All My Net Biz

It is when buy-to-let landlords come to sell up and reap the profits of their investment that the taxman comes up from behind and bites them hard.

Capital gains tax (CGT) now stands at 40 per cent for those in the higher tax bands, so anyone who has owned a property for more than a few months could be liable to pay a large sum if they have not planned in advance.

In the past, some landlords have omitted to mention capital gains to the taxman, but it is now very difficult to get away with this. HM Revenue and Customs is planning an offensive against buy-to-let, especially people who have bought properties abroad.

An amnesty has been offered to taxpayers who may have been underpaying: if they come clean by 22 June and pay the outstanding balance by 26 November, they will be charged a penalty of 10 per cent and interest of 7 per cent per annum on the shortfall. This compares with a maximum penalty of 100 per cent and possible criminal prosecution for deliberate tax evasion.

Offshore investors wishing to take advantage of the amnesty must visit https://disclosures.hmrc.gov.uk to own up. UK landlords must visit their local tax office.

“Immediately after the notification period ends on 22 June, we will target offshore bank account holders with undisclosed income and gains who do not make a disclosure,” a HMRC spokesman said. “We met with representatives of the accountancy profession recently for their views on how we can best inform landlords of their existing obligation to report their property income to us and how we can help landlords to make accurate returns.”

There are several legitimate ways of reducing CGT exposure. The main one is taper relief, which reduces the tax payable according to the length of ownership by up to 40 per cent.

Married investors, and others in long-term relationships, can reduce the tax payable by giving the major share in the property to the partner paying least tax, advises Maurice Patry, a chartered accountant at Landlords Tax Services (www.landlordstax.co.uk).

“If the property is owned jointly, that can double the amount you can get tax-free, especially if one is paying a lower rate of tax,” he says.

Another good way for a landlord to reduce their CGT commitment is to use the place as their main residence for a while.

“If you live in the property at any time during your ownership, the tax relief is enormous,” Patry says. “I know a landlord who changes his address every few months to live in all his properties.”

The drawback is that the move must be genuine, not just a few overnight stays.

“You have to move all your effects in, have a housewarming party and get on the electoral roll at your new address,” Patry says. “There was a recent case where a farmer tried moving into a cottage on the farm during void periods, but the fact that he took his laundry back to his wife 400 yards away blew his argument.”

The reverse situation, where a householder rents their main residence out while they work overseas, for example, can also render them unwittingly liable for CGT, so accurate records of the total period away must be kept.

At the extreme, landlords can escape CGT entirely by living abroad, but they will not be able to return at all in that period except for funerals of close relatives or life-saving operations.

“I have a client who didn’t like CGT so upped sticks with his wife and six children and has gone to Cyprus for five years, so he won’t have to pay it,” Patry says. “You must not sell between the date you leave and the next 5 April, but otherwise you can sell at any time in the next five years and pay nothing.”

I took out a 50,000 loan three years ago to pay for a pilot’s training course, and I’m now flying for a living and paying the loan back. My girlfriend and I want to buy a house, but will lenders be put off by the debt?

The question any lender will ask, when you try to arrange a mortgage, is whether or not you can afford it.

Working this out means setting your monthly commitments – in the form of your professional studies loan – against both your incomes. The remainder is your effective salary for mortgage purposes.

The fact that you are paying back your loan over 11 years means that the monthly payments are lower than they would be for a personal loan. At current interest rates, you’ll need around 550 a month to cover interest and repayments.

The traditional way for lenders to deal with such debts is to work out how much you have to pay each year – around 6,600 – and deduct that from your salary for mortgage purposes. They would then add that to your girlfriend’s salary, multiply it by three, and the resulting figure would be the total you can borrow.

If you were buying alone, the typical lender would offer three-and-a-half times your salary, after deducting the training loan repayments. So you’d be able to borrow around 23,000 less than if you did not have the loan.

Lenders are also increasingly willing to be flexible, says David Hollingworth, director at mortgage brokers London & Country. More and more mortgage companies use so-called “affordability” calculations, rather than simply using salary multiples. If you have a good credit history, a lender might well be willing to go beyond three times your joint income, especially as you expect your earnings to rise.

Some lenders offer more generous terms to professionals. Most do not include pilots in this, but Hollingworth says that Standard Life will offer up to five times’ salary to BALPA-registered pilots. It might also be worth speaking to HSBC, as they provided your original loan.

If none of these options work, then your best route might be to pay off as much of your loan as you can. But you should check the contract to see if there are early repayment penalties first.

Confused about your mortgage options? Foxed by jargon? Email mortgageclinic@independent.co.uk

NB: we will not reveal your identity, and we cannot give specific advice

Following is asampling of stocks that recently jumped to 5 stars. By way of background, we award a stock 5 stars when it trades at a suitably large discount–i.e., a margin of safety–to our fair value estimate. Thus, when a stock hits 5-star territory, we consider it an especially compelling value.

To get a http://news.morningstar.com/article/article.asp?id=193997 of stocks that have recently jumped to 5 stars–as well as our http://screen.morningstar.com/AdvStocks/Results.html?pgid=wwhome2b2&preset=5-StarStocks of 5-star stocks–including our considerbuying and selling prices, risk ratings, and moat ratings–simply take Morningstar Premium Membership for a test spin. https://members.morningstar.com/memberstpages/pm_stocks.html?referid=ONEWSTOANAto sign up for a free trial.

Nighthawk Radiology Holdings
Moat: Narrow | Risk: Average | Price/Fair Value Ratio*: 0.75 | Trailing 1-Year Return: -21.7%

What It Does
http://quicktake.morningstar.com/stocknet/MorningstarAnalysis.aspx?Country=USA&Symbol=NHWK http://quote.morningstar.com/Switch.html?ticker=NHWK provides radiology interpretation services to health-care providers during off-peak hours. The company maintains operations in Sydney, Australia, and Zurich, Switzerland, where its contracted radiologists provide reads during their regular business hours. NightHawk’s direct clients include more than 370 radiology groups and more than 90 hospitals, covering 18% of all U.S. hospitals.

What Gives It an Edge
NightHawk is a heavyweight in the nighttime teleradiology industry. While most players consist of a handful of radiologists operating solely within a region or state, NightHawk’s 100-plus radiologists and expansive client base (more than 20% coverage of all U.S. hospitals) facilitates a large volume of daily radiology interpretations and makes better use of each radiologist’s time, an important factor considering the shortage of U.S. radiologists. NightHawk intends to gain greater scale by acquiring smaller U.S.-based competitors, which will also serve to increase its exposure to the budding daytime teleradiology market. All told, Morningstar analyst Karen Yiu believes that Nighthawk has carved out an entrenched position within an attractive health-care niche, explaining the firm’s “narrow” economic moat rating.

What the Risks Are
Yiu rates NightHawk’s risk as average, given the noncyclical nature of the radiology industry and the firm’s established contracts with its clients and radiologists. The company has no exposure to Medicare and Medicaid reimbursement. However, if its final interpretation business takes off, NightHawk may be exposed to reimbursement risk as those organizations can reduce the profitability of covered services. NightHawk poses nominal financial risk, as it carries no debt.

What the Market Is Missing
Worries about increasing price competition within the industry and uncertainty about NightHawk’s position in its new daytime teleradiology business have caused the market to discount the firm’s profitable operations, its leading industry position, and its claim over the industry’s scarcest resource: U.S. radiologists. Yiu thinks NightHawk’s efficient processes, relatively high customer retention rate, and industry growth opportunities make the stock a good bargain at current prices.

Thomson ADR
Moat: Narrow | Risk: Average | Price/Fair Value Ratio*: 0.77 | Trailing 1-Year Return: -3.3%

What It Does
http://quicktake.morningstar.com/stocknet/MorningstarAnalysis.aspx?Country=USA&Symbol=TMS http://quote.morningstar.com/Switch.html?ticker=TMS offers digital media hardware, software, and distribution services to the entertainment and media industries. The company operates three divisions: services (DVD, VHS, and CD replication and distribution), systems and equipment (television broadcast cameras and set-top boxes), and technology (patent and software licenses).

What Gives It an Edge
Thomson boasts an edge over competitors in a few areas. Thanks to its new asset base, Thomson has become a centralized provider of digital media solutions and content distribution around the globe. As movie studios and networks continue to demand fast replication and secure delivery of content, Thomson has emerged as one of the few firms capable of satisfying their pressing needs. Given the company’s globally integrated processing and distribution capabilities, Morningstar analyst Irina Logovinsky believes Thomson has built a narrow economic moat around its operations. Logovinsky also thinks Thomson’s edge in the DVD replication business is helping the company to grow its content services segment (i.e., editing and special effects). The market for such services is still largely fragmented, and given Thomson’s resources and existing customer relationships, it should be able to acquire a substantial market share. Furthermore, a continued migration to a digital format should benefit many of Thomson’s operations, such as providing cinemas and networks with digital equipment as well as content preparation for digital distribution

What the Risks Are
Thomson faces a multitude of risks, including its ongoing integration of multiple acquisitions and its ability to manage so many new and unfamiliar business lines. The company’s DVD replication business is quickly maturing and is more susceptible to cyclical forces. The low-end nature of many of Thomson’s current services and customer concentration are also concerns.

What the Market Is Missing
The market is concerned that Thomson’s DVD business is going to fall of the cliff due to the proliferation of digital downloading of movies from the Internet. True, the DVD-replication business has decelerated, but that’s largely because consumers have finished upgrading their home DVD collections. However, they’re still buying DVDs, but now they are more selective, purchasing just their new favorite titles. Logovinsky also thinks we’re likely years away from a large-scale shift away from DVDs for a few reasons. First, a lack of digital rights management standards and the slow adoption of fiber-optic cable (capable of quick high-definition movie delivery over the Internet) mean that the DVD business is here to stay, at least for the foreseeable future. Second, movie studios are still dependent on DVD sales, which constitute a large portion of their profits, and studio executives remain very committed to physical media. Third, the DVD business is hampered by a war between two high-definition standards (HD DVD and Blu-Ray), but it should recover once a single standard emerges and consumers start adopting the new technology.

* Price/fair value ratios calculated using fair value estimates and closing prices as of Friday, May 11, 2007.

This article first appeared in http://www.morningstar.com/Products/Store_FundInvestor.html.

Just-published data show that expense ratios, which tell you what a fund charged investors during the most recently completed fiscal year, have come down for three straight years.

Consider that the average individual investor paid 0.93% for U.S. stock funds in 2006 compared with 0.96% in 2005. That’s great news because expenses play a vital role in determining the outcome of a long-term investment.

This marks the third year in a row of meaningful expense ratio drops. That’s a big deal because during the 1990s, assets grew sevenfold yet expense ratios barely budged as middlemen and fund companies kept all the economies of scale for themselves. You can see this in the table–little happened from 1991 to 2001.
Expense Ratio Trends over the Past 15 Years

Broad Category Type 1991
Asset-Wgt
Expense
Ratio ( % ) 1996
Asset-Wgt
Expense
Ratio ( % ) 2001
Asset-Wgt
Expense
Ratio ( % ) 2005
Asset-Wgt
Expense
Ratio ( % ) 2006
Asset-Wgt
Expense
Ratio ( % )

Domestic Stocks Individual 1.04 1.03 1.03 0.96 0.93

Domestic Stocks Institutional 0.83 0.81 0.74 0.68 0.65

Domestic Stocks All Funds 1.00 0.98 0.96 0.88 0.84

Balanced Individual 0.96 0.97 0.90 0.82 0.79

Balanced Institutional 0.84 0.84 0.70 0.64 0.62

Balanced All Funds 0.94 0.95 0.86 0.78 0.76

International Equity Individual 1.24 1.32 1.27 1.13 1.07

International Equity Institutional 1.31 1.11 1.02 0.98 0.94

International Equity All Funds 1.25 1.27 1.19 1.08 1.02

Taxable Bonds Individual 1.06 0.99 0.91 0.84 0.81

Taxable Bonds Institutional 0.59 0.64 0.60 0.54 0.53

Taxable Bonds All Funds 1.01 0.91 0.80 0.72 0.69

Municipals Individual 0.70 0.77 0.74 0.75 0.75

Municipals Institutional 0.58 0.59 0.49 0.44 0.42

Municipals All Funds 0.68 0.75 0.69 0.67 0.66

All Funds Individual 0.97 1.01 1.01 0.93 0.91

All Funds Institutional 0.74 0.80 0.73 0.68 0.66

All Funds All Funds 0.93 0.97 0.94 0.86 0.83

The trend continued in most asset classes. The biggest price break came in international funds where big returns have spurred big inflows. The average individual investor paid 1.07% for international funds in 2006 compared with 1.13% in 2005. Balanced funds’ expenses fell from 0.82% to 0.79%, while taxable bond expenses dipped from 0.84% to 0.81%. Once again, though, municipal-bond funds held fast at 0.75%, reflecting the fact thatcosts are already low but also that advisors may be choosing the highest-yielding funds over the lowest-cost funds. In addition, they haven’t attracted much money of late so fewer fee breakpoint triggers have been hit.

Why Expense Ratios Change
Most funds’ expense ratios change every year, though they tend to move in very small increments. The main reason for a change is simply that assets grew or fell to the point where the fund realized cost savings or lost some cost savings.

Most funds have breakpoints on management fees that cause expenses to fall as assets grow because running a mutual fund is a scalable proposition. A 50% increase in assets doesn’t necessitate a 50% increase in managers, analysts, and traders.

Another way in which a fund’s expense ratio changes is performance fees, which reward or punish fund management based on performance versus an index. A typical fee would add or subtract up to 20 basis points (a basis point equals 0.01%) based on how a fund performs versus the S&P 500 over a rolling three-year period.

The third source of change is when a fund changes the underlying fee structure. It’s not uncommon to see changes to the management fee, changes to the breakpoints, or changes to some other fees that are components of the expense ratio such as the transfer fee.

Why Expense Ratios Are Falling
The overwhelming driver of falling expense ratios is rising assets. A market rally led assets to appreciate and of course drew billions of dollars into funds. That meant many funds hit various fee breakpoints and expense ratios have come down.

Cuts to underlying expense ratios are much less common but do have a positive effect. As punishment for market-timing and other transgressions, former New York Attorney General Eliot Spitzer forced a number of fund companies to lower their fees. That in turn led other fund companies not caught in the scandal to lower their fees because they base their fees on category averages.

Prominent Funds with Big Fee Cuts
http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=MINDX’s http://quote.morningstar.com/Switch.html?ticker=MINDX expense ratio fell sharply from 2.00% to 1.41%, thus significantly improving its appeal. Big inflows to the fund are responsible for the cut. I’m excited because most funds dedicated to hot markets such as India and China are horribly overpriced, but here you can get one of the best Asia managers at a reasonable price.

http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=CFIMX http://quote.morningstar.com/Switch.html?ticker=CFIMX slashed expenses by 49 basis points to 0.62% because Chris Davis and Ken Feinberg charge a much lower management fee than their predecessors.

http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=FIREX http://quote.morningstar.com/Switch.html?ticker=FIREX saw expenses fall due to big inflows. This is no surprise because it’s on top of the two hot trends in investing overseas and in real estate. That’s a bit trendy for me, though, so I’d wait for it to get less trendy before buying.

http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=POGRX http://quote.morningstar.com/Switch.html?ticker=POGRX , http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=POAGX http://quote.morningstar.com/Switch.html?ticker=POAGX , and http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=POSKX http://quote.morningstar.com/Switch.html?ticker=POSKX have aggressive breakpoints to fees, which means that modest inflows led to big expense ratio cuts. The three slashed expenses by 25 to 36 basis points and now charge between 0.89% and 0.99%.

http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=BRAIX http://quote.morningstar.com/Switch.html?ticker=BRAIX also benefited from aggressive breakpoints as John Montgomery’s mid-growth fund cut expenses from 1.37% to 1.12%. The fund is based on growth-oriented quantitative screens, which have so far produced fine performance.

Who’s Hiking Fees?
Not everyone joined the parade to lower fees. Interestingly, two of the lower-cost fund families, Fidelity and Vanguard, made the list.

http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=NTHEX http://quote.morningstar.com/Switch.html?ticker=NTHEX had a huge expense ratio increase from 0.73% to 1.23%–but not to worry. The increase was due to use of leverage to meet redemptions. Funds have to include interest costs on loans in their expenses, so the fund’s expense ratio popped up, but it should settle back down this year.

http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=FCVSX http://quote.morningstar.com/Switch.html?ticker=FCVSX and http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=FDFFX http://quote.morningstar.com/Switch.html?ticker=FDFFX had their expense ratios rise for the best of reasons: They performed well, thus boosting their performance fee.

http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=JGVAX‘ http://quote.morningstar.com/Switch.html?ticker=JGVAX expense ratio ticked up by 13 basis points because poor performance has led to redemptions.

http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=FMILX http://quote.morningstar.com/Switch.html?ticker=FMILX also saw its expenses edge up due to redemptions. Some of those redemptions were a response to the departure of longtime manager Neal Miller. In fact, the fund just reopened in an attempt to stem net outflows.

http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=VMGRX http://quote.morningstar.com/Switch.html?ticker=VMGRX saw its expenses pop up 11 basis points because Vanguard replaced its management with new managers and agreed to pay the new managers a higher fee. We’ve seen Vanguard boost management fees at a number of actively managed funds in recent years.

A Virtuous Circle
Investors and advisors are increasingly turning to low-cost funds because some look closely at cost while others look at performance, and low-cost funds outperform the rest. Whatever the reason, the important thing is that the fund industry has momentum toward lower costs. There’s plenty of room for fund companies to deliver greater efficiencies to investors, so it’s certainly possible that the move to low-cost funds will spur more fee cuts.

In any case, there are scores of good low-cost funds for investors to choose from. So dig in, and don’t settle for overpriced funds.

How You Voted in Foreign Small Value Poll
http://news.morningstar.com/article/article.asp?id=192971, I asked “What do you plan to do with your foreign small-cap exposure?” And here’s how you voted. 46% - Buy more. 5% - Sell more. 49% - Stand pat. Good to know that we contrarians won’t have to fight the crowds.

They are orange, mauve and pink, but they also claim to be green. Some of the first homes to be built as a result of John Prescott’s Design for Manufacture competition are on sale this summer at Oxley Woods, Milton Keynes.

The competition was to design homes to be built for less than 60,000 but that would still meet various space and environmental criteria. They are being built by George Wimpey, one of the winning developers, with the designs by Rogers Stirk Harbour and Partners architects.

Sadly, the target price of 60,000 does not include the cost of the land. The first two-bedroom properties go on sale for 200,000, with three bedrooms costing from 230,000, which unfortunately fails the original purpose of making homes available to low income earners.

The architects have gone for a minimalist industrial design with various brick-, wood-and steel-frame options available. The steel and wood frames are designed for off-site flat-pack pre-fabrication to reduce costs.

They are calling them flexi-houses, as they come without internal walls or structural pillars to allow owners to change the layout in line with individual requirements.

They claim this will allow childless couples to have an almost total open-plan downstairs and a “huge open-plan bedroom covering the first floor”, until the children arrive.

The second unusual feature is what they call an eco-hat, which is an internal chimney that carries all the service piping but also assists with ventilation, capturing some of the heat from extracted air to be reused to heat the incoming air. The eco-hats also aim to bring more daylight into the centre of the buildings. Passive solar water heating is an optional extra. The hope is that the construction reduces heat requirements by 40 per cent and 50 per cent if the solar hot-water system is included.

It is good to see some mainstream builders moving in a more eco-direction, but the fact that the buildings come with no internal walls means radiators will tend to be placed on the outside walls, losing the benefit of heating internal walls.

In addition, promoting large open-plan homes for childless couples means that a larger space will be heated than would be otherwise the case. Also, on an aesthetic level, suggesting such flat-packed minimalist designs can be “adjusted to the local vernacular” will usually be a bit economical with the architectural truth.

While such competitions can make a small difference, there is no way they will make the deep eco-revolution needed in house building fast enough, to ensure we get zero-carbon housing as fast as the climate crisis dictates.

The Government took 10 years to introduce a voluntary sustainable code of practice. It is clear that it is not the cost of building housing that is making them unaffordable but the cost of land. The new Brown Government must therefore grasp the nettle firmly and make the sustainable code of building compulsory as fast as possible.

The time is now far too late for demonstration projects, laudable though they are. Eco- homes urgently need to be the norm now and not the exception.

Donnachadh McCarthy works as an eco-auditor and is the author of ‘Saving the Planet without Costing the Earth’ «www.3acorns.co.uk»

d.mccarthy@independent.co.uk