Topic 8 Flashcards

Question

What considerations should an investor keep in mind when selecting funds based on type of investment?

Answer 1

When selecting funds based on the type of investment, investors should consider their own risk tolerance, investment horizon, and financial goals. Different asset types offer varying levels of risk and return, so choosing the right type (such as shares, bonds, or property) can align an investor’s portfolio with their long-term financial objectives.

Answer 2

Specialized fund categories like ethical investments focus on companies that adhere to ethical standards or certain social criteria, while recovery stocks are funds that invest in companies expected to have a significant turnaround. These specializations allow investors to align their investments with specific values or strategies.

Answer 3

An investor's decision between focusing on income or capital growth generally depends on their financial goals, age, income needs, and risk tolerance. Income-focused funds might appeal more to those needing steady cash flow, such as retirees, whereas capital growth funds might be more suitable for long-term investors looking to build wealth over time.

Answer 4

Ethical investments play an increasingly significant role in modern portfolios by allowing investors to support environmental, social, and governance (ESG) principles through their investment choices. This approach not only fulfills ethical standards but can also mitigate risks associated with companies that might face regulatory or reputational challenges.

Answer 5

A managed fund refers to an investment fund that is composed of holdings distributed across some or all of the other funds offered by a company. It is managed by a fund manager who decides how to allocate investments among the company's various funds.

Answer 6

Examples of managed funds include "managed growth" or "managed income" funds, which are tailored to specific investment goals like capital growth or regular income, respectively.

Answer 7

In a managed fund, the manager's role is primarily to determine the allocation of investments between the company’s other funds, managing the distribution based on the fund's objectives and market conditions.

Answer 8

Managed funds operate within a company’s portfolio by reallocating investments across the company’s range of funds. This approach allows for diversified exposure across various asset classes and sectors, managed under a unified strategy that aligns with specific investment goals like growth or income.

Answer 9

Managed funds offer investors the advantage of diversification across multiple investment areas without the need for the investor to select individual funds or securities. They also benefit from: 1. Professional management, where the fund manager adjusts allocations to optimize returns 2. Profesional management managing risks according to prevailing market conditions.

Answer 10

The strategy of a managed fund differs from that of a single strategy fund in that it involves dynamic allocation across various other funds under the company’s umbrella, allowing for broader market exposure and risk distribution. In contrast, a single strategy fund focuses on specific asset classes or market sectors, providing more concentrated exposure to its chosen area.

Answer 11

A unit trust is a type of pooled investment created under a trust deed where investors can contribute either a lump sum or make regular contributions. It is open-ended, allowing the manager to create more units if there is demand.

Answer 12

Unit trusts are categorized based on the type of assets they primarily invest in. Equity trusts invest mainly in shares and pay dividends, whereas fixed-interest trusts invest in interest-yielding assets and pay interest.

Answer 13

There are generally two types of units in a unit trust: 1. Accumulation units, which automatically reinvest any income generated 2. Distribution or income units, which distribute any income received to unit holders.

Answer 14

Open-ended funds like unit trusts allow for the creation of additional units to meet investor demand. In contrast, closed-ended funds, such as investment trusts, have a fixed number of shares that do not change, and they trade on the stock market.

Answer 15

A unit trust aims to produce returns by selecting investments that will appreciate in value and/or generate income. The successful performance of these investments increases the unit price, potentially offering investors a profitable return when they sell their units.

Answer 16

The performance of a unit trust significantly depends on the fund manager's ability to select and manage investments that align with the trust’s objectives for growth and/or income. The manager’s expertise in choosing the right assets and timing their purchase and sale is crucial for achieving desired returns.

Answer 17

Investors should consider their financial goals and cash flow needs when choosing between accumulation and distribution units. Accumulation units are suitable for those focusing on long-term capital growth, as they reinvest the income. Distribution units are better for those seeking regular income from their investments.

Answer 18

Unit trusts manage flexibility in unit supply through their open-ended structure, which allows the fund manager to issue more units based on investor demand. This adaptability helps accommodate more investments without significantly impacting the unit price.

Answer 19

Unit trusts offer several advantages, including professional management, diversification, and the ability to invest in a broad range of assets. The open-ended nature allows for easier liquidity compared to closed-ended investments, and the option to choose between different types of units can cater to various investment preferences.

Answer 20

In legal terms, a trust is an arrangement where one person (the settlor) transfers assets to another party (the trustees) to manage those assets according to specific rules set out in a trust deed.

Answer 21

A unit trust operates similarly to a trust in that investors give their money to trustees under a trust deed, which outlines the investment rules and objectives. The trustees oversee a fund manager who uses the funds to achieve the trust's objectives, ensuring the manager adheres to the terms of the trust deed.

Answer 22

In a unit trust, trustees are responsible for ensuring that the fund manager complies with the trust deed’s stipulations, effectively safeguarding the investors' assets and interests.

Answer 23

In a unit trust, the trustees hold the legal title to the trust’s assets and are responsible for oversight. They monitor the fund manager’s actions to ensure compliance with the investment strategy and rules specified in the trust deed, thereby acting as a safeguard for the investors' interests.

Answer 24

Trustees are tasked with the crucial responsibility of monitoring the fund manager's activities, ensuring that the investment decisions and actions are in line with the trust's objectives as detailed in the trust deed. This includes regular reviews and audits to maintain alignment with the legal and operational directives of the trust.

Answer 25

The trust structure enhances security by dividing roles and responsibilities: trustees hold legal ownership and provide oversight, while fund managers handle the day-to-day investment activities. This separation helps prevent misuse of funds and ensures that investment activities are conducted transparently and in the best interest of the investors.

Answer 26

The price of a unit is determined by calculating the total value of the trust’s assets, subtracting appropriate costs, and then dividing this amount by the number of units issued.

Answer 27

The four key prices in unit trust transactions are: 1. Creation price: the price at which new units are created by the manager. 2. Offer price: the price at which investors buy units from the manager. 3. Bid price: the price at which the manager buys back units from investors. 4. Cancellation price: the minimum permitted bid price, accounting for the full costs of buying and selling the assets.

Answer 28

Unit prices are calculated on a daily basis by the fund manager, using a method outlined in the trust deed.

Answer 29

The bid price can be above the cancellation price when there are both buyers and sellers of units, reducing the need to trade underlying assets and thereby lowering transaction costs.

Answer 30

Cost adjustments are included in the unit price calculation to account for the expenses involved in managing the fund’s assets, such as trading fees, administrative costs, and other operational expenses. These adjustments ensure that the unit price accurately reflects the net value of the underlying assets.

Answer 31

The cancellation price serves as a safeguard that ensures the bid price covers the full costs of buying and selling the underlying assets. This price is crucial during times of high redemption demands to prevent the fund from incurring losses that could affect remaining investors.

Answer 32

Daily calculation of unit prices provides investors with up-to-date information, reflecting the current value of the underlying securities. This regular update allows investors to make informed decisions about buying or selling units based on the latest market conditions.

Answer 33

The trust deed specifies the methodology for calculating unit prices, ensuring that the pricing process is transparent and consistent with the fund's governing rules. This formal documentation provides a clear guideline for fund managers and protects investor interests by standardizing how fund values are assessed.

Answer 34

Changes in the value of the underlying securities directly affect the unit prices of a unit trust. If the value of the securities increases, the unit price will also increase, reflecting the increased value of the fund's assets. Conversely, if the value of the securities decreases, the unit price will drop, mirroring the reduced value of the fund's assets.

Answer 35

The offer price is used when investors want to buy units in the trust, typically set slightly higher to include operational costs and ensure the fund's liquidity. The bid price, which is generally lower, is used when investors sell their units back to the fund. This spread between the offer and bid prices helps manage the flow of funds into and out of the trust, balancing new investments with redemptions.

Answer 36

The difference between the price at which a unit is offered to an investor (offer price) and the price at which the fund manager will buy it back (the bid price).

Answer 37

The single-price system in unit trusts simplifies the investment process for investors by providing one clear price for buying or selling units, eliminating the need to navigate the complexities of different buying and selling prices.

Answer 38

A unit trust manager might opt for a single-price system to make the fund more accessible and understandable to investors, potentially attracting those who prefer straightforward pricing structures. This can also streamline the pricing process despite the more complex mechanism needed to determine that single price.

Answer 39

In the single-price system, all transactions—whether buying or selling—are conducted at one uniform price. This contrasts with the bid-offer spread system, where there are two prices, potentially leading to confusion or inefficiency for investors trying to calculate the cost or returns of buying and selling units.

Answer 40

Investors choosing between unit trusts with different pricing systems should consider their preference for simplicity versus potential cost savings. A single-price system offers straightforward transactions, while a bid-offer spread might offer opportunities to optimize buying or selling times based on price variations.

Answer 41

Determining a single price in a unit trust involves more complex calculations to ensure the price accurately reflects the net asset value of the trust's holdings and associated costs. This complexity requires precise management and frequent valuation to maintain fairness and accuracy in pricing for all investors.

Answer 42

The single price in a unit trust is determined by calculating the net asset value (NAV) of the fund’s total assets, adjusting for any fees or costs associated with managing the fund, and then dividing by the number of outstanding units. This price reflects the per-unit value of the fund’s assets at any given time.

Answer 43

In a bid-offer spread system, the offer price is influenced by factors such as the net asset value plus any additional fees or charges imposed by the fund to cover administrative costs and ensure profitability. The bid price is generally set lower, reflecting the NAV minus any potential costs or discounts applied by the fund when units are sold back by investors.

Answer 44

Investors should be aware that while a single-price system simplifies transactions, it may also incorporate all costs into one price, potentially making it slightly higher than the bid price in a spread system. They should understand how the single price is calculated and consider how changes in fund management fees or cost structures could affect their returns.

Answer 45

Regulatory frameworks often aim to protect investors by ensuring transparency and fairness in how unit trusts are priced. Regulations may influence a fund’s choice of pricing system by stipulating how costs are disclosed, how often valuations must occur, and the levels of fees that can be charged, pushing some funds towards more transparent single-price models.

Answer 46

The single price in a unit trust is determined based on the net flows of the fund, which assess whether there are more subscriptions (investments) into the fund or more redemptions (withdrawals). This reflects the overall demand and supply dynamics within the fund.

Answer 47

A fund is in 'net inflow' when the value of subscriptions exceeds the value of redemptions. This indicates that more money is entering the fund than leaving, typically leading the single price to be set closer to the offer price due to the need to purchase additional assets.

Answer 48

In cases of 'net outflow,' where redemptions exceed subscriptions, the single price tends to move closer to the bid price. This adjustment reflects the costs associated with selling assets to meet redemption demands.

Answer 49

When subscriptions and redemptions are balanced, resulting in neither significant inflows nor outflows, the single price will generally align with the mid-price of the fund’s assets.

Answer 50

Although not common, a unit trust might impose an exit charge if units are sold within a short period, such as three or five years from the date of purchase, to discourage short-term trading and stabilize the fund's capital.

Answer 51

The single price is influenced by the costs of buying or selling assets within the fund. When the fund experiences a net inflow, the price increases slightly to cover the cost of purchasing additional assets. Conversely, during net outflows, the price decreases to reflect the costs related to asset sales necessary to fund redemptions.

Answer 52

For long-term investors, net inflows can signal a growing fund, potentially leading to more diversified investments and possibly reduced costs per unit over time. Net outflows might indicate a shrinking fund, which could lead to higher per-unit costs and might prompt the fund manager to liquidate assets, potentially at less favorable prices.

Answer 53

Unit trust managers balance the single price by regularly reviewing the fund's asset values, subscription rates, and redemption demands. This ongoing assessment helps ensure the price accurately reflects the current value of the fund’s assets and the transaction costs associated with entering or exiting positions.

Answer 54

Forward pricing is a method where the price at which clients buy or sell units is determined at the end of the dealing period, rather than at the time the order is placed. This means the actual transaction price is unknown when the order is made and is calculated based on the next valuation.

Answer 55

Historic pricing sets the price of units based on the closing price at the end of the previous dealing period. This means that the price is known at the time of the transaction, unlike in forward pricing where the price is determined after the dealing period closes.

Answer 56

Forward pricing is generally used to ensure fairness among all investors by pricing units based on the most current asset valuations at the end of each dealing period. This method prevents arbitrage opportunities that could arise if recent market changes were not reflected in the unit prices.

Answer 57

Fund managers must switch from historic to forward pricing if an underlying market in which the trust is invested moves by more than 2% in either direction since the last valuation. This rule helps ensure that the pricing remains fair and reflective of current market conditions.

Answer 58

Forward pricing enhances investor protection by ensuring that all transactions are executed at prices that reflect the latest available market information. This method prevents the potential for pricing errors or manipulations that could disadvantage any investors, especially in volatile markets.

Answer 59

Using historic pricing can simplify the transaction process for both investors and fund managers, as the price is known in advance. However, it may also lead to potential disadvantages if market conditions change significantly after the price is set, possibly resulting in less favorable transaction terms for one party.

Answer 60

The requirement to switch from historic to forward pricing necessitates vigilant monitoring of market conditions by fund managers. This rule ensures that pricing adjustments are made swiftly in response to significant market movements, thereby maintaining pricing accuracy and fairness.

Answer 61

Investors may face challenges with forward pricing due to the uncertainty about the price at which their transactions will be executed. This can make financial planning more complex, especially for those looking to time their investments or withdrawals closely.

Answer 62

Investors can purchase units directly from unit trust managers or through intermediaries. Purchases can be made in writing, by telephone, or online. All communications with the manager’s dealing desk are recorded to confirm that a contract has been established.

Answer 63

Upon purchasing units, investors receive a contract note, which specifies the fund, number of units, unit price, and amount paid. This document is essential for calculating capital gains tax when the units are sold. Investors may also receive a unit certificate, which serves as proof of ownership.

Answer 64

To sell units, if the units are certificated, the holder must sign a form of renunciation on the reverse of the unit certificate and return it to the managers. If selling part of the holding, a new certificate for the remaining units is issued. For non-certificated holdings, a separate form of renunciation may be required.

Answer 65

Investors using intermediaries such as fund supermarkets to subscribe to a unit trust typically receive their holdings confirmation on a non-certificated basis. They receive regular statements from the intermediary outlining the number of units held and their current value, rather than directly from the unit trust manager.

Answer 66

Unit trusts do not require a secondary market because the unit trust managers are obligated to buy back units directly from investors who wish to sell. This direct transaction simplifies the process and enhances the appeal of unit trusts, making them more accessible to ordinary investors.

Answer 67

The direct purchase and sale of units simplify the investment process, as investors deal directly with the fund managers or through straightforward channels like intermediaries. This eliminates the complexities and potential delays associated with trading on a secondary market such as a stock exchange.

Answer 68

Recording calls to the manager’s dealing desk ensures that there is a verifiable record of each transaction, providing clear evidence of the terms and confirmation of the contract. This practice protects both the investor and the manager by preventing disputes over transaction details.

Answer 69

The contract note is crucial for compliance and tax purposes as it provides the necessary details to report capital gains tax accurately when the units are sold. The unit certificate acts as legal proof of ownership, which is essential for maintaining accurate records of the investor's assets.

Answer 70

The contract note details the purchase price of the units, which is essential for calculating capital gains tax when the units are sold. Investors use this price as the cost basis to determine the gain or loss on their investment, which is reported for tax purposes.

Answer 71

The renunciation process involves formally relinquishing ownership of the units back to the fund manager. This process is crucial for transferring the units legally and ensuring that the investor can receive the sale proceeds. For partial sales, it ensures that the remaining units are accurately re-certificated to reflect the new holding amount.

Answer 72

Fund managers use forward pricing mechanisms to ensure accuracy and fairness in unit pricing. This method calculates the unit price based on the net asset value at the close of each trading day, reflecting recent market conditions and ensuring that all investors buy or sell at a fair price.

Answer 73

Investors with non-certificated units might face challenges related to the lack of physical proof of ownership. These are typically addressed through regular statements provided by intermediaries, which detail the investor's holdings and their values, ensuring transparency and up-to-date information.

Answer 74

Unit trusts in the UK are regulated under the Financial Services and Markets Act 2000 and must be authorized by the Financial Conduct Authority (FCA) if they are marketed to retail investors.

Answer 75

The FCA enforces rules that ensure unit trusts are suitably diversified and restricts them from borrowing more than 10% of the fund’s net asset value, and only temporarily, to reduce associated risks.

Answer 76

The manager’s responsibilities include managing the trust fund according to the trust deed, valuing the fund’s assets, fixing unit prices, offering units for sale, and buying back units from unit holders.

Answer 77

Trustees are responsible for setting the trust’s investment directives, holding and controlling the trust’s assets, ensuring investor protection procedures are in place, approving marketing materials, collecting and distributing income, issuing unit certificates, and supervising the maintenance of the register of unit holders.

Answer 78

Regulatory requirements ensure that unit trusts operate within a framework that prioritizes investor protection and financial stability. These rules mandate diversification and limit borrowing, which helps minimize risk and promote prudent management of the funds.

Answer 79

The relationship between managers and trustees in a unit trust is structured to ensure checks and balances. While managers handle the day-to-day operations and investment decisions, trustees oversee these actions to ensure compliance with the regulatory and trust deed requirements, thus safeguarding investor interests.

Answer 80

The borrowing restriction can limit a manager’s ability to leverage for potential gains, especially in opportunities that require quick or significant capital. Managers cope by ensuring efficient cash management and strategic asset allocation that aligns with the fund’s investment objectives without exceeding regulatory limits.

Answer 81

Trustees verify compliance by regularly reviewing fund activities, ensuring that investments align with the directives specified in the trust deed. They also protect investors by enforcing strict adherence to FCA regulations, overseeing the accuracy of financial reporting, and validating marketing materials to prevent misleading claims.

Answer 82

Unit trusts are regulated under the Financial Services and Markets Act 2000 and must be authorized by the Financial Conduct Authority (FCA).

Answer 83

The FCA mandates diversification and limits borrowing to no more than 10% of the fund’s net asset value for temporary periods.

Answer 84

Managers handle fund management according to the trust deed, set unit prices, manage asset valuations, and oversee unit transactions.

Answer 85

Trustees ensure the fund complies with its investment directives, protect investors, manage the trust’s assets, approve marketing, and supervise the unit holder register.

Answer 86

Managers must buy back units, eliminating the need for a secondary market and simplifying transactions for investors.

Answer 87

It sets obligations for managers and trustees, ensuring the trust operates within defined legal and regulatory frameworks.

Answer 88

By ensuring funds are well-diversified and financially stable, reducing the risk of significant losses.

Answer 89

Investors can buy units directly from the fund or through intermediaries and sell them back to the fund managers who are obliged to repurchase them.

Answer 90

If the market changes significantly (e.g., more than 2% movement), fund managers must adjust the fund's pricing strategy from historic to forward pricing to reflect current market conditions accurately.

Answer 91

FCA rules ensure unit trusts operate with financial stability and integrity, influencing fund managers to adopt strategies that prioritize investor protection and compliance with financial regulations.

Answer 92

The borrowing limit prevents excessive risk-taking by ensuring that unit trusts do not over-leverage, maintaining financial health and reducing the potential for significant financial distress.

Answer 93

1. Initial charge: Covers the cost of purchasing fund assets. The initial charge is typically covere by the bid-offer spread. 2. Annual management (AUM) charge: A fee paid for the use of the professional investment manager. The charge varies but is typically between 0.5% to 1.5% of fund value. Although it is an annual fee, it is commonly deducted on a monthly or daily basis.

Answer 94

Unit trusts are categorized based on their underlying investments: if more than 60% are in cash or fixed-interest securities, they are classified as non-equity funds; if less, they are equity funds. This classification affects how income distributions are taxed.

Answer 95

For non-equity funds, income distributions are treated as interest payments. For equity funds, distributions are treated as dividends.

Answer 96

No. There is no corporation tax on gains within either type of unit trust. BUT investors may be liable for capital gains tax upon encashing their investment.

Answer 97

Dividend income is paid without tax deduction. It's tax-free up to the dividend allowance. Above this, it is taxed at different rates depending on the investor’s tax band.

Answer 98

Income from fixed-interest funds is paid gross and considered savings income. It may be tax-free under certain conditions like falling within the personal savings allowance or starting-rate band for savings, but taxable beyond these limits.

Answer 99

The tax classification impacts how investors plan their portfolios based on potential tax liabilities. Understanding whether a fund is treated as an equity or non-equity can influence an investor’s choice depending on their income needs and tax situation.

Answer 100

Investors can manage capital gains tax liabilities by timing the sale of their units to coincide with years when they have lower overall capital gains, utilizing capital losses to offset gains, or planning sales to stay within the annual exempt amount.

Answer 101

Investors must declare income that exceeds their personal allowances or savings allowances on their self-assessment tax returns. This includes any dividend income above the dividend allowance or interest income above the personal savings allowance.

Answer 102

Unused dividend or personal savings allowances cannot be carried over to the next tax year; they must be used within the tax year they are allocated.

Answer 103

Yes. Investors need to report unit trust income on their self-assessment tax return, detailing the type of income (dividend or interest) and the amount on the appropriate sections of the form.

Answer 104

By timing transactions to use the capital gains tax exemption and balancing between equity and non-equity funds to utilize tax allowances effectively.

Answer 105

Interest income isn't taxed if it falls within the personal savings allowance or the starting rate band for savings for non-taxpayers.

Answer 106

The legal constitution of a unit trust involves trustees who ensure proper management and oversight, significantly reducing the risk of fraud.

Answer 107

Investing in a unit trust generally involves lower risks compared to direct equity investments because unit trusts pool investments and diversify across a range of 30 to 150 different shares, spreading and reducing individual investment risks.

Answer 108

The risk varies depending on the type of unit trust. For example, cash funds have risks similar to deposit accounts and are relatively low risk, while specialist funds investing in emerging markets carry higher risks due to their volatility and potential for rapid changes.

Answer 109

Overseas unit trusts carry the added risk of currency fluctuations, which can affect the value of the investment depending on changes in exchange rates.

Answer 110

A pooled investment strategy is safer because it allows for diversification across many different assets, which dilutes the impact of poor performance of any single investment on the overall portfolio.

Answer 111

Investors should consider the specific assets included in the fund, the fund’s historical performance, the regions and sectors it invests in, and their own financial goals and risk tolerance to choose a unit trust that best fits their risk profile.

Answer 112

Financial risks include the possibility of not recovering the initial capital invested and the potential for fluctuating returns, meaning that there are no guarantees of sustained income or capital growth.

Answer 113

Diversification reduces risk by spreading investments across various sectors and assets, which can mitigate the impact of a downturn in any single sector or asset class on the overall portfolio.

Answer 114

Regulatory risks could arise from changes in investment or tax laws that might affect the performance of a unit trust or alter its tax advantages.

Answer 115

Investors should perform due diligence, assessing their own risk tolerance and financial goals in relation to the specific risks associated with different types of unit trusts, such as market volatility, currency risk, and sector-specific risks.

Answer 116

Trustees oversee the fund’s management to ensure compliance with regulatory standards and the trust deed, providing an additional layer of security and risk management by verifying that the fund’s assets are managed properly.

Answer 117

An investment trust is a publicly listed company that invests in other companies’ stocks and shares.

Answer 118

Investment trusts are closed-ended, meaning they have a fixed number of shares, unlike open-ended unit trusts and OEICs that issue new shares or units based on investor demand.

Answer 119

They are governed by company law, must meet FCA requirements for a stock market listing, and operate under their memorandum and articles of association.

Answer 120

Investment trusts can offer price stability and the potential for higher returns due to their fixed share structure, allowing for long-term investment strategies.

Answer 121

Shares may trade at a premium or discount to the net asset value, offering potential bargains or gains but also posing liquidity risks.

Answer 122

Investment trusts are managed by a board of directors and a fund manager who makes decisions about which assets to invest in, aiming to maximize returns for shareholders.

Answer 123

Shareholders in investment trusts may have to pay capital gains tax on any profits made from selling their shares if the gains exceed their annual exempt amount. Dividends received may also be subject to income tax beyond the dividend allowance.

Answer 124

Since the number of shares is fixed, market prices can fluctuate based on supply and demand dynamics, potentially leading the shares to trade at prices above (premium) or below (discount) the actual net asset value of the trust's portfolio.

Answer 125

Investors should consider buying shares when they trade at a discount to the net asset value and selling when they trade at a premium, as well as paying attention to the historical performance and management strategy of the trust.

Answer 126

Investment trusts may provide more stable returns through diversification and professional management, though they can still be subject to market risks similar to direct stock investments.

Answer 127

Total value of the investment fund's assets less its liabilities, divided by the number of shares issued.

Answer 128

You can invest in an investment trust through a stockbroker, a financial adviser, or directly from the investment trust manager.

Answer 129

Shares of an investment trust are sold via a stockbroker or directly back to the investment trust manager.

Answer 130

Dealing fees are added to any purchase and deducted from any sale of shares. Additionally, an annual management charge between 0.5% and 1.5% is also payable.

Answer 131

The share price of an investment trust is influenced by the value of the underlying investments, but also by supply and demand factors that can cause the shares to trade at a premium or discount to the net asset value (NAV).

Answer 132

An investment trust trades at a discount when its share price is less than the NAV, indicating lower demand. It trades at a premium when its share price is higher than the NAV, reflecting higher demand.

Answer 133

Demand for shares in an investment trust can be influenced by factors such as the trust's performance, market conditions, investor sentiment, and broader economic factors.

Answer 134

Unlike unit trusts, where the price directly reflects the NAV, the price of investment trust shares can deviate from the NAV due to market-driven supply and demand, leading to trading at premiums or discounts.

Answer 135

The level of debt as a percentage of a company's equity. It is a way of measuring the extent to which a company's operations are funde by borrowing rather than by shareholer capital.

Answer 136

Gearing, also known as leverage, refers to the practice of investment trusts borrowing money to invest in opportunities, aiming to amplify returns.

Answer 137

Unlike investment trusts, unit trusts and OEICs can only borrow money short-term and against known future cash inflows, making investment trusts unique in their ability to use long-term debt for investment purposes.

Answer 138

Gearing can enhance returns in a rising market by increasing the investment capital. However, it also increases risk as it can amplify losses in a falling market.

Answer 139

An investment trust described as 'highly geared' has a high level of borrowing relative to its assets, indicating an aggressive strategy to achieve high returns but also facing increased risks of financial distress if unable to meet debt obligations.

Answer 140

An investment trust might use high levels of gearing to capitalize on potential high-return investment opportunities that require more capital than available through equity alone, aiming for substantial growth.

Answer 141

Investors should consider their risk tolerance and the potential for both high returns and significant losses. Understanding the market conditions and the specific investment strategy of the trust is crucial due to the increased volatility introduced by high gearing.

Answer 142

Gearing increases financial obligations in the form of interest payments and debt repayment. In stable or rising markets, the additional capital can lead to higher returns, but during downturns, the financial burden can compromise stability and lead to losses.

Answer 143

At least 85% of the income received by the fund managers of investment trusts must be distributed as dividends to shareholders.

Answer 144

Dividends from investment trusts are taxed in the same manner as dividends from equity unit trusts. Investors may owe income tax on these dividends depending on their total income and the dividend allowance.

Answer 145

No, like unit trusts, investment trusts are exempt from corporation tax on capital gains.

Answer 146

Investors are liable for CGT on the sale of their investment trust shares if the total gains for the tax year, including other realized gains, exceed the CGT annual exempt amount.

Answer 147

Shareholders are responsible for reporting dividend income on their tax returns and may have to pay tax if their total dividend income exceeds the annual dividend allowance.

Answer 148

The tax treatment of investment trusts can affect net returns, as investors may need to pay income tax on dividends and CGT on gains, reducing the effective yield and growth achieved through these investments.

Answer 149

If an investor's dividend income from an investment trust falls below the dividend allowance, no income tax is due on that dividend income.

Answer 150

Investors can minimize their tax liability on dividends by utilizing their annual dividend allowance effectively, and where possible, holding investment trust shares within tax-advantaged accounts like ISAs, where dividends are not subject to income tax.

Answer 151

The exemption from corporation tax on capital gains for fund managers allows investment trusts to reinvest more of their profits, potentially enhancing the fund's growth and the value of shareholders' investments without the burden of tax on those gains.

Answer 152

Investors should track the acquisition cost of their shares and the disposal proceeds to accurately calculate any capital gain. They should also be aware of the annual CGT exempt amount and plan disposals to potentially spread gains across tax years if nearing the threshold.

Answer 153

A split-capital investment trust is a type of fixed-term investment trust that offers multiple types of shares, each catering to different investment preferences regarding income and capital growth.

Answer 154

Common types include: 1. Income shares: These provide all the income generated by the trust's portfolio but no capital growth. 2. Capital shares: These offer no income but entitle holders to all the capital growth after meeting fixed capital requirements upon the trust's termination.

Answer 155

Besides income and capital shares, these trusts often offer additional share classes that combine varying proportions of income and growth potential, allowing investors to select options that best align with their financial goals.

Answer 156

Investors might choose income shares if they prioritize regular income over capital appreciation, such as retirees seeking steady cash flow, whereas capital shares might appeal to those focused on long-term asset growth.

Answer 157

The risks include: 1. Market volatility affecting capital growth shares and the potential for low income if the underlying assets perform poorly. Additionally... 2. The fixed-term nature means liquidity might be limited until the trust is wound up.

Answer 158

Each share type has a different risk profile: income shares generally have lower risk and provide steady returns, while capital shares carry higher risk with the potential for greater returns. Investors must balance their risk tolerance with their need for income or growth.

Answer 159

A REIT is a tax-efficient property investment vehicle that allows private investors to invest in property markets without many of the disadvantages of direct property ownership, such as high initial costs and management complexities.

Answer 160

REITs are exempt from paying corporation tax on the property rental income and growth, provided they meet certain conditions. Additionally, purchases of REIT shares are subject to a lower stamp duty reserve tax rate of 0.5%.

Answer 161

REITs must derive at least 75% of their gross income from property rent, distribute at least 90% of their rental profits to shareholders, and no individual shareholder can hold more than 10% of the shares.

Answer 162

Dividends are distributed net of basic-rate tax, and higher- and additional-rate taxpayers may owe additional tax. Dividends can be paid in cash or as stock dividends and are taxable according to dividend tax rates.

Answer 163

Investors might consider REITs for lower entry costs, reduced management hassle, and significant tax advantages, making it easier to gain exposure to real estate markets.

Answer 164

Risks include market volatility affecting property values and rents, potential regulatory changes impacting tax benefits, and the specific risk profile of properties owned by the REIT, such as geographic or sector concentration.

Answer 165

The requirement to distribute at least 90% of rental profits ensures that shareholders receive regular income, which can be attractive to income-focused investors, but may limit the amount of capital REITs can reinvest for growth.

Answer 166

An OEIC (Open-Ended Investment Company) is a type of limited liability company that pools investors' funds to buy and sell shares of other companies and engage in other investment activities, operating with the ability to issue an unlimited number of shares.

Answer 167

The open-ended nature of an OEIC allows it to issue new shares or redeem shares based on investor demand, with the fund's size adjusting accordingly. This flexibility helps manage inflows and outflows without disrupting the portfolio balance.

Answer 168

Unlike investment trusts, which can borrow money to finance long-term investments, OEICs are only permitted to borrow money for short-term purposes.

Answer 169

The value of OEIC shares is determined by the market value of the underlying investments held by the company, fluctuating based on the performance of these assets.

Answer 170

Investing in an OEIC offers diversification, professional management, and the flexibility of adjusting investment size through the purchase or sale of shares, reducing the risk and complexity involved in direct stock investments.

Answer 171

Umbrella structures in OEICs allow for the creation of sub-funds under the main company, enabling investors to choose from different types of shares and investment strategies within the same organizational framework, catering to varying risk tolerances and investment objectives.

Answer 172

OEICs share similarities with unit trusts and investment trusts in terms of investment pooling and the option for lump sum or regular contributions. However, they differ in corporate structure and borrowing capabilities, with OEICs and investment trusts operating as companies but having different borrowing limits.

Answer 173

OEICs are regulated by the Financial Conduct Authority (FCA) in the UK, ensuring they adhere to specific standards of operation and investor protection.

Answer 174

OEICs can invest in a wide range of assets including stocks, bonds, real estate, and other financial instruments, depending on the specific objectives of the fund.

Answer 175

Investors in OEICs may be subject to capital gains tax on any profits made from selling their shares, and dividends received may be subject to income tax, depending on individual circumstances and existing tax legislation.

Answer 176

OEICs typically charge management fees and potentially other charges like initial service fees or performance fees, which can vary widely and may be competitive with or differ from fees charged by unit trusts or investment trusts.

Answer 177

Investors should consider the OEIC's investment strategy, historical performance, fee structure, the risk associated with its assets, and how well it aligns with their own investment goals and risk tolerance.

Answer 178

Market conditions can significantly impact the asset value within an OEIC, influencing the performance. Managers may adjust strategies in response to market changes to protect investments or capitalize on opportunities.

Answer 179

OEICs are regulated under the Open-Ended Investment Companies Regulations 2001 and must be authorized by the Financial Conduct Authority (FCA). They follow a regulatory framework similar to that for unit trusts.

Answer 180

The depositary oversees the operation of the OEIC, ensuring compliance with FCA regulations and investor protection requirements. This role is analogous to the trustee in a unit trust.

Answer 181

The ACD manages the OEIC’s investments, handles the buying and selling of shares according to investor demand, and ensures that the share price accurately reflects the underlying net asset value of the investments.

Answer 182

OEICs offer a range of investment options similar to unit trusts, including income, capital growth, fixed income, access to overseas and specialist markets, and index tracking.

Answer 183

FCA authorization ensures that OEICs adhere to stringent standards for operation and investor protection, maintaining trust and integrity within the financial market.

Answer 184

The structure of an OEIC allows for a wide range of investment strategies and markets, making it appealing to investors seeking diversification and access to specialized sectors through a regulated, flexible investment vehicle.

Answer 185

Both OEICs and unit trusts are collective investment schemes that pool investor funds to purchase a diversified portfolio of assets. Their similarities in structure and regulation make them both accessible and attractive to a broad range of investors, offering various risk-return profiles suitable for different investment goals.

Answer 186

The share price of an OEIC is calculated by dividing the total value of its assets by the number of shares in issue, similar to how unit prices are determined in unit trusts.

Answer 187

Swing pricing is a method used by some OEICs where the single quoted share price adjusts or 'swings' to reflect transaction costs associated with buying assets during net inflows or selling assets during net outflows, effectively shifting towards a bid or offer price.

Answer 188

Swing pricing adjusts the share price to account for transaction costs, ensuring that these costs are borne by the investors who cause them (either entering or exiting the fund), rather than by all investors in the fund.

Answer 189

OEICs use swing pricing to manage the impact of transaction costs on the fund's assets, ensuring fair treatment of all shareholders by preventing existing investors from bearing the costs associated with accommodating large purchases or sales by others.

Answer 190

Single pricing simplifies the investment process by offering a clear, straightforward price at which all shares are bought and sold, making it easier for investors to understand their transactions without needing to navigate a spread between bid and offer prices.

Answer 191

Swing pricing can be more equitable, as it ensures that those causing the fund to incur transaction costs (by subscribing to or redeeming from the fund) directly cover these costs, unlike traditional bid and offer pricing, which can create discrepancies that might disadvantage either incoming or outgoing investors depending on market conditions.

Answer 192

The initial or buying charge is a fee added to the unit price when purchasing shares of an OEIC, typically ranging from 3% to 5% of the investment amount.

Answer 193

Annual management charges are fees levied based on the value of the fund, generally between 0.5% for indexed funds and 1.5% for more actively managed funds.

Answer 194

A dilution levy is an additional charge that may be applied to the unit price on the purchase or deducted from the price on sale of shares, particularly in situations of large fund inflows or outflows to protect existing investors from the costs associated with these large trades.

Answer 195

Charges such as initial buying fees, annual management charges, and dilution levies can significantly impact an investor's overall return by reducing the net gains or increasing the net losses, especially in the case of short-term investments.

Answer 196

OEICs implement a dilution levy to ensure that the costs incurred from large individual transactions do not affect the fund’s overall value, thereby protecting existing investors from the effects of substantial capital movements into or out of the fund.

Answer 197

Investors should carefully consider the total cost of investment, including initial charges, annual fees, and any potential dilution levies, as these can vary widely between funds and significantly affect long-term investment growth.

Answer 198

OEICs are taxed on their income based on whether they are classified as fixed-income or equity-based. Fixed-income OEICs distribute interest without tax deducted but are subject to income tax. Equity-based OEICs distribute dividends without tax deducted, and these are subject to income tax if they exceed the dividend allowance.

Answer 199

Interest from fixed-income OEICs is taxed as savings income. Basic and higher-rate taxpayers will pay income tax on interest that exceeds their personal savings allowance and starting-rate band for savings. Additional-rate taxpayers are liable for income tax on the full interest amount received.

Answer 200

Dividends from equity-based OEICs are paid without tax deduction. Tax liability arises for basic, higher, and additional-rate taxpayers only if total dividend income exceeds their dividend allowance.

Answer 201

No, OEIC fund managers are not subject to corporation tax on capital gains.

Answer 202

Individual investors may be liable for CGT when they encash their shares in an OEIC, if the realized gains exceed the annual CGT exempt amount.

Answer 203

Investors should consider their income tax bracket, the type of OEIC (equity or fixed-income), and their available tax allowances (personal savings and dividend allowances) to understand potential tax liabilities on the income received from OEICs.

Answer 204

Investors can manage tax liabilities by utilizing tax-efficient wrappers like ISAs, where interest and dividends are not subject to income tax, and by planning the timing of buy and sell transactions to optimize capital gains tax liabilities.

Answer 205

A reporting fund is an offshore investment vehicle that reports all annual income attributable to an investor, distributed or not, to tax authorities. Investors are taxed on this reported income and gains.

Answer 206

Investors in reporting funds are liable for income tax on the income reported by the fund and capital gains tax (CGT) on any gains realized upon disposal of their investment.

Answer 207

A non-reporting fund is an offshore fund that does not report the income attributable to investors. Instead, gains realized upon disposal are taxed as income, not as capital gains.

Answer 208

Gains from non-reporting funds are taxed as income rather than under capital gains tax, potentially resulting in higher tax rates depending on the investor’s income tax bracket.

Answer 209

Investors might prefer reporting funds due to the potential tax benefits of capital gains tax rates on disposals, which can be lower than income tax rates, and for greater transparency and predictability in tax planning.

Answer 210

UK investors should consider the reporting status of the fund, understand the tax obligations for both income and disposals, and ensure they are compliant with all UK tax reporting and payment requirements.

Answer 211

The tax treatment can significantly impact the net returns from investments in offshore funds. Reporting funds offer the advantage of capital gains tax, which might have lower rates compared to income tax rates applied to gains from non-reporting funds.

Answer 212

Investing in an OEIC carries risks such as the possibility of not maintaining the original capital value and uncertainty regarding the level of income that will be generated, despite professional management and diversification.

Answer 213

FCA rules require OEICs to diversify their investments and limit their borrowing, which helps reduce the overall risk by spreading exposure across various assets and minimizing the potential negative impact of high leverage.

Answer 214

The pooled nature of an OEIC allows for professional management and diversification across a wider range of assets than most individuals could achieve on their own, thus reducing the risk associated with individual equity investments.

Answer 215

An investor might consider an OEIC less risky because it combines the expertise of professional managers who can navigate market complexities and the diversified approach which spreads out potential losses across various investments.

Answer 216

Potential investors should assess their risk tolerance and investment goals in light of the fact that OEICs do not guarantee capital preservation or a certain income level, and they should consider how these factors align with their financial planning needs.

Answer 217

Investors can manage risks by choosing OEICs with investment strategies that match their risk tolerance, diversifying their overall investment portfolio to include various types of assets, and regularly reviewing their investment positions in response to market changes and personal financial goals.

Answer 218

An endowment is an investment product that combines life assurance with regular savings, providing a lump sum upon the death of the insured during the term, or at maturity if the insured survives.

Answer 219

The introduction of Individual Savings Accounts (ISAs) has reduced the popularity of endowments, as ISAs often provide more flexible and potentially tax-efficient savings options.

Answer 220

The common types of endowments are with-profits and unit-linked. With-profits endowments offer a minimum guaranteed value at maturity, whereas unit-linked plans’ values depend on the performance of the underlying investments.

Answer 221

Unit-linked endowment plans carry higher risk as there is no guaranteed minimum value at maturity; the return depends entirely on the market performance of the underlying investments.

Answer 222

Someone might choose a with-profits endowment for the security of a guaranteed minimum return at maturity, making it suitable for investors seeking lower-risk options.

Answer 223

Endowments are commonly used as a repayment vehicle for interest-only mortgages, where the endowment policy is intended to grow sufficiently to repay the loan at the end of the mortgage term.

Answer 224

Investors should consider their long-term financial goals, risk tolerance, and the specific features of the endowment type, such as guarantees, potential returns, and associated costs.

Answer 225

While specific tax implications can vary, endowments typically offer tax benefits such as the growth within the policy being largely tax-free. However, depending on the jurisdiction and specific policy terms, the payout may still be subject to taxes.

Answer 226

In a with-profits endowment, the insurer adds annual bonuses to the policy, which, once added, cannot be taken away and form part of the guaranteed amount payable at maturity or on death. There may also be a terminal bonus paid at the end of the policy term.

Answer 227

Bonuses are affected by the performance of the insurer's investment pool, economic conditions, and the actuarial assumptions of future obligations and current surplus.

Answer 228

Potential drawbacks include the possibility of returns not keeping pace with other investment options due to conservative investment strategies typically employed in with-profits funds, and the inflexibility of regular premium payments which may not be suitable for all financial situations.

Answer 229

Since unit-linked endowments are directly tied to the market performance of their underlying investments, economic downturns can significantly reduce their value, while upturns can enhance their growth, making them more volatile.

Answer 230

Investors should consider their risk tolerance, financial goals, need for potential guarantees, and their comfort with market volatility. With-profits offer more stability and guarantees, whereas unit-linked plans offer higher growth potential but with greater risk.

Answer 231

Friendly societies are mutual self-help organizations that originated in the eighteenth century, offering a range of financial services including tax-exempt savings plans.

Answer 232

Friendly Society plans are exempt from corporation tax on investment returns, and there is no tax charged upon encashment of the plan, providing significant tax advantages over conventional endowments.

Answer 233

Contributions to a Friendly Society plan are limited to £270 per year as a lump sum, £25 per month, or £75 per quarter to maintain the tax-exempt status.

Answer 234

These plans are typically set up over an initial ten-year term.

Answer 235

These plans are attractive for saving for children or grandchildren due to their tax-exempt status and the structured long-term saving approach, making them ideal for accumulating funds for future expenses like education.

Answer 236

Compared to other savings options, Friendly Society plans offer unique tax benefits, but with relatively low contribution limits. They are ideal for small, regular contributions that grow over time without tax implications.

Answer 237

Investors should consider the contribution limits, the long-term nature of the investment, the specific financial goals they have for the funds, and the potential returns in comparison to other tax-advantaged investment vehicles.

Answer 238

Investment bonds are single-premium, whole-of-life assurance policies offered by life assurance companies that allow an investor to make a lump-sum investment into a unitized fund.

Answer 239

In unit-linked investment bonds, the lump-sum premium buys a certain number of units in a chosen fund at the offer price. The policy's value is equivalent to the value of these units at the bid price upon surrender.

Answer 240

Investment bonds offer ease of investment and surrender, simple documentation, and flexibility to switch between funds within the same company without incurring costs from bid-offer spreads.

Answer 241

Upon the death of the life assured, the policy ceases, and the payout is typically 101% of the value of the units at the bid price on the date of death.

Answer 242

Investors might choose investment bonds for the additional life assurance benefit, the tax treatment, and the simplicity of managing investments with features like easy fund switches and straightforward documentation.

Answer 243

Investors should consider the potential penalties for early surrender, particularly within the first few years, and the overall performance of the with-profits fund, which can vary based on the life company's investment success and bonus allocation.

Answer 244

Investment bonds may offer tax advantages such as deferred taxation or tax-efficient withdrawals, making them suitable for long-term investment planning, especially for higher-rate taxpayers seeking to manage their tax liabilities.

Answer 245

The funds within investment bonds are taxed internally at a rate of 20% on capital gains, unlike unit trust funds which are exempt from such tax. This tax paid within the fund is not recoverable by investors, regardless of their personal tax situation.

Answer 246

nvestment bonds are taxed internally at 20% on capital gains, and this cost is absorbed within the fund. In contrast, unit trusts do not pay this tax, potentially making unit trusts more tax-efficient for investors who are exempt from capital gains tax.

Answer 247

When policyholders encash their investment bonds, they are considered to have already paid 20% tax within the fund. Therefore, higher- and additional-rate taxpayers may have additional tax liabilities if their effective tax rate exceeds this amount.

Answer 248

Investment bonds are non-qualifying policies because they do not meet certain criteria that would make them qualifying, such as regular premium payments over a minimum term. As non-qualifying policies, they do not offer the same tax benefits as qualifying policies, such as tax-free proceeds on maturity.

Answer 249

Investors should plan for potential tax liabilities upon encashment, particularly if they are higher- or additional-rate taxpayers. Consulting with a tax advisor can help manage these liabilities and integrate the investment into broader tax planning strategies.

Answer 250

Investors should consider the impact of the internal 20% tax on the overall return of their investment bonds. This might make investment bonds less attractive compared to other investment vehicles, especially for those who are not subject to capital gains tax, or it might influence the timing of when to encash the policy to optimize tax outcomes.

Answer 251

A qualifying life policy meets certain criteria such as regular premium payments over a minimum term, leading to tax-free proceeds on death or maturity.

Answer 252

A non-qualifying policy does not meet these specific criteria and may result in tax liabilities on the proceeds for higher- and additional-rate taxpayers.

Answer 253

Proceeds from non-qualifying policies may be subject to income tax on gains above the premiums paid, particularly affecting higher tax bracket individuals.

Answer 254

Individuals may opt for non-qualifying policies for their flexibility in premium contributions or potential for higher returns not typically available in qualifying policies.

Answer 255

Policyholders should consider their future tax situation and possibly consult with a financial advisor to plan for any potential tax liabilities upon maturity or withdrawal.

Answer 256

Considerations should include the individual’s tax bracket, financial goals, premium payment flexibility, and the importance of tax-free policy proceeds.

Answer 257

To be qualifying, a policy generally must involve regular premium payments over a minimum term of 10 years, and there must be no large variations in the amount paid in the premiums during that time.

Answer 258

Typically, a non-qualifying policy cannot be altered to meet the qualifying criteria after it has been issued; the status is based on the terms set at the start of the policy.

Answer 259

Yes, there are different types of non-qualifying policies, including single-premium bonds, and policies that allow flexible or variable premium payments which exceed the set thresholds for qualifying policies.

Answer 260

Strategies might include allocating non-qualifying policy investments in years with lower individual income to minimize tax rates on proceeds or using tax-deferred accounts for other investments to balance the tax liability.

Answer 261

Changes in tax laws can alter the relative benefits of these policies, potentially impacting decisions about which type of policy is more advantageous under new tax conditions.

Answer 262

Qualifying policies can offer straightforward estate planning benefits due to their tax-free nature at payout, while non-qualifying policies might require more careful planning to mitigate potential tax burdens on beneficiaries.

Answer 263

A life assurance policy qualifies for tax benefits if it meets these conditions: 1. Premiums - Must be payable annually, half-yearly, quarterly or monthly and set up for MINIMUM 10 years. 2. Discontinuing payments of premiums - If premiums cease WITHIN 10 years, or three-quarters of the original term if this is less than 10 years, the policy becomes non-qualifying. 3. Sum payable on death - Must be at least equal to 75% of the total premiums payable. 4. Premiums in any one year must NOT exceed twice the premiums in any other year, or 1/8 of the total premiums payable.

Answer 264

A qualifying policy becomes non-qualifying if premiums cease within the first ten years or before three-quarters of the policy term is completed, whichever is less.

Answer 265

Restrictions on premium variability ensure that the policy remains fundamentally a protection product, rather than being used primarily as an investment tool, which helps maintain the integrity of the tax benefits associated with life assurance.

Answer 266

For non-qualifying policies, any proceeds received upon maturity or surrender of the policy may be subject to income tax, especially for higher and additional-rate taxpayers, as opposed to qualifying policies where the proceeds are generally tax-free.

Answer 267

Higher-rate taxpayers will pay an additional 20% income tax on gains from investment bonds, while additional-rate taxpayers will pay an additional 25%.

Answer 268

The gain is calculated by taking the surrender value plus any withdrawals previously made that haven't been taxed, and subtracting the original investment.

Answer 269

Top slicing allows the gain to be averaged over the term of the policy, potentially keeping part of the gain within a lower tax band or making use of the personal savings allowance, reducing the immediate income tax liability.

Answer 270

If top slicing results in the gain remaining within the basic-rate tax band, no further income tax is payable beyond what is deemed to have been paid at source, as the basic-rate tax liability is considered settled.

Answer 271

Investors can withdraw up to 5% of the original investment each year without incurring an immediate tax liability. This allowance can be carried forward and accumulated up to 100% of the original investment.

Answer 272

Withdrawals up to 5% per year are tax-deferred, not tax-exempt. This means while there is no immediate tax on these withdrawals, they could be subject to tax when the bond is encashed or upon the death of the holder, depending on total gains.

Answer 273

For higher-rate taxpayers, an additional 20% income tax is applied to the gain, and for additional-rate taxpayers, an extra 25% is applied. The gain includes the surrender value plus any untaxed withdrawals minus the original investment.

Answer 274

Top slicing averages the gain over the term of the policy, which can help manage tax liabilities, particularly useful when the gain might push a basic-rate taxpayer into a higher tax bracket. If top slicing keeps the gain within the basic-rate band, no further income tax is payable.

Answer 275

Investors can withdraw up to 5% of the original investment each year without immediate tax liability. This allowance is cumulative; if not used, it can be carried forward, allowing for future withdrawals up to 100% of the initial investment over time.

Answer 276

Investment bonds allow for tax-deferred income through 5% annual withdrawals, providing a regular income without immediate tax consequences. This feature can be particularly attractive compared to the potential taxable income from dividends or distributions in unit or investment trusts.

Answer 277

Top slicing can significantly reduce the tax burden by averaging out gains, potentially keeping taxpayers in a lower tax bracket and making use of personal savings allowances more effectively, which is crucial for optimizing tax liabilities over the policy's term.

Answer 278

Investors should consider their annual cash flow needs and tax situations. Strategically using the 5% withdrawal can provide a tax-efficient income stream while preserving the bond's capital growth potential, especially useful in years when other income might be lower.

Answer 279

When the bond is encashed or the policyholder dies, any accumulated gains including previously withdrawn amounts that were tax-deferred will be assessed for tax. The total taxable amount will depend on the individual’s tax bracket at that time.

Answer 280

An NMPI includes investments like units in unregulated collective investment schemes (UCIS), units in qualified investor schemes, securities issued by special purpose vehicles (unless classified as excluded), traded life policies, and interests in these investments.

Answer 281

NMPIs involve higher risks and often lack the regulatory safeguards that apply to mainstream investments. They may also involve assets that are less traditional and more complex, increasing the potential for significant losses.

Answer 282

The FCA restricts the marketing of NMPIs to retail customers due to their high risk and complex nature. They are generally only marketed to high-net-worth or sophisticated investors who can understand and bear the investment risks.

Answer 283

Investors should assess their own risk tolerance, investment experience, and financial capacity. They should also consider the limited protections available in terms of recourse to the Financial Ombudsman Service and the Financial Services Compensation Scheme if the provider is based abroad.

Answer 284

NMPIs typically carry higher risks due to their investment in non-traditional assets and their lack of regulation, which might expose investors to greater volatility and potential for loss compared to regulated schemes.

Answer 285

NMPIs are best suited for high-net-worth individuals or sophisticated investors who have a deep understanding of financial markets and can afford to take on the higher risks associated with these investments. This group is more likely to have the resources to absorb potential losses without significantly impacting their overall financial stability.

Answer 286

Structured products are financial instruments designed to facilitate capital protection while offering exposure to potentially higher returns through investments in high-risk assets like ordinary shares.

Answer 287

Structured products often include capital protection mechanisms, where part or all of the initial investment (up to 100%) is protected against market downturns, depending on the product structure.

Answer 288

The FCA classifies structured products as either deposits or investments. This classification affects how these products are regulated and the level of protection offered to investors.

Answer 289

Cautious investors might prefer structured products because they provide a safeguard against losing the initial capital while still offering the possibility to gain from stock market growth, making it a balanced choice for those wary of direct market exposure.

Answer 290

Structured products can serve as a risk management tool within a diversified portfolio, offering a middle ground between high-risk options like direct stock investments and low-risk, low-return options like bonds or savings accounts.

Answer 291

Investors should consider the terms of capital protection, the risk profile of the underlying assets, potential returns, and how these align with their investment goals and risk tolerance. Understanding the product's structure and how returns are calculated is also crucial.

Answer 292

A SCARP is an investment product that offers potential income or growth over a fixed period. The return of the initial capital is linked to the performance of an index, basket of stocks, or other financial factors, with the risk that some or all of the capital may be lost if certain performance thresholds are not met.

Answer 293

SCARPs expose investors to varying outcomes based on a preset formula tied to the performance of an index or basket of assets. If the performance meets specified conditions, the capital is returned. If not, the investor may lose part or all of their initial investment.

Answer 294

The return of capital is determined by the performance of an index or selected stocks. A formula predefines the range of outcomes, where returns may vary depending on how the underlying assets perform within the limits.

Answer 295

Investors might choose a SCARP for its potential for higher returns, with the knowledge that the risk to capital is tied to specific market outcomes. SCARPs can be attractive to those seeking better growth prospects with a more structured risk profile than traditional investments like bonds.

Answer 296

The main risk is that if the underlying index or stocks perform outside of the specified limits, the investor could lose some or all of the initial capital. This makes SCARPs riskier than many traditional investments that guarantee capital return.

Answer 297

SCARPs should be considered as part of the high-risk portion of a diversified portfolio. They are suitable for investors willing to accept potential capital loss in exchange for the possibility of higher returns, while still maintaining safer assets in other parts of the portfolio.

Answer 298

A non-SCARP structured investment product guarantees the return of 100% of the initial capital, provided the issuer of the financial instruments underlying the product remains solvent. This return is not influenced by the market performance of the underlying assets.

Answer 299

The key difference is that non-SCARPs guarantee the return of the initial capital as long as the issuer remains solvent, whereas SCARPs expose the investor’s capital to potential losses based on the performance of an index or asset basket.

Answer 300

The issuer of the financial instruments backing the non-SCARP must remain solvent for the initial capital to be fully protected and returned to the investor.

Answer 301

A cautious investor might prefer a non-SCARP because it provides capital protection, ensuring the return of the initial investment even if the market performs poorly, as long as the issuer remains solvent.

Answer 302

The primary risk is issuer insolvency. If the issuer of the underlying financial instruments goes bankrupt, the capital protection is no longer guaranteed. Additionally, while the capital is protected, the potential returns may be lower compared to riskier SCARPs.

Answer 303

Non-SCARPs can serve as a lower-risk element of an investment portfolio, offering some capital protection while still providing exposure to potential returns. They are suitable for investors who seek a balance between security and growth.

Answer 304

Counterparty risk is the risk that the issuer of the structured product, often a financial institution, may default or become insolvent, meaning that the capital protection or returns promised may not be delivered.

Answer 305

Market risk refers to the possibility that the underlying assets (such as stocks or indices) perform poorly, which could result in lower-than-expected returns, or in the case of some structured products (like SCARPs), the loss of initial capital.

Answer 306

Inflation risk is the risk that the returns on the structured product may not keep pace with inflation, potentially eroding the purchasing power of the returns or even the initial capital invested over time.

Answer 307

Even if a structured product promises capital protection, if the issuer (counterparty) becomes insolvent, this protection may no longer be valid. Investors should carefully assess the creditworthiness of the issuer to minimize counterparty risk.

Answer 308

Investors can mitigate risks by diversifying their investments across multiple financial products or providers, thoroughly understanding the terms and conditions of the product, and selecting structured products from reputable institutions with strong credit ratings.

Answer 309

Counterparty risk Market risk Inflation risk

Answer 310

A wrap account consolidates all an investor's holdings into one platform, offering a full overview of assets, tax treatment, and performance.

Answer 311

Wrap accounts can hold a variety of assets, including investment trusts, direct equities, OEICs, unit trusts, ISAs, and offshore investments.

Answer 312

A fund supermarket offers a limited range of investments like OEICs and ISAs, while a wrap offers those plus additional assets like investment trusts and direct equities.

Answer 313

Wrap accounts offer a single platform to manage diverse assets, making it easier to track performance and tax treatment across different investments.

Answer 314

Wrap accounts generally charge higher fees because they offer a broader range of services and investment options than fund supermarkets.

Answer 315

Investors with complex portfolios seeking more investment options and comprehensive management tools would benefit most from a wrap platform.

Answer 316

Fund supermarkets are typically used by retail investors who want easy access to a wide range of funds like OEICs, unit trusts, and ISAs, without the need for more complex investments.

Answer 317

Fees can be either a flat fee or a percentage of the assets held on the platform. Wraps may also have additional charges for financial advice.

Answer 318

Yes Both wraps and fund supermarkets offer ISAs and other tax-free accounts to investors.

Answer 319

Investors looking for simpler options with lower fees, and who only need access to funds like OEICs and unit trusts, may prefer a fund supermarket.

Answer 320

Wraps help manage tax by consolidating various tax treatments and showing how different investments impact overall tax exposure, whereas fund supermarkets might offer simpler tax visibility.

Answer 321

IFAs often provide personalized investment advice and portfolio management, which is why wrap accounts generally come with higher fees.

Answer 322

Sustainable finance involves incorporating environmental, social, and governance (ESG) factors into investment decisions, considering how these elements might impact a firm's profitability.

Answer 323

Environmental factors could include practices like recycling, social factors could involve fair employee treatment and wages, and governance factors relate to company ethics, tax transparency, and corporate governance.

Answer 324

Advantages include investing in forward-looking firms, aligning investments with personal ethical values, and the fact that many socially responsible funds have performed well.

Answer 325

Disadvantages include a lack of diversification, higher volatility due to investing in smaller companies, potentially higher charges due to active management, and the risk of 'greenwashing' (false sustainability claims).

Answer 326

An investor might prefer sustainable finance to align their financial decisions with personal values related to social responsibility, environmental protection, and good governance, while also seeking to support forward-looking companies.

Answer 327

ESG-focused funds can limit diversification because they exclude companies that don’t meet ESG criteria, which may expose investors to greater volatility and potential losses compared to a more diversified portfolio.

Answer 328

Greenwashing is when firms make unsubstantiated claims about the sustainability of their products or practices, misleading investors into thinking they are supporting socially responsible companies when they may not be.

Answer 329

Companies that score highly in ESG criteria tend to be smaller or medium-sized, which can be more volatile and riskier compared to investing in larger, more established companies.

Answer 330

Greenwashing refers to firms making exaggerated or misleading claims about the sustainability of their investment products, creating a false impression that they are environmentally friendly or socially responsible.

Answer 331

The purpose of PS23/16 is to help consumers make informed decisions by regulating the naming and marketing of sustainable investment products, introducing labels for transparency, and implementing an anti-greenwashing rule to enhance consumer trust.

Answer 332

Key requirements include regulations on naming and marketing of products, an anti-greenwashing rule, the introduction of four labels to guide consumers, and product-level and entity-level disclosures aimed at providing more transparency.

Answer 333

The FCA introduced these regulations in response to concerns that firms were misleading consumers with false sustainability claims. The regulations aim to protect consumers and improve trust in sustainable finance by providing clearer, more reliable information.

Answer 334

The labels provide a clear, standardized way for consumers to identify and compare sustainable investment products, helping them understand how different funds align with environmental, social, and governance (ESG) goals.

Answer 335

Distributors must ensure that product-level information, including the newly introduced labels, is easily accessible to consumers. They are responsible for making the relevant sustainability disclosures available to both institutional investors and retail consumers.

Answer 336

Cryptoassets are digital representations of value, whose ownership is proven through cryptographic methods. They do not have physical equivalents and exist only digitally, with Bitcoin being the most well-known example.

Answer 337

Users create a digital wallet that generates a pair of keys: one public key (similar to an account number) and one private key (like a PIN). These keys are used to send, receive, and verify ownership of cryptoassets during transactions.

Answer 338

DLT is the technology that records transactions across a distributed network of computers, removing the need for a central authority. Blockchain is a widely known form of DLT where verified transactions are recorded in blocks.

Answer 339

Blockchain is transparent because it is publicly available, allowing anyone to view transactions. It is secure due to its use of cryptography, where each block of transactions is linked to the previous one, making the chain immutable and irreversible.

Answer 340

The security comes from the private and public keys generated by the wallet. The private key is kept secret and used to sign transactions, proving ownership, while the public key allows others to send cryptoassets to the wallet without compromising security.

Answer 341

The peer-to-peer network validates transactions by having participants compete to solve complex puzzles. Once solved, the transaction is verified and added to the blockchain, ensuring that there are no double-spends or invalid transactions without a central authority.

Answer 342

Exchange tokens are a form of cryptoasset not issued or backed by any central authority. They are designed to be used as a means of exchange, allowing for the buying and selling of goods and services without intermediaries, such as Bitcoin.

Answer 343

Utility tokens grant holders access to a specific product or service but do not provide rights equivalent to investments like shares. In certain cases, they might meet the definition of e-money.

Answer 344

Security tokens are cryptoassets that provide rights similar to traditional investments, such as shares or debt instruments, as outlined in the Regulated Activities Order (RAO).

Answer 345

Exchange tokens allow for decentralized transactions without the need for a central authority or intermediaries, providing a fast, borderless, and often lower-cost method of transferring value.

Answer 346

Utility tokens grant access to a product or service rather than representing ownership or rights like traditional investments, such as stocks. They are primarily used within specific platforms or ecosystems rather than for financial returns.

Answer 347

Security tokens carry rights and obligations akin to traditional securities, such as ownership stakes (similar to shares) or the promise of repayment (similar to bonds). These tokens are often subject to regulation under the RAO.

Answer 348

A qualifying cryptoasset is a digital representation of value or contractual rights that is cryptographically secured, transferable, and fungible. Examples include exchange tokens like Bitcoin, but not CBDCs or cryptoassets defined as e-money.

Answer 349

The FCA began regulating financial promotions of qualifying cryptoassets from October 8, 2023, under the FSMA 2000 (Financial Promotion) (Amendment) Order 2023.

Answer 350

Fungibility refers to an asset's ability to be exchanged for other assets of the same kind and equal value. For example, one Bitcoin is fungible because it can be exchanged for another Bitcoin with no difference in value.

Answer 351

The FCA introduced new regulations to increase consumer protection, ensuring that firms marketing qualifying cryptoassets to UK consumers adhere to standards for financial promotions, helping prevent misleading or inappropriate marketing.

Answer 352

Central bank digital currencies (CBDCs) and e-money are excluded because they are already subject to other specific regulations and oversight, ensuring they adhere to different financial and legal frameworks.

Answer 353

Firms must be authorised or registered by the FCA or have their marketing approved by an authorised firm. They must also ensure that marketing materials include clear risk warnings and that ads are fair and not misleading.

Answer 354

The 24-hour cooling-off period is a mandatory time frame that allows first-time investors to reconsider their decision before proceeding with their investment, providing an extra layer of consumer protection.

Answer 355

Direct offer financial promotions can only be made to restricted investors, high-net-worth investors, and certified sophisticated investors.

Answer 356

Client appropriateness testing ensures that retail investors have sufficient knowledge and experience to understand the risks involved with cryptoasset investments, helping to protect inexperienced individuals from potential losses.

Answer 357

The cooling-off period allows first-time investors to take a step back and assess the risks of their investment decision, reducing the likelihood of hasty or impulsive investments.

Answer 358

Firms must either be authorised or registered by the FCA, or have their marketing materials approved by an FCA-authorised firm. Additionally, firms must implement risk warnings, fair marketing, appropriateness testing, and investor categorisation to ensure the suitability of their offerings.

Answer 359

A stablecoin is a type of cryptocurrency designed to maintain a consistent value by being pegged to a particular asset or group of assets, offering more stability compared to volatile unbacked cryptocurrencies.

Answer 360

Fiat-backed stablecoins are tied to the value of one or more specific fiat currencies, such as the US dollar or British pound, and may require the holding of these currencies to maintain the stable value.

Answer 361

The paper focuses on how the FCA may regulate the issuance and custody of fiat-backed stablecoins and their use as a form of payment.

Answer 362

Fiat-backed stablecoins maintain their value relative to a stable fiat currency, reducing the high volatility that unbacked cryptocurrencies like Bitcoin often experience.

Answer 363

Regulation by the FCA could provide greater trust and security for the use of fiat-backed stablecoins as a payment method, ensuring that the stablecoin issuers follow strict guidelines related to custody, backing assets, and overall stability.

Answer 364

Fiat-backed stablecoins offer stability, making them more suitable for use in everyday transactions or as a store of value, unlike unbacked cryptocurrencies that can experience large fluctuations in value over short periods.

Answer 365

Answer: b) The fund manager can create an unlimited amount of units according to demand

Answer 366

False. They are owned and controlled by the trustee

Answer 367

Answer: a) The unit holder

Answer 368

Answer: c) A company that invests in the shares of other companies

Answer 369

Answer: b) By purchasing shares of the investment trust company on the stock exchange

Answer 370

Leverage returns. An investment trust can borrow in order to take advantage of investment opportunities. Unit trusts and OEICs cannot do this.

Answer 371

Answer: c) There is one price, based on the value of the assets divided by the number of shares

Answer 372

Answer: c) 20 per cent is deemed to have been taken within the investment with a potential further liability of 20 per cent for higher‑rate taxpayers or 25 per cent for additional‑rate taxpayers.

Answer 373

False. The investor may withdraw up to 5 per cent of the value of the original investment per annum without paying tax at the time of withdrawal but a tax liability may arise when the bond matures, on encashment of the bond or on death of the bondholder

Answer 374

Answer: d) Noah could choose any of the above. The fact that he is a higher‑rate taxpayer has no bearing on his decision – they are all taxed in the same way.