Questor: Chancellor spares our Income Portfolio’s tax-efficient holdings

Britain's Chancellor of the Exchequer Philip Hammond waves and poses for the media as he holds up the traditional red dispatch box, outside his official residence 11 Downing Street
Chancellor Philip Hammond did not tinker with tax-efficient investments, as had been expected Credit: Frank Augstein

This week’s Budget was a good one for Questor’s Income Portfolio inasmuch as feared cuts to crucial allowances failed to materialise.

Before the statement it had been thought that public anger over the use of offshore tax havens by the ultra wealthy, highlighted by the “Paradise Papers”, might have forced the Chancellor to take aim at venture capital trusts (VCTs), the inheritance tax status of shares listed on Aim, or even pensions.

Our portfolio holds two VCTs: Baronsmead and Northern. VCTs bought at issue and held for at least five years attract 30pc income tax relief, while gains and dividends are tax-free. Such tax perks are offered to encourage investment in fledgling, high-risk companies.

Some minor changes are planned, however. The Government is concerned that managers of VCTs and of assets in the Enterprise Investment Scheme (their more niche cousins) are investing too cautiously and will introduce measures accordingly.

This is likely to result in the risk profile of some VCTs increasing. Both our trusts, however, are long-established with proven ability to adapt to changing regulations. So their share prices were virtually unmoved.

Changes to pensions were notable by their almost complete absence from the Budget. However, because of a new link to inflation, the lifetime limit on pension savings will rise for the first time in seven years, to £1.03m, in April 2018.

Readers will have noticed a hiatus in Questor’s new Inheritance Tax Portfolio. This was to guard against any changes to the rules governing the death duty treatment of Aim-listed shares, which could have been an easy target for the Chancellor.

In the event, he did nothing, so shares in “trading” companies listed on the junior market will remain free of inheritance tax if held for at least two years and on death. As a result the Inheritance Tax Portfolio will return shortly.

Update: Schroder Income Growth

Now boasting 22 years of annual dividend increases, Schroder Income Growth has produced a total return to the portfolio of 11.8pc since our purchase last December.

Dividends per share grew by 5.7pc to 11.2p in the financial year ending in September, its annual report shows. Crucially, payout growth outstripped inflation, which now stands at 3pc.

Returns were driven by the manager’s faith in housebuilders Bellway and Taylor Wimpey, which fell following the Brexit vote last year. Financial firms including Nordea Bank and Aviva have also performed well as global interest rates have risen.

While dividend growth is pleasing, the trust did warn that the outlook was less certain thanks to the fallout from Brexit and that its income would be hit if the pound strengthened against the dollar.

Currently trading at a discount of almost 9pc to the value of its assets (against a 12-month average of 8pc) there is an opportunity for investors to benefit from a future narrowing of the discount.

Update: Renew Holdings

When the portfolio bought Renew Holdings nearly a year ago, we did so knowing that while dividends were low (certainly in comparison with other holdings) they were likely to grow.

It is pleasing then that the engineering firm’s annual results, published this week, show that the dividend for 2017 will rise by 12.5pc to 9p.

Profits totalled £25m over the past year but were lower once “exceptional” items, such as a £5.8m write-down resulting from the withdrawal from a loss-making gas pipe business, were included.

Renew maintains that it should be insulated from any side effects from Brexit as it focuses on regulated domestic markets with long-term contracts, particularly in the nuclear, rail and water markets.

Its “specialist building” division, where it uses subcontractors for building works, must have some exposure, given that it operates in the prime London residential market, but revenues and profits grew and, in any case, this is a small part of the business.

Extra investment in rail infrastructure, also announced in the Budget, should benefit Renew. It has long-term deals with Network Rail and should be uniquely placed to benefit from a wave of new spending promised by the Chancellor.

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