Question 1
Highlighted herein are the different sources of finance available to the Greens’ family for the funding of their £120,000 dream home in Seychelles. Both the advantages and disadvantages of these sources are considered and a conclusion arrived at on how best the dream home can be funded. The available sources of finance are:
i. Family house valued at £450,000
ii. Buy- to- let flat worth £150,000
iii. The house in Sheffield valued at £130,000
iv. The flats in the Seychelles worth £120,000
v. Family assets valued at £1.1m
vi. The liquid assets in Bank and building societies worth £80,000
vii. The liquid assets in ISAs worth £80,000
Based on the fact that both Sarah and Alan are retired and plan to move to Seychelles for at least 10 years, they need a steady source of income, which in this case, comes from their performing assets. The family’s performing assets are the two flats in the Seychelles worth £120,000, and the buy- to- let flat worth £150,000. These assets should never be used in financing the family’s dream home.
The family has not sold the house in UK, which is valued at £450,000. Since the family intends to stay in Seychelles for at least 10 years, their UK house shall not be occupied during this period. This is a great asset which, when put in proper use, can be a great source of returns or income to the family. The house should therefore be let out or leased during the period the family is in Seychelles. The family’s house in Sheffield, which is occupied by the daughter, should be left for the daughter since she is not moving with the parents to Seychelles.
The two better options left for the family in financing their dream home is either through the family’s assets or through the liquid assets. Discussed hereunder are the merits and demerits of using these assets as sources of finance.
The family can decide to sell part of the assets to raise the required amount for the building of the dream home in Seychelles. The main advantage of this option is that the family is able to get the cash from its assets and dispose the old assets at some profits. The family is also able to sell its old assets that are not working and obtain some cash. In addition, if within the assets, some were costly to maintain such as the expensive cars that are expensive to keep in their good condition and cost a lot in terms of property tax, then, the family can sell these assets and eliminate the expenses associated with them. The sale of assets can also help the family evade the depreciation costs. The sale of assets, however, has some disadvantages. These disadvantages include taxation on the capital gains; the value of the assets can grow quicker than what can be yielded by the cash elsewhere; and the assets can be useful securities for loan. Selling of assets is most likely to result into losses due to depreciation.
The liquid assets
Despite the family’s need for liquid assets, these assets are best suited for financing the building of their dream home. The liquid assets in bank and building societies are worth £80,000, which can provide the best source of funds for the home. This amount should however not be fully used. The family needs these liquid assets in order to meet its short-term financial obligations.
The family also has liquid assets in ISAs worth £80,000. The family can therefore use these liquid assets in financing the building of their dream home. Holding the investment in ISA has the main advantage that the gains made are income tax-free. In order to mitigate the capital gains tax on the UK properties, the family can sell the properties and hold the money in ISAs.
In conclusion, the Greens’ main financial goals can be met through selling part of their assets valued at £1.1m, using part of the liquid assets in bank and building societies, and using part of the liquids assets held up in ISAs, to aid in raising the required £120,000. The family should however, not sell the two flats in the Seychelles, the buy- to- let flat in UK, and the house in Sheffield that is occupied by the daughter. The family house in UK should be let out or leased during the period that the family is in Seychelles. In mitigating the capital gains tax on the UK properties, the family should sell most of its non-performing assets and hold the money in ISAs.
Question 2
Investment trust is simply a form or kind of collective vehicle that specifically invests in portfolio shares as well as securities. One most efficient method to undertake investment in the stock market is believed to be via the investment trust. Being a listed company, its shares are listed on London Stock Exchange. Its board of directors are independent and are charged with the responsibility of safeguarding the shareholders’ benefits. Being a quoted company, it is without doubt that its share price is established by its shares supply and demand on the stock market. Investment trusts operate through pooling together the investors’ money as well as charging a fund manager with the responsibility of investing in stock and shares of various companies. This mode of operation enables investors with comparatively smaller amount of cash have an access to a diversified and professionally administered investment portfolio.
The major features of investment trust ranges from the different objective of establishment, share price determination, ability to borrow money to make further investments and role and composition of its board of directors. This is discussed as under.
Every investment trust is bestowed with its own prioritised organization of investment objectives and aims as well as its own director’s board. Some of the investment trusts have the objective of undertaking investment worldwide while other only prioritize investing in specific sectors or countries. There are those investment trusts which may aim to produce growth capital for the shareholders; others may simply focus on income delivery. As well, other investment trusts may decide to offer both. These modes of operation make them possess a feature of different objectives and aims.
Investment trusts have the capacity to borrow money with sole agendum of initiating further investments. They have the capability of borrowing money which is specifically employed in buying shares, usually termed as ‘gearing’. The borrowed money however have a consequence of rising the impact on the investment trusts’ value of net assets of either a rise or decline in trusts’ investments. Quite often, in a situation where the investment bought using a loan rise past the borrowing cost, an investment trust pays back the borrowed money but retains the profit. This fulfils the aim of increasing returns on investments and lowering the borrowing costs. However, a risk crops up in a situation where the investment trust must repay its interest costs and borrowing as well as when the investment value is far much lower. This is due to the fact that it is deemed to make a loss. Usually, an investment trust which is highly geared has a larger impact.
Another common feature of investment trusts is the determination of the share price. Investment trusts share price is established by the stock market. Any given investment trust’s share price is determined by the demand and supply of its shares in the market. This implies that an investment trust’s share price can either be at a premium or at discount to the per share net asset value (NAV). Net Asset Value is simply the sum of market value of the trusts’ investment and assets less its total liabilities. Therefore, net asset value per share is the trust’s net asset value divided by the number of issued shares.
In addition, major feature as well is the role performed by the investment trust’s board of directors. For every investment trust, there is a board of directors charged with the responsibility of safeguarding the shareholders’ benefits. Often, the board is responsible for the approval of the trusts’ strategy aims and objectives.
An investment trust is not a fund. Investment trusts are closed ended and also have a maturity date which is fixed. Most of the investment trust funds are closed-ended and therefore not a fund. The closed nature implies that the trust cannot sell as per market turbulence. Besides, an investment trust is not a fund due to the fact that its price as well as value is based on its own valuation.
Basic factors to consider when purchasing an investment trust are the share price, net asset value, its yield, discount and premium charges and fees. The share price of an investment is an important factor to consider when purchasing an investment trust. The share price is dependent on the demand and supply of its shares in the market. Consequently, the share price can either be at a premium or at a discount to the investment trusts net asset value for every share. It is thus prudent for an individual to consider the share price before purchasing an investment.
A purchaser of an investment trust should as well consider the trusts’ discount in the quoted share price. In essence, a purchaser should consider the ruling discount of the trusts’ share price. Discount exists in a situation that the ruling market price is far much lower than net asset value per share and therefore cheaper for the investors. This implies that investors will be able to purchase more and more of the investment trust at a value which is far much lower than the ruling market value of the investment’s trust assets. This therefore implies that when purchasing an investment trust, an individual should consider the amount of discount offered by the investment trust. Other core points to consider are the premium, net asset value, yield, discount and premium charges and fees.
An individual can buy an investment trust’s shares via a stockbroker. An individual can also buy and sell an investment trust’s share through investing in the saving plans, Individual Savings Account (ISA), and also via saving for the children. For the ISAs, an investor benefits from the capital gains tax in a circumstance when a gain is realized after selling the shares. Also, ISA investors are not charged for income tax on the interests, dividends, or the bonuses.
The UK investment Trust an individual should invest in is the Individual Savings Account (ISA). It is advantageous in the sense that an investor benefits from the capital gains tax when a gain is realized after selling the shares. Besides, ISA investors are not charged for income tax on the interests, dividends, or the bonuses. This makes it convenient and cheap to the investors.
Question 3
Mark Littletown and his wife are presented with the following options for financing their small children’s higher education. The family can achieve their goal without compromising their current or future living standards via using the following approaches. They can use the Individual Savings Account (ISA) valued at £25,000 currently, re-register or transfer a home valued at £420000 or use the share portfolio which is valued at £20,000.
Besides the Mark’s £8,000 per year savings and Wife’s £4000 savings per year, the family can simply use the available current assets. In this case, they can use the Individual Savings Account (ISA) valued at £25,000 currently, let out or sell a home valued at £420000 or use the share portfolio which is valued at £20,000.
The family is free to invest in an Individual Savings Account (ISA). Mark’s £8,000 per year savings and Wife’s £4000 savings per year can be invested in the Individual Savings Account (ISA) to increase the amount of the currently owned ISA valued at £25,000. This presents the parents with certain hidden benefits. Investing in an investment trust via ISA is beneficial as the investors in ISA do not have to pay any UK income or capital gains tax on income or growth within their Individual Savings Account (ISA). The value realized is fully channeled to the children’s higher education when such a time reaches. Besides, it is advisable for the parents to invest their savings in ISAs simply because the current UK rules do not charge income tax on any individual’s interests, dividends or bonuses gained under the individual savings account. This implies that the parents’ gains from the ISA will be fully available for financing their children’s higher education. Interest distributions are received by the fund net of a 20% income tax credit, which is fully reclaimable for ISA investors. ISAs will act as a wrapper around the chosen funds and hence no capital gains tax or income tax on the proceeds realized.
Mark and his wife already have an individual savings account that amounts to £25,000. This ISA value can be re-registered--so that the records of the home holdings valued at £420000--with different managers to fidelity minus disturbing the family’s investments as well as without incurring the capital gains tax. Likewise, due to the fact that the family already holds the Individual Savings Account, they can easily undertake ISA transfer so that the family’s holdings are sold. For instance, the family can sell the home currently valued at £420000 and transfer the gains from the fund manager to fidelity in cash form for the purposes of reinvesting in non-old funds while at the same time continuing to enjoy the capital gains tax free of the individual savings account. The non taxed proceeds for the Individual Savings Account can then be useful in meeting the children’s higher education expenses. This way, the financing of their sons’ education will not in any way compromise their current or future standards of living.
The family’s share portfolio currently valued at £20,000 can as well be used effectively to finance the children’s higher education without compromising the family’s current or future standards of living. This can however only be achieved via investing in the saving plans so that the share portfolio base is increased. Saving plan is believed to the most flexible, straightforward and cost effective to invest in investment trust’s shares. As small as £30, the family can invest their savings in shares to boost the share portfolio. After the purchase of the shares, the family’s plan manager then organizes for the sale of the shares. The family should organize to buy more shares when the prices are low and sell when the prices are high. At the end of the day, enough money shall have been accumulated for children’s higher education without compromising the living standards of the family.
