Capital Gains Tax and the Expat Property Owner
By Spectrum IFA
This article is published on: 28th May 2014
You have realised your dream, bought a property in France, perhaps as a holiday home to start with but now you have moved here, maybe to work, or perhaps you have retired. The big question is what to do with your property or properties in the UK?
When moving to a new country many people are a little nervous about letting go of their old one, rightly so after all holidaying is one thing, but living in a foreign country quite another. So often people keep their property in the UK, for a while at least, however this can have Capital Gains Tax (CGT) implications on a future sale.
A tax treaty signed between France and the UK which became operative on 1st January 2010, meaning that for former UK residents now resident in France, they are liable for french CGT on the future sale of any property including your former main residence. However no liability will apply in the UK.
Main Residence
If you sell your UK home when you move to France or within a relatively short space of time (usually within a year) then no CGT will be payable in either France or the UK. If however, you hold into it for a while ( then or rent it out) then you will pay CGT on it in France just like any other maison secondaire, with no allowance being made for the fact that it was your main home for a period of time.
Buy to let
If you sell your UK buy to let property when you move to France rather than at a later date then you will pay UK CGT. To work out how much tax you will have to pay, take the selling price of the property, then deduct the buying price. You can deduct the costs of buying and selling, e.g. solicitor’s fees, stamp duty, estate agents fees, advertising etc. You can also deduct the cost of
improvements to the property but not routine maintenance and repairs. There is also an annual exemption allowance (£11,000 for 2014/2015 tax year). CGT rates are 18% or 28% for higher rate tax payers. HMRC website provides a step by step guide.
Any buy to let properties that you own in the UK and subsequently sell after you become a french resident will be liable to French CGT.
Ownership
An important point to note, if you are married, but your UK property is only in one person’s name, it may be sensible to transfer the property into joint names prior to any sale to reduce any potential UK CGT liability. There is no CGT payable between spouses/civil partners and the CGT calculation on sale will be based on the original purchase price for both parties.
In France Gift Tax applies between spouses and applies to gifts made in the previous 15 years so it is sensible to take advice from a professional before taking any action.
French CGT
Like UK CGT, you start with the sale price and deduct the purchase price plus any associated buying and selling costs and costs of improvements (but not repairs or DIY, invoices need to be provided from registered builders etc). If you have owned the property for more than five years the notaire can apply an allowance of 15% of the original purchase price of the property – even if you haven’t done any work!
For EEA residents the starting rate for french CGT is 19% plus 15.5% social charges however these start to reduce on a sliding scale from year 6 of ownership onwards. After a full 22 years have passed the CGT reduces to nil, however it is 30 years before the social charges reduce to nil. Additional charges apply for gains above 50,000 euros.
Working out when, where and how much Capital Gains Tax you should be paying can be quite a headache and the best thing to do is take advice from a professional.
This article is for information only and should not be considered as advice and is based on current legislation. 25/05/2014.
Witholding tax on overseas money transfers to Italy
By Gareth Horsfall
This article is published on: 15th April 2014
I would like to bring up the subject of the 20% witholding tax on profit from investment, for Italian residents. This piece of legislation that Italy was going to introduce in February and has now postponed until July. This seemed to be one of the main causes for concern amongst attendees at the recent Tour de Finance Forum events in Italy and so I thought I would write the little that I know of it to assist in preparation for its, possible, return.
To recap, the introduction of the law was aimed at automatically stopping 20% on any monies brought into Italy, from overseas, (for personal account holders only) on the assumption that this money was ‘profit from investment’ and not other types of income. Profit from investment can be clarified as rental income on properties overseas, sales of shares, bonds, or other types of financial assets.
Of course, stopping 20% on ALL transfers into Italy would also catch those who are legitimately bringing in pension income, income from employment, banks savings etc, and therefore to avoid the fiscal authorities automatically witholding 20% on these monies a self certification, in the guise of a letter, would need to be submitted to your bank to declare that this was NOT profit from investment. If you submitted the letter then your personal details would be passed to the fiscal authorities (who we can assume would then start to track your money movements through Internationally agreed exchange of information controls)
Now it is worth noting before I continue, that in essence the law itself was a smart move from the Italian fiscal authorities, in that it would force those who do not wish to be caught in the witholding tax to announce to the Italian authorities that they are bringing money in and out of the country. Hence, they are more easily trackable. In addition, and I think this is the more likely target, it would also force those who have not yet registered assets overseas with the Italian authorities, to do one of 2 things.
1. Carry on regardless and therefore run the risk that when they are found out they could be fined anywhere from 3-15% of the undisclosed assets, and should those assets be located in black list territories then those fines are doubled from 6 – 30% of the undisclosed value. Not advisable!
2. They self certify with the bank and as such are submitting a legally signed statement of intent. Should they then fail to report income from profit, when it enters the country, they have actually ‘knowingly’ broken the law.
Of course, all this is based on the assumption that someone is not declaring assets that they have overseas and for most this is not the case. So what about those of you who are doing what you should be doing?
Then, I believe, it becomes no more than another administrative headache. What I mean is that with a self certification letter the bank will not stop the witholding tax and so income can move freely into the country as it had previously done. However, let’s assume that you do want to bring some money in from an investment overseas, which has already been declared through the correct channels. Does this mean that you have to go back to the bank and request that this one transaction is treated differently, just this time and what if this is a regular occurence?
Also, what if you fail to declare that money is coming in from overseas profits on investment but this money is, once again, already declared legally on your tax return? Are you in breach of rules and therefore subject to fines?
Finally, so as not to drag the point out too much, what if the bank mistakenly witholds the tax on pension income, for example, which you need to live on? Can you easily reclaim this back? Doubtful! Or do you have to wait up to 2 years for a tax credit?
As we can see the legislation had some trivial issues which they needed to iron out, but, fundamentally it was an interesting move. The first of its kind that I have seen in Europe, where a direct attack on profit from investment overseas has come under the spotlight. Until now the main focus has been on bank interest payments and rental incomes for homes overseas. On March 24th 2014 the 2nd phase of the EU Savings Tax Directives was submitted for final approval which will now bring monies held in overseas investments funds, OEICS, SICAVs, Unit trusts etc, in the EU and outside, into an automatic exchange of information agreement. Additionally, Luxembourg and Austria will now be subject to full exchange of information agreements as of 1st January 2015 and other dependants states, such as the Isle of Man, Jersey, Guernsey, Dutch Antilles, San Marino etc will be required to share more information with the EU.
Lastly, and most interestingly, the proposed 20% witholding tax in Italy will likely raise its head again in July this year. But, in what shape or form, I cannot say. The report from Brussels in the aftermath of the first proposals was not as you would expect, a damning of the law. But in fact they openly supported the idea and suggested different ways of looking at implementation. Can we expect to see this Italian model being the model that Europe will use in the future?
So, for those who are not quite ‘in regola’ yet, time is of the essence. The transparency agreements are effectively opening the doors to hidden assets, bank account interest is tracked, rental income on overseas properties is tracked, now investment in foreign investment funds is under scrutiny. It is only a matter of time before income payments from direct investment in shares and bonds are fully disclosed, Capital gains, i.e profit on investment, is now under scrutiny, as detailed above and that only leaves Limited companies and other more obscure and substantially more speculative investments.
It is worth noting that one of the speakers on our Tour de Finance Forum events was Andrew Lawford from SEB Life International. He was explaining how it is perfectly possible to keep assets outside Italy, but be compliant with the laws of Italy, and remove the need to keep abreast of these changes in Italian law by employing the use of an insurance wrapper in which to house your assets. It acts like a tax efficient account whereby SEB Life International, in this case, will act as a witholding agent to ensure you do not pay more tax than you need to and that they become legally responsible for reporting the assets correctly.
It removes the worry of reporting error, keeps monies out of Italy and most importantly, whilst the money is held in the wrapper, it is never subject to Italian income or capital gains tax. Only at the point of withdrawal (partial or full) would any Capital Gains tax liability only, (not income tax) occur, which would be paid automatically on your behalf.
Finishing up on the new legislation, in whatever form it takes, will likely be no more than an administrative headache for most, but for those who, as yet, may have undisclosed assets, then more difficult decisions lie ahead. If you think anyone else might find this article useful, please do feel free to pass the information on and if you would like to speak about this or any other financial matter as an expat living in Italy, then plese get in touch.
Producing Income from Your Investments
By Peter Brooke
This article is published on: 13th April 2014
If you’ve managed to put aside money for your retirement, good job — no one else has been saving for you. But how do you change the balance of your assets to be able to draw an income to supplement a smaller, land-based income or to pay for your lifestyle into retirement?
* Restructure your investments before you need the money. This gives you time to ride out any difficult market years before you retire or move ashore. Crises in stock markets always affect stocks in pre-retirement worse, so protect the value of your funds in the few years running up to taking an income, but keep one eye on inflation as this will reduce the buying power of the “pot” of money you’ve built up.
* Consider the total value of your retirement assets — shares, pensions, funds, investment properties, cash and bonds — as one entity. Then ask yourself, “If I had all of this as cash today, what assets would I buy to give me the income I need?” This question helps you reassess all your assets and bypass any loyalty to a certain asset type, such as property. If Dave bought an apartment nine years ago for €180,000, rented it out and paid off the mortgage, and the apartment is now worth €280,000 with rent at €1,000 per month, after management charges, this works out as a 3.8 percent yield. Dave may do better using the money from the property elsewhere, perhaps by reinvesting in bonds.
* Once the income starts, look at each asset class in terms of income stream and cash flow rather than capital appreciation. It’s important to try and grow the “pot” to beat inflation, but the income is paramount. Yields on equities today are outstripping most government bonds; the capital may fluctuate but the income will remain. To draw an income of €3,500 per month, you need an asset pot of approximately €900,000. With €42,000 per year, a proportion of the cash can be put in longerterm assets (property, equities, etc.) to help grow and replace the funds you withdraw.
Many yacht crew have a large proportion of their assets inside insurance bonds, as they offer tax-advantageous growth and income. However, some don’t offer a way to take a “natural income,” as the funds are all accumulating-type funds. The income that you draw down by cashing in fund units affects the underlying balance and needs to be rebalanced with a steady internal income stream.
Delaying Savings
By Peter Brooke
This article is published on: 12th April 2014
No one wakes up in the morning and thinks, “I must start my pension planning today.”a “I must start my pension planning today.” I’ve not even done that, and it’s my job! Perhaps if someone had pointed out to me 15 years ago what the impact this thought process may have had on my own financial future, I may have listened and (may have) done something about it.
Let’s consider the rather simple examples of two people who joined the yachting industry at the same time, with similar careers, but different saving scenarios.
Scenario 1: James took his first job as a deckhand at the age of 23, earning €2,000 per month. His income went up by a healthy five percent each year, every year until he left yachting at 45 with a final salary of €7,300 per month.
From the very start of his career, James invested 25 percent of his salary every year. This means that by the end of his yachting career, he had earned a total income of €1.25 million and had put aside €310,000. He had managed to achieve an average annual growth rate of five percent on his invested money, which meant his savings pot was now worth €495,000. If he leaves this to grow for another 15 years before using it as a pension scheme, he will retire at 60 with a fund of just over €1 million — a very healthy fund.
Scenario 2: John had a very similar career, but only started saving 25 percent of his salary after being in the industry for 10 years. Even though he still had earned €1.25 million over his career, he only had put away €225,000, which, with the same growth as James, was now worth €290,000 due to the lesser amount of time to compound the growth. Leaving this amount to grow for another 15 years would give John a pension fund of €600,000 — quite a bit shy of James’s healthy fund.
In the real world, yachting salaries rarely grow in a straight line, but this simple example shows how delaying the start of a long-term savings program has a massive effect on your long term wealth and control. In order to retire with the same fund as James, John would have to save approximately €1,500 per month, every month from when he leaves yachting. If he is now working on shore, this could be difficult to achieve as costs normally not associated while aboard will now be added, such as rent, food and every day expenses.
It’s interesting to note that James still actually spent more than €930,000 over his 23 years in yachting, which is an average of €3,400 per month for that period. Are there many yacht crew who actually spend this much on living costs, and if not, could he have saved even more for his long-term future? The answer is obvious.
Should I use a Financial Adviser?
By Peter Brooke
This article is published on: 10th April 2014
Creating a financial plan is not complicated; it’s an audit of where you are today, financially, and where you want to be at different life stages. This requires creating a list of what you have, earn, own and owe and deciding to put something aside to cover different goals for the future.
I have met yacht crew who have worked for 20 years without implementing a financial plan, and when they want to leave yachting, they have no pensions and minimal savings or investments, leaving them with a simple choice: live on very little or keep on working.
We can agree that having a financial plan, however simple, is important, but why have (and pay) someone to help you bring this together?
The process: Although creating a plan is quite simple, a financial adviser will ensure that all areas are discussed and re-examined so nothing is left out. All of the horrible “what if” questions should be covered.
Implementation: A good adviser will have access to thousands of products for different clients with different needs. The more choice available, the more assistance you will need in choosing the best ones, but also, the more independent the advice will be. A small advisory firm is likely to have only a few products to choose from and will display less independence.
Professionalism: If we are ill, we go to a doctor — financial advisers have qualifications to diagnose our financial problems and help put together a plan to make us better. And as with a doctor, a financial adviser should have qualifications in his or her trade, even specializing in certain areas.
Regulation: A financial adviser will be regulated by a government body and will have to display a certain competency and have insurance in order to practice.
Knowledge: Qualifications don’t guarantee knowledge; good advisers should continually improve their knowledge and should be able to prove this through their ability to explain complex issues.
Humanity and perspective: Most importantly, you need to trust your adviser. This person or firm should be your trusted adviser for most of your life; they need to be able to empathize with the different situations in which you’ll find yourself over the years. They should be able to draw on experience from other clients to help solve issues you face; they should be able to offer perspective on the decisions you make.
This last point is the hardest to prove and is probably best achieved through a combination of your own gut instinct and referrals from friends and colleagues. Do your own research on all of the above factors, ask around, and keep asking around until you have a short list of advisers to meet. Then follow your own feelings about whether you can trust them; the relationship should be a long-term one, and you will end up telling them a lot of very personal information over time.
Brandeaux February Update 2014
By Chris Burke
This article is published on: 25th February 2014
Brandeaux February Update 2014
Brandeaux Student Accommodation Fund (Sterling) Limited
Brandeaux Student Accommodation Fund (Multi Currency) Limited
Announcement
Further to the recent press speculation, the Brandeaux Student Accommodation Fund (Sterling) Limited and the Brandeaux Student Accommodation Fund (Multi Currency) Limited confirm that they are continuing to actively review various options with the aim of creating liquidity for their existing shareholders. The options being considered include a potential initial public offering of the assets of the Brandeaux Student Accommodation Fund (Sterling) Limited. The consideration of an initial public offering is at an early stage and there is no certainty at this time that this option will be pursued.
A further statement will be made as and when appropriate.
The above is an extract from Brandeaux on the February update of their suspended funds. In many cases we will be able to help you if you have money frozen in these funds, please contact one of our advisers to find out more
Written by: Chris Burke based in the Barcelona/Costa Brava area
If you are based in that area contact Chris at: chris.burke@spectrum-ifa.com
If you are in another area please complete the form below and we will put a local adviser in touch with you.
Investments can have too much structure
By John Hayward
This article is published on: 24th February 2014
What are structured products?
Structured products are usually set up as an investment of a lump sum in exchange for a return based on the performance of an underlying index such as the FTSE100. They are arranged as fixed term contracts of, normally, 5 to 6 years although some can pay out earlier under certain circumstances. They can be bought from a variety of sources and are particularly popular with banks.
Structured products could be suitable for someone who is willing to buy and hold, understanding that if markets fall sufficiently, then the return could be less than what was paid in. Some structured products offer capital guarantees. This ´promise´ of the return of your initial investment can be somewhat veiled in that the guarantee could be based on the particular underlying index not falling below, say, 50% of its starting level. For example, the initial investment is made and the FTSE100 and that point stands at 6000. 5 years later, the end of the contract, the FTSE100 is at 5700. In this case, the client would receive the full initial investment even though the index level has fallen. Some suggest that the FTSE100 falling by 50% is not likely thus selling the product as risk free. The FTSE100 certainly has fallen by more than 50% in the past (eg. 1999 to 2003).
The people offering any guarantee could be a third party. This is where we have another level of risk, known as counter-party risk. If the third party fails then the guarantee could be worthless.
Another risk is people wanting to access their money before the fixed term is up. The problem is that these products often have no secondary market which could mean you may not be able sell it without suffering a significant loss.
As with all types of investments, there are varieties on a theme, some suitable, some not, depending on one´s risk profile. Complete understanding is essential from the outset.
For more information on how we can protect your savings whilst offering low risk, liquid investments, contact one of our advisers.
Suspended – 20% tax on overseas transfers into Italy
By Gareth Horsfall
This article is published on: 20th February 2014
Suspended – 20% tax on overseas transfers into Italy
The witholding tax of 20% on overseas transfers into Italy has been suspended.
No sooner had the law regarding the 20% withholding tax on transfers from overseas been introduced, than it is suspended. Until July 2014.
The main isssue with the law was one of distinguishing between transfers from abroad that were ‘profit from investment’ and those that were income from other sources, such as pensions. And if you made an auto certificazione’ with your bank to state that you were not bringing money into the country, from profit on investment, then would you have to sign another auto cetificazione when you did? and what happens if you forgot but still declared the asset on your Unico’? These are just some of many questions which needed answering. In the end the law was just another example of very badly thought out policy which really should have been planned more carefully. (Interestingly I have just seen a report that the EU has not condemned the law but says that it needs more thought, essentially)
Athough, the more I think about the law itself, as a way to catch those who were not making accurate declarations, the more I admired it. But once again it came down to implementation and even the best laid ideas are doomed to failure without adequate planning and thought.
That all being said it now seems that, at least for the meantime, Italy will be resorting back to the, what now seems the almost historic, share of information agreements with co-operating countries.
As you may or may not know the EU has an open share of information agreement. Some UK rental property owners found this out to their chagrin in 2012 when the Guardia di Finanza went knocking on doors asking why rental income from a UK property (which interestingly was already being declared and tax being paid in the UK) was not being declared on the Italian tax return. Some of the fines which I heard of were astronomic.
Luxembourg and Jersey have now signed up to a free exchange of information on interest payments, in the EU, from 1st January 2015. Austria will likely follow as the 1st January 2015 marks the entry into force of the mandatory exchange of information agreement across Europe.
The Isle of Man and Guernsey have already agreed a full and open share of information agreement with the EU on income from interest and so the information on offshore bank account holders is fully reported.
And the USA has already entered into agreement with Italy under its FATCA law (Foreign Account Tax Compliance Act) which allows for a free exchange of information on resident individuals in either country. In fact there is a new acronym doing the rounds: GATCA. Global Account Tax Compliance Act.
One of the most interesting points about the Italian move to withhold 20% at source was that it was an open attack on profit from investment.. The share of information agreements, to date, have been mainly focused on interest from savings. Could this mean that the EU is about to enter the next phase of tracking down mis-reported incomes and/or gains from investment. Probably! The mandate has been clear since the implementation of the EU Savings Tax Directive that ultimately the EU will have an open information policy across all EU states on all incomes and profits from savings and investments. We may laugh at the inadequacies of the Italians to implement a law, which on the surface of it seemed ridiculous, but it would not surprise me to see this being the first of many steps throughout the EU to open the information exchange channels even further and to exchange information on almost every financial asset you can think of.
As I have said many times before, if you are a resident in Italy, now is the perfect time to be planning to stay ahead of the game. Many things can be done now to limit losses, limit potential fines, and plan efficiently for tax and it needn’t be painful or frightening.
If you have income and assets in Italy or overseas and want to know how to potentially reduce your tax liabilities and plan more effectively, whilst ensuring you are ‘in regola’, then you can contact me on gareth.horsfall@spectrum-ifa.com or call me on 3336492356
Brandeaux Suspended Funds Update
By Chris Burke
This article is published on: 19th February 2014
The following is an extract from Brandeaux on the latest update of their suspended funds. In many cases we will be able to help you if you have money frozen in these funds, please contact me below to find out more:
Chris Burke
Partner
Office; 34 936652828
Mobile; 34 689915730
chris.burke@spectrum-ifa.com
Ground Rent Income Fund Limited, The Ground Rent Portfolio Limited Ground Rent Portfolio Plus Limited (the “Ground Rent Funds”)
Brandeaux Dual Asset Fund (Sterling) LimitedBrandeaux Dual Asset Fund (US Dollar) LimitedBrandeaux Dual Asset Fund (Euro) Limited(the “Dual Asset Funds”)
Brandeaux Student Accommodation Fund (Sterling) LimitedBrandeaux Student Accommodation Fund (Multi Currency) Limited(the “Student Funds”)
(and together the “Brandeaux Funds”)
The Ground Rent Funds
Update on sales The Brandeaux Update of 26 September 2013 reported that the Ground Rent Funds were in negotiations on sale transactions representing approximately 80% of the total value of the ground rent properties.
Brandeaux is pleased to report that property sales to release approximately £173 million of liquidity available for shareholders have now been achieved representing approximately 37% of the total remaining assets of the Ground Rent Funds. The sale prices for these properties are in line with the directors’ expectations as communicated in our last Brandeaux Update of 26 September 2013 and therefore there is no change to the current share price of any of the Ground Rent Funds.
The potential buyer for the remaining properties that we reported in our September Update as being at an advanced stage failed to complete the purchase in the agreed time frame. This was unexpected and disappointing, but the continuing interest that has been shown in these properties is very positive and a reflection of their inherent value. Brandeaux has recommenced marketing of these properties and will report progress as it develops. In addition, Brandeaux is actively marketing two remaining portfolios and has received significant interest.
Future of the Ground Rent Funds Given the desire that has been expressed by investors in the Ground Rent Funds to realise liquidity, and following the positive results achieved in property sales so far, the directors of the Ground Rent Funds have resolved to market and sell all the remaining properties within the Ground Rent Funds. Once completed, the intention is to wind-up the Ground Rent Funds.
The directors do not wish to wait until winding-up the Ground Rent Funds is completed before releasing to shareholders the proceeds of the sales achieved thus far and so, after allowing for ongoing operating cash requirements and transaction costs, it is intended that the net proceeds will be released to shareholders as quickly as possible. It is presently anticipated that this will take place early in the New Year.
In view of the intention to wind-up the Ground Rent Funds, the directors consider that the best way of ensuring that all shareholders benefit fairly from the liquidity created by the sales is to make compulsory pro rata share redemptions to all shareholders. The effect is that every shareholder will
receive a proportion of the available liquidity based on their current percentage shareholding. The directors have written separately to all shareholders in the Ground Rent Funds to provide further details of the arrangements, process and timing of the redemptions.
The directors will keep under review the progress of further sales and whether further redemptions can be made as further property sales are achieved prior to the commencement of the winding-up process. It is not possible to say definitively when further property sales will complete and, therefore, when the winding-up process will commence. However, the directors are taking steps to progress these matters as quickly as possible while at the same time preserving shareholder value.
The Dual Asset FundsThe Dual Asset Funds, which are shareholders in Ground Rent Income Fund Limited (as well as in Brandeaux Student Accommodation Fund (Sterling) Limited), will receive their share of the net proceeds of the Ground Rent property sales as these are distributed. The Dual Asset Funds will distribute their share of the proceeds of each redemption to their own shareholders on the same basis as the Ground Rent Funds, namely by way of a compulsory pro rata share redemption to all shareholders. It is intended that this will be carried out promptly following the share redemptions by the Ground Rent Funds. The effect is that every shareholder will receive a proportion of the available liquidity based on their current percentage shareholding.
The directors have written separately to all shareholders in the Dual Asset Funds to provide further details of the arrangements, process and timing of the redemptions.
Future of the Dual Asset Funds The Dual Asset Funds were created to give investors exposure to both the Ground Rent and Student Accommodation asset classes within one fund. Once the Ground Rent Funds are wound-up, the Dual Asset Funds will no longer be invested in both asset classes. The directors therefore intend to wind-up the Dual Asset Funds in due course. In order for this process to be completed it will be necessary for the Dual Asset Funds to first realise their investment in Brandeaux Student Accommodation Fund (Sterling) Limited and then distribute the proceeds to shareholders. Accordingly, it will be necessary for liquidity to be achieved in the Student Funds before the Dual Asset Funds can be wound-up.
Important information for IFA’s who have clients invested in The Ground Rent Funds and the Dual Asset Funds through institutional platformsThe shareholders of the Brandeaux Funds are the institutional platforms that hold Participating Shares in these funds. Brandeaux does not have details of any underlying investors (neither their names nor bond numbers) and are unable to identify their individual holdings. IFA’s should contact the relevant platform for information concerning queries from their clients, and the process and timing of distributions from the platforms over which Brandeaux has no control.
The Student Funds The directors are actively continuing the process for the creation of liquidity for shareholders through property sales and other means, although the timeframe remains, at present, uncertain. A number of discussions have taken place over the past six months and the directors are actively looking at various alternative ways to create liquidity for investors but at this time there is nothing further to report.
A further update will be sent when there is information of significance to report.
16 December 2013
This Update is for information purposes only and is not intended as an offer or solicitation to anyone in any jurisdiction in which such an offer or solicitation is not authorised, or to any person to whom it would be unlawful to make such an offer or solicitation. Persons who receive this Update are required to inform themselves about and observe any such restrictions and should seek professional advice. This Update should be read in conjunction with the Funds’ Articles of Association and Private Placement Memoranda. Information and representations herein are based on information available at the date hereof, and are, therefore, subject to change. In particular, past returns are not a guide to future returns and the value of shares may go down as well as up. Moreover, returns in non-sterling denominated shares classes may increase or decrease subject to currency fluctuations. Brandeaux calculates its returns net of Brandeaux charges. This Update is distributed on behalf of Brandeaux Managers Limited by Brandeaux Administrators Limited, Brandeaux House, 13 Upper Mount Street, Dublin 2, Ireland, which is authorised and regulated by the Central Bank of Ireland under the Investment Intermediaries Act, 1995.
Investing for a higher Income
By Gareth Horsfall
This article is published on: 18th February 2014
Investing for a higher Income
Investing for income, rather than capital appreciation, is as old as investing itself but its relevance becomes more noticeable in times of low bank interest rates. (Or historically low as the media likes to keep reminding us).
It offers an additional lifeline for those who need to live from the interest from their savings and not just accumulate for a point in the future. The relevance is bigger for those who are not working and do not have a regular income due to ill health, out of work or in retirement.
To elaborate this theme, I have written in the past how an investment should be considered to behave like a garden. It should be well cared for, maintained, trimmed, fed and watered otherwise it becomes out of control and the weeds take over. In no time the tendered beauty and joy of a well cared for garden, diminishes.
Well, I would like to expand on that concept further to explain the purpose of investing for income.
For most of our working lives we try to accumulate capital, save from the very money that we earn to amass the assets that we will one day live off in retirement. But during this time, you may be unaware that you are actually investing for income as well. Its just that the income is being reinvested back into your account to make the capital appreciation quicker. The difference is that when you reach the point when you want the income, you invest in those assets which pay the better levels of interest and have it paid out instead of reinvested.
If we think about it another way, it is the equivalent of the garden. A beautiful cottage style garden that you cultivate from seed and over many years that you carefully tend to. The flowers bloom each spring, and you diligently tend to the plants as they grow, check for problems, apply pest control methods, trim the flowers to put on your kitchen table and enjoy the joy that it brings for you and the family over the years. During this time you may have a small vegetable plot. (the equivalent of an income). But during your working years you have to invest in earning a living and this may prevent you from expanding the vegetable plot, after all you earn enough money to buy vegetables from the supermarket instead of growing them. The garden provides joy and pleasure but only a small amount of income.
When you finish working and your income level may drop, you now have more time to spend on the part of the garden that can provide you with more of the supplemental income.
But, there are 2 types of vegetable plot, those that provide and those that don’t. The difference relies heavily on the soil. The fertility of soil in which you plant those veggies. If your soil becomes too abused it will stop producing. (Note, Westernised economies and the reason for low interest rates). So you have to look at either changing the type of vegetables you plant (crop rotation) or changing the soil. Both can be as effective as one another.
This is the basic concept of investing for income. If one area is not providing sufficient rewards, then it is time to look elsewhere. (Note, bank interest rates are so low that to maintaina standard of living it is necessary to look at other forms of income producing assets)
Example
I would like to talk about Vodafone for a moment and in particular shares in Vodafone. We all know the name but you may not know the significance of Vodafone as an income producing share.
The talk of shares in companies scares alot of people, but Vodafone is a good example of a reliable company that rewards it shareholders with good dividends (income) for being an investor. At the time of writing, if you invested in Vodafone stock today, you would be rewarded with an interest rate of 5.13%. And Vodafone also has a long history of paying income to its investors and more importantly a rising income.
See the table below for the facts
|
Year ended 31 March |
Interim Dividend |
Final Dividend |
Total Dividend |
Growth % |
| 2010 | 2.6600 | 5.6500 | 8.3100 | 6.95 |
| 2009 | 2.5700 | 5.2000 | 7.7700 | 3.46 |
| 2008 | 2.4900 | 5.0200 | 7.5100 | 11.11 |
| 2007 | 2.3500 | 4.4100 | 6.7600 | 11.37 |
| 2006 | 2.2000 | 3.8700 | 6.0700 | 49.14 |
| 2005 | 1.9100 | 2.1600 | 4.0700 | 100.00 |
| 2004 | 0.0535 | 1.0780 | 2.0315 | 20.00 |
| 2003 | 0.7946 | 0.8983 | 1.6929 | 14.99 |
| 2002 | 0.7224 | 0.7497 | 1.4721 | 5.00 |
| 2001 | 0.6880 | 0.7140 | 1.4020 | 5.01 |
| 2000 | 0.6550 | 0.6800 | 1.3350 | 4.95 |
The thing to note is that from the 10 years till 2010 Vodafone increased its dividend 231.98%. If this were the equivalent of bank interest, assuming bank interest started at 3% in 2000, then you would be receiving 6.959% interest on your bank interest in 2010. (The dividends have also been increased through 2010 to 2013 as well !!, so the rate today would be even higher). All this through 2 stock market crises (the tech boom and bust of 2000 and more recently the financial market collapse of 2008/2009). It should be noted that the underlying stock price has increased during this time as well.
I am not recommending that you go online today and buy Vodafone stock. With all investments of this type it comes with risks, management of the business, future profitability of the business and ability to continue to pay dividends, profit warnings, market sentiment, to name a few. However, you can minimise your risk of investing in this way by investing through a fund that specifically invests, manages the risk and can pay out the income.
The point of this blog post is to reiterate the point that if you feel that bank interest is not satisfactory for your living requirements, or you have a tax bill because of being resident in Italy and need supplementary income to pay it, or you just need some more income to make life easier then there are alternatives to leaving the money in the bank or investing in Government Bonds (the historical investment choice of type for the ‘average’ Italian).
If you would like to know how to build a portfolio of income producing assets or would like to discuss any other ways of improving your current financial situation then you can contact me on gareth.horsfall@spectrum-ifa.com or call me on 3336492356.