By Robert Stock Foreign & Colonial this week starts marketing its latest income producing fund, whic...
By Robert Stock
Foreign & Colonial this week starts marketing its latest income producing fund, which makes use of an individual's CGT allowance to provide greater tax efficiency.
The group's intention of bringing out such a product, to be called Blue, was first reported by Investment Week in December last year.
F&C Blue's core objective is to produce a stable annual growth rate of around 5.5% through an underlying portfolio of high-quality overseas bonds, direct investments in European equities, and derivatives.
F&C claims that this portfolio, which is contained within a UK Oeic, has the characteristics of a gilt fund, giving it a risk profile below that of with-profits or corporate bond funds.
Investors who want income will be able to take it by selling shares in the Oeic. Part of the income taken through the sale of shares is counted as a return of capital and part is counted as capital gains and so this payment is liable to CGT, not income tax.
As long as the portion liable for CGT is less than the £7,200 CGT allowance for the year, it is also effectively tax-free. Over time, taper relief reduces CGT liabilities further.
According to F&C, this would mean that, assuming a 5% return from Blue, an investment of £250,000 with income taken of £12,500pa would retain the original level of capital invested without ever incurring CGT liabilities over a 25-year period, providing that that investor has not used up their CGT allowance with other investments.
The fund will be launched on 5 February and has a front-end charge of 3.5%, of which 3% is payable as IFA commission. The annual management charge is 0.75%, of which 0.25% is payable as trail commission. The minimum investment is £5,000 and there is no maximum. There is a top-up facility with a minimum amount of £1,000. Blue can be held within an Isa.
The underlying portfolio has been designed by Stephen Dolbear, director and head of derivatives at Foreign & Colonial, to produce a stable, low-risk return without generating dividends.
It is made up of 35% high-quality bonds, principally government bonds from Switzerland and Japan. This portion of the portfolio is invested in the lowest coupon papers available to avoid generating income tax liable dividends, with maturities between three and five years. Currency risk is fully hedged away, using forward foreign exchange rates.
The remaining 65% is invested in a basket of stocks tracking the EuroStoxx 50, the 50 largest Eurozone companies, stocks which have a very low dividend yield. Some 75% of this basket of stocks is hedged through selling equity futures. Currency risk will be fully hedged back into sterling. That leaves a core investment of 16% of the total fund in equity investments.
The IFA packs that F&C is mailing out this week contain a CGT calculator which allows intermediaries to demonstrate how Blue works to clients with any combination of investment and income. Investors will also receive an annual statement from F&C which can be presented to the Inland Revenue, meaning that there are no complicated calculations needed to complete a client's tax return.
Dolbear said: "IFAs' clients can put a large amount of money into this investment, take a regular withdrawal and not pay any tax on it at any stage, leaving the original capital to be passed on to descendants."
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