What caught my eye this week.

One thing crowdfunding investors should be used to is losses. At least 75% of start-ups fail, and I haven’t seen any evidence of those firms that turn to a whip round from ordinary investors bucking the trend.

Unfortunately, my sense is that most crowdfunders who chip in to back a company – especially those who put more money in than they should – too often don’t appreciate such statistics.

That’s partly because every person I’ve ever spoken to about their crowdfunding only backs a few companies. Often only one!

And as I’ve written before about venture capital investing, spreading your money around is the best way to try to get any sort of credible return. At least in financial terms.

What other kind of returns are there, you might retort?

Indeed it’s a fair – if I’d suggest rather too narrowminded – view to say there aren’t any.

However it’s obvious that many of the people who invest in the likes of supposedly-alternative beer company Brewdog do so for non-financial reasons.

Perhaps it’s for the investor perks and freebies. Maybe they like feeling they’re part of something, or that their money is helping to build a brand new company rather than just shuffling share ownership around.

With Brewdog case I’m sure some even believed they were sticking it to the man…

Downward dog

Alas, Brewdog was flogged off this week for parts. According to the BBC:

US beverage and medical cannabis company Tilray has bought the company’s UK brewing operations, brand and 11 pubs in a £33m deal.

Administrators said the sale had preserved 733 jobs – but that 484 jobs had been lost and 38 bars had closed after they were not included in the rescue deal.

And they said no equity holders – including those who invested in the brewer’s Equity for Punks scheme – would get any return from the deal.

Now there are several aspects to this story that do stick in the craw.

Unite says workers were treated very shabbily. Management of the company has been controversial for years, and neither the decline in Brewdog’s fortunes nor its ignominious end will have repaired any reputations.

As for investors, as the BBC tells us:

In 2009, the firm launched a fundraising scheme called Equity for Punks.

About 200,000 people put money into the scheme, which offered a stake in the company, discounts and perks. The investors typically spent about £500 on shares costing £20 to £30 each, although others invested larger sums.

Before it closed to new investors in 2021, Equity for Punks is said to have raised £75m which was used to expand the business into an international brand. In 2017 a US equity firm TSG Consumer Partners acquired a 22% stake in Brewdog.

But unlike the Equity for Punks’ “ordinary” shareholders, TSG was given “preference shares”.

That meant that if Brewdog was sold, TSG was first in the queue to get back its investment plus any return owed, possibly leaving little or nothing for small investors.

One thing not mentioned in this summary is Brewdog’s 2020 valuation – the last time it secured ‘Punk Equity’ money – of £1.8bn. This raised a further £30m.

From nearly two billion quid to a fire sale in six years is some going – even for a post-Covid collapse.

Dog days

I’m not going to dissect Brewdog’s swan dive today. Another BBC article offers an even-handed overview.

I would note though that Brewdog is far from the only then-bright-and-shiny company to have achieved a batshit valuation in the weird pandemic era, only to shortly afterwards see things turn south faster than Scott of the Antarctic on the whiff of a Norwegian.

However I do get a bit dismayed by the various stories of woe from Brewdog shareholders.

Of course I’m sympathetic. Nobody likes to lose money, and Monevator is a site for ordinary investors that tries to help them make it, not lose it.

For what it’s worth I had £500 in Brewdog, too. I’d guess I enjoyed about £100 to £150 in perks and discounts. Carrying the capital gain loss forward will save me another £100 or so some day. Call it £300 down the tubes.

Would I rather I hadn’t invested in Brewdog? Yes, of course.

But does losing a few hundred quid on it upset me? Not really – and not because I can’t think of much more entertaining ways to dispose of £300.

Spread manure around

Rather, I’ve invested in dozens of crowdfunded startups (and follow-on rounds) and I fully expect a lousy result from most.

VC returns notoriously go to a few winners. That is what I am seeing in my own portfolio and what shapes my strategy.

As a counterpoint to Brewdog, I recently liquidated a portion of a private company holding that – after tax relief – has returned over 30-times my investment. That sort of return covers a lot of failures.

This isn’t to brag. Not least because I haven’t a lot to brag about! As I said, there have been a lot of failures to cover. Before this recent disposal I was slightly underwater on a ‘money out’ basis.

My ongoing portfolio however is valued at 2-3x the money I invested. Moreover I judge most of those valuations to be pretty sound after a tough few years. (War shocks notwithstanding.)

Time will tell, but for me this experimental allocation of a small portion of my capital is looking like it’ll deliver tracker fund returns for a lot more work – but, for me, more fun and interest too.

How to lose money responsibly

We can debate whether I should get out more, given that I consider this sort of thing to be fun.

My point though is that this isn’t how most people do their crowdfunding.

A majority probably plump a couple of hundred quid into one or two companies, and that’s fine.

But judging by the stories that emerge when things go wrong, too many seem to stick meaningfully large-for-them lump sums into start-ups that they feel some affinity for, and they often don’t appear to anticipate the downsides. As such they take on far more risk than they should. Sometimes with woeful outcomes.

That is dispiriting. It has me wondering if individual investment sizes should be capped, say, on top of the existing ‘sophisticated investor’ tests that supposedly restrict the sector.

However I wouldn’t like to see crowdfunding regulated away. I think there’s something to be said for democratising capitalism in its rawest sense this way.

And for what it’s worth there are (a small number of) backers in the likes of Revolut who have made truly life-changing sums of money. I know some read this blog.

But if you’re tempted to try crowdfunding I’d suggest you:

• Invest only what you can afford to lose in any one company. Because you probably will.
• By all means back firms you find inspiring or fun. But understand that is part of your return.
• Ditto the perks and discounts. They are nice to get but they also might be all you get.
• Either invest very small amounts of money (for you) in a few companies you really like, or adopt a VC approach and spread it widely. Don’t put big chunks of your net worth into companies that are statistically very likely to go bust.
•  Don’t get involved with crowdfunding unless you’re already sensibly saving and investing for your future.

Money for nothing

Plenty of Monevator readers would say my bullet point list should start and end with ‘Don’t Do Crowdfunding’ and I understand that point of view.

From a personal finance and investing perspective, crowdfunding is entirely superfluous. It will more than likely leave you needing to find and save more money to make up for the losses it delivers.

But I still see a place for it akin to a carefully budgeted night out in Las Vegas for those who think it seems like an exciting way to lose money – and as a potentially modestly lucrative hobby for a minority.

Just please please don’t confuse it with proper investing for your long-term financial security.

Have a great weekend!

[continue reading…]

Okay, so you know your inc from your acc. But do you know your retail from your institutional? Your dirty from your discounted? Your clean from your super-clean?

I am, of course, talking about fund share classes. The hottest topic at dinner parties across the land.

Where did they all come from? What do they do? Does it even matter?

Let’s start with the basics and work up.

The basics

An investment fund may have many share classes or unit types. Each share class will be invested in the same assets but may vary by:

• Whether dividends are paid out in cash (inc, for income) or accumulated in the unit price (acc)
• The level of fees – initial and ongoing
• The trading or hedging currency

Note, we’re only talking about investment fund share classes. Listed companies can also have varying share classes, but that’s a different kettle of fish.

An investment platform may only allow you to invest in a subset of the available share classes. For instance, you’ll usually only get one trading and (if applicable) hedging currency. It should be clear from the fund name which one you are investing in.

Next some examples. (Share class data is from Trustnet.)

Vanguard LifeStrategy 60%

This perennial Monevator favourite is admirably straightforward. Just two share classes – one inc and one acc – and no fee variation:

Rathbone Global Opportunties

Less relevant to your average passive investor but a popular fund nonetheless, Rathbones Global Opportunities also has just two share classes. But this time the difference is in the fees:

An investment platform will typically only support one of these share classes, but not necessarily the same one as other platforms:

iShares Environment & Low Carbon Tilt Real Estate Index

This last example is a constituent of the Monevator Slow and Steady portfolio. It really is a smorgasbord (as Ms Reeves would say):

Again, different platforms support different share classes, sometimes for seemingly arbitrary reasons:

Classes D and H vary only by the initial charge – it’s usually waived by the platforms, so it won’t make any difference in practice.

A brief history of share classes

Back in the ‘good old days’, adviser commission was usually bundled in the cost of a fund for retail investors. Thus, annual fund fees were often around 1.5%, with half going to the adviser or, if you didn’t have an adviser, just swallowed by the fund provider along with its own cut.

If you were lucky and invested via one of the then-emerging fund supermarkets or platforms, you could get a cash kickback – effectively giving you back a portion of your own money.

Good times!

Then, at the end of 2012, legislation known as RDR came along and spoiled the fun. Bundled adviser fees and cash kickbacks to platforms were banned. The old retail or bundled (aka ‘dirty’) share classes were phased out. Individual investors were given access to the institutional class – or ‘clean’, as it was free of commission.

But some platforms (notably Hargreaves) still wanted to negotiate a discount on fund fees.

In response, as well as the clean share class, fund providers started launching discounted, or ‘super-clean’ share classes, with a few basis points shaved off the fees.

Where will it all end?

In the years after RDR, the number of share classes ballooned as different platforms secured different deals.

Over time though, things have begun to simplify again. The old retail share classes have disappeared. The discount levels have narrowed.

Terms like bundled, clean, and super-clean are all pretty much meaningless now. Just relics of history.

Maybe we’ll eventually end up with the Vanguard model, with just a pair of inc/acc share classes and one level of fees for everyone.

But for now you may need to navigate multiple options, and slog though the fund details for more info.

So which one do I want?

First, decide between inc or acc. That is, do you want some regular cash income or would you prefer to keep it all rolled up in your growing investment?

(Consider the tax complications outside of ISAs and SIPPs before making your mind up).

With that, you’re probably done. Your platform will usually offer only one fee level, one trading currency, and one hedging currency, if any, for your chosen share class.

If you do see multiple fee levels then obviously you want the cheapest. But in many cases, even where platforms support multiple share classes, they will steer new investors into the cheapest one anyway.

Stuck in an expensive class?

Sometimes you’re not quite so lucky.

In the Rathbone example above, you’ll see that Interactive Investor supports both the I and the S class. This is probably because it initially supported the more expensive I class, but later successfully haggled with Rathbones to get access to the cheaper S class.

While new investors are now funnelled into the cheaper S class, old investors are left languishing in I with the extra fees.

If you’re such an existing investor, then what you need is a conversion.

Conversions

A conversion is a transaction that converts a holding in one share class to another share class in the same fund.

A conversion is not a switch. The change from one class to another happens at a single point in time. The holding is not sold and then invested again.

This distinction matters. A switch means you may be out of the market for a short time and subject to the vagaries of swing pricing (where dealing costs could move the price against you). With a switch, it would be easy to lose more from adverse price swings than you’d ever save in lower fees.

A conversion does not present these risks.

A conversion will also not trigger any capital gain. Neither should a switch as long as the underlying fund is the same, although it may result in some confusion, for instance on book costs and equalisation (as raised in the comments to my article on transfers.)

Why don’t we just convert then?

Because your platform probably won’t let you.

I don’t know of any mainstream investment platform that enables an investor to convert an existing holding (even though they can process conversions, as we will see shortly).

The last time I tried calling my platform to request a conversion, the administrator patiently explained to me what a switch was, as if talking to a small child. I got nowhere trying to explain the difference.

Perhaps, as the number of share classes continue to be rationalised, this problem will become rarer. But as a cost-obsessive Monevator reader, it’s irritating if you’re the unlucky one who gets stuck with unnecessary extra fees.

The transfer problem

Imagine you had a holding in the iShares real estate fund above at Interactive Investor (in the D class) and you want to transfer in-specie to Hargreaves Lansdown (which only supports S).

You can’t simply re-register the units across as you would if it was the same share class. You need someone to do a conversion.

It is ironic that, whilst RDR forced platforms to support in-specie transfers, it also prompted a flourishing of different share classes that made many in-specie transfers impossible.

This problem required more rule changes from the FCA (Making Transfers Simpler, introduced in 2019) to fix the problems created by the earlier policy.

Platforms must now convert share classes where necessary to complete an in-specie transfer and then move the investor to their cheapest share class.

So today you generally don’t need to worry about share classes when transferring. Either the old platform will convert before transfer, or the new platform will convert afterwards – or both.

A convoluted conversion

It’s frustrating. Platforms can process conversions but choose only to do so for transfers where the regulations insist on it.

However more cunning readers may have already spotted a decidedly convoluted workaround.

If, in a situation like the Rathbones example above, your platform won’t convert your holding to a newer, cheaper share class, then one option is to transfer your account elsewhere and then transfer it back again.

The FCA rules mean that by the time you get your investment back where it started, one of the platforms involved should have converted you to the cheaper class.

I’ve never done this, but I see no reason why it wouldn’t work in theory. In practice, it may well turn out to be too much of an admin headache.

So what?

Maybe you’ve never needed to think about share classes. And maybe you never will. (I know, I waited right until the end to admit it!)

You’ll probably:

• Only need to choose between inc and acc
• Never be given a choice of currencies or fee levels
• Never have to worry about transfers
• Be happy with the share class you’re given

But it’s just possible that you may get stuck in an expensive share class, or have a transfer go awry with share class mismatches. If you do hit a problem then you may not get much sense from your platform helpline – and knowing your share class onions might just help.

Ever been stuck in an expensive share class? Know of any platforms that will process a conversion for you? Ever tried the transfer dodge?! Let us know in the comments below.

Oh – and that bit about share classes and dinner parties? Not true. Don’t try it. Really.

Can’t fit all your investments into your ISAs and SIPPs? Then you’ll reduce your tax bill by following the first rule of tax-efficient investing:

Squeeze the most heavily taxed investments into your tax shelters first.

Happily, the pecking order for maximum tax efficiency is clear cut for most people.

Tax-efficient investing priority list

Shelter your assets in this order:

• Non-reporting offshore funds
• Bond funds, money market funds, UK REITs and PIAFs
• Individual bonds
• Income-producing equities
• Foreign equities (arguable)

To see why this sequence is tax efficient, let’s just tee up the relevant tax rates:

Dividend income tax will rise to 10.75% (basic rate) and 35.75% (higher rate) from 6 April 2026. The additional rate remains unchanged.

From 6 April 2027, tax on savings income – as paid by money market, treasury bills, and bond funds – rises to 22%, 42%, and 47% for basic, higher, and additional rate tax-payers respectively. The same rate will also apply to property income from 6 April 2027. This is payable by UK REITs and PIAFs but not ordinary REIT tracker funds.)

At a glance we can see that income tax is the nastiest while capital gains tax (CGT) is generally the most benign. Your CGT burden can also be reduced by offsetting gains against losses.

So the plan is to shelter investments that are liable to income tax first, dividend tax second, and CGT third.

A few tax efficiency caveats to consider

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

• Interest is taxed at your usual income tax rate until 6 April 2027. Basic-rate payers have a £1,000 personal savings allowance, reduced to £500 for higher-rate payers and nil pounds beyond that.

• A few very low earners qualify for an additional band of tax relief on savings. Up to £5,000 of interest can be sheltered under the ‘Starting Rate for Savings’.

• If your interest, 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.

• In that situation, it matters what order you’re taxed in, so you can make the most of your tax-free allowances. The UK order of taxation is: non-savings income, savings income, dividend income, and finally capital gains.

• If you’d like a quick refresher on the tax-deflecting powers of ISAs and SIPPs, just click on those links.

• And if you’re not sure which is best for saving then try our take on the ISA vs SIPP debate. Most people should probably diversify across both tax-efficient investing shelters. But there are a some important wrinkles to think about.

Let’s now look in more detail at – all things being equal – the best order of sheltering assets for tax-efficient investing, starting at the top.

Non-reporting offshore funds

Offshore funds that do not have reporting fund status are taxed on capital gains at income tax rates. And as you can see from 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 exchange-traded product (ETP) doesn’t trumpet its reporting status on its factsheet then it probably falls foul.

It’s worth double-checking HMRC’s list of reporting funds. Many offshore funds / ETPs available to UK investors don’t qualify. Also, it’s possible for a reporting fund to lose its special status.

Any fund that isn’t domiciled in the UK counts as an offshore fund. (Sometimes it’s worth saying the obvious!)

Bond and money market funds

Money market funds, bond funds, and even treasury bills are next into the tax bunker because interest payments are taxed at income tax rates rather than as dividends. (And on the higher ‘savings income tax’ rates from 6 April 2027.)

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.

However, because these distributions count as savings income, interest payments are also protected by your Personal Savings Allowance (and even the Starting Rate for Savings).

Bond fund capital gains fall under capital gains tax, naturally.

Money market funds typically achieve at most miserly capital gains.

Treasury bills count as deeply discounted securities. Essentially they’re designed to make a capital gain rather than pay interest. But the capital gain counts as savings income.

Our Treasury bill article explains the weirdness.

Starting Rate for Savings – bonus protection

Some people – most likely retirees – can find themselves with low earnings income but reasonable savings income.

Such savings income can be sheltered by the Starting Rate for Savings.

Savings income that sits in a £5,000 band beyond your Personal Allowance may qualify for a 0% rate of income tax thanks to the Starting Rate for Savings rules.

That’s most likely to happen if your non-savings income plus savings income lands somewhere between £12,570 and £17,570.

(The upper limit can be increased if you’re eligible for additional tax-free allowances.)

Beware that every pound you earn (in non-savings income) over £12,570 shaves £1 from your £5,000 Starting Rate for Savings allowance.

So if you earn over £17,570 in non-savings income then you won’t get any Starting Rate for Savings privileges.

Whereas, £14,000 in non-savings income leaves you with another £3,570 in savings income that can be protected using your Starting Rate for Savings.

Any savings income that can’t huddle behind the Starting Rate for Savings barricade can still duck under the Personal Savings Allowance.

All this begs the question: what counts as earnings income?

The main categories are:

• Income from work, whether employed or self-employed
• Pension withdrawals including the State Pension
• Retirement annuities
• Rents
• Taxable benefits

It’s obviously less urgent to get all your bonds into your ISAs and SIPPs if you can earn interest tax-free via the Starting Rate for Savings and Personal Savings Allowance routes.

As mentioned though, bonds can make capital gains. Long to intermediate maturity bond funds are most likely to land you with a significant CGT bill whereas short bonds tend to be more cash-like.

UK Real Estate Investment Trusts (REITs) / PIAFs

UK REITs and PIAFs pay some of their distributions as Property Income Distributions (PIDs).

PIDs are taxed at income tax rates not as dividends. UK REITs and PIAFs will pay higher property income tax rates from 6 April 2027. Those rates will be 22%, 42%, and 47% for basic, higher, and additional rate tax-payers respectively.

Get them under cover for optimal tax-efficient investing. PIDs are paid net so make sure you claim back any tax due if you tax shelter ’em.

REIT tracker funds and ETFs distributions are liable to the standard dividend income tax rate, not the higher property income tax rate.

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 are not liable for capital gains tax.

We’ve previously delved into the differences between how bonds and bond funds are taxed.

There are also some particularly intriguing low coupon gilts on the market that pay very little interest. Instead, their future cashflows are heavily skewed towards capital gains – which are tax-free.

They’re worth a look if you’re comfortable with buying individual gilts and would like to reduce your tax bill.

Income-producing equities

The dividend tax situation has got a lot worse for UK investors in recent years, 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 still defuse capital gains every year – although this mitigation measure is being steadily eroded by the shrinking capital gains allowance – and you can usually 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.

Sometimes 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% if your broker has the appropriate paperwork.

Foreign investments in SIPPs can often have all withholding tax refunded but only if your broker is on the ball (and the appropriate agreements are in place). 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 from a dividend perspective. (There’s still capital gains tax to think about in the long-term, remember.)

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,

The Accumulator

Note: This article on tax-efficient investing has been given a tidy up after a few years out in the pastures. Comments below might refer to previous tax rates and allowances. So do check the date they were posted!