How can an entrepreneur start investing £10m for FIRE?

One of my readers, Peter, liked my post (or its readers’ comments, more to the point!) about Jane and her £10m quality problem. He’s shared with me his attempt to find a new IFA.  Below is his initial introduction email, suitably anonymised, to an IFA he’s been intro’d to.

Peter is very well informed about FIRE. He’s thoughtful and articulate, and lays out a pretty clear strategy.

I’d love comments on this blog about what you think of his approach. I will comment myself, below this post.

In the meantime, it’s over to Peter.

Dear [Ifa]

Below is a summary of my situation. I’d be interested to hear how you could help.

Best wishes

Peter

My background:

  • I am 39 years old
  • 4 children (all under the age of 10)
  • I am not (yet) married
  • I am UK domiciled and resident

My work background:

I have been an entrepreneur for well over 10 years.

I’ve built and sold one business. I made net proceeds of around £10m (and exhausted my lifetime entrepreneur’s relief allowance).
I am now running my second business. I would anticipate my ~40% stake is currently worth around £10m. However, as with my previous business it could be worth zero (in an unlikely scenario though) up to a potential £30m+ in a ‘home run’ outcome 2-4 years from now. This is completely illiquid and high risk. I don’t count it at all. CGT would be due on the proceeds.

My investment history over the last 5 years

When I had my big ‘pay day’ from my first business a few years ago, I immediately bought lots of property. Mostly residential. Total deployed was just under £8m in/around London.

At the time, I knew zero about ‘conventional’ investing. “Sharks trying to sell me something I don’t understand”, etc was how I saw it. Thankfully I didn’t fall into the trap of immediately putting it all into an offshore bond and all into high-fee funds (as suggested by the private bank who was trying to become my new best friend back then…)

I did what a lot of people do when they have zero understanding of ‘conventional’ investing and turn to property. The (flawed) logic being “you can touch it”, easy to understand it (or so I thought), you can gear it up with debt to accelerate gains, “you can’t lose in property”, etc.

Fast forward a few years and to cut a long story, I absolutely hate being a landlord. Even with a competent property management company, it’s a constant head ache, so many hidden fees which lower the return, ongoing damage to property, constant management required, a big time sink, etc.

I hate being a landlord so much, that I’ve taken the decision to sell everything (apart from my principal residence, which is debt-free but has significant running costs). Not only do I not want to be a landlord, but I also don’t want to own the assets long term. I don’t want to be trapped in the assets if I change my mind at a late date and there are large inflation-linked gains with CGT due on switching, etc…

So what now?

When all the property is sold, my aim is:

  • to have a total of £10m re-invested into assets that can provide me a life-time income
  • I have ‘normal’ living expenses of £300k per annum (4 kids private school fees, expensive ‘family life’, etc…).
  • I believe my ‘bare bones’ (i.e. no holidays, etc) living expenses would drop to £150k-200k if need be in down years.
  • I would like to achieve £300k per annum without ever touching the principal, and for the principal to grow with at least inflation over the long term (subject to volatility of course)
  • Being relatively young, I have a very long time horizon (60 years, hopefully!) so eating into capital for multiple decades doesn’t feel wise
  • I have a *very strong* preference for living off natural yield – rather than pushing for excess growth and selling capital. I don’t feel comfortable with that in principle – v.s. living off the natural yield and holding firm during any downturns.
  • I anticipate having a £400k emergency cash (or very cash-like) buffer on top of the main investment pot, with which to make it through any prolonged years of dividend slashing periods. This is intended to be 2 years of ‘lean years’ expenditure.
  • I don’t think bond/bond funds really work for me (at this present time) as:
    • I have such a long time horizon (e.g. I’m not a typical late-life retiree and drawing down the capital)
    • I see their capital values being greatly at risk when interest rates rise
    • Yields are low
    • Total return is unlikely to be able to deliver enough growth for the lifetime income I require, without eating into capital.
  • I prefer a fire-and-forget strategy. Whilst I have read most of the personal finance and FIRE blogs back-to-back (e.g. Monevator, RIT, etc), I have to force myself to read them, rather than turning to them for enjoyment. This leads me to believe I want a very simple investing solution – both to deploy and ongoing.

As I see it, the main challenges I need to solve:

Q1) How do I achieve the investment returns I require?

For example, I need to achieve either:

  • an income yield of 3% and pay zero tax.
  • or 3.75% yield and 20% tax bill
  • or somewhere in between

Of course, I would much rather achieve an income yield of 4% AND a tax bill of zero.

Regarding achieving a high income yield, I am very tempted to put all £10m into FTSE 100 trackers and be done with it. Logic:

  • 3.7% yield (at today price)
  • Reasonable global diversification (although sector risk)
  • A fire-and-forget strategy
  • Low fees to help long-term returns
  • High natural yield at a ‘sensible’ valuation (v.s. US equities with low yield and toppy valuations)
  • I’m not buying overseas when GBP is depressed (although UK equities are of course somewhat linked to currency due to overseas revenue)

Another appealing option is to maybe split this 50:50 with a 25 share portfolio (bluechips only).

Using UKValueInvestor‘s stock screen, if I filtered FTSE 100 both for Dividend Yield > 3%, and then take his top 25 (approx ever other stock in the top half of the FTSE 100) you end up with an average dividend yield of 4.7%. I intend manually to try to avoid value-traps too. If I split this strategy 50:50 with VUKE/ISF trackers, then I’d end up with blended dividend yield of 4.2% (at a healthy level).

I also feel both capital value volatility and sequence of returns risk is less relevant if living off natural yield? (as long as I can grin-and-bear a downturn).

How sensible (or crazy) is this strategy for all £10m?

I know we’ll debate a text-book globally diversified, balanced portfolio – re-balanced periodically. And I understand all the logic behind it. However, I find it hard to get my head around it due to all of the points above (my preference for living off natural yield, bonds values being at risk with interest rates rises, currency depressed so difficult to stomach over-seas investments, long term equity exposure needed, wanting more of a fire-and-forget strategy, etc).

This brings me onto my next point: Tax

Q2) What is the most efficient structure to own these assets in?

All of my ownership (apart from some small ISA amounts) will be outside of tax wrappers.

Personal ownership seems very expensive (due to the majority of income then being subject to income tax).

A FIC (Family Investment Company [Editor’s note: a limited company set up as a private investment company typically for one family]) would seem to be a sensible structure?

  1. I can loan my company £10m (via a Director’s loan):
  2. The FIC re-pays my loans (£300k per year – rising with inflation)
  3. My directors loans aren’t exhausted until, by my calculations, I’m over 65 years old (allowing for inflation)
  4. My company receives dividends tax free (as corporation tax is already paid by the issuing company)
  5. Assuming 4.0% dividend yield, there is an extra c.£80k per annum to re-invest (gross rollup) compared to if I held the assets personally
  6. Thereafter, I’m assuming I’m paying 35% dividend tax to withdraw funds, however because the gross roll-up has been building the investment pot, I can afford to now pay that level of tax without eating into capital
  7. Indexation relief can be applied if shares/funds ever need to be sold (i.e. inflation removed before calculating CGT)
  8. I can issue dividend-only shares to my future wife, children in the future, etc

Again, how crazy (or not) is this structure for 100% of my investments?

Logic would say don’t put all your eggs in one basket (i.e. own some personally and/or via similar vehicles?). I’m not yet clear on what other similar vehicles would look like.

The problem I have with personal ownership is that at some point I will start earning PAYE again, which even if I had £1m of assets owned personally (~£40,000 gross income), suddenly all of this would be pushed into the higher rate tax bracket.

I struggle to understand why a FIC is not perfectly suited given my requirement for mostly/all equities.

One issue I see with this is as time goes own, more and more asset ownership will be in the company, with less personal loan back to me remaining. This then makes borrowing more difficult for personal purchases (or similar) where I need/want the funds in my control.

Having said that, if I ever wanted to buy a 2nd home, I would likely want to run it as a minor ‘holiday rental’ property only, so the FIC could buy it? Alternatively, would there be some way of borrowing money personally secured on my shares in the FIC?

Other thoughts/points/questions that come to mind:

  • I prefer ETFs (or at least anything that can be bought via Interactive Brokers). They offer margin finance as low as 0.5% over base, secured against the assets (e.g. if I wanted to borrow to buy a 2nd holiday rental home, I could borrow against the assets at a click of a button)
  • REIT funds – presumably a source of higher yields. How do they work with corporation tax, etc in a FIC?
  • How does corporation tax work if either bond funds and/or mixed funds which own bonds (e.g. Vanguard’s Life-strategy) are owned by a Ltd company/FIC? When calculating corporation tax, do you have to ‘look through’ the fund to understand the underlying assets and source of income? However, I don’t think most report in a way which makes this possible. It would be good to be able to read more about this/what is/isn’t subject to corporation tax, etc… (although material seems sparse on this online)
  • When all directors loan repayments from a FIC are exhausted, are there other ways to unwind the Ltd company and/or remove funds tax efficiently? E.g. move offshore? (not desirable). Can I loan money out to myself personally for example, without punitive costs? Presumably the company could be liquidated which would result in a 20% personal CGT charge – as well as corporation tax to pay on realised gains (less indexation relief).  If a future liquidation strategy is wise, should multiple FICs be set up at the outset, so I could stagger liquidations?
  • It would be good to confirm if dividends from equities ETFs (e.g. VUKE/ISF) are definitely not subject to corporation tax?

That is very much a brain-dump of everything that’s on my mind at the moment. I’m sure there is lots more to cover and/or wider aspects to explore.

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33 Comments on “How can an entrepreneur start investing £10m for FIRE?”

  1. Slow Dad says:

    Interesting scenario.

    A few observations:

    Regulatory risk is a factor worth considering in constructing any financial plan.

    The rules can and do change, particularly when the government is feeling strapped for cash… as private landlords, people living inside the “yield shield”, and independent service business owners have all discovered to their cost over the last few years. With much economic uncertainty ahead, and a big deficit, it is hard to see that trend changing any time soon.

    The gap between tax evasion and tax avoidance appears to be shrinking in terms of how the tax authorities view “tax minimisation” strategies, particularly those entered into solely with the purpose of not paying taxes. There is a fairly real chance the UK tax man will decide to “look through” such arrangements, in a similar way to what is happening to independent contractors in the IT and construction industries. Recent examples include the celebs who were stung by investing in film production, or the old Isle of Man directors loan scam.

    If he was really serious about tax minimisation he’d be looking into offshore vehicles in which to hold his assets, outside of HMRC view and reach… a well trodden path as the Panama papers showed.

    Diversifying across geographies would be prudent. If things were to go pear shaped with Brexit, and Britain ends up sliding into banana republic territory, then it would have been a shame to have had all Peter’s assets concentrated there. Imagine how a Venezuelan version of Peter from 10 years ago would be feeling today!

    Diversifying across asset classes would also be wise. Different classes experience different life cycles at different times… avoiding having his day completely ruined should a stock market crash occur at an inopportune time, for example when Peter wants access to capital to start his third successful business.

    On the property front Peter should ask himself (before selling everything) how much of his hatred of being a landlord is down to a specific problem tenant or incompetent property manager, versus how much is down to landlording in principle? Any landlord has days when they wonder why they bother owning properties… but then other days they look at the capital gains they may have experienced, value generated by extending/subdivision/redeveloping and think it isn’t so bad.

    Peter appears prone to doing a bit of research then going all in. Everything in property “a few years ago”, now talking a dumping all that (in a falling London market without much sales activity) to go all in on shares which (in the US at least, accounting for ~50% global market capitalisation) are both expensive compared to earning and at all time highs. Not necessarily a bad thing, but worth him being conscious of.

    For what it is worth, I think Peter should talk to a few specialists in the field, compare their answers, and factor that into his thinking. Much of the advice he receives will be bad (isn’t it always?), but he’ll learn about some new ideas and approaches that may not surface via the comments section of a PF blog!

    Much of the personal finance blogosphere is aimed at a much lower scale, where the fees associated with being smarter about structures, financing arrangements, and taxes aren’t affordable so they roll their own. Peter is likely past that threshold, so there are likely options open to him that the bloggers don’t widely write about as they are outside the reach of themselves and their audiences.

    Interesting exercise, thanks FvL.

    Like

  2. The Rhino says:

    If I were the IFA I’d probably look at the multi-page rhetorical question, think this guy looks like trouble and throw it in the bin.

    PS – Its you isn’t it?

    Liked by 1 person

  3. markb says:

    I suspect he needs a tax adviser, rather than an IFA.

    I’d want to be absolutely certain that the FIC structure is the optimum solution. He assumes that the company would pay no corporation tax in respect of any dividend income, on the grounds that it has already been paid by the companies issuing them. Is this definitely correct? Dividends no longer carry any notional tax credits. And could there be a requirement to revalue the portfolio once a year and pay corporation tax on any gains, even if not realised? Listed equities are inherently liquid and easy to value; I would be surprised if it’s possible to leave them on the balance sheet indefinitely at the acquisition price and not revalue them.

    If as I suspect the corporate wrapper doesn’t help him, he will be paying tax on dividends received as an individual taxpayer at his marginal rate, which is likely to be 38.1 percent. This being so he might want to consider doing something I’m instinctively nervous about, namely letting tax considerations drive his investment strategy. Given that capital gains are taxed at 10 or 20 percent, it could pay him to focus on zero- or very low-yielding equities and sell down units to generate a cashflow to support him and his family in their somewhat opulent standard of living.

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    • The Rhino says:

      ‘I suspect he needs a tax adviser, rather than an IFA.’

      I think thats true in most cases right? Thats the message that Lars Kroijer puts across in his book

      i.e. what an IFA does is the bit you really need to do yourself, and what a tax adviser does is the bit you probably shouldn’t do yourself?

      Liked by 1 person

  4. CyclingHedgie says:

    I can’t talk about his specific situation, but we have a FIC and it works very much as he suggests it might. We largely hold property and equities in ours. We hold mostly UK listed investment trusts, that invest internationally but pay their dividends in Sterling (the accountants don’t like foreign currency). This structure works very well for us, there’s no tax to pay on the dividends paid to the company. As it happens we hold the trusts at Interactive Brokers, and have a margin loan, the interest on which is tax-deductible for the FIC, and offset’s the rent we receive on property. This is a very efficient structure because we get to effectively ‘mortgage’ the assets at a tax deductible ~1.25% pa rate. We also pass shares down the generations over time so that older participants can reduce their assets whilst managing the transfer of control as appropriate. **This is not financial advice **

    Liked by 2 people

  5. fireinlondon says:

    Hi FvL,

    Firstly, congratulations to your friend for being able to get to that position! He needs someone who is able to help the structure and the tax implications. It also depends on how he wants to pass on any inheritance over multiple generations (assuming he does).
    There is also the question of will he marry – I am assuming he is still with the mother of the children? There is the thought of putting the full allowance into ISAs etc. as well – pensions and IHT options as well.

    A lot of things to consider – but I am with him in avoiding the buy to let. I would be intrigued to see what he gets back, if anything, from the IFA. My normal approach would be to spread across a few ETF providers for the natural yield (VWRL, VHYL etc.) but the tax implications on that size of income I would want to talk to someone who knows the options.
    Cheers,
    FiL

    Like

  6. JonWB says:

    The immediate thing that stands out for me is he is unmarried and having around £25M (£10M in property sales post CGT, £10M in unlisted shares in his second startup and £5M in family home at a guess) held as an individual with 5 dependents (4 children and a partner), the first thing to sort is life insurance, IHT and estate planning if that isn’t already ticked off. I think you can be a bit more relaxed about it in your late 30s or 40s if you are married, since it is highly unlikely that both die within a short time of each other and the spousal exemption mitigates immediate problems on one death.

    There are big advantages to holding certain investments in certain vehicles. Once you get to 7 figures in net wealth (excluding a principle primary residence) you really need to consider the tax implications of the different investment vehicles on offer, in conjunction with what you can do with those investment vehicles.

    – Distressed debt works really well in ISAs and SIPPs as there is no tax to pay on income or gains and the taxation of income outside the wrappers is high with zero reporting requirement.

    – Buy and hold of securities that pay dividends work really well in FICs as the dividend rolls up tax free and you only pay tax when selling the security and even then you get taper relief before corporation tax is applied. Add in the ability to use Directors loaning money to the FIC and the FIC being able to borrow from elsewhere and it can work really well, coupled with different share classes for different family members and you have a very good level of control.

    – Buy and hold of securities that do not pay much in the way of dividends can work well when held in a dealing account, but forced transactions can be a problem (e.g. special dividend, restructuring, mergers, disposals etc).

    – Long dated GILTS (as they are qualifying corporate bonds) with leverage has been a great investment since 2013 when held in a dealing account as the gain in price on the bond is tax free as it is a qualifying corporate bond (QCB), the income is taxed at the individuals marginal rate.

    Diversity of investment vehicles is very important as it helps mitigate legislative change. By holding in investment vehicles (ISAs, SIPPs, FICs) it gives you and your family options and completely segregates things from an individuals personal tax situation.

    I think the best approach is to work out the asset allocation, work out your attitude to leverage, work out the cashflow requirement, then work out the best vehicles to hold those assets in baring in mind that diversity of investment vehicles is a real benefit to mitigate legislative change.

    ISAs are not always necessarily the right answer. For example, I think I would have done better had I gone with leverage through Interactive Brokers in a dealing account than I have done with ISAs where leverage is not allowed. I would have paid more tax, but still, it’s the post tax position and relative risk that you need to weigh up. I think all I can say for sure is I would have made more via the dealing account route but it definitely would have been higher risk. It is hard to say – in hindsight – whether the extra return was sufficient for the extra risk. I probably should have gone with a dealing account with leverage, then ensured I did an ISA subscription in full at the end of each tax year for the optimal approach.

    Likewise, when comparing ISAs with SIPPs, SIPPs can hold unlisted shares (which ISAs can’t) and SIPPs (from a full service provider) also allow you to borrow 50% of the value of the SIPP at the time the loan is taken. Most online comparisons I’ve seen ignore this. The most important thing with SIPPs is the relief on the way in. For many on PAYE, using salary sacrifice with Employer NI added in gives far higher relief on the way in than the 55% tax charge for exceeding the Lifetime Allowance on the way out. The annual allowance taper has brought an end to some of that for now, but there are still a fair number (like me) that can rely on grandfathered rights.

    I have a FIC and use Interactive Brokers due to the cheap leverage via a margin loan that it offers.

    £10M in liquid investments with £10M in an illiquid, unlisted and what I presume is a small business (together with what I presume is a family home in London) is approaching the smaller end of family office size.

    Some reading on family offices, these are essentially the same book, one short, one longer, written by a wealthy American that runs a family office network. The book costs 99p:

    The term for receiving dividends into a ltd company from a holding of shares in another ltd company used to be called ‘Franked Investment Income’, but this was replaced by ‘Exempt ABGH Distributions’ when the dividend tax credit was abolished. Both before and after the cutover period (April 2016) there is no further tax to pay on the dividend received into the ltd company that holds the shares.

    See page 17:

    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/611159/CT600_Version_3_guide.pdf

    This works differently in the US, where you are required to hold something like 80% of the shares of the company paying the dividend before the dividend passes without further tax (one reason Buffett was so keen to buy entire businesses).

    I can only echo CyclingHedgie….

    **This is not financial advice **

    Liked by 1 person

    • CyclingHedgie says:

      I’d add one other observation about the SIPP and the tax relief. It’s the only wrapper that UK domiciled people can get relief from US dividend with-holding tax. This suggests, given that a cap weighted global equities allocation is 50% US, that one should put as much as possible of that in the SIPP. In fact the various dividend withholding regimes should be yet another consideration with regard which assets in which assets. There’s no point wasting wrappers on assets which are having tax withheld anyway, if at the same time none-withheld income is being received outside wrappers.

      Like

  7. A says:

    At what kind of asset level is a FIC worth considering?

    Like

    • JonWB says:

      I’d only suggest using it after:

      – ISAs are fully subscribed.
      – SIPPs are fully subscribed (assuming you receive sufficient upfront tax relief to make use of them)
      – Capital Gains Tax allowance can be fully utilised in perpetuity.

      I’d say starter level is £100K. That will get you £400K in assets under management with a £300K margin loan using Interactive Brokers. A 4% dividend yield on that is £16K and the FIC will have about £4K in interest cost to service on the margin loan. That means if you start with a £100K loan, you have something like £12K each year.

      It’s attractive as you can extract the £12K each year as a repayment of the loan for 8 years with no tax implications, or you can keep in the FIC and just roll it up. You also get to pay £5K in dividends tax free this year on top of this, then £2K in dividends tax free from next year for each shareholder.

      With mortgage rates so low one option is to increase the LTV on your primary residence and use that as the loan to the FIC. That is how I got started. But I wouldn’t do this unless I had large ISA and SIPP balances to fall back on and was underweight in property exposure (via a mortgage).

      The interest on the mortgage is not tax deductible as the loan is to a close investment company (loans from directors to trading businesses can claim a deduction for the interest cost against their tax bill).

      There is a very real risk of getting caught by margin calls, so you have to be careful.

      Like

      • While not offering financial advice, personally I consider having a 3:1 loan:equity ratio on an equity-rich portfolio is *extremely risky* and not a good starting level. A 12.5% drop in the portfolio value – something which happens pretty often – will halve your equity value. I find having even a 1:3 loan:equity ratio noticeably stressful even though at that level I run no realistic chance of having a margin call against me.

        Liked by 2 people

    • There is a ‘breakeven’ analysis to do here which will help you answer that question.

      A FIC has some level of fixed incremental costs and so it is a question of what level of taxable assets is sufficient to deliver a taxable return where the tax savings cover those fixed costs.

      I think in London you should assume annual filing/accounting costs of around £2k p.a. (including VAT). This is if you can find an accountant comfortable with margin loans, overseas equities, and so on (and if so please share his/her name!). On top of that is a little bit of your time in managing the filing/accounting too.

      Assuming the tax benefit is around 20% per year, then you need income of around £10k p.a. to cover these fixed costs. This suggests about £300k of unleveraged assets (at a running yield of around 3.3%) are required.

      If you apply leverage then the equation needs to consider the deductibility of interest (possible in an FIC, but not personally) among other things. In principle the level of equity that makes FICs worthwhile is quite a bit lower – potentially as low as £100k as @JonWB explains in his comment.

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  8. Belatedly, and feeling humbled by the very high quality of comment so far, here are my promised comments on Pete’s approach.

    I think Pete is thinking very sensible and thoughtfully about his strategy. This is most of the battle. He won’t go far wrong, based on his description above. Nonetheless, I have five concerns for Pete here:

    1) Managing for uncertainty.
    I am few years older than Pete, and already know that a critical factor is ‘knowing thyself’. Talking in the abstract about ‘holding firm during downturns’ is easy. Sticking to that discipline when you are worried that Barclays/Lloyds/HBOS might go bust overnight and leave your £1m cash deposit worth £80k is quite another. The latter has happened in my recent memory so who knows what might happen in the next 60 years?

    On a more positive note, Pete has already created a lot of value in the last 20 years. He will almost certainly create quite a bit more in the next 40+ years. So his net worth will almost certainly increase considerably from the numbers here. This all means that planning for the long term, looking to save £80k p.a., I think will feel dated fast.

    I think the implication of this is to stay flexible. I have learnt to really value liquidity. The FIC-led structure offers a lot of liquidity but not enough regulatory flexibility – see below.

    2) 100% UK equities is crazy.
    Pete is tempted to put all the assets into UK FTSE-100. I have two major difficulties with this.

    For starters, the UK is a very peculiar place to invest in right now. For Brits it might feel obvious. But for a global citizen it definitely isn’t. More to the point it has hardly any Tech, it doesn’t have some cracking assets like 3M, Coca Cola, Nestle, etc. And it has a lot of Russian-orientated mining exposure.

    Pete flags that the UK pound is depressed, so this is a bad time to invest overseas. There is lots of literature to debunk this argument. Trying to call the FX markets is a mug’s game, and calling the top of the market almost equally so. And you don’t need to be much of a politics student to see that there is at least as much chance of the UK macro-economic picture getting worse as there is it getting better.

    Secondly, I am a strong believer in a diversified asset allocation. The logic of modern portfolio theory – that the only ‘free lunch’ is diversification, and in particular a blend of uncorrelated assets delivers a better risk-adjusted-return than any individual class of asset – is compelling to me. So I grit my teeth and invest in bonds. I think Pete’s aversion to bonds is understandable – but I think it worth looking for an uncorrelated-to-equities asset and including that in the allocation. Property would count. So would cash. So would gold (God help me). But 100% UK equities is so far from textbook I shudder.

    3) Structure risk.
    This point has been made by @JonWB – but I reiterate the concern that the goalposts move. I am already worried that the ISA allowance is reduced/capped for HNWs. I think it quite plausible that FICs become the target of a clampdown too. I wouldn’t commit more than 50% of my assets to any particular structure/provider/account.

    4) Big bang risk.
    Pete looks likely to make a very well-considered, thought-thru decision, and then commit to it for 90% of his liquid assets with a 50+ year timescale. This feels very risky to me.

    Pete acknowledges sequence-of-returns risk, which is the obvious trap to avoid. But there are other reasons to dip your toes in to the water one toe at a time, including keeping advisers focused/hungry, preserving flexibility, diversification, etc.

    I would pick an overall strategy (e.g. use FICs to manage the bulk of my money, investing mostly in UK liquid equities with an eye to dividend yield) and then slowly start shifting my assets into this strategy. I would not execute this strategy in one fell swoop, but rather do it incrementally over a few years.

    5) Marriage.
    I echo JonWB’s point about hoping insurance/wills/etc are all in place. But ultimately marriage is very tax-efficient for large estates, surely…

    In any case I am learning a lot from the comments on this post so please keep’em coming!

    Liked by 1 person

  9. RGH says:

    Nothing to add other than to say how tremendously interesting this has been. I hadn’t heard of FICs before, so will have a good read up on them. I’m now falling outside of the SIPP regime, due to earning levels despite not having much of a pension, filling ISAs, close to having enough cash to fully offset my offset mortgage and potentially coming up for a seven figure capital gain – so this is especially helpful and timely

    Are there other places to read about tax structures and financial planning for the moderately well off, most other FIRE blogs I follow are at the extremely low end.

    Anyone willing to share details of (if not recommend) their tax advisers?

    Thanks everyone for their comments.

    Liked by 1 person

  10. JonWB says:

    @RGH, @Fire v London

    There is some stuff on FICs – whitepapers from accountancy firms if you google it.

    I don’t use a tax adviser or accountant and I do it all myself. I have no background in either profession. It is a definite time sink, but one which is worth it for me as it helps with understanding how to structure portfolios and investment vehicles for the very narrow, single use case of my personal family circumstances.

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  11. He lost me at “force myself to read them”… 😉

    (*weeps quietly*)

    Liked by 2 people

  12. […] How to deploy £10m for financial freedom [“Forced” to read Monevator ] – FireVLondon […]

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  13. Mike says:

    Very interesting discussion! As a tax adviser who has helped several clients set up FICs, I thought some comments on my practical experience may be useful. First off, given the set up costs, ongoing costs, the risk of changing legislation etc I would normally not recommend a FIC unless the assets going in were say £2 million plus. Part of the reason for this is you want to be receiving a meaningful saving to deal with the hassle /administration factors. As other people have alluded to, the real benefit to FICs is the dividend exemption. Corporation tax is paid on interest and rents, and most interest paying securities are marked to market each year, with tax payable on the increase even if unrealised. Small beer perhaps, but Peter can also make use of his own dividend nil rate allowance (5k but set to fall to 2k next year), which might help eke his loan account out further. If Peter borrows from the company, he will likely trigger a tax charge for the company under the ‘loans to participators’ rules. On another note, and to agree with not letting the tax tail wag the investment dog, in my experience it is better to keep the emergency fund outside of the company for the simple reason that the appalling interest rates paid on corporate bank accounts will likely mean even after suffering personal tax, Peter would receive more net interest holding the funds in top paying personal savings accounts.

    Liked by 1 person

    • markb says:

      It’s great to have a tax expert on this thread, because I think the FIC is very much a tax-driven option.

      You wrote that ‘most interest paying securities are marked to market each year, with tax payable on the increase even if unrealised.’ By interest-paying securities, do you mean bonds/gilts?

      If these are marked to market and unrealised price rises taxed, doesn’t the same apply to other securities, including equities? My reluctance to set up one of these vehicles is mainly the fear that unrealised gains on equities might turn out to be taxable, either now or in the future if the rules change.

      Liked by 1 person

      • Mike says:

        Mark, yes bonds and gilts would be taxed in the way described, as would bond and gilt collective funds. This is because they are taxed under the ‘loan relationships’ rules, which require the tax treatment to follow the accounting treatment, and new accounting standards generally require you to fair value each year, subject to exceptions for some very small entities I think, but I am not an expert on the accounting! Equities and collectives invested predominantly in equities are not subject to the same rules, so taxation only occurs on sale. Obviously rules can change, but I would expect the principle to remain as equity is inherently riskier at least in theory and can fluctuate in value much more, so taxation in the same manner would be less logical. To quote others, not advice, DYOR etc etc!

        Liked by 1 person

      • JonWB says:

        FICs are a tax driven option (compared to having the same investments held personally), but so are ISAs and SIPPs. It’s just FICs are less mainstream.

        They are a million miles away from the artificial structures caught by anti-avoidance measures though.

        Bonds/Gilts are marked to market so avoid within a FIC, they are best held in ISA/SIPP as interest is paid gross and there is no reporting requirement (particularly important for any corporate restructuring events).

        If equities were to be taxed on unrealised gains, holding companies would be liable to pay corporation tax on any increase in the market cap of the subsidiary entities they held. That is never going to happen; it would force everything within a huge group of companies to be held in a single limited company simply to avoid tax being paid on the gain of specific operating businesses.

        Whilst it is possible that a close investment company might be subject to something like this, I think it unlikely, taxing capital gains on a unrealised basis would be a very complicated thing to do and cause huge problems; I know of an individual who has a holding of nearly £1Bn in gains from a single company that are unrealised and held in a close investment company.

        What is more likely, in my opinion, is that dividends distributed by one ltd company and received into another ltd company have a tax levied in some way on the ltd company receiving the distribution of dividends; this has been the situation in the US for a long, long time.

        Buffett does an excellent job of explaining dividends in the 2016 Berkshire Hathaway shareholder letter. See the bottom of page 20 and top of page 21:

        http://www.berkshirehathaway.com/letters/2016ltr.pdf

        The other risks to FICs on the horizon at the moment is from the consultation on company distributions from 2015/2016. Details here:

        https://www.gov.uk/government/consultations/company-distributions

        Whilst this was squarely aimed at personal service companies, changes around the allowable level of distributable reserves would impact FICs and may force distributions to shareholders once any shareholder loans are repaid.

        Liked by 1 person

  14. BaronFactotum says:

    Tax implications aside, for this kind of investment horizon broad and global diversification is an absolute must. A good place to start would be a Global Market Portfolio. You could substitute bonds with cash and increase equity allocation, because cash has lower duration than bonds. Using ETFs would be an optimal way to do this. An example allocation would be: 30% CDs and term deposits 50% global stocks, 10% global REITs, 10% high yield bonds. If dividends are lower than required 300k, withdraw some of the cash, if higher, buy more ETFs.

    Given the insanely long investment horizon you really should avoid concentraiing on high dividend yields as they tend to be concentrated in old economy stocks (retail, energy etc.). Who knows if they’ll exist in 40 or 50 years? It’s much better to generate dividend yield yourself by dipping into the cash pile when natural income is lower.

    Liked by 1 person

  15. fireinlondon says:

    Can I just add a thank you to everyone who has joined this conversation – this has been one of the most interesting, thought provoking and informative conversations I’ve read in a very long time. Many thanks both to FvL for posting the original topic, and to all the others who have contributed. I am certainly going to be doing some digging into FICs amongst other things
    Cheers,
    FiL

    Liked by 3 people

  16. […] move £200k into my wife’s name this year.  Actually, since the fascinating  discussion on my ‘Peter’ blog post, I’ve realised I need to upweight my Ltd Company assets too.  So how have I got […]

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  17. Dan says:

    I thought of your post when reading this http://p2pindependentforum.com/thread/9943/tax-efficient-income-portfolio-question, particularly the post by yangmills

    Liked by 1 person


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