ETFs, Property, Private Equity Flashcards Preview

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Flashcards in ETFs, Property, Private Equity Deck (20)
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What is an ETF?

An ETF is a company listed on the stock exchange which aims to follow a stock index.



What are the methods of tracking the index?

ETF can either use:

  • full replication (buy everything in the index);
  • sampling or optimisation (attempt to get close to the index by buying only some of what is in the index, tracking error will be higher but costs lower);
  • synthetic replication (use derivatives)




NO stamp duty

NO initial fees

Typically low ongoing costs

You'll have to pay brokerage costs to buy and sell (as if you were buying or selling shares).




ETFs are just like owning shares effectively, you pay dividend tax on any dividends you receive and CGT on any gains when you sell.


What is an ETC?

Exchange traded commodity, tracks a commodity price or a basket of commodities.


What is an ETN?

Notable risks?

Issued by banks and listed on an exchange, basically it's a package of derivatives used to track the index.

As it's issued by a bank you have an additional credit risk (if the bank goes bust you don't get paid).



5 ways of investing in property and implications

  • Buying properties for yourself (high cost, high risk, low liquidity, poor diversification)
  • Buying property companies (not a direct property investment, home building companies have lots of other things going on other than property prices)
  • Property collective funds (more diversification than buying property company shares directly but still not a direct investment in property prices)
  • Property insurance funds (these can invest directly in property so a good choice)
  • Property Authorised Investment Funds (i.e. REITS, these have some tax benefits but also restrictions on their activity)



What is a REIT?

UK listed closed ended companies

Resident in the UK for tax purposes

Issue one class of share



Tax features of REITs

REITs earn part of their income from tax exempt activities

Legally this must be at least 75% of their income and they must distribution at least 90% of these profits.

The REIT withholds 20% tax on this income and then distributes to investors, who must top up if they are high or additional rate.

Other income is taxed internally with corporation tax and investors pay normal dividend and gains taxes.



Borrowing rules for REITs

REITs can borrow (i.e. gear) but the interest cost on their borrowing must be covered 125% by rental income.


Private Equity

What is private equity?

Private equity is buying small and unlisted companies for the purposes of selling on at a profit in a few years time.

You can invest through Private Equity funds (usually parternships), directly through AIM share, or via EIS, SEIS, VCT schemes.



What are they, legal structure?

VCTs are listed companies which are run by fund managers.

Like a listed investment fund but hold a small number of big investments in small companies, instead of a large number of small investments in big companies!




Investor requirements/restrictions

  • £200k allowance per year
  • Relief withdrawn if sold within 5 years



Tax Benefits

  • 30% tax relief
  • No income tax on dividends
  • No CGT on gains (so no loss relief either)



Fund restrictions

  • Must list on a stock exchange
  • Must get income from investing in shares/securities
  • >70% holdings in qualifying holdings
  • No more than 15% in any company
  • Fewer than 250 employees



Investor restrictions

  • Up to £1m allowance per year
  • Lose tax relief if you sell within 3 years



Tax benefits

  • 30% tax relief
  • Can carry the tax relief back by 1 year
  • Can defer CGT on sales of any other asset if you invest the proceeds into EIS
  • No GGT on gains (so no loss relief either)
  • Must pay tax on dividends received (unlike VCT)
  • Get 100% business relief if you hold for 2 years



Company restrictions

  • Up to £15m assets pre fund raising (£16m post fund raising)
  • No more than £5m raised in the last 12 months
  • Qualifying individuals investing in qualifying shares in a qualifying company
  • Key feature of qualifying individuals is they're not connected (eg employees, partner is an employee)
  • Fewer than 250 employees
  • Shares must be unlisted on the day the money is raised



Differences to EIS

  • 50% relief instead of 30%
  • Only £100k allowance down from £1m
  • 25 or fewer employees (down from 250)
  • Max £200k gross assets (down from £15m pre, £16m post)


How does private equity (including VCTs, EIS, SEIS) stack up as an investment?

Potentially high returns but very high risk.

Low diversification since you usually only invest in a small number of companies.

Very illiquid, might take years to get money back.