Topic 9 (Tax Wrappers)

Question 1

What is a Tax Wrapper?

Answer 1

A tax shelter around underlying investments that changes the way it’s taxed

Question 2

What are the 2 stages where tax can be charged in an investments life?

Answer 2

1. While the funds are invested

2. When funds are drawn or income is paid out

Question 3

What are the main taxes involved in investment?

Answer 3

Income tax

Capital Gains tax

Question 4

Name 2 types of ISA?

Answer 4

• stocks and shares component

- cash component

Question 5

What are some key features of a stocks and shares component ISA?

Answer 5

• life policies on the life of investor
• shares and corporate bonds
• gilts and government stocks of EEA countries
• UK authorised unit trusts and OEICs

Question 6

What are some key features of a cash component ISA?

Answer 6

• bank/building society deposit accounts
• stakeholder cash deposit products
• unit/shares in uk authorised unit trusts are money market schemes

Question 7

How is someone eligible for an ISA?

Answer 7

• minimum age for investing in stocks/shares is 18 (cash ISA it’s 16)
• must be resident UK for tax
• only held in a single name

Question 8

What is the subscription limit for an ISA?

Answer 8

It’s increased annually alongside the CPI and rounded to the nearest multiple of £120, if the CPI falls the limit remains unchanged

Question 9

On death, what are isa holdings designated as?

Answer 9

Designated as a continuing account of a deceased investor and remains so until:

• administration of estate
• closure of the account
• third anniversary of death

Question 10

What is an additional purpose subscription and it’s purpose?

Answer 10

An APS allowance applies when an individuals partner dies

It’s purpose is to protect the tax benefits around the savings in the ISA

Surviving partner can make additional ISA contribution

Question 11

What are the key facts for withdrawals and transfers of ISA’s?

Answer 11

Withdrawals

• isa providers have the option to offer flexibility, allowing funds to be withdrawn
• many allow no notice withdrawals to be made

Transfers

• funds can be transferred between isa’s
• can be transferred between providers

Question 12

What are the tax reliefs for ISA’s?

Answer 12

• investors and exempt for income/CGT tax on their investments
• investments held in unit trusts are liable for CGT on encashment

Question 13

What are the key features of a Help to buy ISA?

Answer 13

• designed for people saving for 1st home
• joint purchasers can have an account each
• maximum investment of £200 per month

Question 14

What are the key features of a lifetime ISA?

Answer 14

• encourages people to save for their first home or for retirement
• opened by those ages 18-40
• £20,000 annual subscription
• maximum of £4,000 saved per tax year
• savings can be withdrawn when someone’s terminally ill
• Penalty applies if funds are withdrawn for reasons other than ones stated above

Question 15

What is a child trust fund?

Answer 15

A tax free savings account for children

Question 16

What are the key features of a CTF?

Answer 16

• account is in force until child’s 18th birthday

- parent is responsible if child is under 16

Question 17

Name 3 types of Child Trust Fund?

Answer 17

1. Deposit type savings account
2. Share accounts that invest directly/indirectly in shares
3. Stakeholder CTF account invest in a range of company shares

Question 18

What are the subscription limits and taxation on CTF’s?

Answer 18

• subscription year runs from the child’s birthday to the day proceeding their next birthday
• no tax on income or capital gains

Question 19

What are junior ISA’s?

Answer 19

• available for those who don’t have CTF
• taken out by the parent of child
• no contribution from government
• funds are locked until child is 18 but can be accessed by parents

Question 20

The government offer 2 schemes that incentivise investment through the award of tax benefits, what are they?

Answer 20

• venture capital trust (VCT)

- enterprise investment scheme (EIS)

Question 21

What is the main difference between EIC and VCT?

Answer 21

The main difference is that a VCT is an investment in its own right, a collective investment whereas the EIS is a system of tax reliefs that an individual company applies for

Question 22

Describe a VCT!

Answer 22

• Run by a professional manager
• Encourages people to invest in certain smaller companies
• High risk
• Capital gains are exempt
• tax relief of 30% on investments up to £200,000 per tax year

Question 23

Describe an EIS!

Answer 23

• Designed to encourage investment into certain smaller, high risk companies by offering tax relief on the investment
• tax relief of 30% on investments up to £1 mil per tax year
• CGT can be deferred by re-investment
• Are exempt from CGT if shares are held for more than 3 years

Question 24

What is the Seed Enterprise Investment Scheme (SEIS)?

Answer 24

Offers even higher tax reliefs than EIS as it is targeted at raising funds for small startup companies

Question 25

What presents a higher risk, VCT or an investment trust?

Answer 25

A VCT because they invest in newly established companies which tend to be at higher risk