh?

dunstonh

Most GEBs are taxed against CGT when invested in an unwrapped form. They are the main things that fit your criteria of no risk and chargeable against CGT.

cepheus

Not exactly no risk, but wouldn't some of the well covered zeros be the nearest as 'qualifying' in this respect. Yes I know some invest in one another thereby increasing the gearing and therefore risk but not all, and some would be very well covered. I think this is what they were designed for at any rate, a low risk component of a trust aimed to achieve a predefined maturity value on a certain date qualifying as capital gain.

http://www.splitsonline.co.uk/zero_hr_all.asp?portfolioview=all&quasiflag=A&stats=monthendstats&sharetype=Zer&calculated=all

Joey122

Dunstoh - Thanks for the reply

What is a GEB?

Joey122

cepheus wrote: »

Not exactly no risk, but wouldn't some of the well covered zeros be the nearest as 'qualifying' in this respect. Yes I know some invest in one another thereby increasing the gearing and therefore risk but not all, and some would be very well covered. I think this is what they were designed for at any rate, a low risk component of a trust aimed to achieve a predefined maturity value on a certain date qualifying as capital gain.

http://www.splitsonline.co.uk/zero_hr_all.asp?portfolioview=all&quasiflag=A&stats=monthendstats&sharetype=Zer&calculated=all

How do these zeros exactly work?

How to they move up and down? What factors affect their performance?

Are they fixed / flotaing? What is the rate of return? Is it compounded?

cepheus

Joey122

This article is a bit dated, but it covers most of your questions.

What are zero dividend shares?
An uncertain stock market is bad news - especially when combined with interest rates in the bank or building society which are still low. But there are bright spots in the gloom. One of the most interesting is the investment trust* zero dividend* preference share. It pays you back at a fixed price at a set date, but doesn't pay any income.

Why should I buy zeros?
Because they give you the chance of locking into a return worth 7 or 8% a year for the next five or six years.

Do they pay interest?
No, hence the name. You just get a lump sum when you sell, or at maturity if you hold them until then.

What about tax?
You are liable to capital gains tax* if you make a profit of more than your yearly allowance, set at £7,200 this year. This tax treatment makes zeros particularly attractive to people who pay income tax but are not making use of their capital gains tax allowance. For most people, their gains on zeros will be tax free.

How do they work?
Zeros are a type of split capital investment trust share, but one where you know in advance how much you will get back. They have a fixed redemption price that is paid when the trust they are part of comes to the end of its life. They usually have a life of seven to ten years, but many of the current crop have five years or less to run.

Investment trusts are risky, aren't they?
They invest in shares, so they are relatively high risk. But zeros are the exception. Although they depend on the performance of the stock market, they are low risk because zero shareholders are first in line for repayment at maturity. They are not guaranteed, but all the zeros that have matured so far have paid out as expected. The risk of getting less back at maturity than you invested in a zero is very small. Stock markets would have to fall through the floor.

How much money might I make on zeros?
That depends on the price you pay to buy. Prices tend to be fairly steady, increasing over the life of the zero. They do fluctuate, but not like share prices.

Why are they attractive now?
Because they offer a better return than similar low-risk investments, such as Government gilts*. You can only get 4-5% from a gilt, but over 8% on some zeros.

Are some zeros better than others?
Some do offer a higher return than others, but may be less secure. You can judge the security by looking at the cover for a zero. If it is more than 1, it means that there is more than enough in the investment trust to pay off the zeros at maturity. Virtually all zeros currently have cover of more than 1. But if share prices fall, zeros will be less well covered. Advisers suggest you should look for cover of at least 1.3.

Can I sell at any time?
Yes. You can sell a zero at any time. You don't have to wait until the maturity date. The price of a zero should gradually rise over its life, so you are likely to make a profit when you sell.

Is there anything else I should look at?
Yes. The hurdle rate. This shows the rate at which the investment trust has to grow in value each year to pay off the zeros at maturity. Most zeros have negative hurdle rates, so trust values can fall and zero holders still get repaid.

http://uk.biz.yahoo.com/edu/savings/zero.html


I think the CGT limit is now above £9000. I know that some of the more risky zeros were in trouble during the last bear market. Remember like any investment intending to provide fixed returns if a zero accumulates at 10% per year it doesn't really return anything if inflation is 10%.

Cover and hurdle rate are indicators of risk verses the underlying trust, but doesn't tell you how risky the underlying investment of the trrust are. Look also at their chart verses the underlying market they invest in and general market, this might also provide a rough idea of how risky they are. This is probably a safer one

http://www.trustnet.com/it/funds/chart.asp?unit=31157H

Joey122

Hi cepheus,

have you used these before?

What is the Neil Woodford version of this? ie What it the top consistent performer of these?

Unless I missing something these guarantee a Interest rate (which will be booked as CGT) of about 7->8%?

In the example you gave http://www.trustnet.com/it/funds/chart.asp?unit=31157H

can you help me read of the rate of return over the last two years? Is it 10%?

cepheus

I would say the rate of return is around 7% per year according to the graph, there are tables that state the return explicitly on one of the sites I have posted. 5% per year is usually very safe, 7-8% is more typical for a zero, and should return this rate barring a stockmarket crash. 10% and over is more risky and should be treated more like a conventional stockmarket investment. The cover and hurdle rate are supposed to indicate risk but zeros are the 'safe' portion of what is known as a split capital investrment trust. These are complex beasts because the trust can borrow, can invest in safe or volatile underlying markets, and worst of all invest in one another which increases gearing. Hence about 5 years ago some of these supposedly safe investments didn't pay out for the first time.

I don't know enough about them to recommend one. As with all equity related products something that looks good value sometimes isn't on further inspection and vice versa. That said, if you can find a good unbiased specialist advisor in these I expect they represent a better return to risk ratio than more conventional investments. This is from 2003 but it tells you what to look out for.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2003/04/30/cmsplit30.xml&sSheet=/money/2003/05/01/ixperson.html