Chapter 7 - Test

Question 1

Entities A & B are involved in the running of a unit trust. Entity A legally holds the trust assets and Entity B is responsible for the day-to-day running of the unit trust. From this information you can deduce that:

Select one:

a. Entity A is the depository and Entity B is the authorised corporate director of the unit trust.
b. Entity A is the authorised corporate director and Entity B is the depository of the unit trust.
c. Entity A is the manager and Entity B is the trustee of the unit trust.
d. Entity A is the trustee and Entity B is the manager of the unit trust.

Answer 1

d. Entity A is the trustee and Entity B is the manager of the unit trust.

chapter reference 7C1

Question 2

George is a basic-rate taxpayer whereas Henry, his brother, pays higher-rate tax. They are both invested in the same fixed interest OEIC fund that produces an income of £1,500 per annum gross. They have no other savings income and their OIEC income does not alter their tax brackets. Their respective tax liabilities from their OEIC income are:

Select one:

a. £200 for George and £400 for Henry.
b. £300 for George and £600 for Henry.
c. £100 for George and £200 for Henry.
d. £100 for George and £400 for Henry.

Answer 2

d. £100 for George and £400 for Henry.

chapter reference 7C10

Question 3

Gert is a basic-rate taxpayer who receives an income of £600 every six months from his only investment, a corporate bond unit trust. What is Gert’s tax liability on this income over a year, if any?

Select one:

a. £240.
b. £0.
c. £40.
d. £300.

Answer 3

c. £40.

chapter reference 7C10

Question 4

Joyce is due to invest £40,000 in a unit trust, her first investment into a regulated product. You can reassure her that her rights are protected by the:

Select one:

a. trustees of the unit trust, along with the FSCS, via the complaints and arbitration procedures and depositary safeguarding.
b. trustees of the unit trust, along with the FSCS alone.
c. trustees of the unit trust alone.
d. trustees of the unit trust, along with the FSCS and via the complaints and arbitration procedures alone.

Answer 4

d. trustees of the unit trust, along with the FSCS and via the complaints and arbitration procedures alone.

chapter reference 7C5

Question 5

Jung Woo, a higher-rate taxpayer, receives £7,000 income from his equity based OEIC. Assuming this is his only investment income, what is his tax liability on this income?

Select one:

a. £762.
b. £650.
c. £1,625.
d. £2,000.

Answer 5

c. £1,625.

chapter reference 7C10

Question 6

Mia has been told that her investment is trading at a discount to the asset value. What type of investment does she have?

Select one:

a. Open ended investment company share.
b. Unit trust.
c. Investment trust.
d. Exchange traded fund.

Answer 6

c. Investment trust.

chapter reference 7G2C

Question 7

Lena has recently invested £150,000 into a unit trust. Her bid / offer spread is most likely to be around:

Select one:

a. £6,000.
b. £9,000.
c. £13,500.
d. £3,000.

Answer 7

b. £9,000.

chapter reference 7C22

Question 8

Lora has a unit trust and Beth has an OEIC. An advantage for Beth of having the OEIC is that:

Select one:

a. it is more tax efficient than Lora’s unit trust.
b. it is able to issue multiple classes of share.
c. only Beth is able to hold her OEIC within an ISA.
d. the dealing costs on OEICs are significantly lower.

Answer 8

b. it is able to issue multiple classes of share.

chapter reference 7D5

Question 9

A retail UCITS unit trust has 20 holdings; by how many does this exceed the minimum?

Select one:

a. 0.
b. 4.
c. 8.
d. 10.

Answer 9

b. 4.

chapter reference 7B6

Question 10

Peter, a higher-rate taxpayer, received an income payment of £2,700 from a UK equity income unit trust. Assuming this is his only investment income, what tax is Peter liable for on this payment?

Select one:

a. £280.
b. £877.50.
c. £227.50.
d. £1,028.70.

Answer 10

c. £227.50.

chapter reference 7C10

Question 11

Star Investment Trust has an annual management charge [AMC] of 1.2%, whereas Moon Investment Trust has an ongoing charges figure [OCF] of 1.4%. This means that the:

Select one:

a. terms AMC and OCF are interchangeable and so Star Investment Trust is more cost effective.
b. AMC is variable based on fund costings, whereas the OCF tends to be a fixed amount.
c. AMC includes all charges including the initial charge.
d. OCF figure for Moon Investment Trust will include the AMC of that investment trust.

Answer 11

d. OCF figure for Moon Investment Trust will include the AMC of that investment trust.

chapter reference 7G12B

Question 12

Clive, a basic-rate taxpayer, is invested in a UK corporate bond unit trust. The distribution he receives is £150. When calculating his income tax position, the distribution is treated as being paid:

Select one:

a. gross but is subject to 10% tax via self-assessment.
b. net of tax at 20%.
c. gross and Clive will have no tax to pay if this falls within his personal savings allowance.
d. gross but is subject to 7.5% tax via self-assessment.

Answer 12

c. gross and Clive will have no tax to pay if this falls within his personal savings allowance.

chapter reference 7D6

Question 13

Andrew, an additional-rate taxpayer, wishes to invest into an offshore fund and is trying to decide between a reporting fund and a non-reporting fund. In making this choice he should bear in mind that:

You must select ALL the correct options to gain the mark:

a. any gains for Andrew on a non-reporting fund would attract 45% income tax.
b. only non-reporting funds can pay dividends.
c. the annual capital gains tax exemption is only available for reporting funds.
d. any capital gains achieved within a non-reporting fund are subject to income tax.
e. it is not possible to hold both reporting and non-reporting funds simultaneously.

Answer 13

a. any gains for Andrew on a non-reporting fund would attract 45% income tax.
c. the annual capital gains tax exemption is only available for reporting funds.
d. any capital gains achieved within a non-reporting fund are subject to income tax.

chapter reference 7F6

Question 14

Sarah, a non-taxpayer, made a gain of £23,000 on her unit trust holding. Karl, her husband and an additional-rate taxpayer, made a gain of £19,000 on his unit trust holding. Assuming that neither of them have made any other gains or losses in the 2020/21 tax year, what is their combined capital gains tax liability?

Select one:

a. £3,015.
b. £2,410.
c. £2,590.
d. £3,480.

Answer 14

b. £2,410.

chapter reference 7C11

Question 15

Uri is planning to invest in a UK gilt fund with a current value of £10m. According to the UCITS regulations, what diversification rules apply?

Select one:

a. The fund must be invested in at least 6 different issues of stock with no single stock holding exceeding 30%.
b. The fund must be invested in at least 16 different issues of stock with no single stock holding exceeding 30%.
c. The fund must be invested in at least 16 different issues of stock with no single stock holding exceeding 35%.
d. The fund must be invested in at least 6 different issues of stock with no single stock holding exceeding 35%.

Answer 15

a. The fund must be invested in at least 6 different issues of stock with no single stock holding exceeding 30%.

chapter reference 7B6

Question 16

Harry is an additional-rate taxpayer and receives a dividend distribution of £300 from his equity unit trust holding. What maximum further amount of tax will he need to pay on this distribution, assuming he has fully utilised his dividend allowance?

Select one:

a. £97.50.
b. £67.50.
c. £60.
d. £114.30.

Answer 16

d. £114.30.

chapter reference 7C10

Question 17

Will is making changes to his existing investments. He will suffer a potential liability to capital gains tax because he is:

You must select ALL the correct options to gain the mark:

a. switching funds within a fund of funds unit trust.
b. selling shares via a share exchange into units of a unit trust.
c. switching sub-funds within an umbrella fund open ended investment company.
d. selling units in a unit trust and buying back within an ISA.
e. transferring ownership of shares in an open ended investment company to his wife.

Answer 17

b. selling shares via a share exchange into units of a unit trust.
c. switching sub-funds within an umbrella fund open ended investment company.
d. selling units in a unit trust and buying back within an ISA.

chapter reference 7C11

Question 18

Jane, a non-taxpayer, Mark, a basic-rate taxpayer, Graham, a higher-rate taxpayer and the trustees of a discretionary trust all have £10,000 holdings in a UK gilts unit trust, and have all received a £500 distribution. Ignoring the personal savings allowance, they should be aware that:

You must select ALL the correct options to gain the mark:

a. the distribution is paid gross.
b. Mark is liable to pay income tax at 7.5%.
c. Graham is liable to pay an additional 32.5% tax.
d. Jane would be taxed at 7.5% at source and would be unable to reclaim this.
e. the trustees may be liable to pay income tax at 45%.

Answer 18

a. the distribution is paid gross.
e. the trustees may be liable to pay income tax at 45%.

chapter reference 7C10

Question 19

Victor is invested in a split capital investment trust. He has purchased zero dividend preference shares which:

You must select ALL the correct options to gain the mark:

a. are identical to capital shares.
b. have a fixed redemption date.
c. will be taxed under capital gains and not income tax rules.
d. give Victor the right to purchase further zeros at a fixed price on a pre-determined date.
e. are issued at an initial value that rises at a pre-determined compound annual growth rate.

Answer 19

b. have a fixed redemption date.
c. will be taxed under capital gains and not income tax rules.
e. are issued at an initial value that rises at a pre-determined compound annual growth rate.

chapter reference 7G7C

Question 20

Sergei has been advised to invest in an open-ended investment company. He should be aware that:

Select one:

a. this type of investment will typically invest to solely produce a high income.
b. this type of investment will always provide some degree of guaranteed return.
c. the assets are held for investors by fund managers.
d. this will typically be invested in 50 or 100 different share holdings.

Answer 20

d. this will typically be invested in 50 or 100 different share holdings.

chapter reference 7B

Question 21

Mark has a UK unit trust within which four of the holdings are at the maximum 10% value permitted. How many further holdings must there be as a minimum?

Select one:

a. 46.
b. 11.
c. 16.
d. 12.

Answer 21

d. 12.

chapter reference 7B6

Question 22

Bob is a member of a group who is responsible for looking after the interests of shareholders in an investment trust. As a result, Bob must be one of the:

Select one:

a. trustees appointed by the independent board of directors.
b. directors of the independent board of the public limited company.
c. salaried fund managers appointed by the board of directors.
d. authorised corporate directors established at outset.

Answer 22

b. directors of the independent board of the public limited company.

chapter reference 7G2

Question 23

The manager of a unit trust subcontracts out the investment management to a separate fund management company, which in turn selects a third party to handle day-to-day administration. The responsibility for the compliance of the administrators lies with the:

Select one:

a. fund management company.
b. trustees.
c. unit trust manager.
d. administrators.

Answer 23

c. unit trust manager.

chapter reference 7C1B

Question 24

Sheila owns shares in four different companies with a total value of £50,000. By switching these shares into an open-ended investment company [OEIC], she will be able to:

You must select ALL the correct options to gain the mark:

a. reduce the investment-specific risk.
b. have the comfort of receiving a guaranteed return.
c. gain exposure to a number of different asset classes.
d. select the shares for the OEIC.
e. avoid capital gains tax on the OEIC.

Answer 24

a. reduce the investment-specific risk.
c. gain exposure to a number of different asset classes.

chapter reference 7B

Question 25

What is the minimum number of shareholdings that a unit trust is allowed to hold?

Select one:

a. 16.
b. 36.
c. 20.
d. 40.

Answer 25

a. 16.

chapter reference 7B6

Question 26

Sade is invested in an offshore reporting fund. She should be aware that:

You must select ALL the correct options to gain the mark:

a. her share of the income will be subject to tax, even if an actual distribution is not received.
b. any dividends the fund receives will usually be subject to non-reclaimable withholding tax.
c. there is no need for her to declare any income to HM Revenue and Customs.
d. any capital gain on a sale is subject to normal capital gains tax rules.
e. they are deemed to be exempt from inheritance tax for UK residents.

Answer 26

a. her share of the income will be subject to tax, even if an actual distribution is not received.
b. any dividends the fund receives will usually be subject to non-reclaimable withholding tax.
d. any capital gain on a sale is subject to normal capital gains tax rules.

chapter reference 7F6A

Question 27

Vincent is a higher-rate taxpayer who has realised a gain of £8,000 when encashing a non-reporting offshore fund. Henry is a basic-rate taxpayer who has realised a gain of £6,000 when encashing a reporting offshore fund. Assuming they have both fully used their capital gains tax exemption in the current tax year and the gains do not change their tax brackets, what is their combined tax liability on these gains?

Select one:

a. £5,600.
b. £4,400.
c. £2,800.
d. £3,800.

Answer 27

d. £3,800.

chapter reference 7F6

Question 28

Greg is an additional-rate taxpayer and receives a dividend distribution of £200 from his equity unit trust holding. What maximum further amount of tax may he need to pay on this distribution?

Select one:

a. £85.
b. £90.
c. £65.
d. £76.20.

Answer 28

d. £76.20.

chapter reference 7C10

Question 29

Sean has invested in an investment trust, partly due to the fact it was trading at a discount. He will suffer the greatest loss if the discount:

Select one:

a. narrows and the stock market falls.
b. narrows and the stock market rises.
c. widens and the stock market falls.
d. widens and the stock market rises.

Answer 29

c. widens and the stock market falls.

chapter reference 7G2C

Question 30

Yvonne has just received the first distribution under her UK equity unit trust and has noted that she has also received an equalisation payment. She should be aware that this payment is:

Select one:

a. not subject to capital gains tax but may be liable to income tax.
b. potentially liable to income tax and capital gains tax.
c. deemed to be a return of capital and is not subject to income tax.
d. paid net of corporation tax and may be liable to capital gains tax.

Answer 30

c. deemed to be a return of capital and is not subject to income tax.

chapter reference 7C8

Question 31

When a unit trust is operating on an ‘offer basis’, this would tend to indicate that:

Select one:

a. the fund is new.
b. warrants are being offered alongside standard units.
c. demand for units in the trust is low.
d. demand for units in the trust is high.

Answer 31

d. demand for units in the trust is high.

chapter reference 7C22

Question 32

Jack & Jill made gains of £22,000 and £35,000 respectively from their OEIC holdings. Neither has made any other gains or losses in the 2020/21 tax year. If Jack is a basic-rate taxpayer, Jill is a higher-rate taxpayer, and these gains do not change this, what is their combined capital gains tax liability on these gains?

Select one:

a. £6,480.
b. £5,510.
c. £11,400.
d. £3,240.

Answer 32

b. £5,510.

chapter reference 7C11/7D6

Question 33

William, who has a taxable income of £65,000, receives a dividend distribution of £11,800 from his unit trust holding. Assuming he has no other dividend income, what amount of income tax will he need to pay on this distribution?

Select one:

a. £3,835.
b. £3,185.
c. £3,733.80.
d. £2,210.

Answer 33

b. £3,185.

chapter reference 7C10

Question 34

When considering an investment into a split capital investment trust, what factors should an investor take into account?

You must select ALL the correct options to gain the mark:

a. The redemption yield, as this measures the capital and income return on a particular share until wind-up.
b. A negative hurdle rate, as this indicates a negative outlook.
c. The asset cover, as this measures the company’s ability to meet the liability to share classes with a pre-determined redemption price.
d. A negative hurdle rate, as this indicates a positive outlook.

Answer 34

a. The redemption yield, as this measures the capital and income return on a particular share until wind-up.
b. A negative hurdle rate, as this indicates a negative outlook.
c. The asset cover, as this measures the company’s ability to meet the liability to share classes with a pre-determined redemption price.

chapter reference 7G6

Question 35

Shane’s unit trust is invested in a UK Equity Income fund. Virat’s open ended investment company is invested in a UK Corporate Bond Fund. When considering the income distributions they receive from their investments, it would be correct to say that:

Select one:

a. both will be paid with no tax deducted.
b. Shane’s will be paid with no tax deducted, and Virat’s will be paid net of 20%.
c. Shane’s will be paid net of 10% and Virat’s will be paid net of 20% tax.
d. both will be paid net of 20% tax.

Answer 35

a. both will be paid with no tax deducted.

chapter reference 7C10

Question 36

The regulatory framework and structure of an open-ended investment company means that:

You must select ALL the correct options to gain the mark:

a. the depository is responsible for the preparation of accounts.
b. the tax position applying to the investor is the same as for unit trusts.
c. the scheme operator must report to investors twice a year.
d. a dilution levy may be charged for large inflows or outflows from the fund.
e. shares issued to investors must be based on a single pricing structure.

Answer 36

b. the tax position applying to the investor is the same as for unit trusts.
c. the scheme operator must report to investors twice a year.
d. a dilution levy may be charged for large inflows or outflows from the fund.

chapter reference 7D

Question 37

Tyra is investing £120,000 in a retail non-index tracker UCITS fund. She is keen that the fund is diversified. You can reassure her that the maximum monetary holding she will have in the shares of one company is:

Select one:

a. £18,000.
b. £6,000.
c. £10,000.
d. £12,000.

Answer 37

d. £12,000.

chapter reference 7B6

Question 38

The first income distribution from a unit trust includes an equalisation payment, which:

You must select ALL the correct options to gain the mark:

a. is partially subject to income tax.
b. is fully subject to income tax.
c. represents a partial refund of the original capital invested.
d. aims to allow the same pence per unit dividend payment to be made to all unitholders.

Answer 38

c. represents a partial refund of the original capital invested.
d. aims to allow the same pence per unit dividend payment to be made to all unitholders.

chapter reference 7C8

Question 39

If Derek has invested in an offshore reporting fund, he needs to be aware that:

Select one:

a. capital profits are potentially subject to income tax.
b. income is always distributed net of 20% tax.
c. the fund must distribute all of its profits.
d. capital profits are potentially subject to capital gains tax.

Answer 39

d. capital profits are potentially subject to capital gains tax.

chapter reference 7F6A

Question 40

What additional reporting is a reporting fund obliged to make compared to a non-reporting fund?

Select one:

a. Only interest-bearing income must be reported to HM Revenue and Customs.
b. All income must be reported to HM Revenue and Customs.
c. Only dividend income must be reported to HM Revenue and Customs.
d. All income must be reported to the Financial Conduct Authority.

Answer 40

b. All income must be reported to HM Revenue and Customs.

chapter reference 7F6A

Question 41

If a fund of funds is described as ‘fettered’, what restriction is imposed on it?

Select one:

a. Investment is restricted to one geographical area.
b. Investment is restricted to only one asset class.
c. It is subject to stricter oversight by the FCA.
d. It may only invest in funds run by the same management group.

Answer 41

d. It may only invest in funds run by the same management group.

chapter reference 7E1A

Question 42

Cerys receives distributions from a unit trust that is invested in a UK gilt fund, which means that:

You must select ALL the correct options to gain the mark:

a. the distributions are paid gross.
b. if Cerys is a non-taxpayer, she can reclaim any tax paid from HM Revenue and Customs.
c. if Cerys is an additional-rate taxpayer, she is subject to £450 income tax on an interest distribution of £1,000.
d. if Cerys is a higher-rate taxpayer, she is subject to a further £225 income tax on an interest distribution of £800.
e. if Cerys is a basic-rate taxpayer, she has no further liability if the distribution is within her personal savings allowance.

Answer 42

a. the distributions are paid gross.
c. if Cerys is an additional-rate taxpayer, she is subject to £450 income tax on an interest distribution of £1,000.
e. if Cerys is a basic-rate taxpayer, she has no further liability if the distribution is within her personal savings allowance.

chapter reference 7C10

Question 43

A fund consists of 100% UK gilts and is valued at £500 million. To stay within the diversification rules, a single stock within the portfolio could be worth as much as:

Select one:

a. £100 million.
b. £150 million.
c. £50 million.
d. £25 million.

Answer 43

b. £150 million.

chapter reference 7B6

Question 44

Anna works for a small open ended investment company [OEIC]. She is responsible for the preparation of accounts as well as ensuring the OEIC complies with its investor protection requirements. This means that Anna must be:

Select one:

a. one of the trustees.
b. the authorised corporate director.
c. the fund’s internal depository.
d. the fund’s independent depository.

Answer 44

b. the authorised corporate director.

chapter reference 7D2

Question 45

All the warrant holders within an investment trust decide to exercise the warrants they hold. Where the option price is below the market share price, this will have a:

Select one:

a. negative impact on the undiluted net asset value [NAV].
b. negative impact on the diluted net asset value [NAV].
c. positive impact on the diluted net asset value [NAV].
d. positive impact on the undiluted net asset value [NAV].

Answer 45

a. negative impact on the undiluted net asset value [NAV].

chapter reference 7G2B

Question 46

Spires Investment Trust has 22 million ordinary shares and 4 million outstanding warrants that give the holders the right to subscribe at £1 per share. If the trust’s assets are worth £24 million, this means that:

You must select ALL the correct options to gain the mark:

a. when warrants are exercised, the number of ordinary shares and the value of the trust increase proportionately.
b. the diluted net asset value represents the true picture if all warrants were exercised.
c. the diluted net asset value is £1.08 [to 2 decimal points].
d. only the undiluted net asset value is expressed as a value per share.
e. the undiluted net asset value is £1.09 [to 2 decimal points].

Answer 46

b. the diluted net asset value represents the true picture if all warrants were exercised.
c. the diluted net asset value is £1.08 [to 2 decimal points].
e. the undiluted net asset value is £1.09 [to 2 decimal points].

chapter reference 7G2B

Question 47

Faith Bank are the trustees of a unit trust. Their responsibilities include all of these, APART from:

Select one:

a. ensuring adherence to the terms of the trust deed.
b. arranging the auditing of the trust.
c. selecting investments.
d. arranging meetings of unitholders.

Answer 47

c. selecting investments.

chapter reference 7C1A

Question 48

Richard, a higher-rate taxpayer, is considering an offshore investment. When deciding between reporting and non-reporting funds he should be aware that:

You must select ALL the correct options to gain the mark:

a. non-reporting funds are usually roll-up funds.
b. the annual capital gains tax [CGT] exemption cannot be used to mitigate any CGT tax liability in a reporting fund.
c. dividends paid from reporting funds constituted as companies are taxed as foreign dividends.
d. for non-reporting funds, the highest level of tax that Richard would pay is 40%, if his tax status remains unchanged.
e. he will only be taxed on his share of the income within a reporting fund if an actual distribution is received.

Answer 48

a. non-reporting funds are usually roll-up funds.
c. dividends paid from reporting funds constituted as companies are taxed as foreign dividends.
d. for non-reporting funds, the highest level of tax that Richard would pay is 40%, if his tax status remains unchanged.

chapter reference 7F6

Question 49

Asif has taxable income of £50,000. In addition, he receives £4,000 dividend income and £5,000 savings income. How much additional income tax would he be liable to as a result of these dividends and savings income?

Select one:

a. £1,800.
b. £3,100.
c. £2,450.
d. £2,250.

Answer 49

c. £2,450.

chapter reference 7C10

Question 50

Loic and Robin are both UK-residents and higher-rate taxpayers. They have both realised a gain of £15,000. Loic’s is from his interest-producing reporting offshore fund and Robin’s is from his non-reporting offshore fund. Assuming they have both fully utilised their capital gains tax exemption and their personal savings allowance in the 2020/21 tax year, their tax liabilities will result in:

Select one:

a. Robin paying £1,800 more than Loic.
b. Loic paying £1,800 more than Robin.
c. Robin paying £3,000 more than Loic.
d. Loic paying £3,000 more than Robin.

Answer 50

c. Robin paying £3,000 more than Loic.

chapter reference 7F6

Question 51

John, a higher-rate taxpayer, firmly believes he will be a basic-rate taxpayer when he needs to realise any investments. If he is looking to invest offshore, which of these options is most likely to be appropriate for him?

Select one:

a. Non-reporting fund.
b. Index fund.
c. Distributor fund.
d. Reporting fund.

Answer 51

a. Non-reporting fund.

chapter reference 7F6B

Question 52

When more units or shares can be created on demand, this describes the features of:

Select one:

a. unit trusts and investment trusts.
b. OEICs and unit trusts.
c. OEICs only.
d. OEICs and investment trusts.

Answer 52

b. OEICs and unit trusts.