March 2023 Flashcards
State the main tax allowances that would be potentially available to Mathieu and Johanna in respect of income generated from their GIA and calculate, showing all your workings, the total income they could generate between them in the current tax year, without liability to personal taxation.
Mathieu, aged 52, and Johanna, aged 54, are married. Mathieu is employed as a project manager by an
international construction business with a salary of £90,000 per annum and Johanna has recently become
a partner in a law firm with her partnership share income in excess of £175,000 per annum.
Personal Savings Allowance
Johanna = £0/not available
Mathieu = £500
Dividend Allowance
£2,000 x 2/each = £4,000
Personal Allowance
Johanna = £0/not available
Mathieu = £12,570
Total = £4,500 or £17,070
The authorised corporate director (ACD) for Style Fund Managers has recently announced it intends to launch a global emerging markets version of the Style Unconstrained strategy. As Mathieu and Johanna have always invested in UK equities, they would like to understand more about investing on a global basis.
Identify six main risks of investing in a global emerging markets equities fund and provide one reason for each risk.
- Currency
- Adverse exchange rate movement/lack of/cost of hedging.
- Economic
- Different stage of business/economic cycle at same time/reliance upon foreign currency/capital flight.
- Concentration
- Index composition/weighting may be different.
- Political
- Political decisions/instability.
- Liquidity
- May not be able to divest quickly/at fair price.
- Governance/legal/regulatory
- Lower accounting standard/less transparency/less corporate governance.
- Manager
- May not have local knowledge/experience in geography.
State the options that are available to Johanna at the forthcoming maturity of the issue of Index-Linked Savings Certificates.
Renew at a new term of same length.
* Renew at a new term of different length.
* Cash it in.
Explain briefly to Johanna how the total maturity value of the Index-Linked Savings Certificates is calculated. No calculations are required
- The original value;
- plus, interest;
- plus, inflation.
- using CPI.
Identify four main benefits of investing in NS&I products.
- No market risk.
- Accessible/highly liquid/deposit-based.
- Guaranteed/government backed/low default risk;
- without limit/above £85,000/FSCS limit.
- No charges.
Outline the tax treatment of Johanna’s holding of NS&I Green Savings Bonds.
Johanna is an additional rate tax payer
Green Savings Bonds are all 3-year fixed term
* All/3 years’ interest;
* taxable at 45%/additional rate;
* at maturity/end of term.
* Taxed as savings/income tax/PSA not available.
Calculate, showing all your workings, the maximum amount of new money that Johanna could invest into the NS&I products held in her portfolio.
The below are current investments made this tax year
Premium Bonds
£50,000 - £28,000 = £22,000
Green Savings Bonds
£100,000 - £75,000 = £25,000
Index-Linked Savings Certificates
£0/not open to additional investment
Describe the main characteristics of a value-based investment style.
- Bottom-up;
- uses fundamental analysis to find;
- stocks that are under-valued/out of favour/mis-priced.
- Low P/E;/P/B;
- or high dividend yield.
- Potential for re-rating/mean reversion.
- Often contrarian.
- Long-term view.
Calculate, showing all your workings, the time-weighted rate of return (TWR) for the Style Unconstrained fund over the period of the most recent annual statement.
Period 1
(£172,000 / £151,000) = 1.139072
Period 2
£160,000 / (£172,000 + £18,000) = 0.842105
(1.139072 x 0.842105) -1 = -0.040785 x 100 = -4.08%
Explain briefly why Mathieu and Johanna would use the TWR rather than the money weighted return (MWR) when evaluating the performance of the fund.
- Better for comparing funds.
- Not influenced by cash flow/timing;
- as outside of manager control.
- Focuses on individual manager/performance.
- TWR compounds multiple sub-periods/shows change over entire period.
Describe briefly the main functions of the authorised corporate director (ACD) in respect of the structure and operation of an OEIC.
- Compliance and regulatory reporting.
- Responsible for pricing/valuations.
- Appoints/oversees manager.
- Buys/sells shares.
- Maintains shareholder register.
- Maintains liquidity/imposes dilution levy.
- Prepares accounts.
Describe briefly the main functions of the depositary in respect of the structure and operation of an OEIC.
DASCOM
- Acts as custodian;
- safeguards assets.
- Collects/pays income distributions.
- Monitors ACD;
- on investment/borrowing limits.
- Deals with any wind-up of fund.
Explain briefly the tax treatment of dividends paid from a VCT and from a SEIS.
VCT
* Tax-free
SEIS
* Dividend allowance available/ first £2,000 taxed at 0%.
* 8.75% / 33.75% / 39.35%.
Calculate, showing all your workings, the total dividends that would be paid to Mathieu, including any tax liability, if he invested a further £15,000 into a VCT and a further £20,000 into a SEIS in the current tax year. Assume the yield remains the same for the existing holdings and the new investments.
Assume he is a HRT
Total dividends
VCT
(£220,000 + £15,000) = [£235,000 x 6.2%] = £14,570
SEIS
(£43,000 + £20,000) = [£63,000 x 3.4%] = £2,142
Tax liability
SEIS
£2,142 x 33.75% = £722.93
or
less DA/£2,000 = £142
£142 x 33.75% = £47.93
Total gross = £16,712.00 or
Total net = £15,989.07 or £16,664.07 (if DA applied)
Explain briefly reinvestment relief in respect of investment into a new SEIS.
- 50% of gain;
- exempt;
- up to maximum £50,000.
- Must receive/qualify for Income Tax relief.
Calculate, showing all your workings, the information ratio of the FTSE 250 listed investment trust.
56,250 - 50,000 = 6,250
(6,250 / 50,000) x 100
= 12.5
(12.5 - 11) / 5
1.5 / 5 = 0.3
Outline the main benefits to Syed offered by segmentation of the onshore investment bond.
- Can encash whole segment/segments in full/all segments.
- May keep Syed as BRT/prevents HRT/maximises any top-slicing.
- Defers gains/chargeable event for longer.
- Takes into account investment performance/actual gain or loss.
- Can reduce chargeable gains/more tax efficient.
- Can assign/gift segments.
Describe the regular withdrawal facility of the onshore investment bond including the tax treatment based upon Syed’s Income Tax position.
- Up to 5% pa;
- of original investment/£75,000
- Cumulative/unused 5% carried forward.
- Deemed as return of capital.
- Tax-deferred;
- to 20 years/surrender/death.
- Corporation Tax paid internally.
- 20% BRT deemed paid/additional 20% if becomes HRT.
Calculate, showing all your workings, the dividend cover for Tall Curve plc on a total profit basis.
18,400,000 - 6,150,000 - 3,200,000 = 9,050,000
(9,050,000 / 7,950,000) = 1.14 x/times
Comment on the dividend cover for Tall Curve plc
1.14times
- Dividends covered by earnings.
- Close to 1/low cover.
- Dividend may have to be cut in the future/ vulnerable.
- Company is paying out majority of profits/less money to invest.
- Company is building up reserves.
Comment on the Tall Curve plc’s current dividend yield.
- Yield is high/more than twice the benchmark.
- Artificially inflated/affected by share price drop.
- May appear attractive/value trap.
- Dividend may be supported by borrowing/paid from reserves.
Following his bereavement Reg had several meetings with his financial adviser, which quantified
Reg’s total gross income as £28,000 per annum. In addition to this figure, an income shortfall was
identified of £7,000 per annum over the medium to long term. Reg believes that the shortfall can
be met solely from the dividend income he will receive from his new shareholding, although Reg’s
financial adviser has previously drawn his attention to several factors regarding the company’s
financial information. The adviser believes that Reg may be exhibiting the investor biases of
anchoring and mental accounting.
Explain the limitations of Reg relying on the dividend cover and yield from Tall Curve plc when considering his income need.
Dividend cover 1.14times
- Dividend info is historical/income need is for future.
- Dividend cover is low/dividend is at risk/not sustainable.
- Dividend not fixed/can change.
- Can be distorted by other/one-off factors.
- Will be affected/reduced by share buybacks.
- Dividend allowance about to reduce/excess subject to dividend rate of tax/
dividend tax rate can increase. - Focuses on/ignores capital value
Identify eight main factors that could affect the share price of Tall Curve plc. Exclude market movement from your answer.
- Economic outlook/stage of economic cycle.
- Changes in legislation/regulation.
- Change in sector sentiment/competition/business risk.
- Corporate event/profit warning/guidance/dividend cut.
- Investor or market sentiment/broker or credit rating change.
- Takeover speculation/activity.
- Change in/bad management.
- Accounting issue/fraud/scandal.
- Inclusion/removal from an index.
State two reasons why the adviser may believe that Reg is exhibited the investor bias of anchoring.
Anchoring
* Focusing on dividend figures.
* Ignoring whether dividend is cheap/expensive/may change.
State two reasons why the adviser may believe that Reg is exhibited the investor bias of mental accounting.
Mental accounting
* Allocating solely dividend to meet income need.
* Focusing on dividend only at expense of capital.
