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R03 - 2023 > 10 - Indirect Investments > Flashcards

10 - Indirect Investments Flashcards

1
Q

What is pension Annual Allowance

A

£60,000

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2
Q

What is MPAA

A

Money Purchase annual allowance - £10,000

The MPAA is triggered when you withdraw income from a defined contribution pension scheme, not including any tax-free lump sums you are entitled to. It is designed to limit the amount you can benefit from tax relief after retirement.

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3
Q

What is the tapered annual allowance

A

When income is over £260,000 -The rate of reduction is £1 for every £2 that income exceeds £260,000, down to a minimum annual allowance of £10,000 (the same level as the MPAA).

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4
Q

What is PCLS restricted to

A

25% of recent lifetime allowance £1,073,100

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5
Q

How are Death benefits from DC taxed?

A

Before 75 - tax free
Paid out or drawdown - 2 years of death

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6
Q

What are the three ways for investors to access DC Pension?

A

Crystallise
Uncrystallise
Annuity

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7
Q

What happens when DC pension is crystallised?

A

25% Taken as PCLS (Tax Free)
Then flexi-access drawdown (taxed as income)

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8
Q

What happens when DC pension is uncrystallised?

A

Withdarawls taken from fund
Each withdrawl 25% tax free
75% - treated as income and subject to income tax

Uncrystallised funds pension lump sum

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9
Q

What happens when Annuity pension is purchased

A

25% PCLS taken
Annuity is purchased -> subject to income tax

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10
Q

Are pension funds taxed on investment income and chargeable gains?

A

NO

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11
Q

What is a protected and guaranteed structured product

A

Provide investment returns - linked to index such as FTSE 100

Growth Products - Guaranteed minimum return
Income products -> Not common -> returned initial capital and income

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12
Q

What are closed-ened investment companies taxed like

A

Taxed as dividend income - subject to dividend allowance
Chargeable gains - CGT
Can be held in ISA

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13
Q

What are listed bonds or medium term notes?

A

Fixed term contracts ->
Taxed at saving income
£5,000 allowed to be used
Then PSA is allowable
Chargeable gains subject to CGT
Can be held in ISA

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14
Q

What are the different types of ISAs

A

S&S
Cash
Junior
Innovative Finance
Help to Buy
Lifetime

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15
Q

Limt for Adult ISA

A

£20,000

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16
Q

What can u invest in S&S ISA

A

Unit Trust
OEICs
UK UCITS
Investment Trust
Shares on Stock Exchanges/SMEs
Securities
Corporote bonds
Securities
EEA
Lifetime Assurance Policy
Cash

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17
Q

Can you receive relief of CGT in S&S transfer of employee shares?

A

Investment in a stocks and shares ISA can be in the form of a CGT-free direct transfer of employee shares received in the previous 90 days from an approved profit-sharing scheme, share incentive plan or save as you earn (SAYE) scheme. All other subscriptions must be in cash. Transfers of newly issued shares or any other shares that the investor already owns are not permitted.

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18
Q

What is innovative finance ISA

A

p2p lending
Hold Sharia compliant products

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19
Q

Help to buy ISA limit

A

£3,000 on £12,000 savings
First time buyers
£450,000 in london and £250,000 elsewhere -> Cannot be used until completion of property
Min bonus £400

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20
Q

Lifetime ISA

A

£4,000 investment limit
£1,000 bonus until 50

Can be used to fund retirement - 60+ can access funds

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21
Q

What is additional permitted subscription

A

When spouse dies - may invest deceased amount + £20,000 until administartion of estate is complete or three years and one day have laspsed since death whichever is sooner

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22
Q

How are ISA taxed

A

Free from tax

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23
Q

What are CTFS?
Types (3)

A

Child trust funds (31/08/2002 - 03/01/2011)

Saving accounts
Stakeholder
Accounts in shares

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24
Q

UK collectives - What are they?

A

OEICs and unit trusts
Taxed as dividends
But disposing subject to CGT

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25
Q

What is reporting funds

A

UK investors subject to income tax - regardless of distribution

Equity distrubtion -> Dividend taxed at dividend rates
Interest distributions -> Taxed as savings income (income tax)

[Taxed same way as collectives]

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26
Q

What is non-reporting funds?

A

Income is taxed on disposal of unit/shares - so income is rolled up and accumulated

Gain - is calculated on CGT (WITHOUT exempt amount)
Also subject to income tax on year of enchashment

Gain is liable to income tax (without PSA/ Dividend allowance - or starting rate of savings)

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27
Q

Advantages of non-reporting funds

A

Income can grow quicker - only taxed on disposal not on investment
Income is only taxed on disposal -> low tax bracket/ non-uk resident tax less
Can use remittance basis
For non-uk domiciled investors (escape Inheritance tax)

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28
Q

How is offshore funds taxed?

A

Equities -> Dividends (non-reclaimable witholding tax)
Fixed interest funds (Pay income gross)

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29
Q

What are qualifying life policies?

A

Life policies with regular level premiums payable for 10 years
£3.600 premium limit across all policies per year

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30
Q

Who is liable for tax on UK life policies?

A

Life Company

**Fund pays 20% on Interest, property, offshore income gains **
(Dividends are paid gross)
Then if sell any assets pays tax of 20%

Taxes paid by life office do not involve policy holder

31
Q

What is the policyholder tax situation for Life policies?

A

Chargeable event gains -> Income tax not CGT

32
Q

When does chargeable event gain occur?

A

Surrender (within 10 years - or 3 quarters if term shorter)
Death or maturity (10 years - 3 quarters)
Loan is chargeable event

33
Q

What are some events not chargeable events?

A

Assignment by way of mortgage
Payment of critical illness

34
Q

What is the amount that can be withdrawn before chargeable event gain is triggered

A

5% per year

35
Q

What happens when a chargeable event occurs? What must the life office do

A

They must issue a certificate showing the chargeable gain

36
Q

What is the limit for friendly society premium

A

£270 a year (annually)
£300 a year (£25pm monthly)

37
Q

What are the different in taxes for annuities

A

Purchases Life annuities (Part taxed as saving income/ part tax free)
Purchased annuities certain (Part taxed as saving income/ part tax free)
Pension annuities (taxed in full)
Deferred annutiies (Taxed as purchased life annuity when annuity taken)
Annuities for beneficiaries under Trust/Wills (Taxed in full as saving income)

38
Q

What are structured settlements?

A

Annuities paid without deduction of tax (generally with injury claims)

39
Q

What are immediate needs annuity

A

No income tax liability - if they disabled

40
Q

What are purchased annuity certain?

A

Payable for set term regardless of death

Fixed term - tax is deducted at basic rate of 20%

41
Q

How are pension annuity taxed?

A

In full

42
Q

How much money must offshore life office must have before they have a UK tax representative?

A

More than £1m of paid premiums

43
Q

How are offshore bonds taxed?

A

At investor personal tax level on entireity

44
Q

How are onshore bonds taxed?

A

Net 20% - Fund will be taxed
Then on gain after 20%
Investor tax either 20%/25% - higher/additional tax erate

45
Q

How has HMRC taxed personal portfolio bonds?

A

Penal Tax on gains
15% on total premiums paid end of policy year
No top slicing relief

46
Q

What is an OLAB

A

Overseas life assurance business
The overseas life assurance business (OLAB) of a UK life office is only taxed on the profit it makes from writing the business. It is not taxed on the income and gains from the investments in the OLAB fund

47
Q

How is an OLAB set up

A

For policyholders who do not live in UK

Trusts policies can only be OLAB if settlor and all beneficiaries are non-residents

48
Q

When is the OLAB lost?

A

The OLAB status is lost if the insurance **company learns within 18 **months of the policy date that the policyholder was resident in the UK within 12 months of the policy date. Otherwise, the policy does not lose OLAB status if the policyholder later becomes UK resident.

49
Q

What must be obtained for OLAB to run

A

Life office must have a certificate

50
Q

Who is responsible for tax as a result of a life policy when it comes to a trust

A

The settlor

51
Q

What happens if Settlor is alive - how are they taxed

A

The gain is treated as part of the settlor’s income, meaning the settlor is taxable on it.
Any tax paid can be recovered from the trustees.

52
Q

What happens if Settlor is dead - how are they taxed

A

the trustees are chargeable on the gain

Discretionary trust are taxed at 45% for income above the trust’s standard rate band and 20% within it.
Thus, to the extent that a gain exceeds the available standard rate band, there is a 25% liability for a UK policy because of the basic rate tax credit.
No tax credit is given in relation to an offshore policy so the effective tax rates are 20% in the standard rate band and 45% thereafter. This tax cannot be reclaimed by the trust beneficiaries, even if they would not have been liable in their own right because they were well below the higher rate threshold.

53
Q

What happens with inheritance tax and life policy (Trusts)

A

When a life policy is taken out under trust, the settlor makes a transfer of value for IHT purposes.

54
Q

What is the rules with life policies regarding bare/absolute trusts and PETs?

A

For bare (or absolute) trusts, whenever created, the payment of the first premium will be regarded as a potentially exempt transfer (PET). Subsequent premiums will also be regarded as PETs to the extent that the value of the policy is increased.

55
Q

With Interest in possession trusts how are these charged?

A

For policies placed into interest in possession trusts before 22 March 2006, all premiums are generally treated as PETs under transitional provisions introduced by the Finance Act 2006. However, if a beneficiary with an interest in possession is changed after 6 October 2008, this will bring the trust into the post-2006 trust tax regime unless the change stemmed from the death of the previous income beneficiary.

56
Q

What is POAT

A

2.25% tax on interest rained by settlor
if total notional income less than £5000 -> no tax (less than £222,222x2.25%=£5000)

57
Q

What are the three types of tursts subject to POAT

A
  1. Business trusts in which the settlor is a potential beneficiary along with fellow partners or shareholders
  2. Trusts established before 18 March 1986 (as power of appointment or discretionary trusts) that often included the settlor as a potential beneficiary
  3. Certain trusts that gave a temporary interest in possession to a spouse
58
Q

What is an SPV

A

A special purpose vehicle (SPV) is usually a limited partnership (often based in the Channel Islands for tax purposes) or an exempt UK unit trust or investment trust, which is set up to finance specific projects.

59
Q

How are REIT Taxed?

A

To be exempt from corporation tax:

at least 75% of the company’s total gross profits have to originate from property letting, and interest on borrowing has to be at least 125% covered by rental profits.

60
Q

How are REIT paid out

A

A payment from the tax-exempt element:

For individual investors, this is classed as property income and paid net of 20% tax.
Non-taxpayers may reclaim the excess tax deducted.
ISA investors receive payments gross.
A dividend payment from the non-exempt element:

This is taxed as any other UK dividend.
Gains on REIT shares are subject to CGT in the normal way for investors.

61
Q

How do insurance company property funds differ from REIT?

A

The values of units are directly linked to the underlying properties in the portfolios and are established by regular professional valuations.
The funds are not geared through borrowing – unlike property companies.

62
Q

What is the tax relief on EIS

A

Income tax relief is given at 30% on qualifying investments of up to £1m in a tax year (£2m if investments in excess of £1m are made in knowledge-intensive companies).

63
Q

How can u get CGT relief on EIS

A

shares have been held for three years.

64
Q

For IHT business relief how long do shares have to be owned?

A

For shares quoted on AIM and unquoted shares, IHT business relief is normally available after** two years’ **ownership.

65
Q

What are some rules to be a qualifying company for EIS?

A

Gross assets of no more than £15m
<7 years experience trading
Established UK
Less than 250 employees [500 KI companies]
No more than £5m under EIS [10mil KI]

Qualifying trades:
No deailing in land, shares, insurance..

66
Q

What are some withdrawls of tax relief UK

A
  1. Shares disposed within 3 years - spouse
    If an investor receives value from the company within a period starting one year before and ending three years after the issue of the shares or three years after the company started trading if later.
  2. Receiving value includes selling shares back to the company in any way and obtaining any loan, gift or similar benefit from the company.
    Normal dividends do not count as receiving value for this purpose.
  3. If the company ceases to be a qualifying company in the first three years, such as no longer carrying on a qualifying trade.
67
Q

How to defer CGT even more as an investor

A

30% income tax and CGT of 28%

  • UK resident
  • 3 years
68
Q

Which one is targeted at smaller, start-up companies? EIS or SEIS?

A

seis

69
Q

What is the income tax relief on SEIS shares?

A

50% on qualifying investments of up to £200,000 in a
tax year.

70
Q

Provided they are not otherwise connected (under the 30% shareholding restriction), an investor is permitted to be a paid director at the time shares are subscribed for in which scheme; EIS or SEIS?

A

SEIS

71
Q

For a company to qualify as a SEIS:
1. Trading for how long?
2. Which type of trade?
3. How much in gross assets?
4. How many employees?

A

Less than 3
Genuine new trade
No more than £350,000
Less than the equivalent of 25 full-time

72
Q

What is the CGT treatment on reinvested gains in SEIS shares

A

A
50%

For example, an investor who reinvests gains of £200,000 will pay CGT on only £100,000; the other £100,000 will be exempt from CGT.

73
Q

How soon must reinvestment take place in SEIS shares to qualify for CGT relief?

A

Within same tax year that the gain arises.
Or…
The following tax year if relief is carried back to the year of the gain

74
Q

What is VCT Relief

A

income tax relief at 30% on investments of up to £200,000 per tax year in newly issued ordinary shares in VCTs.

R03 - 2023 (15 decks)

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