Investment clubs

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24. Dealing with a member leaving

It is an important tenet of an investment club that members can sell their units whenever they want to.

• Members may want to sell some of their units to raise cash

or

• They may want to sell all their units and leave the Club

In either case, the member concerned sells units back to the Club at the unit price in force at the time. The Club cancels the units so that remaining members have a proportionately larger holding in the assets of the Club.

The Club can pay the member out of its cash resources, but if there is not enough in the kitty it will have to sell shares to raise the cash. This can be problematic, because it may be a bad time to sell shares (if the market is low) and it may create tax liabilities which other members would prefer not to incur.

Firstly it can plan ahead. Standard Club rules require members to give notice of their intention to sell units. This gives the Treasurer time to work out whether the Club can buy back the units out of cash reserves or whether it has to sell shares to raise the money. If it makes sense, the Treasurer can conserve cash (i.e. not invest it) from monthly subscriptions to build up the fund necessary to buy back units.

If the Club does have to sell some shares to buy back units, the timing of those sales should be decided at a monthly meeting. But it is also fairly normal practice for the Treasurer to sell shares to at least half the amount on receiving the member's notice. This hedges against the risk that share prices will move sharply downward in the interim (which would obviously be bad for members).

Some clubs permit members to transfer units to each other free of club brokerage. If your Club allows this, a departing member can sell units to another member, thus avoiding the need for the Club to sell any of its shares.

Remember that members are liable for capital gains tax on gains made by the club over the years. Members should bear this in mind when withdrawing funds and plan to make the best use of their capital gains allowances.

For the same reason, a club winding itself up may choose to do so over a period of years rather than in one fell swoop. Typically, the members will agree on a change of rules which brings an end to monthly subscriptions, and sets out an orderly programme of share sales over a number of tax years. This allows members to realise gains in the most tax efficient way.

1. What is an investment club? 2. A simple explanation of how it works 3. Why join an investment club? 4. Deciding on your aims 5. Joining an existing club 6. Preparing to launch a new investment club 7. The draft constitution and rules 8. Drafting the investment strategy 9. Example of an investment strategy 10. Attracting members to your club 11. Preparing for the inaugural meeting 12. The inaugural meeting - appointment of officers 13. The inaugural meeting - key decisions 14. Things to do after the inaugural meeting 15. Starting the processes 16. Running the first meeting 17. Regular meetings - the key to success 18. The cash account 19. The capital account 20. The asset register 21. The annual general meeting 22. Tax 23. Performance measurement 24. Dealing with a member leaving 25. Conclusion

• ProShare Investment Clubs Looseleaf Manual
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• The Company of Successful Investors