Section 10 - Indirect Investments Flashcards

Question

Social enterprises

Answer 1

Social investment tax relief (SITR) Similar to EIS 30% income tax relief on investment up to £1,000,000 per tax year Can be carried back to previous tax year Investment can be in debt or equities CGT deferral available Disposal exempt from CGT Eligible organisations must have a defined and regulated social purpose, have fewer than 250 employees and gross assets of no more than £15m

Answer 2

Qualifying life policies - life policies with regular level premiums payable at least annually for at least 10 years/£3,600 annual premium limit Non-qualifying policies - single premium investments

Answer 3

Life Company Taxation: - No tax on dividend income - 20% tax on rental, interest, offshore income - Gains taxed at 20% (indexation relief up to December 2017 only) - Paid by life office - Cannot be reclaimed by policyholder, therefore less tax-efficient for many than collectives (especially non-taxpayers) Policyholder Taxation: - Income tax on policy profits - Gains referred to as chargeable gains - But not subject to CGT Qualifying policies are more favourable as only gains within first 10 years are taxable All gains from non-qualifying policies are taxable

Answer 4

Death (if it gives rise to a benefit) Maturity Surrender and certain part surrenders Assignment for money’s worth Policy loan (if taken out after 26/03/74)

Answer 5

Assignment by way of mortgage Assignment between spouses (could be useful where one is a higher / additional rate taxpayer and the other isn’t – assign and then surrender Payment of critical illness

Answer 6

Maturity/Surrender: - Amount paid out (including any capital payments) less premiums paid (including any previous chargeable gains) Death: - Surrender value before death (plus any capital payments) less premiums paid (including any previous chargeable events) Assignment: - Price received (plus capital payments) less premiums paid (including previous chargeable gains) If assignment is between connected persons, then market value used

Answer 7

Includes bonus encashment or loans Chargeable if exceed certain limit Total part surrenders considered per policy loan (not individual part surrenders) Chargeable event only if reckonable aggregate value exceeds allowable aggregate value 5% withdrawal allowed without chargeable event Able to carry forward unused 5% allowance Any 5% taken brought back into calculation on final encashment Allows higher and additional rate taxpayers regular ‘income’ without immediate charge to tax, even more tax efficient if basic rate taxpayer on final encashment

Answer 8

If surrenders exceed allowance, then chargeable event and excess is chargeable gain Occurs at end of policy year Individual owning policy at time of chargeable event is liable If tax charge excessive, can approach HMRC

Answer 9

Terminated by death, maturity or full surrender

Answer 10

Falls fully in basic rate – no tax due Falls fully in higher- 20% of gain, though may be reduced by PSA Falls fully in higher – 25% of gain If straddles tax band, use top-slicing relief to spread gain over policy years using 5- step process 5-step process: Step 1: Calculate investor’s taxable income (to establish how much of gain falls into starting rate, personal savings allowance, basic rate, higher rate, additional rate) – ignore gift aid donations Step 2: Calculate tax due on gain across each tax band and deduct 20% basic rate tax to show total liability Step 3: Calculate annual equivalent of gain which is the gain divided by N, where N is: - Onshore policies, full surrender: divide gain by full number of policy years since outset - Onshore policies, partial surrender: divide gain by full number of policy years since last chargeable event -Offshore policies (pre-6 April 2013): divide gain by full number of policy years since outset - Offshore policies (6 April 2013 onwards): -- If UK resident whole time: divide gain by full number of policy years since last chargeable event -- If not UK resident whole time: divide gain by number of full policy years since outset and make reduction for years of non-residence Step 4: Calculate tax due on annual equivalent and deduct 20% to give relieved liability Step 5: Deduct relieved liability from step 2 to give top-slicing relief

Answer 11

Life office issues certificate to policyholder on chargeable event Certificate enables completion of self-assessment

Answer 12

Taxation of gain depends on residence of trust creator and trustees If person who created trust is alive and UK resident before chargeable event, then gain treated as part of income, top-slicing available, can reclaim tax from trustees If person who created trust was dead or non-UK resident before chargeable event and one or more trustee UK resident, then trustees liable (45% trust rate so 25% liability onshore bond with 20% tax credit, 45% offshore bond no tax credit) If trustees not UK resident, any beneficiary receiving a benefit under the trust from the gain is liable Possible to avoid trust’s liability - replace UK trustees with foreign trustees prior to chargeable event - beneficiaries then liable at own rates, but no top slicing and no reclaim of tax credit on UK policy Alternatively, assign policy to beneficiary before chargeable event, beneficiary can then encash and tax is chargeable at their rates with top-slicing relief Assignment of a policy is not a chargeable event Bare/Absolute trust for minors - beneficiary liable to income tax on gains arising from policies held in trust Settlements legislation - if either or both of child’s parents are settlors of bare trust then potentially liable to income tax on gains from a life assurance policy

Answer 13

Gain reduced by no. days policyholder non-UK resident divided by no. days policy run Example, if non-resident 3 / 10 years, gain reduced by 30%

Answer 14

Policies can be traded on open market as second-hand policies No tax if qualifying policy traded after 10 years

Answer 15

Gross roll-up - usually established in low tax countries so investment rolls up free of tax May be withholding tax (non-reclaimable) Policyholder liable to income tax at highest rate on whole of gain PSA available Time apportionment relief for periods of non-UK residency Number of years for top slicing reduced for periods of non-residency

Answer 16

Consider encashing policy whilst still non-UK resident

Answer 17

Onshore: - Higher rate taxpayers - 20% on net return of fund - Additional rate taxpayers - 25% on net return of fund Offshore: - Higher rate taxpayers - 40% on gross return of fund - Additional rate taxpayers - 45% on gross return of fund Tax representatives - appointed by offshore life offices/responsible for issuing chargeable gain certificates

Answer 18

Of a UK life office only taxed on profits made on writing overseas business Not taxed on income and gains from investment in OLAB funds OLAB - only with non-UK residents OLAB policies not qualifying - treated as offshore life policies

Answer 19

Personal portfolio bonds unattractive for UK investors Penal tax which effectively taxes policyholder as if investments yielding 15% compound

Answer 20

Able to sell exempt policies Qualifying policies with limited premiums Funds are free of UK tax Limits - £270pa/£25pm Under 18s = baby bonds

Answer 21

Investment returns linked to equity investments (usually an index) Returns achieved through combination of deposit/fixed interest investments and derivatives Capital bonds generally provide minimum guaranteed return Income bonds are mostly no longer available Generally sold in tranches May receive income or gains – if gains can use CGT AEA, if income then tax liability is deferred if interest rolls-up. If held in ISA/ pension, then no tax due May reduce IHT payable due to illiquid nature – may be worth less on death than they will on later maturity

Answer 22

Registered Pension Scheme Privileges: - Tax relief on input - No CGT on gains or investment income within fund - 25% of fund tax-free on crystallisation - Tax-free death benefits before age 75 (within limits) Contributions: - Employed and self-employed - tax relief on contributions up to 100% of earnings - Employer and employee contributions - up to annual allowance £40,000 - Subject to tapered annual allowance (min £4,000) for those with total income in excess of £240k (reduced by £1 for every £2) - Low/no earnings - £3,600 per annum with basic tax relief Tax Relief on Contributions: - Net pay method - contributions deducted from pay before calculating tax - Relief at source - contributions net of 20% tax (higher relief claimed from HMRC) - Pre-July 1988 retirement annuity contracts and GP/dentists who are taxed as self-employed and also members of NHS pension scheme claim relief via self- assessment Carrying Forward Annual Allowance: - Any unused part of the annual allowance from previous 3 years – 2021/22, 2020/21 and 2019/20 for 2022/23 - can be carried forward and added to the current year’s allowance - Pension Input Period - in line with tax year since 2017/18

Answer 23

Lifetime limit £1.0731m Max tax-free cash - 25% of fund Retirement date - earliest age 55 (rising to 57 2028) Death benefits before 75 - usually tax free up to lifetime allowance

Answer 24

Occupational schemes - scheme pension Individual schemes - secured pension (annuity) or capped/flexi-access drawdown No longer requirement to crystallise benefits PCLS can be taken at any time, but only alongside ‘relevant’ pension Transfers to charity are tax-free

Answer 25

Residential property and tangible moveable assets trigger tax charge Max borrowing - 50% of net value of fund Pension fund taxation - tax-free on gains and investment income

Answer 26

Greatest value where tax relief on contributions is greater than tax on benefits Employer contributions and pension benefits are not subject to NICs Non-earners (including children) can pay contributions of £3,600 and receive tax relief Make pension contributions to remove dividends from higher tax rates, increase basic rate band and reduce gains taxed at 20%/28%

Answer 27

Purchased Life Annuity (PLA): - Capital content tax-free, - Interest element treated as savings income and taxed @ 20% - Capital content based on purchase price divided by number of year annuitant expected to live (mortality tables prescribed by HMRC) Purchased Annuities Certain: - Fixed term - Capital content tax-free - Interest element treated as savings income and tax and taxed @ 20% - If annuity is paid to someone other than person who paid purchase price, then no tax-free capital content Pension / Lifetime Annuity: - Taxed in full as earned income Deferred Annuity: - Taxed as PLA when annuity taken Annuities for Beneficiaries: - Under a trust or will, taxed as full investment income, basic rate deducted at source Cash Sum Payable Under Guaranteed Annuity: - Tax-free Structured Settlements: - Annuity paid in settlement of claim for damages, paid without deduction of tax and not taxable in hands of recipient Immediate Needs Annuity: - No income tax liability if used for long-term care and payments made direct to care provider

Answer 28

Complete HMRC form R89 if total income doesn’t exceed personal allowance

Section 10 - Indirect Investments Flashcards

(52 cards)