Paradise lost - the future for off-shore investing
In this week's FT Money show, presenter Claer Barrett speaks to Holly Mackay of Boring Money and the FT's Vanessa Houlder in the wake of the Paradise Papers, discussing the widespread nature offshore investments and collective investment vehicles. Plus Paul Lewis outlines why the Budget could bring reforms to Universal Credit, and Leonora Walters of the Investors Chronicle explains why discounts on many investment trusts are narrowing.
Presented by Claer Barrett. Edited by Paolo Pascual.
You can enable subtitles (captions) in the video player
The Paradise Papers are hell on earth for wealthy people holding assets offshore. We ask how far investors can push the definition of tax efficiency. Campaigners are calling for universal credit to be reformed ahead of the budget. Paul Lewis, BBC Money Box presenter, explains why he thinks the numbers don't add up, and mind the gap. Discounts on investment trusts have narrowed sharply, but our special guide for investors this weekend shows pockets of value still remain.
Welcome to the Money Show, the FT's weekly podcast about personal finance and investing. I'm Claer Barrett, FT Money editor, bringing you this week's money news.
The offshore tax affairs of royalty, rock stars, and even racing drivers have been brought into the public spotlight this week thanks to the Paradise Papers, which leaked details of tax avoidance schemes, which, while strictly speaking legal, have proved to be morally hazardous. The revelations are leading many to call for stricter tax rules governing how much tax companies and individuals should pay in the UK, but how does this square with tax-efficient investing, spending time planning our finances to protect our hard-earned cash from the tax man.
This week's revelations have cast aspersions on those using legal forms of tax avoidance, but there are many grey areas. Joining me in the studio to discuss is Vanessa Houlder, FT Money's resident tax expert, and Holly Mackay, the investor and founder of BoringMoney.co.uk, the consumer finance website. Welcome both.
So starting with you, Vanessa, how seriously should we take this latest leak?
Well, Claer, I think the first thing to say is that it's very different from the leak we had last year, which became known as the Panama Papers, and if you remember, that was another massive data hack and there were huge sham stories coming out of that, often involving Asian corruption sanctions busting.
Evasion being illegal.
Evasion being the illegal one. Now, so far, at least, the latest set of revelations look very different. They largely come from a law firm called Appleby and the New York Times, which is one of the newsgroups reporting this story and has gone through all the documents says it appears to be predominantly elite clients, and that's rather different to the Panama firm, which was the centre of last year's revelations, which seemed to be far less discriminating in its clients.
And some of the stories have come out. They've been some what look like some quite aggressive avoidance scams, but by and large what we've seen doesn't look legal. It's very much about how companies and individuals structure their affairs. So, probably the ramifications are going to be rather less than those of last year, which have led to all sorts of things, toppling of prime ministers and so forth, but there could still be an impact because this all feeds the political debate about offshore centres and in Brussels, in particular, there's a real move to crack down on them, and here in the UK there's also quite a strong political reaction to this.
There's the leader of the opposition, Jeremy Corbyn's talked about the social damage done by an elite group which holds the taxation system and the rest of us in contempt, and I think this theme of making the rich pay their fair share is something which we're going to hear a lot more about in the months to come.
Certainly, and I have to say the dividing line between tax evasion, which is illegal, and tax avoidance, which is not illegal, is just becoming greyer and greyer, and even if the people in companies who are named in these leaks are not breaking the law, clearly there's still reputational damage.
Indeed there is and in some cases I think you could argue that that was reasonable, some of the uses of very aggressive tax avoidance schemes. People may feel deserved to be called out for it, but the queen? The queen was the centre of the first of these revelations because she's got an investment through the Dutch investment in the Cayman Islands, and frankly, that is quite ridiculous. The lot of us have those sorts of investments, but we may see reputational damage even if the people who understand these things don't think there's anything to be concerned about.
I mean, last year in an extreme case, Emma Watson, the actress, was criticised because she held a home through an offshore company, and she did that just to protect privacy to stop being stalked.
Well, I'm going to bring you in now, Holly, as an investor who does understand the uses of offshore schemes. So in the wake of the latest leak, the popular press wants a further crackdown, but as an investor you're worried that important distinctions are being missed in the reporting.
I think so, Claer. I mean, this week I think we've seen really sloppy, poor journalism. The word offshore has sort of been bandied around and it's sort of offshore is bad. It reminds me a bit like when people talk about fat. People say fat is bad for us, but no. There's good fats. You know, all the avocado stuff no one really likes and there's bad fats, the saturated stuff.
So I think when I look at offshore funds, for example-- I mean, the reason we set up offshore funds, and there are many in Dublin, there are many in Luxembourg, is because we can sell these around Europe. You don't need to set up a fund in every separate country, which is absolutely boring and time consuming. So that's the reason people do it, and I looked, for example, the country's most popular broker, Hargreaves Lansdown, last month their top-selling fund was a Lindsell Train fund, and guess what? That's an offshore fund. It's domiciled in Dublin so that they can sell it in lots of different countries and try and boost sales that way.
So I think offshore funds, which are collective structures that loads of us normal people can buy into, are absolutely fine, and there's not a distinction being made by the press between those sorts of investment vehicles, which, guess what? Even the NP's pension fund invests in, and the slightly dodgy more secretive vehicles, trust structures, which are bespoke structures set up by people with dodgier intent when it comes to managing their tax.
I mean, as somebody who's worked in the financial services industry for a long time, can you see wealthier people deliberately shunning offshore, whether they're the avocado equivalent or the saturated fat equivalent and just saying, reputationally, I don't want to have any of these in my portfolio?
Well, I think we have to tackle that. I mean, I was doing a radio show earlier in the week and someone was talking about the queen's investment in the Cayman island fund, which is perfectly legit, and they were saying, well, has she been poorly advised? Should she just see that word offshore and shy away from it?
In practise, that's going to be really hard to do because it's just so common and most of your listeners will hold some investments in offshore funds. So I think what we have to try and do is keep this sort of distinction between these offshore funds, which are set up partly so groups can sell into multiple countries, but also partly so we're not paying tax twice. You know, if that Cayman island fund wasn't set up, people would have to pay US taxes over there and also sort of UK tax here when we declare it, as we all have to do, for CGT or income tax purposes.
So I think we've got to be really clear about the offshore funds, which, collectively, calls for loads of people to invest in, which are totally legit, and the dodgier schemes, which people are setting up to evade or avoid tax.
So, playing devil's advocate, how far could this play out? What about tax relief on pensions, for example, or tax-free investing within the stocks and shares I saw, or even managing one's finances to make full use of the nil-rates Inheritance Tax band, in which case I could be considered tax avoider fairly, as well.
Well, and anyone who's got an icer could be. I mean, I think what will be interesting is we've got the budget coming up. Pensions is always a low-hanging fruit, isn't it? The tax relief available to us on pensions. Some people are saying that they don't think it's fair that higher-rate taxpayers can claim higher relief. So that could come into scrutiny.
I think we may see, we'll certainly see that discussion carry on. Whether it's going to change in this budget or not I don't know. So there is a backlash, which I think this has started, but I think if you sort of strip it back to, why do we have these tax reliefs in the first place? It's because we've got an appalling savings rate. It's because we need to encourage people to save up for their retirement.
So I think they are a good thing. When it comes to pensions, is it right that higher-rate taxpayers get further tax relief. You know, we could debate that 'till the cows come home. I think there is a case for stripping that away and having a single rate of tax relief, but generally speaking I think we have to remember why we have tax reliefs, why we have ISAs. It's to encourage savings for our future. It's to encourage investment amongst normal people and I think that's a good thing.
Well, thank you very much there to the FT's Vanessa Houlder and Holly Mackay from Boring Money. You can read more about this story in the money section of the FT weekend newspaper or online now at FT.com/money and tell us what you think about the distinction between people who are avoiding tax and people who are maybe not paying enough. Email us on firstname.lastname@example.org or tweet us at @FTMoney. Money
Ahead of the budget, many readers will no doubt have concerns that higher-rate pensions tax relief and even business property relief or name shares are looking vulnerable, and it's no secret that the chancellor is coming under severe pressure, even from those within his own party, to rethink universal credit, the government's flagship welfare reform project. Paul Lewis has written about the system's flaws in his FT Money column this week and joins me now on the line. Welcome, Paul.
You haven't minced your words. You think the benefit should be renamed universal discredit. Tell us why.
Well, the tragedy of universal credit is it is a good idea, but the way it's been implemented really means it's going to fail many people. It replaces six existing means-tested benefits. They all have their own rules. They all have their own conditions. You have to claim them all separately.
So, by replacing all those six benefits for people who are out of work, who can't work, too ill to work, got children with one benefit-- in theory, that's a good idea. But I think the discredit falls on politicians and let me name a former chancellor George Osborne, who was particularly big on this with his austerity, that cuts and cuts and cuts were made to the basic principles of universal credit to save money. No housing help for people under 21, for example.
A 10 pound, 50-a-week premium for families scrapped to save money, and, of course, the freezing of the benefit. It's not changed since April 2016. Won't change for another three years till April 2020, even though inflation is running at 3%. So that's a cut every year. So all those things make it worth a lot less.
So one area that's attracted a lot of attention recently is the six week delay between applying for this benefit and when it's received, but it could even be longer.
Well, it can be longer than that. In fact it is, as a standard, longer than that, and let's be clear. This isn't an administrative delay. This is built into the system. Once the claim is made, there are seven days before it's considered, called waiting days. Now, that was another cut. There used to be three waiting days, extended to seven to save money, 275 million pounds a year.
Then after the waiting days, there's a sort of consideration period of a month, a calendar month. Obviously, that will normally be 30 or 31 days, and then once your claim has been approved and that period is finished, there's another seven days for reasons I really don't understand before the first payment is made.
So if you add all those up, you get to 44 and 1/2 days. So nearly 6 and 1/2 weeks between claiming it, i.e. needing it, and actually getting your money. Now, the month in the middle is an essential part of universal credit because it's supposed to mirror being in work, where most people are paid monthly in arrears.
Not most claimants of this benefit, crucially.
Absolutely because Resolution Foundation found that most people who claim universal credit are not paid monthly. When they come onto the benefit, they've been paid weekly or fortnightly. Suddenly, they're on a monthly in arrears payment and this extra two week period that they have to pace the delay. That makes it very difficult, not least because Resolution also found that only one in seven claimants have savings of more than a month's pay. So they have nothing to tide them over. Well, except the local food bank, of course.
Indeed, and there are worries that the demand on food banks this Christmas is going to be soaring as the benefit is rolled out, but another area that you've examined in your column is the taper. Now, listeners will obviously be familiar with other tapers used by HMRC, but this one is particularly egregious.
Well, it is. I mean, once you reach a certain level of earnings-- for some people it's zero, for others it's 192 pounds a month-- once you reach that level of earnings, your universal credit is withdrawn bit by bit, and the rate is every pound you earn extra, 63 pence is taken away. So you can think of it like a marginal tax rate of 63 pence. Now, that isn't the end of it though, because on top of that, there's another benefit that helps with council tax. That also has a taper.
That pushes the withdrawal rate up to 70 pence for the people who have housing costs, and of course if you do work and earn more money, even minimum wage for a full week, then you will find that you pay national insurance and you pay income tax. The marginal rate then goes up to 80 pence. So you earn a pound, you keep 20P, and in some parts of the country where the council tax help is structured slightly differently, you can lose 82.4 pence for every pound you earn.
Now, universal credit is supposed to make worth work pay. It's supposed to be an incentive. Now, keeping 17.6 pence in every pound you earn is probably not an incentive to really work that much harder and get that money. Of course, if you are very poor, you need every penny and it might be, but you'll recall all the fuss about the 50 pence income tax rate, where people would say that they leave the country. They'd stop doing any more work and that was only 52 pence with national insurance.
This is 80% for many people. 82% for some.
Well, a very clearly-written piece. Thanks very much there to Paul Lewis. You must read his column, "Universal Credit: Why the Numbers Don't Add Up" in the money section in the FT weekend newspaper this Saturday or online now at FT.com/Money before the budget on the 22nd of November where we feel sure universal credit is going to be one of the things that comes up.
Investment trusts are back in vogue again with demand for new issues close to all-time highs and prices shooting up for many funds across a wide variety of key sectors. These listed closed-ended funds, currently more than 250 on the London Stock Exchange, have long proved popular with both retail investors and wealth advisers, largely because of their superior performance when compared to the open-ended unit trusts.
So what better time for both FT Money and the Investors Chronicle to focus in on this sector in a double whammy special issues this weekend. Joining me now to discuss the latest trends in the investment trust world is Leonora Walters, personal finance editor of the Investor's Chronicle. Welcome, Leonora.
So you've been pulling together the Investors Chronicles' take on the investment trust world. The biggest focus for investors is often the discounts or the premiums to net asset value. What are the trends and what's driving them?
Well, we're getting tighter and tighter. Since the start of 1990, the long-run average discount for investment trusts has been 9.3% according to broker Winterflood, but at the end of last year this came into 4.1%, and at the end of September this was 3.5%. So considerable tightening there.
There was a number of reasons behind that. Now, one obvious reason is rising market share prices catching up with underlying assets, but there's a number of other factors. Investment trusts are companies and have a board and, in the past, boards haven't been very proactive about doing things about discounts to net asset values, but they're realising slowly that shareholders don't necessarily like this. So they are being more proactive about doing share buybacks, which is one way to try and begin the discount.
Now, another factor is the popularity of income and funds with high yields, and if an investment or trust fund has a high yield, there tends to be higher demand for it, and this has driven investment trusts with an attractive yield to a premium, and the reason this has skewed the overall figure is alternative investment trusts, quite a lot of which have an attractive yield, are accounting for a larger and larger percentage of the overall investment trust universe. So if they go to a premium, then they skew the view of the overall figures.
So, taking a more granular approach, how are investment trusts performing in relation to the open-ended funds? At the moment, really well, and historically, really well. Broker Winterflood recently conducted a survey and found that, over the 12 months to the end of August this year, investment trusts outperformed their open-ended equivalents in 14 out of 16 subsectors. They also looked at the longer-term and found that investment trusts outperformed their open-ended equivalents in nine out of 16 subsectors over three years and 12 out of 16 over five.
Now, what I think is important to mention here is these are sector averages. These aren't individual funds. So bottom line is there are investment trusts which underperform and do badly, and there are open-ended funds which do really well. That said, there are some factors as to why an investment trust structure can have some advantages.
Two main reasons. One, because investment trusts can give and can take on debt, which allows them to invest extra, and if the market's going up, well that's great, but if the market's going down it can exacerbate their losses, and the other thing is investment trusts don't have to meet investor redemptions. So managers can take a long-term view. They can take a bet on maybe, I don't know, a share that's really cheap, doesn't look good, and wait for several years until it comes to fruition, whereas the open-end fund manager maybe couldn't take that bet.
And how do the costs of investment trusts compare to the costs of investing in open-ended funds?
Right, well that's not so good. Investment trusts are, on average, more expensive. There's some reasons for this. A few years ago, open-ended funds used to bundle up commission payments in their ongoing charges. They no longer do this since January 2013 and they have-- I've introduced new cheaper share classes also, offering ordinary investors like you and me the cheaper institutional share classes, and these are far and away cheaper. So most open-ended funds now have an ongoing charge below 1%, which is not necessarily the case with investment trusts.
That said, again, these are averages and there's actually quite a lot of cheap investment trusts if you drill down to individual fund levels. So I would really emphasise, whether it's performance or whether it's cost, don't look at sector averages. Look at each fund individually.
OK, and tell us a little bit about the Investors Chronicle issue that's coming out on Friday because you're going to be doing a deep dive into many trusts, separating the wheat from the chaff.
We are. I mean, we've got several pieces looking at several things. We've got a special focus on Asian investment trusts, which look like they are often quite good value, and some fun suggestions there.
We spoke to four professional investors. These are fund managers who don't invest their funds in shares, but invest their funds in investment trusts. So I figure they've got a really good bird's eye view of the universe of investment trusts, and they've actually suggested what look like some good trusts at the moment.
We've also done an update on our investment trust portfolios for income. We've got two professional wealth managers who have put together model portfolios for us, which we update every year, and we've made quite a few changes which you can read all about.
Excellent. Well, thank you very much there to Leonora Walters, personal finance editor of the Investors Chronicle. You have a double delight of investment trust coverage this weekend with the IC special issue on sale in all good news agents on Friday, and David Stephenson's analysis of where to find value leaves the FT Money section from Saturday in the weekend FT newspaper or read online-- FT.com/Money.
That's it from the FT Money Show this week. To get in touch with our team of financial experts, email us email@example.com, tweet us @FTMoney, or you can comment on our articles online at FT.com/Money. We will be back next week at the usual time. Goodbye