Topic 9 Flashcards
1
Q
What is a tax wrapper?
A
A tax wrapper is a structure, like an ISA (Individual Savings Account), that changes the tax treatment of income and capital gains generated from the underlying investments, often providing tax advantages.
2
Q
At what stages can tax be charged on investments?
A
Tax can be charged while the funds are invested (income tax) or when funds are drawn or income is paid out (capital gains tax or income tax).
3
Q
What are the main taxes that affect investments?
A
The main taxes affecting investments are income tax and capital gains tax (CGT).
4
Q
Why might an investor use a tax wrapper like an ISA?
A
Investors use tax wrappers like ISAs to shield their income and capital gains from taxation, allowing their investments to grow tax-free or to receive income without paying income tax.
5
Q
How does a tax wrapper affect the taxation of income and gains from investments?
A
A tax wrapper can either eliminate or reduce the tax liability on income and capital gains from the underlying investments, depending on the type of wrapper used.
6
Q
What is the benefit of using tax wrappers for long-term investment strategies?
A
Tax wrappers are beneficial for long-term investment strategies because they allow investors to maximize returns by minimizing the tax burden on income and capital gains over time.
7
Q
How does capital gains tax (CGT) apply to investments outside of a tax wrapper?
A
When investments outside a tax wrapper are sold, any profit made above the annual CGT allowance may be subject to capital gains tax.
8
Q
What types of investments can be held within a tax wrapper like an ISA?
A
Investments such as stocks, bonds, mutual funds, and cash savings can be held within a tax wrapper like an ISA, providing tax advantages for the returns generated by these assets.
9
Q
What is the purpose of ISAs?
A
ISAs were introduced in 1999 to encourage people to save and to ensure that tax relief on savings is distributed fairly.
10
Q
What investments can be held in a stocks and shares ISA?
A
A stocks and shares ISA can include:
- Shares and corporate bonds issued by companies listed on a recognised exchange anywhere in the world, including AIM shares.
- Gilt-edged securities and similar stocks issued by government of contries in the EEA.
- UK-authorised unit trusts and OEICs.
- UK-listed investment trusts
- Life assurance policies on the sole life of the ISA investor
- Units in a stakeholder medium-term investment product
- Shares acquired in the previous 90 days from an all-employee savings-related share option scheme (SAYE)
11
Q
What types of savings can be included in a cash ISA?
A
A cash ISA can include:
- Bank and building society deposit accounts
- Money-market unit trusts and OEICs
- Stakeholder cash deposit products.
12
Q
What is an innovative finance ISA?
A
An innovative finance ISA can include peer-to-peer lending and long-term asset funds, such as privately-owned companies or property funds with extended notice periods.
13
Q
What is the purpose of a Lifetime ISA?
A
A Lifetime ISA is designed to help individuals save for their first home or for later life, offering bonuses on contributions.
14
Q
Why might someone choose a stocks and shares ISA over a cash ISA?
A
Someone might choose a stocks and shares ISA if they are looking for potentially higher returns through investments in equities, bonds, or unit trusts
Whereas a cash ISA is more suitable for lower-risk savings in deposit accounts.
15
Q
How does the Lifetime ISA differ from the Help-to-Buy ISA?
A
The Lifetime ISA replaced the Help-to-Buy ISA, offering a broader scope by allowing savings for both a first home and retirement.
Whereas the Help-to-Buy ISA was specifically designed for first-time homebuyers.
16
Q
What types of investors would benefit from an innovative finance ISA?
A
Investors interested in peer-to-peer lending or illiquid assets such as privately-owned companies and property funds may benefit from an innovative finance ISA, as it provides a tax-free wrapper for these types of alternative investments.
17
Q
What are the benefits of holding assets in an ISA?
A
The primary benefit of holding assets in an ISA is that any income or capital gains generated from the investments are tax-free, which helps investors grow their savings or investments more efficiently.
18
Q
What types of investments are allowed in a Lifetime ISA?
A
A Lifetime ISA allows cash, stocks and shares, or a combination of both, and can be used for saving towards a first home or retirement.
19
Q
What is the minimum age for opening a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, or Lifetime ISA?
A
The minimum age is 18 for all these types of ISAs.
However, a Lifetime ISA can only be opened by individuals under the age of 40.
20
Q
Can non-UK residents open an ISA?
A
No.
An ISA investor must be generally resident in the UK for tax purposes to open and contribute to an ISA.
21
Q
Can an ISA be held jointly with another person?
A
No.
ISAs can only be held in a single name; joint ISAs are not permitted.
22
Q
Why does the Lifetime ISA have an additional age restriction compared to other ISAs?
A
The Lifetime ISA is designed to help younger people save for their first home or retirement, which is why it is only available to those under 40 years of age.
23
Q
What happens if an ISA holder moves abroad and is no longer a UK resident?
A
If an ISA holder moves abroad and becomes non-UK resident, they can keep their existing ISA;
But they will no longer be able to contribute to it until they return to the UK and regain residency.
24
Q
Why are joint ISAs not allowed?
A
ISAs are individual tax wrappers designed to offer personal tax relief.
Allowing joint accounts would complicate the tax treatment, as ISAs are structured for individual use and tax benefits.
25
What are the eligibility rules for ISAs?
1. The minimum age for investing in a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA or Lifetime ISA is 18 years old; Lifetime ISAs can only be opened by those under 40.
2. An ISA innvestor must be generally resident in the UK for tax purposes.
3. An ISA can only be held by a single name, ie. joint accounts are NOT permitted
26
What is the purpose of setting subcription limits for ISAs?
To prevent high-net-worth individuals from benefiting excessively by switching large amounts of savings into ISAs for tax benefits.
27
Can investors split their contributions across different types of ISAs?
Yes
Investors can split their contributions across different types of ISAs, as long as they do not exceed the overall annual subscription limit.
28
What happens to an ISA after the account holder dies?
Their ISA becomes a “continuing account of a deceased investor” for up to three years and one day, during which it retains its tax advantages.
No additional funds can be added during this period.
29
What is an Additional Permitted Subscription (APS)?
APS is an allowance that allows the surviving spouse or civil partner of a deceased ISA holder to make an additional subscription to their own ISA up to the value of the deceased’s ISA, preserving the tax benefits of the savings.
30
How long does a spouse or civil partner have to use the APS allowance?
The surviving spouse or civil partner has three years from the date of the account holder's death or 180 days after the administration of the estate, whichever is later, to use the APS for cash ISAs.
For stocks and shares ISAs, the time limit is 180 days after the administration of the estate.
31
Why are ISA subscription limits important?
Subscription limits ensure that the tax benefits of ISAs are distributed fairly, encouraging those with smaller amounts to save while preventing wealthier individuals from exploiting tax benefits on larger sums.
32
How does the Additional Permitted Subscription (APS) benefit the surviving spouse or civil partner?
APS allows the surviving spouse or civil partner to preserve the tax advantages of the deceased's ISA by transferring an equivalent amount into their own ISA, thereby continuing the tax-free growth or income generation of the assets.
33
What are the implications if a surviving spouse does not use the APS within the allowed time?
If the APS is not used within the time frame (three years for cash ISAs, 180 days after estate administration for stocks and shares ISAs), the surviving spouse loses the opportunity to make the additional subscription, potentially missing out on valuable tax benefits.
34
Can the APS be used with a different ISA provider?
Yes, the surviving spouse or civil partner can transfer the APS to a different ISA provider, provided the new provider agrees to accept the additional permitted subscriptions.
35
Can you make multiple subscriptions to the same ISA in a tax year?
Yes.
Investors can make multiple subscriptions to the same type of ISA in a tax year, as long as the total contributions across all ISAs do not exceed the annual limit.
36
What is the current annual subscription limit for ISAs?
For the 2024/25 tax year, the annual subscription limit for ISAs is £20,000, which can be split across different types of ISAs (cash, stocks and shares, innovative finance, or Lifetime ISAs).
37
Can the value of an APS exceed the annual subscription limit for regular ISAs?
Yes
The APS is separate from the regular ISA annual subscription limit.
This means that the surviving spouse or civil partner can make an APS contribution in addition to their regular ISA contributions, potentially exceeding the £20,000 limit in that year.
38
Can funds withdrawn from an ISA be replenished during the same tax year?
Yes
ISA providers have the option to offer flexibility, allowing funds withdrawn from a cash or innovative finance ISA, or the cash element of a stocks and shares ISA, to be replenished during the same tax year.
However, not all providers offer this feature.
39
What happens if you transfer out of a Lifetime ISA before the age of 60?
If you transfer out of a Lifetime ISA before the age of 60, a 25% withdrawal fee is triggered, reducing the value of the funds you receive.
40
Can you transfer funds from one ISA provider to another without losing the tax benefits?
Yes.
You can transfer funds between ISA providers or different types of ISAs without losing the tax benefits, provided the transfer follows ISA rules and doesn't exceed the annual limit.
41
Are there any restrictions on transferring assets from an innovative finance ISA?
While cash can be transferred from an innovative finance ISA, other assets held within it (such as peer-to-peer loans) may not be transferable.
42
Why might some ISA providers not offer flexibility for replenishing withdrawn funds?
Offering flexibility requires additional administrative processes, and some providers may choose not to offer it to keep their services simpler or reduce costs.
43
How do withdrawal restrictions impact the use of fixed-rate cash ISAs?
Fixed-rate cash ISAs often come with restrictions that prevent withdrawals during the fixed-rate period.
This means you may face penalties or be unable to access your funds until the term ends, making it less suitable for short-term savings.
44
What are the benefits of transferring an ISA to another provider?
Transferring an ISA can provide access to better interest rates, lower fees, or investment options that better align with an investor’s financial goals.
It also allows continued tax-free growth of funds.
45
Why is there a penalty for withdrawing funds from a Lifetime ISA before the age of 60?
The penalty is in place to discourage using the Lifetime ISA for purposes other than its intended goals, which are saving for retirement or buying a first home.
The 25% fee ensures that funds are withdrawn only for these specific purposes.
46
Sarah invests £15,000 in a stocks and shares ISA on 6 April, where the annual subscription limit is £20,000. On 1 August, she withdraws £4,000, leaving a balance of £11,000.
If her ISA provider offers flexibility, how much can she still invest for the remainder of the tax year?
Since Sarah’s ISA offers flexibility, she can still invest the full amount she withdrew, in addition to her unused annual limit.
The total amount she can invest for the rest of the tax year is £9,000 (£20,000 – £11,000 + £4,000).
47
Emma invests £10,000 in an innovative finance ISA on 6 April, with the annual limit of £20,000. On 1 September, she withdraws £5,000.
If her ISA provider does not offer flexibility, how much can she still invest for the rest of the tax year?
ince Emma’s ISA does not offer flexibility, her withdrawal reduces her remaining subscription allowance.
Therefore, she can still invest £10,000 (£20,000 – £10,000), and the £5,000 withdrawn cannot be replenished.
48
David opens a Lifetime ISA and invests £8,000 on 1 April, planning to use it to buy his first home. However, on 1 November, he withdraws £3,000 from the Lifetime ISA for an unrelated reason.
What penalty does David face, and how much will he receive after the penalty?
Lifetime ISA withdrawals before the age of 60 (if not for a first home purchase) incur a 25% penalty.
Therefore, David will face a penalty of £750 (25% of £3,000), and he will receive £2,250 after the penalty.
49
Tom has invested £6,000 in a fixed-rate cash ISA, with the annual subscription limit being £20,000. After six months, he finds a provider offering a better interest rate and wants to transfer the funds.
Can he transfer the full balance without penalty, and how much can he still invest for the remainder of the year?
If Tom’s fixed-rate cash ISA allows transfers without penalties, he can transfer the full £6,000 to the new provider.
Since the transfer does not affect his annual limit, he can still invest up to £14,000 (£20,000 – £6,000) for the remainder of the tax year.
50
Lisa has £5,000 in a Help-to-Buy ISA (which is now closed to new applicants). She plans to withdraw £2,000 in July to cover an unexpected expense.
Can she replace the funds later in the tax year?
Help-to-Buy ISAs do not offer the flexibility to replenish withdrawn funds.
Therefore, if Lisa withdraws £2,000, she cannot replace it later in the tax year.
She can still contribute up to the remaining subscription limit for the year, but the withdrawn amount cannot be re-added.
51
How is a unit trust or OEIC treated for tax purposes if not held within an ISA?
If a unit trust or OEIC is held outside of an ISA, it is potentially liable to income tax on interest or dividends, and to capital gains tax (CGT) when encashed if the gains exceed the annual CGT allowance.
52
What happens to the tax liability on a unit trust or OEIC held within an ISA?
If a unit trust or OEIC is held within an ISA, there is no liability to income tax or capital gains tax (CGT) on any income or gains generated.
53
Why might investors prefer to hold unit trusts or OEICs within an ISA?
Investors may prefer to hold unit trusts or OEICs within an ISA to benefit from the tax-free status, as this exempts them from paying income tax on distributions and CGT on capital gains, helping to maximize their returns.
54
How does the tax treatment of ISA investments benefit long-term investors?
The tax exemption on both income and capital gains in ISAs allows long-term investors to grow their savings without worrying about tax liabilities, which can compound their growth over time compared to taxable investments.
55
What is a Help-to-Buy ISA?
A Help-to-Buy ISA is a cash ISA designed to help first-time homebuyers in the UK by offering a government bonus on the savings they contribute toward purchasing a home.
56
When was the Help-to-Buy ISA available to new applicants?
The Help-to-Buy ISA was available from 1 December 2015 until 30 November 2019.
No new accounts could be opened after this date, but existing account holders can continue saving until 30 November 2029.
57
What is the minimum and maximum government bonus for a Help-to-Buy ISA?
The minimum government bonus is £400 (for savings of £1,600), and the maximum bonus is £3,000 (for savings of £12,000).
58
What are the price limits on properties eligible for the Help-to-Buy ISA bonus?
The bonus is available on properties valued up to £450,000 in London and £250,000 elsewhere in the UK.
59
Why is the Help-to-Buy ISA attractive to first-time homebuyers?
The Help-to-Buy ISA is attractive because it provides a 25% government bonus on savings, helping first-time buyers increase their deposit amount when purchasing their first home, making homeownership more attainable.
60
How does the Help-to-Buy ISA affect the annual ISA allowance?
Contributions to the Help-to-Buy ISA count toward the annual ISA allowance, meaning the total amount saved in a Help-to-Buy ISA is part of the £20,000 annual ISA limit (2024/25 tax year).
61
What happens if a Help-to-Buy ISA holder does not use the funds for a home purchase?
If the funds are not used to purchase a home, the account holder can withdraw the money, but they will not receive the government bonus.
The savings can still be used for other purposes without losing the tax-free status on the interest earned.
62
Why are joint purchasers allowed to have individual Help-to-Buy ISAs?
Joint purchasers can have individual Help-to-Buy ISAs to allow each person to receive a separate government bonus, potentially doubling the bonus if both are first-time buyers, making it easier to accumulate a larger deposit for a home.
63
Can I still open a Help-to-Buy ISA?
No.
The Help-to-Buy ISA scheme closed to new applicants on 30 November 2019.
However, if you opened an account before that date, you can continue to save until 30 November 2029.
64
When is the latest date I can use the government bonus from my Help-to-Buy ISA?
You must use the funds and claim the government bonus by 1 December 2030.
65
What is the minimum balance required to receive the Help-to-Buy ISA bonus?
You need to have at least £1,600 saved in your Help-to-Buy ISA to qualify for the minimum bonus of £400.
66
How are the monthly contributions structured for a Help-to-Buy ISA?
After an initial deposit of up to £1,200, you can contribute between £1 and £200 per month into the Help-to-Buy ISA until 30 November 2029.
67
Why is there a property price limit for the Help-to-Buy ISA bonus?
The property price limits of £450,000 in London and £250,000 elsewhere are intended to target first-time buyers looking to purchase more affordable homes, ensuring the bonus supports those who need it most.
68
What happens if I exceed the £200 monthly contribution limit in a Help-to-Buy ISA?
Any contributions over the £200 monthly limit will not count toward your Help-to-Buy ISA, and you may need to request a refund for the excess amount.
It could also affect your eligibility for the government bonus.
69
Can I use the Help-to-Buy ISA bonus for a property outside the UK?
No.
The bonus can only be used for purchasing a first home within the UK. Properties outside the UK are not eligible for the Help-to-Buy ISA bonus.
70
Why do contributions to a Help-to-Buy ISA count towards the annual ISA allowance?
Since a Help-to-Buy ISA is a type of cash ISA, it follows the same rules regarding the annual ISA allowance, meaning all contributions are part of the overall £20,000 limit to prevent excessive tax-free savings.
71
Who is eligible to open a Lifetime ISA?
A Lifetime ISA can be opened by individuals aged 18 to 39.
72
What is the government bonus for a Lifetime ISA?
The government pays a 25% bonus on savings made before the age of 50.
The bonus is paid monthly, enabling interest to be earned on it.
73
What is the maximum amount that can be saved in a Lifetime ISA per tax year?
The maximum amount that can be saved per tax year is £4,000.
74
When can funds from a Lifetime ISA be withdrawn without a penalty?
Funds can be withdrawn without a penalty for purchasing a first home, when the holder reaches age 60, or if the holder is terminally ill.
75
What is the penalty for withdrawing funds from a Lifetime ISA for reasons other than buying a home or reaching age 60?
A 25% penalty is applied for withdrawals made for any other reason, effectively reducing the total amount saved.
76
Why might someone choose a Lifetime ISA over other types of ISAs?
A Lifetime ISA is attractive because it offers a 25% government bonus on savings, making it ideal for young people looking to save for their first home or retirement.
The monthly bonus payment also allows for faster accumulation of interest.
77
How does the Lifetime ISA compare to the Help-to-Buy ISA for first-time homebuyers?
While both ISAs are designed to help first-time buyers, the Lifetime ISA allows for larger contributions with a £4,000 annual limit and a 25% bonus.
However, you can only use the bonus from one of these ISAs toward the purchase of a first home.
78
How does the Lifetime ISA fit into the overall annual ISA allowance?
Contributions to a Lifetime ISA count toward the overall annual ISA allowance, which is £20,000 for the 2024/25 tax year.
Meaning you can contribute up to £4,000 to a Lifetime ISA and the remainder to other types of ISAs.
79
What happens if funds are withdrawn from a Lifetime ISA before age 60 for reasons other than buying a home or terminal illness?
If funds are withdrawn early for other reasons, a 25% penalty is applied.
This penalty not only cancels out the government bonus but also reduces some of the original savings.
80
Can you contribute to both a Help-to-Buy ISA and a Lifetime ISA?
Yes, you can contribute to both a Help-to-Buy ISA and a Lifetime ISA.
However, you can only use the bonus from one of these ISAs toward the purchase of a first home.
81
Can you continue contributing to a Lifetime ISA after the age of 50?
No.
Contributions to a Lifetime ISA stop once you reach age 50, although the funds will continue to grow, and the bonus will apply to any contributions made before that age.
82
What is the maximum value of the home you can purchase using a Lifetime ISA bonus?
The maximum property value for using a Lifetime ISA to purchase a first home is £450,000.
83
Can you use the funds in a Lifetime ISA to purchase a home outside of the UK?
No.
The Lifetime ISA bonus can only be used to purchase a first home in the UK.
84
Why is there an age limit for opening a Lifetime ISA?
The age limit of 18 to 39 is set to target younger people, encouraging them to start saving early for their first home or retirement, offering them more time to accumulate savings and receive the government bonus.
85
How does the monthly bonus payment benefit Lifetime ISA holders?
The monthly payment of the government bonus allows savers to earn interest or investment returns on the bonus throughout the year, compounding their savings and potentially increasing their returns faster than an annual bonus.
86
Why is there a 25% penalty for non-qualifying withdrawals from a Lifetime ISA?
The 25% penalty is designed to discourage people from using the funds for purposes other than a first home or retirement.
It ensures that the government bonus is only used for its intended purpose, and the penalty also recovers some of the initial tax-free benefits.
87
Can Lifetime ISA holders use their savings for both a first home purchase and retirement?
Yes.
Lifetime ISA holders can use the funds for both purposes—first for a home purchase and later for retirement savings, provided they do not withdraw the entire balance for their home purchase.
88
Can I transfer an existing ISA into a Lifetime ISA?
Yes, you can transfer funds from an existing ISA into a Lifetime ISA, but it will count towards the £4,000 annual contribution limit for that tax year.
89
What happens if you don't use the Lifetime ISA to buy a home?
If you don’t use the Lifetime ISA to buy a home, the savings can remain in the account and continue growing.
You can withdraw the funds tax-free once you reach age 60 or use them under specific conditions like terminal illness.
90
Can you open multiple Lifetime ISAs?
You can open more than one Lifetime ISA during your lifetime.
BUT you can only pay into one Lifetime ISA in any given tax year.
91
When were Junior ISAs introduced, and what did they replace?
Junior ISAs (JISAs) were introduced in November 2011, replacing the Child Trust Fund (CTF) scheme.
92
Can a child have both a Child Trust Fund (CTF) and a Junior ISA?
No.
A child cannot have both a CTF and a JISA.
However, a CTF can be transferred into a JISA upon request.
93
What types of Junior ISAs are available?
There are two types of Junior ISAs: stocks and shares JISAs and cash JISAs.
Investment can be made into one type or split between both.
94
Who can open and manage a Junior ISA for a child under the age of 16?
For children under the age of 16, a Junior ISA can only be opened and managed by the child’s parent or another adult with legal responsibility for the child.
95
When can the funds in a Junior ISA be accessed?
The funds in a Junior ISA cannot be accessed until the child reaches the age of 18, at which point the account becomes a conventional adult ISA.
96
Why might a parent choose to transfer a Child Trust Fund (CTF) into a Junior ISA?
Parents may choose to transfer a CTF into a JISA because Junior ISAs typically have better interest rates, lower fees, and more investment options compared to CTFs, providing greater potential for growth.
97
What are the tax benefits of a Junior ISA compared to a regular savings account?
Junior ISAs offer the same tax benefits as adult ISAs, meaning that any income or capital gains generated are tax-free, unlike regular savings accounts where interest may be subject to tax.
98
How does the annual contribution limit for Junior ISAs work?
There is an annual contribution limit for JISAs, which can be split between a cash JISA and a stocks and shares JISA.
For the 2024/25 tax year, the limit is £9,000.
99
Why can’t funds be accessed from a Junior ISA before the child turns 18?
The purpose of the Junior ISA is to encourage long-term saving for a child’s future, such as education or starting adult life.
By preventing access until age 18, the JISA ensures that the funds are used for significant milestones.
100
How does the management of a Junior ISA change once the child turns 16?
Once the child turns 16, they are eligible to open and manage a Junior ISA themselves.
If a JISA has already been opened by a parent, the child takes over managing it, although the funds remain inaccessible until they turn 18.
101
Can new Child Trust Funds (CTFs) still be opened?
No, new CTFs are no longer available.
However, existing CTFs can still receive contributions up to the annual limit.
102
What happens to a Child Trust Fund when the child turns 18?
When the child turns 18, no further contributions can be made, but the account retains its tax-exempt status until it is closed.
The maturing CTF can also be transferred into an adult ISA without affecting the child's ISA subscription limit.
103
What are the types of Child Trust Funds that were available?
There were three types of CTFs:
1. Deposit-type savings accounts
2. Share accounts
3. Stakeholder CTF accounts
104
What is the maximum annual charge allowed for a stakeholder CTF?
The maximum annual charge allowed for a stakeholder CTF is 1.5%.
105
Why might someone transfer a Child Trust Fund into a Junior ISA?
Transferring a CTF into a Junior ISA may provide better growth potential due to potentially higher interest rates, more investment options, and lower fees compared to most CTF accounts.
106
What happens to the tax benefits when a Child Trust Fund matures at age 18?
he tax-exempt status of the CTF continues even after it matures, as long as the account is not closed.
The funds can also be transferred into an adult ISA, retaining their tax benefits.
107
How do stakeholder CTFs reduce risk compared to other types of CTFs?
Stakeholder CTFs are subject to certain government rules designed to reduce risk, such as investing in a diverse range of company shares and capping management charges at 1.5% per year.
108
What were the key features of the three types of Child Trust Funds?
Deposit-type savings accounts focused on cash savings with low risk, share accounts were investment-based with higher risk, and stakeholder CTFs invested in a diversified range of company shares, offering a balance of risk and potential returns under regulated conditions.
109
Can the child access money from the CTF before turning 18?
No.
There is no access to the funds in the CTF before the child turns 18, ensuring that the funds are saved for their future needs.
110
What is the purpose of Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS)?
VCTs and EIS are schemes designed to encourage private investment in newly established or smaller high-risk companies by offering tax incentives to investors.
111
What is the main difference between a VCT and an EIS?
A VCT is a collective investment listed on the stock exchange, run by an investment manager, while the EIS involves direct investment into eligible smaller companies that apply for EIS tax reliefs.
112
What tax reliefs are available for investing in a VCT?
Tax reliefs for VCTs include income tax relief of up to 30% on investments of up to £200,000 per tax year, tax-free dividends from these investments, and exemption from capital gains tax (CGT) on any gains.
113
What are the tax benefits of investing through the Enterprise Investment Scheme (EIS)?
EIS offers income tax relief of up to 30% on investments up to £1,000,000 (£2,000,000 if investing in knowledge-intensive companies), CGT deferral on reinvested capital gains, and CGT exemption on gains if the shares are held for at least three years.
114
What is the Seed Enterprise Investment Scheme (SEIS)?
The SEIS is a scheme similar to the EIS but targets very small start-up companies, offering even higher tax reliefs to incentivize early-stage investment.
115
Why are tax reliefs offered for investments in VCTs and EIS?
Tax reliefs are offered to make investments in high-risk companies more attractive to private investors, helping newly established or smaller companies raise the capital they need to grow.
116
How does the risk level of a VCT compare to that of traditional investments?
VCTs are considered high-risk investments because they involve smaller, less established companies.
However, the risk is mitigated by the tax reliefs offered, which can help offset potential losses.
117
Why might an investor choose an EIS over a VCT?
An investor might choose an EIS if they prefer a more direct approach to investing in individual companies and want to benefit from tax deferral on reinvested capital gains, as well as the possibility of investing in knowledge-intensive companies with a higher investment limit.
118
What are knowledge-intensive companies, and how do they affect the EIS investment limit?
Knowledge-intensive companies are those that are involved in research and development or employ a large proportion of highly skilled workers.
Investors can invest up to £2,000,000 per tax year in these companies through the EIS, compared to the regular £1,000,000 limit.
119
How are VCT dividends treated for tax purposes?
Dividends paid by a VCT from the maximum permitted investment of £200,000 are tax-free, providing an attractive income benefit for investors.
120
Why might the Seed Enterprise Investment Scheme (SEIS) offer higher tax reliefs compared to EIS?
The SEIS offers higher tax reliefs because it targets very early-stage start-up companies, which are even riskier than the companies eligible for the EIS.
The higher tax relief is designed to compensate for this increased level of risk.
121
Can VCT shares be traded on the stock exchange?
Yes.
VCT shares are listed on the stock exchange and can be traded, making them more liquid compared to direct investments in smaller companies.
122
How long must EIS shares be held to qualify for CGT exemption?
EIS shares must be held for at least three years to qualify for exemption from capital gains tax.
123
What is the maximum annual investment in VCTs that qualifies for tax relief?
The maximum annual investment in VCTs that qualifies for tax relief is £200,000.
124
Is there an annual limit for investing in the Seed Enterprise Investment Scheme (SEIS)?
Yes.
The annual limit for investing in the SEIS is £100,000.
125
Why might an investor prefer VCTs over directly investing in a single start-up company?
An investor might prefer VCTs because they offer diversification, as the VCT spreads investments across multiple companies, reducing the risk compared to investing in a single start-up.
126
How does the capital gains tax deferral work for EIS investments?
If an investor reinvests capital gains into an EIS-eligible company, they can defer the CGT liability until the new investment is sold.
This is particularly advantageous for managing tax liabilities over time.
127
What conditions must be met for a company to be eligible for EIS?
1. The company must be relatively small
2. Not listed on a major stock exchange
3. Must meet various conditions laid out by HMRC, such as: Focusing on a) growth and b) development activities.
This ensures that the scheme supports high-risk companies that need capital for expansion.
128
How does the liquidity of a VCT compare to an EIS investment?
VCTs are generally more liquid than EIS investments since VCT shares are traded on the stock exchange, whereas EIS investments are direct investments in companies that typically do not have an active secondary market.
129
What is the significance of a VCT being approved by HMRC?
HMRC approval is required for a VCT to qualify for the tax reliefs available to investors.
This approval ensures that the VCT complies with regulations that make the tax incentives available and that it operates within certain parameters designed to reduce investor risk.
130
What are the risks associated with investing in a VCT or EIS?
Both VCT and EIS investments are high-risk as they involve investing in smaller, less established companies.
These investments may result in losses if the underlying companies fail, and the value of the shares can be highly volatile.
131
What tax reliefs are available if an EIS investment fails?
If an EIS investment fails and results in a loss, the loss can be offset against an investor’s income or capital gains tax liabilities, providing further relief.
132
Is there any restriction on how long VCT shares must be held to retain tax reliefs?
To retain the 30% income tax relief, VCT shares must be held for a minimum of five years.
Selling them before this period could result in a clawback of the tax relief.
133
Can a VCT investment be used for inheritance tax planning?
No.
VCTs do not offer specific inheritance tax reliefs.
However, investments made through EIS can qualify for inheritance tax relief after being held for at least two years.
134
How does the maximum income tax relief for EIS compare to VCTs?
The EIS provides up to 30% income tax relief on a maximum investment of £1,000,000 (or £2,000,000 for knowledge-intensive companies), which is significantly higher compared to the £200,000 limit for VCTs.
135
Why might an investor be interested in knowledge-intensive companies under the EIS?
Knowledge-intensive companies often involve research and development or highly skilled industries, which may offer greater potential for growth.
Additionally, the EIS allows for a higher investment limit of £2,000,000 if investing in these companies.
136
What is the benefit of capital gains tax exemption for VCT and EIS investments?
The exemption from capital gains tax (CGT) means that any gains made from selling VCT or EIS shares after meeting the holding period conditions are not subject to CGT, allowing investors to keep more of their profits.
137
How does SEIS differ from EIS in terms of tax incentives?
The SEIS offers higher levels of tax relief compared to EIS, including up to 50% income tax relief on investments, as it targets very early-stage companies that present even higher risks.
This additional incentive encourages more investment at a stage when funding is particularly challenging to secure.
138
Eligibility rules for ISAs?
Investing in Stocks and shares or innovative finance ISA - 18 years.
Cash ISA - 16 years or over
Can only be held in single name, no joint accounts
139
Stella, aged 24, has invested £4000 into a lifetime ISA (LISA) in 2020/21.
How much if anything can she invest into other ISA’s in the current tax year?
£16,000
She has the remainder of her annual limit.
140
In what circumstances is an additional permitted subscription (APS) over and above the usual investment limit, allowed in respect of an ISA?
An APS is allowed for someone who has died.
The spouse/civil partner of the deceased is able to make an additional ISA contribution to the value of the ISA holdings of the deceased.
141
Followimg someone’s death the right to make an APS lasts for a period of up to:
A). 6 months
B). 12 months
C). 2 years
D). 3 years
D) 3 years
The right to make an APS lasts 3 years from date of death.
For stocks and shares the limit is 180 days after administration of the estate is complete.
142
The advantage of holding investments in a stocks and shares ISA, rather than holding collective investments directly, is that the investment is free of what taxes?
Investments held within an ISA are free from income tax and Capital gains tax.
143
What is the purpose of the lifetime ISA?
The lifetime ISA is to encourage people to save for the purchase of their first home and/or for retirement.
143
Existing help to buy ISA customers can continue saving up to £200 per month until:
A) 30 November 2021
B) 30 November 2024
C) 30 November 2026
D) 30 November 2029
D) 30 November 2029
Customers who owned a a help to buy ISA before 30 November 2019 can save a maximum if £200 per minth until 30 November 2029
144
An investor can increase their annual ISA investment limit by taking out a life time ISA, a help to buy ISA and a standard ISA.
True or false?
False
The help to buy and lifetime ISA are part of annual allowance not in addition to it.
145
Aaron, aged 12, has a stakholder child trust fund. What is the maximum annual management charge that can be applied to the fund?
A) 0.75 percent
B) 0.5 percent
C) 1 percent
D) 1.5 percent
D) 1.5 percent
146
Which form of investment normally represents a higher risk: an investment trust or a venture capital trust?
Venture capital trust as these are new companies and represent a higher risk.
