10 - Indirect Investments Flashcards
What are the main tax privileges given to registered pensions?
Tax relief on input
Freedom from yax on gains from investment income wihtin the fund
Freedom from tax on 25% of the fund on maturity
Death benefits tax free when the deceased is under 75
How much can a person with little or no income contribute to a pension and qualify for basic tax relief?
£3,600
How are pensions protected from tax avoidance?
Once a pension fund has been accessed flexibily, the future level of annual allowance is reduced to £4,000 to prevent a person taking one pension after 55 and activating another
When is the MPAA (money purchase annul allowance) not triggered if a person has accessed thier pension?
If only a pension commencement lump sum is taken or if a non flexible annuity is taken
What is the tapered allowance for 20/21 for those with income over £240,000?
Reduction of £1 for every £2 earned over £240,000 down to an allowance of £4,000
What was the tapered reduction for years 2016 through to 2020?
Income threshold of £150,000, minimumal allowance of £10,000
What is the lifetime allowance for 20/21?
£1,073,100
What is the maximum death benefit from a pension?
euqal to the annual allowance
If death benefits from an uncrystallised pension are not paid out within two years, how are they treated for tax purposes?
As income
Are death benefits from a crystallised fund, subject to a further lifetime allowance test?
No
If death occurs after age 75, how are pension benefits treated?
As income by PAYE in the hands of the recipient
What are the three main ways members of DC schemes can access their pension funds?
- Crystallised with 25% paid tax free. The remainder drawndown as required
- Uncrystallised. Withdrawals taken from the fund with 25% of each tax free,
- Take 25% tax free then purchase an annuity with the remainder
How might a member of a DB scheme increase pension flexibilty?
Transfer to a DC scheme
What is capped drawdown and who is it available to?
For contracts established before 6th April 15, which can continue provided the individual does not draw in excess of the maximum income relevant to the scheme.
Individuals retain a full allowance of £40,000, but it is reduced if rules are breached and then revert to the reduced MPAA and the scheme is treated as a flexi access drawdown
Do members have to crystallise benefits?
No
Are
savings from a parent into a JISA subject to income tax?
No, it is locked away for the child
How much is the government bonus for a help to buy ISA?
25% up to a maximum of £3,000 on £12,000 of savings
How do reporting and non reporting funds differ in terms of tax treatment for an investor?
Reporting funds - equity distributions are taxable at the divident rates and are eligible for the £2,000 allowance. Interest distributions are tax at savings rates with allowances applicable. Gains are subject to CGT on disposal
Non-reporting
Income is usually accumlated, therefore gains are charged on disposal using income tax rates with no dividend or savings allowances are applicable
What are the advantages of non-reporting funds?
Income is accumlated in a low tax environment so the investment can grow faster
UK investors can roll up income and realise profits maybe when they are paying a lower rate of tax
For non resident investors, gains and income offshore are not liable to tax (maybe within thier own country)
For UK resident, non domiciled investors, income and gains that are not remitted to the UK escape UK tax
Offshore investments are excluded for non-dom investors so escape IHT
What would be the benefit to an investor of selecting to invest in structured products maturing in different years?
To maximise CGT allowance in each maturity year
How is income from a closed ended investment company treated?
As dividend income
How is income from a listed bond or medium tern=m note treated?
As savings income
For how many years do premiums for a qualifying life policy have to be paid?
What is the annual limit?
for at least 10 years and at least annually
£3,600
What is the general rate of tax paid by a life company?
20%
When is tax payable on a qualifying life policy?
Chargeable event
Chargeable gain
when the gain is added to the tax payer’s other income causing it to fall within the higher or additional rate band
where gain cause tax credits, personal allowances being reduced or lost
What are the chargeable events for a non qualifying policy?
Death Maturity Surrender Part surrenders Policy loan (after 26th March 1974) Assignment for money or money's worth
What are the chargeable events for a qualifying policy?
Full or part surrender, assignment for money within 10 years of the policy term (or 3/4 if sooner)
Policy converted into paid up wihtin 10 years (or 3/4)
How much could be withdrawn from a policy without causing a chargeable event?
5%
Can the 5% allowance be carried forward to future years if it is not used?
Yes
Do adviser charges count towards the policy withdrawal allowance?
Yes, unless they are provider facilitated and paid by the life company
What tax rate is used on chargeable gains for policies?
Higher or additional rate, minus the basic rate
If a loss arises at the end of a policy term, is the holder entitled to a deduction from other income?
Yes - deficiency relief is available, within the tax year and provided it does not exceed the previous chargeable gains
Only operated for higher rate tax income
Does the disposal of a qualifying second hand life policy give rise to a chargeable gain for income tax?
No, for CGT
Following a chargeable gain on a life policy, when would a certificate from the life office need to be sent to HMRC?
The chargeable event was an assignment for money or money’s worth
The gain or connected gain exceeded half the basic rate limit (£18,750 in 20/21)
What are the limits that apply to friendly society policies and what are they know as in terms of thier tax position?
£270 per year in premiums if paid annually
£300 is paid monthly
Exempt policies
If a chargeable gain is made on a tax exempt friendly policy, would it be subject to tax?
Yes at the full rate
How are the following annuities treated for tax? Purchased Life Purchased certain Pension Deferred Under will or trust for beneficiaries
Partly taxed as savings income and partly tax free
As above
Taxed in full as earned income
Taxed as purchased life when the annuity is taken
Taxed as savings income
If an annuity is paid in settlement of a claim for damages in an injury claim, are they taxed?
No, they do not become taxable in the hands of the recipient
Is an immediate needs annuity liable to income tax if it is used or paid direct for long term care?
No, there is no liability
In what circumstances would a purchased life annuity not be dependant upon human life?
Any alreayd treated as part capital and part interest
Any purchased in pursuance of a direction in a will or by virtue of a will or settlement
Any in connection with a pension annuity or a sponsored superannuation scheme, or in recognition of services in any offcie or employment (Hancock annuity)
Why would only the interest element of a purchased life annuity be taxable?
As the capital content would be seen as a return of the original investment
For a purchased annuity certain, what are the implications if the capital content is paid to another person and how could this be avoided?
The whole amount would be taxable
They could give the purchase price directly to the donee so they could use the money to buy the annuity
Are pesnion annuities taxable?
Yes in full under PAYE
How might an individual benefit from the tax free capital element of an annuity?
Withdraw up to 25% as a lump from the pension and purchase a life annuity
In what circumstances would payment of annuities be made without deduction of tax?
Annuitant’s total income is such it is unlikely they would pay tax
When would an annuitant potentially pay double tax & when might it be avoided?
If they are resident abroad and subject to both UK and local tax where resident
If there is a double taxation treaty in place
What is the main attraction of offshore life assurance policies?
They are usually established in low tax countries where the investment rolls up more or less free of tax
What is the tax liability for UK policyholders with offshore life policies?
Liable for tax at the highest rate on the whole of thier gain
What is time apportionment relief?
Relief given by reducing the chargeable gains whilst the policyholder was not resident in the UK
Why might an offshore bond not be favourable to an onshore bond?
Onshore bonds are taxed at 20% for higher rate and 25% for additional rate vs 20% for basic, 40% for higher and 45% for additional rate tax payers
Witholding tax may have been deducted, thus reducing the gross roll up. No credit would be made for the withholding tax therefore the gain may be subject to double taxation
An onshore bond can deduct management expenses from the income for tax purposes, an offshore bond has not tax charge to deduct therefore reducing the gross roll up
Onshore tax is charged on the net return, offshore on the gross return
what is imposed by the HMRC on personal portfolio bonds to discourage investors?
A penal tax on deemed gains at 15% of the total premiums paid at the end of the policy year plus the total deemed gains from previous years - on top of hte normal tax charge
What might a returning expat wish to do before returning to the UK if they hold an offshore life policy?
Cash in whilst still abroad, depending on the local ta laws
Why can funds in an OLAB (overseas life assurance business) grow faster than ordinary UK funds?
The life office is only taxed on the profit it makes from writing the business, not gains and income from the investment
Can a UK resident hold an OLAB?
No, they are only for policyholders who do not live in the UK
If a life office learns that a policyholder was resident within the UK within 12 months of the policy date, what happens?
The policy loses its OLAB status
If a life policy is subject to a trust and there is a chargeable event, who is the chargeable person?
The settlor, provided they are alive and a UK resident
How would a settlor recover any tax on their income following a chargeable event?
They could recover it from the trustees
If the settlor is dead or non resident before the chargeable event, who does the chargeable gain fall to?
The trustees provided they are resident in the UK, then onto the beneficiaries at their rate of tax
How would a settlor and trustees avoid the 25% additional tax charge?
if the beneficiaries are non tax payers or basic rate tax payers and can be arranged via assignment. They would become the beneficial owner
When would a life policy be subject to CGT?
When it is assigned for actual consideration
When a life policy is taken out under trust, what are the premiums treated as for IHT purposes?
As a transfer of value
For a bare (absolute) trust, how will the first and subsequent payments be regarded?
as PET’s
For trusts other than bare trusts, how are transfers into the trusts treated?
How are they charged?
As a CLT
20% is payable on the excess over the CLT limit of £325,000, less any previous transfers made in the previous 7 years
What is a POAT and what is its purpose?
Pre-owned asset tax
Anti avoidance measure, targeted at complex arrangements structured to sidestep the GWR benefit (gift with reservation)
What is the POAT charge?
2.25% on the value of interest retained, no charge if the total notional income does not exceed £5,000
What are the three types of trust that could be subject to POAT?
Business trusts where the settlor is a potential beneficiary along with fellow partners and shareholders
Trusts established before 18th March 1986
Certain trusts that gave a temporary interest in possession to a spouse
What is a special purpose vehicle?
A limited partnership or an exempt UK unit trust or investment trust set up to finance specific projects
Why are special purpose vehicles tax efficient?
They allow investments from SIPP’s and SSAS’s and registered charities
How does investment in a property trust differ from direct property investment?
The investment is diversified across a number of properties
Share prices are affected by the quality of the management and borrowing levels in addition to the underlying portfolio
The value of property shares tends to move more quickly than the property market generally
How does a Real Estate Investment trust have to be structured?
UK tax resident
Closed ended companies listed on a recognised exchange
What are the conditions for a REIT to be exempt from corporation tax?
75% of the total gross profits have to originate from property letting
Interest on borrowing has to be at least 125% covered by rental profits
90% of rental profits from each accounting period must be paid as a dividend to investors within a 12 month period after the accounting period
What are the two elements of distributions from REIT’s?
A payment from the tax exempt element
A dividend payment from the non-exempt element
What is the relief given by an EIS?
30% on qualifying investments
How is EIS relief calculated?
It is deducted from the investor’s tax overall liability
If a disposal of qualifying shares in an EIS is made, are they subject to CGT?
No, as long as they have been held for three years
What are the qualifying conditions for an EIS?
Gross assets must not exceed £15M before an investment and no more than £16M after
Trading for less than 7 years (10 for a knowledge intensive company)
Permanent base in the UK
Unlisted when the shares are issued
Less than 250 employees (500 for knowledge intensive)
Raised no more that £5M under EIS
Qualifying trade
When might tax relief of a EIS be withdrawn?
Shares disposed of within 3 years
Investor receives value from the company within one year or three years after issue or three years after trading started
If the company ceases to qualify within the first three years
What is the maximum potential tax relief on EIS if chargeable gains are deferred?
58% (30% income tax and CGT liability of 28%)
When can an investor defer the chargeable gain in EIS?
Must be resident
Reinvestment must take place within a period one year before and ending three years after the disposal
No upper limit on the amount
What are the main differences between EIS and SEIS?
Tax relief is at 50% on qualifying investments up to £100K in a tax year
The investor is allowed to be a paid director
Must be trading for less than 2 years, a new trade, gross assets of not more than £200K and less than 25 employees
Can qualify for 50% CGT exemption on gains that are reinvested in shares that qualify for EIS
What is the tax relief available for VCT’s?
30% on investments up to £200K per tax year
Dividends from VCT’s up to £200K are tax free
Exempt from CGT on disposal of shares with no minimum period
Income tax relief is withdrawn if shares are disposed of within 5 years
Cannot defer capital gains by reinvesting in VCT
