ASSET BACKED INVESTMENTS

Investing money needs careful consideration and you need to be absolutely sure of the risks involved. This section provides generic information on different types of saving & investment. You should seek advice appropriate to your specific circumstances prior to making any decisions.

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Asset Backed Investments

 

Different types of asset-backed investments include:

  • Shares

  • Investment Trusts

  • Investment Bonds

Shares

Shares are issued by companies who wish to raise money. The best known shares are bought and sold daily on international Stock Markets. There are several different types of share but the most common are simply called 'ordinary shares'.

A shareholder will normally receive a dividend twice a year which is related to the profitability of the company. The board of directors decide how much the dividend will be in any given year. Dividends can be raised, lowered or stopped altogether, but past experience has shown that over the medium to long-term they tend to rise, thereby giving investors some protection against inflation, however this is not guaranteed.

In the short-term, share prices may fluctuate in response to changes in opinion about the company itself or the general outlook for business and the economy as a whole. However, in the medium to long-term, past experience has shown the tendency for share values to rise (IE. capital growth). This helps protect the real value of the investor’s capital against inflation.

Selling shares may produce a capital gain for investors (IE. the value realized at the sale may be greater than the value at the time of purchase). A capital gain realized on the sale of shares is potentially liable to Capital Gains Tax. Capital losses may be set against gains for tax purposes.

 

Investing in individual shares can be risky and picking the wrong company could mean losing some or all of the original investment. Investors may pay personal tax on income or gains unless the shares are held within an ISA or income is covered by allowances such as the dividend allowance or personal savings allowance.

Investment trusts

Although branded ‘trusts’, investment trusts are not subject to a trust deed like unit trusts are. However, they are a pooled investment. Investment trusts are limited companies and their company directors are usually fund managers or investment experts. Their profit is made for their shareholders by buying and selling financial instruments, such as stocks and shares.

It is possible for shares in investment trusts to be ‘trading at a premium’ or ‘trading at a discount’ for example:

  • shares in issue = 1 million.

  • underlying asset values = $1 million.

  • therefore each share is worth = $1.

This $1 is open to fluctuation due to influences and market sentiment just like stocks and shares. Therefore if the shares are trading at $0.95 they would be trading at a discount. If they were trading at $1.05 they would be trading at a premium.

Investment trusts are closed ended investments (unlike unit trusts which are open ended) and should they wish to acquire more investments than their share capital allows, they can benefit by ‘gearing’. This simply means that they can borrow money to invest. Therefore a ‘highly geared’ investment trust would have large borrowings and could be considered high risk, especially in a falling (bear) market place. All the tax implications for investment trusts are the same as shares as this is actually what the investor buys.

Investment bonds

Investment bonds are single premium life assurance policies. There is a high allocation to investment and relatively low life cover. They are pooled investments whereby relatively small amounts of individual investor’s money will be invested to create large pooled funds, maintained by a life assurance company. Investments can be spread across a broad range of assets including property, shares, Government stocks and companies’ loan stocks, thereby reducing the risk for investors. It is, however, very important to realize that investment bonds are medium to long-term investments. As such they should not be considered for periods of less than five years.

There are two basic types of contract for investment bonds.

 

For the first of these (with-profits), the sum assured will be increased by bonuses related to the company’s profits.

For the second type of contract (unit-linked) the life assurance company maintains a number of underlying funds which are divided into units, the value of which is determined by the value of the assets in the fund.

The value of an investor’s investment will, therefore, be determined by the value of the units in the underlying fund and the amount of units that they hold. The funds may specialize in particular areas for example, property, shares, government securities, or they may cover some or all of these in a managed or mixed fund. Income and capital growth is accumulated within the funds.

With an investment bond the tax on income and capital gains is ‘deemed’ to have already been paid within the product at basic rate of Revenue and Customs. As long as their capital remains invested within an investment bond, investors will have no personal liability for either income tax or capital gains tax.

When money is withdrawn from a bond (for example, to provide income) or the bond is totally surrendered there will still be no liability for either basic rate income tax or capital gains tax (the fund has already paid these). If an individual is a higher rate tax payer at the time of withdrawal then additional tax may be become payable

However, the rules governing bond taxation are such that higher rate tax may be reduced or even avoided altogether with careful planning. It is normally possible for investors to withdraw money from an investment bond, either on a regular or irregular basis, without bringing the bond to an end. This is important where income is a priority. Up to 5% pa of the original investment can be withdrawn as a partial withdrawal (until such time as all of the original investment has been withdrawn in this way) without triggering an immediate tax charge (the tax assessment is deferred until the bond or segment is fully encashed).

Withdrawals can be made by surrendering part of a bond, but there can be adverse tax consequences for large withdrawals, and you should seek advice before making a partial surrender. However, some bonds divide the original investment into a number of small policies. In this case withdrawals can be made by totally surrendering some of these small policies. This may have certain tax advantages for the investor.