FOR MATTIOLI WOODS CLIENTS JUNE 2016

managingwww.mattioliwoods.com WEALTH GOOD FOUNDATION Why should you invest in a structured product fund?

also in this issue... Private Investors Club Pension freedoms

Finance for children Property ownership ISAs - a love story Venture capital trusts INVESTMENTS INVESTMENTS FEATURE PENSIONS FEATURE PROPERTY SAVINGS INVESTMENTS Structured Structured Private Pension Children Property ISAs Venture Capital product fund product return investors club freedoms finance ownership Trusts A GOOD FOUNDATION Why should you invest in a structured product fund? Mark Fuller, Head of Structured Products

The benefits of structured products within a diversified portfolio are easy to explain. Investing in structured products can give the buyer returns that are uncorrelated to the performance of the usual benchmarks, such as the FTSE100 or the S&P 500; they can also provide leverage, so an underlying asset that moves 1% can provide a return of much more than 1% if bought as part of a structured product. At Mattioli Woods, we have used UK inflation and the movement of house prices to provide returns for our structured products. Return on these underlying assets and many others are difficult for investors to access directly, but can be easily provided via a structured product. The final benefit, the return of the initial investment, can be demonstrated by Mattioli Woods’ track record in structured products. Over the last 10 years, 45 of the structured products we have put together for our clients have matured. Of these, 82.23% have paid a positive return, 13.33% have returned the investor’s original investment and just 4.44% have returned less than the original investment. Since 2005, we have arranged our structured product investments via plans. Although the advantages of structured product investing are clear, structured product plans as an investment strategy have a few flaws from a client’s perspective that cannot be easily overcome. For example… • All structured product plans have a fixed start and end date, so clients cannot control the start level for any index or other underlying asset used for the structured product in which they invest • When a plan matures, the client will automatically receive their money back whether they want it or not, but without an obvious next investment; structured products are “buy and hold” investments, so holders usually have to keep the plan until maturity to get the full return • Some structured products can be held without any prospect of a return if the underlying asset moves dramatically in the wrong direction shortly after the start date • The terms of any structured product, including the pay- off at maturity, are predefined

2 MANAGING WEALTH - ISSUE 13 FIVE THINGS YOU ALWAYS WANTED TO KNOW ABOUT • Buying a structured product via a plan exposes the customer to the risk of losing some or all of their initial investment if the STRUCTURED bank issuing the plan becomes insolvent * • Comparing one structured product with another is impossible as PRODUCTS no two structured products are the same By contrast, investing in funds is straightforward … Mark Fuller, • Fund investment can happen immediately Head of Structured Products • Liquidity is constantly available The return on a structured product can be linked to • An infinite number of funds with a similarly infinite number of almost any underlying asset… don’t believe me? – then objectives exist – and with the ease of liquidity an investor can look below… change their view and their fund holding very quickly 1) The following have been used to pay a return on • Funds can be compared and the track record of fund managers retail structured products: can be accessed from many sources a. Spain winning the football World Cup in 2010 • Funds are open-ended investments – the entry and exit to a fund (they won, and Banco Sabadell paid a bonus are determined by the individual investor, not the structured coupon). product plan manager b. Snow falling on Christmas Day 2005 at Heathrow • The risks to initial capital of fund investment are limited to the Airport (this was part of a Bristol and West performance of the fund Building Society structured deposit – it didn’t snow). A structured product fund eliminates most of the flaws of structured product investing via a plan, maintains all the benefits of 2) Some structured products linked to commodities structured products, and adds all of the benefits of investing via a pay a return in the form of a physical delivery of the fund. We are developing a collateralised structured investment fund commodity. That’s OK if the underlying asset is gold, with the sole objective of providing returns similar to an absolute but it has always limited the demand for uranium- returns fund via investments in structured products. The fund itself linked structured products... will be 100% collateralised – eliminating any counterparty risk. 3) In November 2005, The Midshires Investors can buy or sell units in the fund at any time, and investors Building Society offered a structured product to fans immediately receive exposure to a diversified portfolio of structured of Wolverhampton Wanderers. Promotion to the products. The products are selected by managers with a combined Premiership boosted returns by 1% and there were 25 years’ experience of structuring and selling structured products. added bonuses … you could get tickets in the box, or The fund itself will be transparent – all the structured product pay- a signed Wolves shirt and a signed football. Mattioli offs held by the fund will be available on our website, and as it is a Woods could have offered a similar product linked fund, it will be open-ended with no fixed maturity date. to the performance of City this season, Our structured investment fund will have various structured but pension schemes and trusts would not have product pay-offs, which could take into account every form of been allowed to receive the signed memorabilia and underlying asset – the following list is just for demonstration tickets… I am sure they would be happy to receive the purposes and is not exhaustive! cash bonuses though! • Equities 4) Some structured products are given nicknames to • Commodities promote an understanding with the investing public. For example, a “Commodore” structured product was • Bonds named after the Commodores song “Once, Twice, • Rates Three Times a Lady”, because the possible return • Foreign exchange was “once, twice, three times” the performance of the • Mutual funds FTSE100. If you work in structured products, this is a hilarious play on words… apparently. These underlying assets will be in a fund with an objective to provide a smooth return in excess of the risk-free rate with a low 5) FIFA, the global governing body of football, arranged volatility – regardless of the performance of traditional benchmarks. a structured product named “The 2006 FIFA World The returns on the fund will be subject to capital gains tax when Cup Cancellation Bond” for the 2006 World Cup investment is not via a SIPP, SSAS or ISA. We will continue to sell in Germany. This was a catastrophe-linked bond to structured product plans that pay income, but in time we will have protect FIFA against financial losses that would result a separate structured investment fund that pays income too. should the 2006 World Cup in Germany be cancelled. History does not record where the FIFA’s upfront fee So, in answer to my initial question, “Why should you invest in for this bond was paid... a structured product fund?” … By combining the benefits of fund investing and the unique way a structured product can increase * the returns in a portfolio, a structured product fund is without BUT WERE TOO doubt the best way to invest in this asset class for growth-seeking investors. AFRAID TO ASK

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THE IN CROWD We were delighted with the outcome of our very first Private Investors Club (PIC) opportunity – an investment that has returned 17.75% over just 18 months. Bob Woods, Chairman

The PIC is designed not as an occasional speculative areas to house students more efficiently. The subject investment but as a considered and creative initiative property, Philip House, is located 50 metres away from the to develop a relatively low-risk portfolio of unusual University of Ulster which, after a £250m redevelopment and interesting opportunities, and which will provide and relocation programme due to complete in 2018, will valuable diversification as an investment uncorrelated to be home to some 15,000 students. mainstream investment markets. Set out below is the story The risk of this, our first matured investment. By way of security, investors had a first legal charge In October 2014, Mattioli Woods launched a new over the subject property, which on acquisition only had initiative for its clients, the Mattioli Woods Private planning consent for office space. Office space has a Investors Club. Running simultaneously with the launch much lower value than residential property, so the formal was the introduction of its inaugural investment, MW valuation on completing the Loan provided a value of Private Investors (101) Limited Partnership. Investors only £1.5m, somewhat lower than the Loan required were offered the opportunity to loan £1,722,000 (“the of £1.722m. With the benefit of planning consent for loan”) to York Street (No.1) Ltd, a Special Purpose Vehicle student accommodation, the valuation would be increased (“SPV”) set up to acquire Philip House, York Street, to £3.5m. Therefore, the risk to investors was whether and ultimately secure planning permission for student approval for student accommodation could be secured. accommodation. The Loan was provided for a period of 18 months; The Loan however, the borrower had the option to redeem earlier. Planning approval for student accommodation was York Street (No.1) Ltd is an SPV of experienced secured on 15 March 2016 and offers in excess of £4m property developers based in Belfast and the North East were received soon after this date. of England, specialising in high-quality commercial and residential developments. Collectively, they have over 60 The return years’ experience in real estate investment, development, On 7 May 2016, investors received a full return of their and construction, primarily in the residential, student, capital invested and a total net return of circa 17.75% hotel and leisure sectors. for their 18-month investment. Unusual investment At the time of making the loan, the city of Belfast, opportunities like this are hard to find, but they deliver unlike all other university cities, had no private sector enormous value in providing our clients with attractive purpose-built student accommodation; in fact, planning investments uncorrelated with mainstream investment markets – particularly important in today’s investment had not even been granted for any at this point. With the climate. majority of Belfast students living in houses of multiple occupation, and the relocation of the University of Ulster We continue to seek out good opportunities to help our from Jordanstown to Belfast City Centre, the council was clients build well-diversified portfolios of Private Investor coming under increasing pressure to provide localised Club opportunities.

4 MANAGING WEALTH - ISSUE 13 INVESTMENTS INVESTMENTS FEATURE PENSIONS FEATURE PROPERTY SAVINGS INVESTMENTS Structured Structured Private Pension Children Property ISAs Venture Capital product fund product return investors club freedoms finance ownership Trusts

PENSION FREEDOMS - two years on...

Discussing the market challenges. George Houston, Senior Technical and Development Manager

We have been talking about pension freedoms for two investment for them in the first place, so they understand years and it has been a year since people were able to that the long-term benefits of investing can outweigh use these new freedoms. Since then, the FTSE 100 has short-term volatility. dropped by 15%. Such a dip in the market has posed problems for many investors and shows that sequencing It is worth noting that not all areas of investment risk (the order of returns) can play havoc with the value of portfolios have dropped – for example, commercial a portfolio, especially when an income is also being taken. property and absolute return strategies are two areas that George Houston discusses how Mattioli Woods has helped our clients have benefited from in real terms. A lot of our its clients through this period. clients have property, and this has helped maintain their pensions in difficult equity/bond markets. What is your experience of the take-up of the new pension freedoms? Looking at a client’s overall wealth management plan as we do, pensions are only part of the equation and We have certainly experienced an increase in conversations with clients wanting to fully understand regular reviews help to keep clients informed of what has the new freedoms and how these impact on their options. happened in markets, how this has impacted on their own Very few have opted to cash in the entire value of their plans’ investment performance and allows for a discussion pension savings – there have been some, but these have around income sources for the year ahead. Of course, there tended to be for very specific reasons! In reality, it has are also some IHT considerations to be mindful of and been mainly those with smaller pension pots who have there is merit in dovetailing pension income strategies been tempted by the option of drawing their entire fund with other investment vehicles, and a well-rounded plan in one go. will afford sufficient flexibility to increase efficiency across Income and Inheritance Tax planning. How are you handling the drop in the value of investments since this time last year? What is your advice to clients in this situation? Any client entering the drawdown phase with their Each client will differ depending on the construction of pensions is made aware of the risks they are taking on, their overall plan. Managing risk and trying to mitigate and they understand there will be challenging times the impact of market turbulence through well-diversified from an investment perspective. Getting to the stage portfolios has helped our clients in the past, and we will of drawing benefits has generally been a long-term aim to deliver the same outcome in the years ahead.

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FINANCE FOR CHILDREN Teaching our children the value of money

Clothes, shoes, not to mention large telephone bills – no parent needs reminding that children are an increasing cost (we’re not saying they’re not worth it!). Simon Gibson, Director

Add to this the help needed to purchase a first home year old raise that sort of money? It is likely to be via and the ever increasing costs of university (tuition) fees the Bank of Mum and Dad, Aunt, Grandma … you get – they all seem to fall on parents. Throw in a wedding (or the picture. two) and your plans for retirement may be pushed further 5. A plan made early enough can mitigate these large out to sea, with your dreams of a cruise soon on a distant costs – whether it be for school or university, an horizon. education fees plan can make those decisions in the Can you remember ‘cut out and keep’ guides? They future much easier. seemed all the rage when I was first working (which, for 6. When work becomes a reality, perhaps at 16, straight the record, was the ‘80s). Today, I shall endeavour, if not from school, or much later after further education, in exactly that format (no scissors required, no dotted try to find time to take an interest in the financial line to follow), to highlight what I see as the stages that any mum, aunt or grandma would wish to see their child, aspects of the new, exciting adventure that your child niece, nephew or grandchild through, as they move from is embarking upon – after all, you are the one with the school to work: hard-earned experience! 1. Firstly, let us all concentrate on teaching children the Investment options value of money. A good place to start is with pocket The Junior ISA (JISA) must be first on the shopping list money, and my “Four Pots” is available free to anyone to financially help our children on entering adulthood. who would like to see how it works – and it really does! With university fees at an all-time high, and mortgage Start them at age three. deposits often beyond the reach of first-time buyers, the JISA, which was launched in November 2011, offers an 2 . Next, don’t forget that the main thing children value is efficient savings vehicle with many of the same features not your money, your cheque book or your credit card, as adult ISAs. In addition, since April 2015, it has been but your time. How much does that cost? They also like possible to transfer existing child trusts funds (CTFs) over promises, so when we say, “I promise to read to you to a JISA. Investment limits for 2016/17 of £4,080 mean tonight”, it is rarely if ever forgotten – and it means a lot. that, in a similar way to the adult ISA, using the allowance 3. OK, I can hear the complaints – “All mine want me for each year in the long term can generate a sizeable pot. is my money” – see 1. above, and educate them out of As with any investment, JISAs may not be suitable in it, as early as possible. all circumstances, and there are pros and cons. It can be a 4. Practically of course, there does come a time when long-term, tax-efficient savings route for a child; however, money really is needed – let’s call it university! In there is no flexibility on early access. At 18, the account future, we know fees are increasing, and that our holder then has complete access to the proceeds. This children are likely to expect our never-actually-uttered may be a cause for concern as the young adult will have “promise” to be fulfilled – they can have the best full access to the money. With many young adults having education available to them. A recent study suggests debts in their 20s, it reinforces the fact that there is a that a typical three-year degree costs around £55,000, responsibility to educate our children about money and once fees and living costs are included. How does an 18 financial planning in particular.

6 MANAGING WEALTH - ISSUE 13 Planning is the key and there are a range of other Equally, it may well be that all you need is to protect the investments which parents and/or grandchildren are source of the funds that pay for school fees and investigate often well advised to consider when planning for a child’s family protection options. The death or serious ill health future: of a parent or guardian can have devastating consequences • ISAs financially as well as emotionally. • Investment trusts Mattioli Woods • Unit trusts/OEICs At Mattioli Woods, we have one best-selling product – • Child savings bonds peace of mind – and we are seeing more and more clients • Pensions – yes, even before they are earning, your planning for their children’s futures. “Disaster recovery child/grandchild may have a pension, with tax relief plans” are being built to ensure that school fees (and more) can be met in the event of the untimely demise, or serious And don’t forget, in the recent Budget the Lifetime ISA illness, of a parent. For others, tailored solutions mean was revealed. From April 2017, any adult under 40 will be able to open a new Lifetime ISA, which can be used to consideration can be given as to how best to help children, save in order to buy their first home. Up to £4,000 can be grandchildren, etc. in financial terms, regardless of their saved each year, and savers will receive a 25% bonus from future needs. Whether cascading funds for the mitigation the government on this money! The total amount you can of inheritance tax or simply making sensible plans to meet save each year into all ISAs will also be increased from future expenses, the experienced consultants at Mattioli £15,240 to £20,000 from April 2017. Woods can help.

WWW.MATTIOLIWOODS.COM 7 INVESTMENTS INVESTMENTS FEATURE PENSIONS FEATURE PROPERTY SAVINGS INVESTMENTS Structured Structured Private Pension Children Property ISAs Venture Capital product fund product return investors club freedoms finance ownership Trusts GOOD BYE-TO-LET Thomas Duckworth and Thomas Mayne – Consultants

The British have always had an obsession with property TM – Overall, whilst income from a buy-to-let property ownership. With mortgage interest tax relief and attractive may still seem generous next to the current yields of capital and income returns, buy-to-let has historically other investments, that’s assuming that the property was represented a sound option for those looking to put their tenanted of course! If you only have one property and faith in the age-old adage that “there’s nothing safer than you find it cannot be let for some reason, or if you face bricks and mortar”. a significant bill for repairs, or you get to retirement and you haven’t paid off the borrowing, then you are going to However, from April 2016, there is now a three-pronged be in trouble. attack on the private buy-to-let investor, introducing: The market did see a surge in additional buy-to-let 1. The removal of higher-rate tax relief on the mortgage properties being purchased before the end of March, with interest payments on second or subsequent homes. a view to looking to gain that “guaranteed” level of income 2. A requirement for capital gains tax liabilities to be at retirement, and providing an alternative to pension settled within 30 days. schemes. 3. 3% stamp duty land tax surcharge on anything other What is interesting is now that the end of March rush than a primary residence. is over, we are starting to explore some of the physical We asked Thomas Duckworth and Thomas Mayne, practicalities. We have already seen the reports of “Granny (consultants at Mattioli Woods) – Do these changes flat classed as a second property”, though they seem to eliminate a buy-to-let investment as a viable option for have now been spared! all but the super-rich, and will there be a significant But additional complications are coming to light, cases move away from buy-to-let investments? where siblings part own a second home and wish to Thomas Mayne – Prior to April 2015, with the access transfer ownership to one sibling, and whether a first-time restrictions on pension plans, it was no surprise that buyer is really a first-time buyer if they own an investment more individuals were looking at buy-to-let to fund their property as a result of inheritance. retirement years, and for those with money to invest, it Do you think the impact of the extra 3% stamp was easy to see why. Rising rents have seen yields on buy- duty and the restrictions on tax relief will entice those to-let properties jump above those of the world markets. who still wish to invest in property to look for other Thomas Duckworth – Historically, it may have been retirement options? good for investors, but market commentators have long TD – The additional stamp duty charge does not apply felt that the buy-to-let market has put a squeeze on the to the commercial sector, and with the advantage of not bottom end of the housing market, contributed to the having to pay income or capital gains tax within a pension increase in house prices and made it increasingly difficult arrangement, this may be the alternative solution for those for people to take their first steps onto the property ladder. buy-to-let supporters. In the year to June 2015, buy-to-let borrowing increased by 22%, whilst over the same period, first-time buyer TM – The changes introduced in April 2015 (allowing borrowing fell by 16%, with buy-to-let mortgages now individuals to access their funds more flexibly after the accounting for 15% of all mortgage borrowing. age of 55) have added a new dimension to pension savers, and could tempt individuals into thinking more about Going forward, from a costing point of view, on the their retirement. Clients looking at income-producing average-price buy-to-let in England of £184,000, stamp assets may consider the rental rates associated with duty would climb from £1,180 to £6,700. The removal commercial property as the answer. of higher-rate tax relief on the interest payments will also make a dent. A higher-rate paying landlord, with a TD – I would say it is safe to assume that residential £200,000 property and a £150,000 mortgage, would see property will not be an allowable asset within a pension his profit drop from £2,160 to £960 per year (a return of scheme anytime soon, except in the same ways as less than 2%). The new need to settle capital gains tax currently acceptable. Although it has been a point liabilities within 30 days limits the appeal of the capital of debate for some time, it would fly in the face of all growth side of property investment. recent changes. Pensions still benefit from excellent tax

8 MANAGING WEALTH - ISSUE 13 advantages over privately held investments, with tax invest in real estate investment trusts, such as Custodian relief on contributions, virtually tax-free growth, and 25% REIT. This is basically a collection of properties across tax free when withdrawn from the scheme. There are the country, leased out to your blue chip tenants, and then limitations around access and investment choice, but the tax advantages are undeniable, and if you have your heart the rental is distributed to shareholders of the fund. A set on “bricks and mortar” investment, then commercial dividend payment at today’s price would pay a yield of property can be held by a pension scheme and will enjoy 5.78% p.a. all of the associated tax benefits. TD – If income generation within your pension scheme TM – When looking at commercial property within is a priority, there are other options that would be worth a pension structure, you do need to be mindful of both considering where diversification and liquidity are also the connected party rules and also, as with any buy-to-let investment, what would happen in the event of default considerations. on rent and/or the cost of holding an untenanted property Structured products can also provide strong returns in within the scheme. flat, or even declining markets, whilst offering an element TD – The impact that a tenant not paying rent has on of capital protection. Structured products may be based scheme income is potentially dramatic, but the capital on a wide range of assets, stocks, indices or sectors. As growth can also be impacted. If the tenant lets a property fall into a state of disrepair, and the costs cannot be such, a strategy of investing smaller amounts in a range of recovered from them because of insolvency/bankruptcy, structured products over time can provide strong returns, the costs of returning the property to rentable condition regardless of prevailing market conditions. may fall upon the scheme and reduce any overall gain made from a future property sale. Please note When looking for income, what other investment The comments above are based on our understanding of strategies could we consider? HMRC rules, rates and reliefs, which are subject to change TM – Clients looking to include property within a at any time; Mattioli Woods cannot be held responsible pension scheme, but without any of the potential concerns for the effect of any such changes on current financial an unconnected tenant could bring, would be able to planning.

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Since April 1999 when Personal Equity Plans became Individual Savings Accounts (ISAs), it is fair to say the UK public has fallen in love with these investments. Martin Jarvis, Associate Consultant

Indeed, a 2015 government report showed the total and shares). The allowable investments have also become value in ISAs (excluding JISAs) was nearly £500 billion, more flexible by allowing investment in Alternative which is more than the technology giant Apple is worth. Investment Market shares and peer-to-peer lending for instance. An individual has to be over 16 to open a cash With the recent budget including the announcement of ISA and 18 for a stocks and shares ISA, as well as being a new “Lifetime ISA”, it could be argued the ISA is also one a UK resident or crown servant/civil service worker or of the favourite political tools in the Chancellor’s bag. spouse/civil partner, if not UK resident. There have been many changes to ISAs over the years, Only one ISA can be opened in a tax year and and following announcements in the recent budget now the account is held individually. There is an annual seems a good time to take stock and review the main investment allowance (currently £15,240), and returns and options available in the ISA family. withdrawals are tax free. The family tree Over the years, ISAs have also increased in flexibility The basics of the ISA framework have rarely changed as on death. No income tax or capital gains tax is since they were first introduced. Only slight tweaks due, although the account is included in the estate for have occurred, depending on what that particular ISA is inheritance tax (IHT) purposes unless passed to the trying to achieve. This means the DNA of those initial spouse, in which case the surviving spouse/civil partner ISAs can be seen in each product. Arguably, it is the can inherit the value of the pot to use along with their below cornerstones that have contributed the most to the own ISA allowance for the tax year. For example, if an ISA success story as they are clear, understandable and individual dies with £100,000 in an ISA and passes it to advantageous to a large proportion of the public: her husband, he can then add the £100,000 into his own 1. Tax-free returns ISA, plus the annual limit. Returns within the ISA framework are tax free, giving Finally, withdrawals reset the allowance, i.e. if an ISAs a sizeable advantage over other investment vehicles. individual used £15,240 then withdrew £10,000, they can re-invest the £10,000 and still be within their ISA 2. Tax-free withdrawals allowance for that tax year. Tax-free returns are one thing, but add in the ability to Although technical in detail, the clear tax-efficient make tax-free withdrawals and ISAs also have an added structure and understandable allowances are at the core. attraction. So what about the ISA offspring? 3. Annual investment allowance Junior ISA – Golden child A clear investment limit is also in place. On the Following the relative complexities of the Child Trust one hand, this is a potential disadvantage as there is a Fund (CTF), Junior ISAs (JISAs) were introduced in restriction. On the other, the limit creates transparency 2011 and operate in an almost identical way to ISAs. and reduces complexity. Importantly, the tax treatment is the same but with a Although there may be slight tweaks to the above smaller allowance, currently £4,080 per child per tax year. depending on the investment vehicle, the important point The individual must be below age 18 and live in the UK. is all three factors are the starting point when a new ISA CTFs can also be transferred into a JISA. Again, cash and framework has been developed for the marketplace. With stocks and shares JISAs are available. this in mind, let’s introduce the ISA family: These are a useful by-product as the contributions ISA – THE FOUNDING FATHER are likely to be made by parents and/or grandparents, which can work as an attractive IHT tool, for example, The original ISA framework has remained remarkably making use of the gift out of normal expenditure rules. untouched since its introduction in April 1999. Although Furthermore, no withdrawals can take place until age 18, differences between stocks and shares, and Maxi and but the child takes control of the funds at age 16 – an Mini ISAs have come and gone, the tax advantages have important point, as it is imperative to ensure the child is remained constant. ready to receive what could potentially be a large amount There are currently two types of ISAs (cash, and stocks of money.

10 MANAGING WEALTH - ISSUE 13 Help to Buy ISA – The property mogul Lifetime ISA – The bouncing baby Slightly more complex than its older family members, The new arrival, with a due date of April 2017. Hot but offering the genetic blueprint of tax-free growth and a on the heels of the Help to Buy ISA, on 16 March 2016 set investment allowance. George Osbourne announced a new Lifetime ISA. In a similar way to the Help to Buy ISA, it seems wrapping Specifically, these accounts are aimed at first-time up a political problem in the ISA framework solution is a buyers, piggybacking on the success of the ISA framework common theme. and allowing savings of up to £200 per month (£2,400 per annum) for a maximum of five years. In addition to With many young people struggling to save for this, the government will provide a 25% bonus on the a pension, and the most lucrative defined benefit contributions up to a maximum of £3,000 (i.e. on the full schemes all but gone, the innovative option builds on £12,000 maximum contribution by the ISA holder) when the tax advantages, offering a £4,000 annual allowance the ISA is used to buy that first house. Again, returns and for individuals between the ages of 18 and 40. The withdrawals are tax free, although if funds are used for government, in a similar way to its Help to Buy sibling, anything other than a house purchase then no bonus is also adds an additional 25% bonus at the end of each payable by the government. The individual needs to be year. The funds must be retained either for a first house over age 16 to establish an account. purchase (up to £450,000) OR until age 60. Withdrawals can be made before these events, however the bonus is lost Furthermore, one Help to Buy ISA per person is allowed and there is a 5% charge. Again, growth is tax free. and not one per household, so a couple can each save for a first home (up to £450,000 in and £250,000 Help to Buy and Lifetime ISAs will interact when an outside of London). When using the funds to purchase a individual can save for both but only use one towards home, the acting solicitor applies for the bonus. An initial buying a house. An individual can transfer a Help to Buy deposit of £1,000 can be made in addition to the annual ISA into a Lifetime ISA from April 2017. allowance. There is a limited timeframe however, with The product will be in place from April 2017 when accounts to be opened by 1 December 2019 and bonuses the overall allowance available into all ISAs will rise to must be claimed by 1 December 2030. £20,000. Implemented at a time when first-time buyers are The foregoing does not spell the end of pensions as struggling to set foot on the housing ladder, Help to Buy there are many extra flexibilities that could be pertinent ISAs harness the transparent nature and tax advantages of to a client’s situation. However, the use of the tax-free ISAs to great effect. Since the launch in December 2015, withdrawals, tax-free growth and annual subscription over 250,000 have been opened, or one every 30 seconds, allowance stalwarts are being used to potentially solve a according to a government report. large problem. The future of the family As you can see, there are various solutions, each with slightly differing characteristics. However, can they be used in tandem? For example, utilising the Junior ISA allowance of £4,080 each year for the first18 years of a child’s life yields a net contribution of around £73,000. After conversion to an ISA, a Lifetime ISA can also be opened. By utilising the annual Lifetime ISA allowance and assuming a 5% return to age 60, a total of around £1 million could be generated. Marry this with pension planning and other tax- efficient structures, such as Venture Capital Trusts, and all of a sudden an exceptionally diverse and tax-efficient portfolio can be created over time. Given the additional technicalities, these can be used for a first home purchase, wedding costs or as an integral part of a retirement income strategy. Conclusion ISAs have come a long way since 1999. Despite the many different structures that have been introduced, the fundamentals of what makes an ISA great are still there: simplicity and tax efficiency, when tailored to a client’s situation, can create a potent combination. It is intriguing to speculate how these vehicles might evolve over the next 15 years, but the three main factors are likely to be constant: tax-efficient withdrawals, tax-efficient growth and a set annual subscription amount.

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IS THE TIDE TURNING ... for venture capital trusts?

Sarah Levett, Consultant

The history So, what are the attractions for higher earners? The heyday of venture capital trust (VCT) investing was Contributions and income tax relief ten years ago, when 40% income tax relief was available. With VCTs, the initial income tax relief is 30% of In the years since, they have been seen as second best to the amount invested (a maximum of £200,000 per tax the increasingly fashionable enterprise investment scheme year), providing it is held for five years. Compare this (EIS). to pensions; although a higher-rate taxpayer will receive This decline was partly tax driven, as VCT income tax 40% relief on pension contributions, the contribution is relief reduced at the same time as EIS relief increased; restricted to a maximum of £40,000 per annum (assuming but in addition, many new VCT investors were burnt as a no carry-forward allowance is available). This results in number of newer trusts suffered heavy losses during the maximum tax relief of £60,000 and £16,000 respectively, a most recent credit crunch. significant difference. Why now? Of course, tax incentives should not be the sole reason There are clear signs that the tide is turning in favour of for investing, however. For those looking for an income VCTs. stream, the tax treatment of the investment becomes relevant when comparing what might otherwise be Age: the industry is maturing. As at 31 March 2016, competing vehicles to deliver this income. total VCT funds under management stood at £3.32 billion, with many trusts tracing roots back to the 20th Tax-free income century. Poor performers of the past have almost entirely Whilst everyone has a tax-free dividend allowance disappeared, and there are a smaller number of committed (£5,000 for 2016/17), higher-rate taxpayers will pay more managers who really understand their market. tax on dividends above this. Although typical smaller company equity funds pay little by way of dividends Knowledge: advisers have a better understanding of to investors, anything above this new allowance will be VCTs and are coming to appreciate that they are not, on taxable. VCTs pay tax-free dividends to investors and, the whole, as high risk as may have been assumed. Many given their increasing maturity, many have a sustainable VCTs, and not just those designed to be limited life, are yield of over 5%. significantly lower risk than a host of traditional equity funds that advisers recommend. VCTs are not for everyone, but they should be considered as part of a diversified portfolio for Pension restrictions: Over recent years, more and more higher earners. As pension saving becomes ever people have found that retirement funding via pensions more challenging, expect to see increased demand for has been closed off through successive reductions in VCT investments as they become a viable alternative the lifetime and annual allowances. For additional-rate investment. taxpayers, the new tiered annual allowance could mean their annual pension allowance is less than their ISA All figures are courtesy of Association of Investment allowance! Companies (AIC)

Issue 13 was produced in June 2016. Mattioli Woods plc, MW House, 1 Penman Way, Grove Park, Enderby, Leicester, LE19 1SY. www.mattioliwoods.com Authorised and regulated by the Financial Conduct Authority.

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The articles herein represent the views of the author and are not intended as a personal recommendation to make an investment. Investments can go down as well as up in value and you could get back less than you invested. Any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances.