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Investing in main market stocks

The main market on the London Stock Exchange is home to some of the world’s biggest companies, but it also imposes strict listing rules to protect investors.

Investing in equities is very risky: the price of shares in a company can slump dramatically in a matter of hours and the business can even go bust, wiping out your investment altogether. But some types of equity investments are generally considered riskier than others.

Most UK investors buy shares in companies listed on the London Stock Exchange (LSE) for a series of reasons. Many companies listed on the LSE are British businesses that investors know well. These shares are also priced in pounds, so you don’t need to worry about the prospect of currency movements directly affecting the value of your holding. Still, bear in mind that if a firm makes some sales abroad, changes in foreign exchange rates can still affect profit levels and hence share prices.

However, there is an important distinction to be made between companies listed on the LSE’s main market and its junior exchange, the Alternative Investment Market (AIM).

The main market of the London Stock Exchange, established in 1698, currently includes more than 1,000 firms, from corporate giants such as Vodafone and BP to smaller companies like Topps Tiles and Punch Taverns. The 100 largest companies in the main market make up the blue chip FTSE 100 Index, while the FTSE 250 Index is comprised of mid-sized firms.

Companies on the main market are required to meet strict listing rules tougher than those applied to companies listing on AIM, giving investors more confidence and greater protection.

Governance

Generally speaking, companies on the main market tend to be larger, more mature businesses, but the LSE still imposes strict regulations on the companies listed.

To qualify for a premium listing, which includes access to the FTSE indices, companies must meet basic qualifying criteria. The company has to be worth at least £700,000, for example, and it must make at least 25% of its shares available to the public. It must have three years of independently-audited accounts and it must have had control over the majority of its assets for at least three years.

These are important safeguards that mean investors in the business can be confident it is an established company that hasn’t just appeared out of nowhere. Moreover, additional rules ensure that investors are able to keep a close eye on the businesses they have backed (or are considering for investment).

Main market-listed companies must publish an audited annual report within four months of the end of their financial year, as well as more basic half-year reports within two months of the end of this period. The London Stock Exchange also requires firms to publish an interim management statement twice a year, between the annual and semi-annual reports, to update investors on the business.

Companies are also bound by the UK Corporate Governance Code, which sets standards for how companies are run and their relationship with shareholders – those businesses that don’t meet any of the standards must say so and explain why they have chosen not to comply.

Transparency

Another advantage of the LSE’s main market is that it operates with an electronic order book. This means every investor buying and selling shares in a particular company places their order through the Stock Exchange Electronic Trading Service (SETS) – in practice, your stockbroker or online trading platform may do this on your behalf – detailing what price they are prepared to buy or sell at, and how many shares they want to buy or sell.

Everyone else considering investing in the same company can look at all the orders placed at a given time. This means the system is both transparent – you can see what prices people are willing to trade at – and liquid, in that investors always have access to the maximum possible amount of demand and supply.

By contrast, other markets operate using a quote-driven book (as did the London Stock Exchange until the 1990s). This relies on dealers, or market makers, who post the prices they are prepared to accept for sales and purchases of shares in a particular company at any one time. This is a much less transparent system, since there is no way of knowing what trades other investors dealing with the market maker are hoping to make.

Also, liquidity depends on the market makers – if only one or two dealers choose to trade a particular stock, sale volumes may be quite low. Lower liquidity means there is less likelihood of investors being able to buy or sell at the price they choose.

Investing on the main market, in other words, gives investors access to larger, more closely regulated companies, via a dealing system that produces greater transparency and liquidity.

Remember that all investments can fall as well as rise in value and you may get back less than you invested. Investing in individual shares is not suitable for everyone, and they should usually only be held as part of a diversified portfolio. If you’re unsure, seek independent advice.

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Tax efficient ISA / SIPP investments in the UK

Can’t fit all your investments into your ISA and SIPP tax shelters? Then you’re going to have to make some choices. Happily, the pecking order for maximum tax efficiency is clear cut.

In order of most important-to-shelter to least:

  • Offshore funds without reporting fund status
  • Bond funds / Fixed interest ITs
  • REITs
  • Individual bonds
  • Income producing equities
  • Foreign equities (arguable)

Tax efficient investing for your ISA or SIPP

To see why this sequence is likely to suit your circumstances, let’s just quickly tee up the relevant tax rates from April 2016:

 2016/17 Income tax Dividend tax Capital Gains Tax
Tax-free allowance £11,000 £5,000 £11,100
Basic rate taxpayer 20% 7.5% 18%
Higher rate taxpayer 40% 32.5% 28%
Additional rate taxpayer 45% 38.1% 28%

At a glance we can see that income tax is the nastiest while capital gains tax (CGT) is generally the most benign due to the high personal allowance (you can use your spouse’s too) and the ability to offset gains against losses.

Before we get into the guts of it, I’ve got to dish up some caveat pie:

  • This article is written for the 2016/17 tax year, so I’ve used the new dividend income tax rates.
  • Information on the CGT rate for 2016/17 is currently unavailable.
  • Interest is taxed at your usual income tax rate and basic rate payers will have a £1,000 personal savings allowance from April, reduced to £500 for higher rate payers and nil pounds beyond that.
  • If your interest or dividend income or capital gains pushes you into a higher tax band then you will pay a higher rate of tax on the protruding part.
  • I’m restricting this article to mainstream investments – no kinky stuff.
  • If you’d like a quick refresher on the tax deflecting powers of ISAs and SIPPs, well, just click on those links.
  • And if you’re not sure which is best for saving then try our take on the old ISA vs SIPP debate.

Non-reporting funds

Offshore funds that do not have reporting fund status are taxed on capital gains at income tax rates. As you can see in the table above that’s a hefty tax smackdown. Worse still, your capital gains allowance and offsetting losses are knocked out of your hands by HMRC like the school bully taking your lollipop.

If your offshore fund or ETP doesn’t trumpet its reporting status on its factsheet then it probably falls foul and should be stashed in your ISA or SIPP.

It’s worth double-checking HMRC’s list of reporting funds. Around 25% of offshore funds / ETPs available to UK investors don’t qualify.

It is possible for a reporting fund to lose its special status, therefore you could put all offshore investments in tax shelters, if you like to head off unlikely but plausible worst case scenarios.

Bond funds

Bond funds / ETFs are next into the tax bunker because interest payments are taxed at income tax rates rather than as dividends. Any vehicle that has over 60% of its assets in fixed income or cash at any point in its accounting year falls into this category.

Real Estate Investment Trusts (REITs)

REITs pay some of their distributions as Property Income Distributions (PIDs). PIDs are taxed at income tax rates not as dividends. Get ‘em under cover.

Individual bonds

Individual bonds are liable for income tax on interest just like bond funds. The only reason that bonds are slightly further down the list is because individual gilts and qualifying corporate bonds do not pay capital gains tax.

Income producing equities

The dividend tax situation has suddenly got a lot worse for UK investors, so high-yielding shares and funds should duck under your tax testudo next.

By all means prioritise protection for your growth shares if you think CGT is the bigger problem, but bear in mind you can defuse capital gains every year and you can always defer a sale.

Foreign equities

It isn’t necessarily a priority to get overseas funds and equities sheltered but there’s a tax-saving wrinkle here that only works with SIPPs. The issue is withholding tax which is levied by foreign tax services on dividends and interest you repatriate from abroad.

Some withholding tax will be refunded as long as you fill in the right forms. For example a 30% tax chomp on distributions from US equities becomes a mere 15%.

Foreign investments in SIPPs can have all withholding tax refunded but only if your broker is on the ball. You’d need to check. ISAs don’t share this feature.

If you hold foreign equities outside of a tax shelter then you can use whatever withholding tax you have paid to reduce your UK dividend bill.

So in the case of US equities, a basic rate taxpayer could use the 15% they’ve paid in the US to reduce their 7.5% HMRC liability to zero.

In other words, only higher rate / additional rate taxpayers should consider sheltering US equities in ISAs. Everyone can benefit from the SIPP trick, though.

Bow-wowing out

It only remains to say that this is generalised guidance and tax is a byzantine affair. Please check your personal circumstances.

Tax efficiency is important but whatever happens don’t let the tax tail wag your investment dog.

Take it steady,

Contact Us for all your funding needs, including Loans, Project Finance, BG, SBLC, L/C. 
 
EMAIL 1: loanandinvestments@outlook.com
EMAIL 2
: ceo@loanandinvestments.com
Skype: 
loanandinvestments
 
NOTICE: Brokers are welcomed, appreciated and compensated. We pay 1% commission to our brokers and company representatives. If you want to be our broker or company representative in your country, EMAIL us  for more information.