Racing fan: Murari has shares in three horses and wants to buy more
In our Money Pit Stop series, we ask an investing expert to give one of our readers a free portfolio makeover.
Murari Kaushik, 63, is a retired banker living in Hampshire who has £1.24million of investments in shares, investment trusts and ETFs, which generate around £60,000 a year of tax-free dividend income.
He is looking for assistance to achieve a number of financial goals.
He wants to maximise his current investment income, keep his inheritance tax liabilities to a minimum, help his two daughters get on the housing ladder, buy more shares in race horses and spend money on holidays.
Murari plans to give his daughters – a medical writer, aged 32, and a fashion model, 26 – some £200,000 each towards buying their first homes in the next few years.
He already owns shares in three race horses, which cost him around £10,000 to £15,000 each, and would like to buy a further share per year in other horses.
For those in the know, he currently has shares in a three-year-old filly sired by Camelot, a Treble Classic winner; a two-year-old colt sired by Australia, a winner of the Epsom Derby and other Classics; and a colt sired by Dream Ahead, trained by George Baker and managed by Highclere Thoroughbred Racing, which has a family connection to Highclere Castle where Downtown Abbey is filmed.
Murari, who was a Liberal Democrat candidate for the New Forest West constituency in 2005, is looking to get an expert take on his current portfolio, which he says has grown five times in volume since 2011.
But he warns that he isn’t keen on branching out from trusts and ETFs into investment funds, saying: ‘I don’t believe in them. I am not a great fan because of the charges.’
So what should Murari do to achieve his goals? We asked a wealth manager.
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Murari’s savings and investments
Risk appetite: High
Time horizon: 5 to 10 years
Shares: £940,000 of shares in Capita, Centrica, GlaxoSmithKline, Imperial Brands, ITV, Land Securities, L&G, Royal Dutch Shell, Saga
Investment trusts and ETFs: £300,000 in BlackRock World Mining, Merchants Trust, Woodford Patient Capital Trust, iShares UK Dividend, ETFS Physical Platinum, iShares Physical Silver
Debenture loan: £30,000 to Hampshire County Cricket
Property: Home valued at £525,000, no mortgage
Premium bonds: £50,000
Murari’s portfolio is sheltered in tax-efficient Isas apart from £48,000 in the BlackRock trust and £32,000 each in the silver and platinum ETFs. He contributes to a pension fund and expects to start drawing a full state pension in a couple of years’ time.
Rachel Winter, senior investment manager at wealth management firm Killik & Co, writes: I have concerns about the high level of risk of this portfolio.
At the moment the dividend income is a sizeable £60,000 per year with no tax liability, but it comes from a very concentrated portfolio of shares, many of which are in companies that are currently experiencing difficulties.
Although Murari describes his own risk appetite as high, this portfolio accounts for the majority of his overall wealth and it would be helpful to clarify how much he could genuinely afford to lose and furthermore how critical the £60,000 per year income is to his lifestyle.
If a loss in capital or income would have a severely detrimental impact on his retirement plans, then I would seriously consider reducing the level of risk.
Rachel Winter: ‘Race horse investments are not liable for capital gains tax, the reason being that they fall under HMRC’s “wasting asset” exemption’
Consider diversifying the shares portfolio
It’s not clear when these shares were purchased, but presently it appears that the bulk of the money is split across just nine shares.
Troubled outsourcing company Capita has lost 67 per cent of its value this year and has just announced a major rights issue.
Centrica, the owner of British Gas, has lost 25 per cent of its value and admitted to losing 750,000 customers last year.
ITV is suffering due to declines in TV advertising.
Saga has lost 37 per cent of its value following a major profit warning at the end of last year.
It may be that these share prices have hit rock bottom and that significant returns could be made in the event of a successful turnaround, but on the other hand, further share price declines and dividend cuts are a very real possibility.
Risk could be reduced by increasing the level of diversification across different companies, different sectors of the market, and different geographical regions.
In our view an equity portfolio of this size should have at least 40 different stocks, but as mentioned above this portfolio contains just nine, all of which are listed in the UK and most of which have very UK-centric revenue streams.
I would recommend buying some overseas shares or at least some shares in UK companies that have more international operations.
How do you buy overseas shares?
Want to buy shares listed abroad? Find out how here.
HSBC, for example, has a good dividend yield and is a truly global bank.
Telecoms companies such as Vodafone and Deutsche Telekom could increase diversification whilst generating yield.
Technology businesses such as Microsoft and IBM offer income as well as potential for growth.
Shed the no-yield assets
One of Murari’s objectives is to increase his income, but the portfolio contains some investments that do not pay any yield whatsoever, specifically the silver and platinum exchange-traded funds and the Neil Woodford Patient Capital Trust.
The level of income generated by the portfolio could be increased if these were switched into higher-yielding assets.
Use funds and trusts for investments hard to access via shares
I take the point about not wanting to purchase investment funds due to the charges.
While funds are a great way to add diversification to smaller portfolios, Murari’s portfolio is sufficiently large to achieve a good level of diversification just by buying into individual stocks.
However, I will point out that fees have come down substantially over the last few years.
Historically, open-ended funds such as unit trusts and OEICs did charge high fees, and it was cheaper to opt for closed-ended structures such as investment trusts.
However, a number of regulatory initiatives have increased transparency and resulted in a much higher level of price competition across the funds industry.
While I see little benefit in Murari buying bog standard global equity funds, he could use both funds and investment trusts to add exposure to areas of the market that he cannot access by buying individual shares.
These include non-equity investments such as infrastructure and logistics-related commercial property, or perhaps smaller companies and emerging market equities.
Illiquid assets such as commercial property are best purchased via a closed-ended investment trust such as LondonMetric Property.
More liquid assets such as emerging market equities can be purchased via open-ended funds such as Newton Global Emerging Markets.
Race horses are high risk but there is a tax advantage
Investing in race horses certainly fits with Murari’s high risk objective. A successful investment in horses could generate a very significant return indeed, but on the other hand the chance of losing everything is not low.
10 ways to avoid inheritance tax
Find out how to stop the taxman grabbing some of your estate from loved ones – including how ‘business relief’ works. Read more here.
I would recommend that Murari restricts his racing horse investments to money that he can afford to lose.
On a more positive note, race horse investments are not liable for capital gains tax, the reason being that they fall under HMRC’s ‘wasting asset’ exemption.
Other examples of wasting assets include wine and classic cars.
Tips to reduce inheritance tax
Regarding inheritance tax, the planned gifts to Murari’s daughters will be exempt as long as he lives for seven years following the date of gifting. In addition, he could gift £3,000 annually between both daughters.
He could also give away unlimited amounts of surplus income, but he must be able to show that capital is not being depleted elsewhere in order to allow for the income to be given away.
If he wants to help his daughters buy property in a few years’ time, he could consider starting to gift money now so they can take advantage of saving products with government assistan
ce that are aimed at first-time buyers, for example the Help to Buy Isa and the Lifetime Isa.
These offer a 25 per cent bonus on contributions, but only a certain amount can be contributed per year so it is better to start sooner rather than later where possible.
Help to Buy Isa vs Lifetime Isa
Which is best for you? Read our guide here.
Defined contribution pensions can also be passed on to beneficiaries free of inheritance tax, so it could be worth adding more to a pension, although Murari should bear in mind that beneficiaries will pay income tax on bequests if he dies after the age of 75.
Lastly, there are certain investments that are eligible for so-called ‘Business Relief’, meaning that they are exempt from inheritance tax if held for two years or more.
There are many shares quoted on AIM (the Alternative Investment Market) that are eligible for this, and he may wish to look for wealth management firms that offer inheritance tax portfolios investing in this type of share.
The information provided by our expert is for the purposes of this article and is not personal advice.
If you are at all unsure of the suitability of an investment for your circumstances please seek advice.
Nothing in this response constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
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