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Can we buy investments through our company?

A couple ask if they should consolidate and how to utilise cash in their business

Can we buy investments through our company?

Laura and her husband are age 54. He is a doctor and earns £125,000 per year. He normally also earns about £48,000 a year before tax from a private practice, but this has not been making any money since the onset of the Covid-19 pandemic. Laura is a part time English tutor and earns about £4,000 per year. They have three children – working, at university and at school. 

Reader Portfolio
Laura and her husband 54
Description

Isas, pensions and trading accounts invested in funds and shares, residential property, cash.

Objectives

Supplement pensions income in retirement, average annual total return of 3-4 per cent with investments, preserve the capital value of investments, cut number of holdings, minimise cost of investing, invest money in business.

Portfolio type
Investing for goals

Their home is worth around £1.25m and mortgage free. Laura also owns two rental properties worth about £250,000 and £130,000, on which the latter has a mortgage of £60,000. The properties generate around £8,500 per year after expenses.

“My husband will receive a final salary pension of £45,000 per year from age 60, and the annual amount of the payout will rise by £10,000 from when he is age 67,” says Laura. “However, as an NHS doctor he could face some huge tax bills in the next couple of years. He also has a free-standing additional voluntary contribution (FSAVC) scheme worth £100,000.

"I have a final salary pension that will pay out £7,000 per year from when I am age 60 and a personal pension worth £100,000.

“We would also like our investments to produce an income to supplement our pensions. So we want the holdings in our individual savings accounts (Isas) to make an average annual return of 4 per cent a year, and our other investments one of 3 per cent a year. We also hope to preserve the capital value of our investments.

"Although I have been investing for 25 years we are quite conservative. But as equity investments generally do well in the long run we would be happy for our investments' value to fall by up to 20 per cent in any given year – as long as we don’t have to sell them so that they can recover over the long term.

"Our professionally managed portfolios – two Isas and my personal pension – have been built up over 25 years, are invested in funds, and are much more diversified and risk balanced. But I am worried that the charges for these are too high and I think they have too many holdings – 46 in each of our Isas and 45 in my pension.

"So I am thinking of managing all our assets myself, but I don’t know if I have the expertise or time to do this. We have caring responsibilities for our elderly parents so are time poor, although when my husband retires it will be a different story.

"The portfolios we manage ourselves are mostly invested in direct share holdings in blue-chip companies given to us by my father in law, and investment trusts.

"The way we invest has been influenced by my father in law who buys but never sells investments. His main requirement is that they have a yield and until he retired he reinvested all dividends. 

"I have added a few holdings but am concerned that I’m 'not on top of it'. My additions have mostly been large UK companies, and investment trusts to diversify by geography and sector. But selling is emotionally much harder than buying. 

"We have been using the income from my husband’s private practice to pay for our children’s education and holidays. But we are now going to retain funds in the business and wind it up when we retire. The company has £35,000 cash, but this is being eroded by inflation. So could we hold an investment account within this company – essentially a trading company – and buy investments?"

 

Laura and her husband's portfolio
HoldingValue (£)% of the portfolio
Aviva Investors Distribution (GB00BYZC2W42) 17,351.001.01
TB Enigma Dynamic Growth (GB00BD8YW758) 10,334.000.60
Laura investment account447,269.6825.95
Laura professionally managed Isa218,573.6412.68
Laura personal pension100,134.185.81
Laura self managed Isa98,362.325.71
Husband professionally managed Isa206,827.4412.00
Husband self managed Isa and investment account94,458.335.48
Husband FSAVC105,277.666.11
Rental properties minus mortgage320,000.0018.57
Cash in business35,000.002.03
Cash savings70,000.004.06
Total1,723,588.25 

 

Laura's self managed Isa and trading account
HoldingValue (£)% of the portfolios
Anglo American (AAL)53,8499.87
AstraZeneca (AZN)8,4361.55
BAE Systems (BA.)8,1391.49
Balfour Beatty (BBY)5,3440.98
BHP (BHP)41,3887.59
British American Tobacco (BATS)9,7181.78
Burberry (BRBY)4,0780.75
Carnival (CCL)2,4550.45
City Merchants High Yield Trust (CMHY)6,2521.15
Electra Private Equity (ELTA)1,5750.29
Elementis (ELM)7,6421.4
Experian (EXPN)21,6463.97
Galliford Try (GFRD)1,1540.21
Hollywood Bowl (BOWL)1,4470.27
HSBC (HSBA)21,3483.91
IG (IGG)17,1323.14
InterContinental Hotels (IHG)2,0290.37
International Consolidated Airlines (IAG)3810.07
Lloyds Banking (LLOY)1,9050.35
Mondi (MNDI)33,0216.05
MPAC (MPAC)20,3573.73
National Grid (NG.)8,6361.58
Pennon (PNN)3,5660.65
Prudential (PRU)6,0871.12
Rio Tinto (RIO)25,9844.76
Rolls-Royce (RR.)3,5370.65
Royal Dutch Shell (RDSA)8040.15
Royal Dutch Shell (RDSB)17,4183.19
Scottish Mortgage Investment Trust (SMT)5,0840.93
Smiths (SMIN)14,6502.68
South32 (S32)3,2690.6
SSE (SSE)4,8430.89
Standard Chartered (STAN)10,5971.94
Standard Life Aberdeen (SLA)11,7222.15
Tesco (TSCO)5,5561.02
Renewables Infrastructure Group (TRIG)10,1001.85
Unilever (ULVR)24,1014.42
Vesuvius (VSVS)8,8591.62
Vistry (VTY)10,2111.87
Vodafone (VOD)9,8321.8
Diageo (DGE)67,02312.28
GlaxoSmithKline (GSK)15,7622.89
Cash8,6931.59
Total545,632 

 

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.

 

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

We can’t be sure whether a 3 to 4 per cent return a year is a reasonable expectation. One way to think about equity returns is to assume that prices rise in line with dividends which, in turn, grow at the same long-run rate as the economy. Adding the dividend yield to this gives expected returns of around 5 per cent a year after inflation.

Or you could add an equity premium to bond yields. This gives an expected return of only around 1 per cent a year. Your assumption splits the difference, which is reasonable.

But huge risks surround this. Even if average annual returns are 5 per cent a year, there’s around a 10 per cent chance of returns being less than zero over 10 years. So even longer-term investors should hold non-equity assets to diversify this risk.

 

TAXATION

Kay Ingram, chartered financial planner at LEBC Group, says:

You've built up an impressive array of investments, but you could be more tax efficient.

Your strategy of buying and holding means that your investments may be sitting on unrealised gains. Capital gains tax (CGT) is not payable on death as inheritance tax (IHT) is payable on estates at that point. However, the government is reviewing CGT and IHT, and increases may be introduced next spring. One possibility is that CGT becomes payable on death, and or the current 10 and 20 per cent top rates are aligned to income tax rates – doubling them.

As a married couple you could realise up to £24,600 of gains net of losses each year by both using your annual CGT allowances of £12,300. Gains above this would bear 10 per cent tax if when added to your income they fall below £50,000, and 20 per cent for any portion above £50,000. Realising more than the £20,000 you are putting into your Isas each year could enable you to realise some of your investments' growth ahead of any possible tax rises.

Your husband’s concerns about paying tax on his NHS pension savings have been allayed. Since 6 April, the earnings threshold at which pensions savings allowances are restricted has been increased. Previously this applied to those with income over £110,000 but since then it only applies to those with taxable income over £200,000. So if you have an adjusted income of between £110,000 and £299,000 per year you can make bigger pension savings with the benefit of tax relief.

Your husband’s pension will use up most of the current pensions lifetime allowance of £1,073,100. But it is index-linked so may escape an additional charge in six years’ time.

His FSAVC plan could be used as part of your inheritance planning strategy. Pension plans of this type can be left on death to others and do not usually form part of taxable estates. If you die before age 75 the recipients of the pension do not pay income tax on the funds withdrawn, but a 25 per cent tax charge could apply to any portion over the lifetime allowance. If you die over the age of 75 there is no tax to pay on the funds rolling up, but the recipients pay income tax as and when they withdraw funds. He needs to check if this older plan allows for this extra flexibility, as some pre-2015 pension plans do not incorporate the new rules. If this is the case he could transfer it to a modern plan.

Your pensions are much less well funded than your husbands and, like many women who interrupt their careers to become carers, you may have a shortfall in your state pension. It is worth getting a forecast of your state pension and paying up to the maximum allowed into a private pension, including carrying forward any relief not claimed in the previous three years.

You should not invest the money in your husband’s private practice as this could change its status to that of an investment company. Rather, consider how to tax-efficiently withdraw the funds. For example, if other family members work in the business, they should be paid at least the minimum wage and, if they earn more than £10,000 per year, receive pension contributions. An employer is required to pay 3 per cent of qualifying earnings above £520 per month and can pay up to £40,000 per year as an employer contribution. Alternatively, dividends should be paid and the first £2,000 per year of these are tax free for shareholders who have not used up this allowance.

 

FINANCIAL ADVICE

The investments made by your financial adviser meet your need for a well-diversified portfolio. But you do not appear to be getting full value from this relationship. A financial planner can help you create a financial strategy for your retirement plans and do some inter-generational planning between the three generations of your family. Financial planners offer much more than an investment service. If yours does not consider changing to a firm that would:

  • help to make strategic plans to cover each family member, and ensure that income and capital needs are met in the short, medium and long term;
  • advise on a sustainable level of retirement income and provide ongoing monitoring;
  • advise on tax mitigation enabling your family to keep more of the wealth you have built up;
  • help you decide when and how to cascade family wealth down between the generations, and safeguard this from the risks of death, divorce and debt;
  • measure and monitor the risk of your investments, and rebalance them from time to time;
  • introduce insurance, wills and powers of attorney to safeguard your family’s interests;
  • provide investment fund research, regular monitoring, and platform and fund discounts available to larger portfolios;
  • provide a degree of objectivity as it is hard to do this with your own financial planning;
  • take responsibility for the advice it gives and, if you are dissatisfied, offer access to an Ombudsman Service which can award up to £355,000 in compensation.

 

You appear concerned about the cost of financial advice and are adopting a DIY approach to save money. All regulated financial advisers are required to give you a fee schedule, and disclose all costs and charges of funds you are invested in prior to any commitment to pay for advice or invest money.  I suspect that just the tax savings that good financial advice could achieve would dwarf the cost of the service.

 

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

You're right to be concerned that you may have too many holdings and are are paying too much in charges. When you add a new asset to a portfolio you reduce the contribution of the existing ones. But you increase the importance of covariances between assets, because returns come more from assets rising and falling together rather than what any individual one does.

This applies to relative as well as absolute returns. If you hold many assets your best hope of beating the market rests on them out performing at the same time – rather than one doing well.

For these reasons you should not hold many funds. Doing this greatly reduces your chances of beating the market, but you still pay the funds' fees. In effect, you end up with a tracker fund except that you are paying a percentage point more per year in fees than you would for a tracker fund. And an extra percentage point compounds horribly: over 10 years it can easily cost you £1,500 for each £10,000 invested.

So consider dumping most of your equity funds and replacing them with a global tracker fund. You could supplement it, if you must, with one or two specific funds you think have a chance of out performing. This could be because of their managers' ability or, more plausibly in my view, because of their exposure to particular segments of the market.

Your equity holdings are also over diversified, but the cost of these is mainly the time and effort spent monitoring them, rather than management charges.

Ideally, your portfolio should comprise a global equities tracker fund, a bond fund, gold and or foreign currency, cash, and one or two good stock or fund ideas. Work towards this, and you’ll not have to spend so much time managing it.

I suspect you’ve acquired so many stocks because of your father in law’s policy of never selling, and because you find it emotionally hard to do. You need to overcome these barriers. Even professional fund managers with teams of analysts typically only have a handful of good stock ideas, so what is your chance of having more? And even the best stockpickers make many mistakes. Acknowledging these errors by selling is not an admission of failure, but rather a recognition that everybody makes mistakes.

It is important to sell – equities are prone to momentum meaning that losing stocks, on average, keep falling. So cut your losers. A policy of selling when prices fall below their 200-day moving average tends, on average, to work.