Chapter 5 Investment Taxation Flashcards
(43 cards)
1
Q
ISA Eligibility rules
- Limits
Junior ISA
16 -17
A
- Resident in UK or non resident and crown employee (or spouse /partner)
- 18 + S&S, innovative or Lifetime ISA
- Cash - 16 minimum
- Junior ISA - £9k limit for 20/21. Withdraw at 18. Cash & S&S only
- CAn transfer from CTF to ISA
LIMITS: £20k across cash, S&S, IFISA - Up to £4K in Lifetime ISA - 16-17 Can have Junior ISA and Cash ISA
2
Q
ISA Tax treatment
- What if holder becomes non UK resident
- On death
A
- Interest yields from cash/fixed int/divs paid gross and tax free
- All encashment free of CGT
- Can keepISA if non - res, but cant add to it
Death:
Continuing ISA until earlier - Account closed, 3 years DRO date of death or administration of estate
- After 3/12/14 spouse/ civil partner camp be transferred to survivor by one off additional allowance
- allowance based on valued of deceased ISA at dod or when ISA ceases to be continuing account, whichever higher.
- Don’t actually have to inherit to get allowance
3
Q
- Help to Buy ISA
- When finish
- Bonus?
- MAximum monthly saving
- Property purchase amount available - London or elsewhere
A
- from 1.12.15 to Dec 2019
- Bonus - every £200 isn’t time buyer saves, £50 government bonus
- Max monthly £200 - Up to maximum £3,000 on £12,000 savings
- London £450k max, Elsewhere £250k
4
Q
- Lifetime ISAs Limit Bonus What for Penalty. Unless?
A
- available since 6/4/2017
£4K annual limit
- available since 6/4/2017
- 25% bonus
- First house purchase or retirement at age 60
- Bonus withdrawn and 5% penalty if other purpose (unless terminally ill)
5
Q
- C hargeable gains
A
DAMPS
- Death
- Assigment for money or moneys worth (sale)
- Maturity
- Partial surrender in excess of 5%
- Surrender (full)
6
Q
Chargeable Event in a Trust
- Who liable. What can they do
- If not (point one) who then liable and what rate
- if Trustees non uk resident
- What should trustees do to avoid high rates of tax
A
- If settlor alive and UK resident , they are liable, but can recover tax from trustees
- If settlor not liable, Trustees have liability- 20% up to standard rate band, then 45%, although credit given for 20% deemed taken at source for onshore bonds
- If Trustee non Uk resident, UK resident beneficiaries are liable to personal rates with no top slicing relief
- Trustees can consider assigning the policy to the beneficiaries in the year before the chargeable event
7
Q
Reporting / Non Reporting Funds
- Taxation
A
- Reporting : Dividends ()7.5%, 32.5% or 38.1%) ; interest (o%, 20%, 40% or 45%)
- Starting rate for savings, personal savings allowance and dividend allowance apply
- CGT applies as normal
Non Reporting :
- Income accumulates - only taxed on disposal
- Gain calculated according to CGT principles. No CGT annual exempt amount allowable
- GAin taxed at 20%, 40% or 45%. No starting rate, PSA/DA.
8
Q
REITS
(5)
- How taxed
A
- Must be tax resident in UK and be closed end company
- At least 75% of gross profits must originate from property letting (this part exempt from corporation tax) and 75% of fund in property
- At least 90% of the rental profits from exempt element must be paid as dividends to investors within 12 month accounting period
- interest on borrowing must be 125% covered by rental profits
_ Exempt from rental profits and capital gains - Paid as property income and paid net of BRT
(Property Income Distribution PID)- cant use PSA or /DA classed as non savings - Gains on sales of developed property taxed at 30% unless held for 3 years from completion
Tax :
from tax exempt element - Deemed property income and taxed accordingly - From taxed element
Treated as normal dividend and taxed accordingly
GH;
2 internal sub sections / 2 income streams - tax exempt ring fenced section contains property + non tax exempt provides property management services
“ All about the tax”
“We want you to be a rent collector”
9
Q
-Top Slicing
5 Step process
A
- Step one Calculate total taxable income for year and identify how much of gain falls into relevant tax bands
- Step two - Calculate total tax due on gain and deduct basic rate tax deemed paid at source
- Step Three - Calculate annual equivalent (usually gain divided by number of years policy in force)
- Step four - Calculate tax due on annual equivalent, deduct basic rate tax deemed taken at source and multiply back up by number of policy years used in step three
- Step Five - Find top slicing relief due by deducting the amount in step four (relieved liability) for amount in step 2 (total liability)
Example:
50k gain, 5.5 years held. £30k after PA
30,000 @ 20%. = £6,000
Tax on gain:
500 @ 0% = £0
£7,000 @ 20% = £1,400
£42,500 @ 40% = £17,000
Step 2 Tax on gain : £18,400 Less basic rate deemed paid on £50k = (£10,000) Tax remaining £8,400 Step 3 Annual equivalent £50,000 /5 = £10,000 500 @ 0% = £0 7,000 @ 20% = £1,400 2,500 @ 40% = £1,000 Total. = £2,400 Step 4 Tax on annual equivalent £2,400 Less basic rate £10,000 @ 20% = £2,000 tax remaining. £ 400 Multiply back by 5 = £2,000 Step 5 Top slicing relief due Step 2. £8,400 Less Step 4 (£2,000) Top slicing relief £6,400
Liability after to slicing relief is £24,400 (total liability to tax) less £6,400 (top slicing relief) = £18,000
BAsic rate credit is 50,000 @ 20% = £10,000
leaves £18,000 less £10,000 = £8,000
10
Q
OEIC
Unit Trusts Fund Issues Price Units/shares Charges protection of assets Managed
A
OEIC Fund in company Issues shares Open ended Single price Issues different classes of shares Charge paid from fund Independent depositary protects shareholder assets, Company law & FCA Managed by corporate director Internal gains exempt from Corporation tax
Unit Trust Fund in trust Issues units Open ended Dual price - bid/offer Only difference between units is accumulation or distribution Charges included in manager fees Trustee oversees fund Fund manager
11
Q
Investment Trust:
Features:
Differences (5)
Compared to OEIC - costs , risk
- What can IT do, as opposed to UTs/ OEICS
A
- Investment Trust > Think Investment company> company law
- Costs or purchasing shares in ITs is lower
- Risk in IT higher
- ITS can borrow Money (gearing)
- ITs are closed ended - UTs/OEICS are open ended
= ITS are PLCs, whilst UTs are Trusts - ITS listed and trade on London Stock exchange . UTs and OEICS not listed
- ITS can be bought and sold any time of day, UTs / OIECS can only be bought/sold once per day.
GH:
ITs: Closed ended, priced by supply & demand, generally lower charges, different share classes, gearing, more specialised.
Unit Trust/OEIC : open ended, proceed to NAV, higher charges, often one share class, gearing capped at 10%, mainstream investments generally
Can invest: quoted/unquoted shares, Venture capital, worldwide
Income is always dividend - can use div allowance
12
Q
INVESTMENT TRUSTS -
HMRC approval
A
- Investment Trust must be resident in UK
- At least 70% of ITs income must be from relevant investments
- ITs ordinary shares must be listed on recognised stock exchange ie LSE
- Can only retain maximum of 15% of its earnings
- Can’t invest any more than 15% of its assets in any one company
- ITs memorandum and articles of association must prohibit distribution of surpluses from disposals as dividends
13
Q
Conditions an EIS must fulfil to qualify for EIS
A
- company must be unlisted when EIS shares issued (no arrangements to become listed).Being on AIM is ok\
- Pemanent establishment in UK
- Fewer than 250 employees (500 KIC)
- Gross assets not more than £15m before investment ands £16m after
- Qualifying trade (excluded dealing in land, commodities, financial instruments , financial activities, property development
- Cannot raise more than £5m (£10m KIC) in past 12 months from `EIS or VCT
- £12m cap(£20m KIC)
- IHT relief 2 years
-
14
Q
EIS
Important points
A
- 30% tax relief (investor must be liable for IT)
- New shares only
- Unlisted company (can be on AIM)
- 100% shares
- Max £1 million (£2m KIC) per tax year
- Disposal exempt CGT If held 3 years and tax relief given at outset
- Can be used for CGT deferral- no more than 1 year before/3 years after original disposal. Gain becomes chargeable on disposal of EIS
- If disposal creates loss, amount of loss (less income tax relief given at outset) can be taken off capital gain or income
- Hev to be unconnected with company -CGT deferral available to everyone
- 80% of funds must be applied in year 1 and then 20% balance over 2 years
15
Q
SEIS
- Maximum investment
- How long do shares have to be held
- CGT
- connected
A
- Maximum investment £100k
_ Relief withdrawn if held less than 3 years
-Relief can be carried back one year - Income tax claim can be made up to 5 years after 31st January following tax year of investment.
- Half of any chargeable gains can be reinvested and be exempt from CGT (up to £50k). DIsposal and reinvestment must take place in same year
- Disposal proceeds exempt from CGT if held 3 years. Must qualify for IT relief in 1st place
- Must invest in ordinary shares - no prior exit strategy
- Investor may be a paid Director of the company when shares are subscribed for
16
Q
SEIS conditions
A
- Company must have been trading for less than 2 years. Unlisted
- gross assets less than £200k. Fewer than 25 employees
- 100% shares
- Single company structure
- Company must be unquoted at time of share issue
- Must be carrying on qualifying trade
- 100% IHT relief if held 2 years and still held at death
- Maximum 3 years t o apply funds to qualifying investment
17
Q
VCT
- Tax relief
- Dividends
- CGT
- Death
- HMRC qualifying
A
- 30% income tax relief (holding period 5 years)
- Approved Investment Trust company
- Maximum investment £200,000
- No income tax on dividends
- Exempt from CGT on disposal. No holding period
- Can’t defer gain . No IHT relief
HMRC: - must not be a close company
- Must be listed on EEA stock exchange
- Income must be wholly or mainly derived from shares
- At least 80% must be qualifying unlisted trading companies
- AT least 70% of qualifying investment must be in shares- balance can be debt/ gilts
- VCT must not hold more than 15% of ordinary shares in any one company
- At least 10% of investments in any company must be in ordinary, no. Preference shares
- Companies have no more than £15m gross assets before or £16m after
- Fewer than 250 employees (500 KIC)
- Funds must be applied within 3 years
- MAximum annual investment by VCT £5m (£10m KIC)
- Generally not invest in cos more than 7 years old (10 KIC)
- CAp on investment of 312m (£20m KIC) applies EIS/SEIS/VCT
18
Q
What cant you do /different with VCT/different to EIS or SEIS
(5)
A
- Holding period 5 years ( others are 3 years)
- Can’t carry back one year (can ESI/SEIS)
- No income tax on dividends
- Gains (CGT) exempt from outset ( no holding period of 3 years)
- No CGT deferral relief
19
Q
What is an ETF
Benefits (4)
Physical v’s synthetic
A
“Passive fund for active investors” traded any time of day (buy & sell) Real time (trade like shares)
(OEIC valued and deal once per day)
ETF - Open ended fund index tracking
- No stamp duty
- Often tracks index, sectors ,commodities etc
- very cheap way of gaining exposure. Cheaper than collectives
- more transparent than fund
- Collection of stocks and securities - traded on exchange
- multiple underlying assets
- ETFs trade throughout the day (unlike mutual funds)
Physical: Investment house (Barclays)actually buying stocks eg FTSE 100. Arithmetic basis.
Synthetic: 3rd party agreement with counterparty. Will give movement in asset price ie buying a derivative with 3rd party - popular for commodities.No income stream fro synthetic. COUNTERPARTY risk
20
Q
ETFS
- Advantages
- Disadvantages
A
Pros
- access to many stocks across various industries
- Low expense ratios and fewer broker commissions
- Diversification
Cons
- Actively managed ETFS have higher fees
- Single industry ETF has higher fees
- Lack of liquidity
21
Q
EIS
Loss relief
A
HRT realised gain £51k. Invested £39k into EIS (gets 30% IT relief of £11,700)
Remaining £12k is covered by annual exempt amount
3 years later co. Goes into liquidation
net loss is £39k less IT relied of £11,700 - £27,300
Loss can be set against income tax or CGT
Income tax saving £27,300 @ 40% = £10,920
OR
Could set against CGT but would only be 20/28% as opposed to 40%
22
Q
Zero Coupon
4 points
A
- No interest payments (coupon)
- Issued below par
- Return is gain at maturity on nominal value payment
- Income tax liability rather than CGT
23
Q
Preference Shares
(3) key areas / differences
A
- Expectation for receipt of dividends
- No voting rights
- Return of capital if liquidated over ordinary shares
- Lower Risk than ordinary
- Dividend set at fixed rate
24
Q
How is Offer/Buying price arrived at for Unit Trust
A
- Underlying assets market value
- Add dealing costs, stamp duty, broker fee
- add other UT assets
- Deduct tax,fees,charges and expenses
- Divide total by number of issued
- add initial charge
25
Advantages of indirect property investment
- Diversification
- professional management
- less administration and paperwork
- liquidity
- partial sale
- possibility of smaller /regular investments
- investor protection via increased regulation
- Potential CGT savings by partial sales
26
What is a REIT
- Corporation. Tax
- Qualifying conditions
- Company that own real estate
= Generates income through letting, renting and sales
- Income distributed directly to shareholders
- Corporation tax exempt on letting part of business and qualifying chargeable gains depending on conditions met-Qualifying activity must be ring fenced
- corporation tax paid on other sources
Qualifying:
- Single company owns and manages commercial or residential property on behalf of shareholders
- Must be UK resident
- Closed ended
- Quoted on a recognised stock exchange
- Corporation tax exempt ( on letting part) at least 75% of gross profits come from property letting and interest on borrowing is at least 125% covered by rental; profits
- Gains on sale of properties developed are taxable at 30%, unless held for 3 years from completion
- at least 90% of rental profits must be paid out within 12 months from end of accounting period
- Income from exempt part paid as property income distribution (PID). Paid net of 20%. Non tax payer can reclaim. HRT extra 20%. ART 25%
- Dividend from non exempt element. Paid gross
UK REIT itself pays no CGT on disposal of rentals. Investor pays CGT on gain from shares
27
Cash Investments
| Risks (4)
- Interest rate variations - INTEREST RATE RISK
- No capital growth
- Default risk- FSCS £85k per individual . 5 - 20 days. Per institution. Temporary high balance £1m limit for max 6 months (eg lottery, sale of property)
Inflation risk
- Exchange rate risk
28
Investment Trusts
Structure (8)
- PLC invests in. Other companies
- Shares (quoted/unquoted)
- venture capital
- Worldwide
- Regulated under company law
- Traded on exchange
- closed ended - supply & demand
Limited life
- Share price disconnected from NAV
29
Benefits of Investment Trusts (4)
- Cost.
- Discount to NAV
- Continuously priced : Do it any time of day - Unit Trusts aren’t listed on stock exchange. Deal twice a day
-
30
PAIF
Property Authorises Investment Fund
Structure ?
- Open ended (REIT closed ended IT)
- Structured as OEIC )if your wanted money out you go back to fund)
- Contains cash element to aid liquidity
- Investor owns shares in. Property that invests in property ( 3 pots instead of 2)
Ring fenced property letting = at least 60% of overall gross profits & 60% of fund in property
NO 90% rule
- No corporate investor can hold more than 10% of funds NET Asset value (NAV)
Cash element : Interest paid gross. Internal taxation : corporation tax as usual...Taxation of investors ...usual interest treatment ie PSA, savings allowances etc
6 month encashment clause
31
REIT v’s PAIF Differences (5)
```
REIT:
- Closed
- IT
- 75% min in property
- 2 income streams
(Property ring fenced) - Dividend (non)
- Can be in ISA
```
```
PAIF
- Open
- OEIC
60% minimum in property
- 3 income streams (property, non proiopety & cash)
- Can be ISA
```
32
OEIC & UNIT TRUST Diversification rules for actively managed fund
Tracker
- Minimum holdings actively managed OIEC / UT= 16
- Maximum of 10% holding - 4 allowed
- Max 5% - 12 allowed
Gets 16
Tracker:
- 20% maximum in one company in any one index (could go up to 35%)
33
Gold: 5 benefits and 3 drawbacks of holding gold physically as part of a balanced portfolio
Benefits:
1) Diversification 2) reduce overall volatility 3) negative correlation with equities and bonds4) hedge against inflation 4) tangible 5) hedge against political instability 6) CGT free
```
Disadvantages:
1) No income
2) difficult to store /extra insurance
3) price arrested by supply & demand
WIDE BUY & SELL SPREAD AND HIGH TRANSACTION COSTS
```
34
Property - Risks of direct investment
- Value falls
- Interest rates could increase which affects mortgages
- Maintenance costs
- Liquidity
- Void risk
35
What is ETF
- Passive (tracks index).Basket stocks or commodities. 1 share rather than whole lot
Advantage:
Cheap, simple, wide range of investments, easily traded. Access to what you might not get.No stamp duty. Charges less. Any denomination. Traded any time of day
Disadvantage:
Synthetic /options / futures. More risk. More complex. Not going to beat market. Don’t perfectly track - tracking error . Currency risk
Geared ETFs can magnify losses - extra cost
36
Additional information IFA would need in order top establish investment needs (7)
- ATR
- Capacity for loss
- Health
- Emergency fund
- Other assets liabilities
- Ethical/socially responsible preferences
- Future lump sums required
37
Investment Trusts - Split Capital
Three classes
Hurdle rates
Asset Cover
Benefits of buying at discount/premium to NAV
- Zero Dividend preference shares
No income, but set distribution of capital on wind up (low risk)
- income shares:
Income during life and predetermined capital; return (medium risk)
Capital Shares:
No income. Remainder of assets (after zero and income shares) (High risk)
Hurdle rate - annual compounded rate of growth required to pay off people with prior claim. Hurdle rate differs depending on class of share. Can be negative
Asset cover: eg £70m assets, £100m liabilities
£70m /£100m = 0.7
Shortfall if ,1
Discount to NAV :if in demand will turn to premium. Higher yield. BUT discount may get larger, lower yields if purchased at premium
38
Investment Trusts- Warrants
| Describe
- Normally issued at outset where set up costs high etc. offered on x for y
- Sweetener
- option to buy additional shares for a fixed price in future.
- Undiluted or diluted valuation
Undiluted : Assets/no. Shares (ignore warrants)
Diluted NAV : Assets - liabilities (value warrants) / No total shares (with warrants)
39
Unit Trust Manager Duties
- asked
- MAintain record of units
Responsible for day to day running
- Manages Trust in lime with regulation, Trust deed
- In return for annual management fee
- Responsible for promotion &. Advertising
- Selecting investments & fund administration
- Must have adequate financial resources
- Must supply info to Trustee when asked
- MAintain record of units
40
Trustee duties
- Legal owner of assets
- Must be regulated by FCA
- mustbe independently from management group
- Key role to ensure investors protected
- Hold assets
- Check managers actions and investments
- Responsible for register
- Distroibution of income to unit holders
41
UCIS: Unregulated Collective Investment Scheme
Who can be promoted to
- Not retail
- Liquidity limited - (investments might be wine, crops , timber)
- UCIS - unregulated (not authorised by FCA)
- No investor protection
- No redress
- underlying investments more risk
- Mostly offshore
promoted: certified high net worth, self certified sophisticated investor
Cant promote to normal investors
42
Fettered v Unfettered
Fettered: Multi manager selects funds they believe to be best in each asset class. MAnager can only select from within their organisation
Advantages - costs usually lower. Multi Manager has more access to underlying managers
Unfettered - Can select from any organisation and go for best. More to choose from investment styles and funds .Should be greater diversification
43
Manager of Manager
- How Work
- Advantage
- Disadvantage
- Overall manager decides asset allocation
- appoints manager to to run each sector/objective
- Monitors performance
- Can replace managers / replacement takes over existing assets
- funds are segregated
- discretionary
Advantage:
- Bespoke mandate/ overall manager has say in investments
- Can replace managers
- No requirement to sell a fund and replace
Disadvantage
- New manager left with whatever predecessor had
- Limited number of managers to run mandate
