10.11 HAS A SUMMARY ON WHOLE CHAPTER. Chapter 10 – Indirect Investments (12 OR 13marks) Flashcards
What is the age range for lifetime ISAs?
Must be 18 or over but under 40
ie 18-39
Once open, investors can continue to save into the Lifetime ISA until their 50th birthday.
Watch for this in your R03 exam; the examiner has a habit of asking you about contributions to a LISA for a couple, but one of them is age 40 or over!
Additional Permitted Subscriptions (ASPs) - LOOK AT 10.2 TO SEE HOW DIFFERENT SCENARIOS ARE CALCULATED. USEFUL BEFORE EXAM!!!
LOOK AT EXAMPLE 10.1
What is a windfall?
a large amount of money that is won or received unexpectedly.
What is a continuing ISA?
What actually are pension schemes
effectively standard investment products (incorporating investments in many asset classes) but with additional tax benefits.
LLOK AT 10.3 FOR A COMPARISON BETWEEN THE MAIN REGISTERED PENSION SCHEMES
What is the annual allowance for pensions?
£60000
This reduces by £1 for every £2 of excess income over £260000
The max the annual allowance can reduce to is £10000. So if your income is over £360000 your annual allowance will always be £10000
if 60% or more of assets is interest-bearing (cash and fixed interest) income is deemed to be interest - classed as a ‘non-equity collective’.
If less than 60% of the assets are interest-bearing, then the income is deemed to be dividends - classed as an ‘equity collective’
Are unit trusts and OEICs subject to CGT?
Yes, ALWAYS
This is regardless if it holds any underlying assets that would be exempt from CGT if held directly, such as Gilts or qualifying corporate bonds
Their income is taxed differently dependant on whether they are classed as a equity fund or a non equity fund
What are Offshore Collectives / Funds?
Offshore funds are collective investment schemes established outside of the UK, usually in tax havens like the Channel Islands and Luxembourg. They are normally just OEICs
DO NOT CONFUSE WITH OFFSHORE BONDS, which are non qualifying single premium whole of life assurance based outside of the UK
How are offshore funds taxed differently to onshore funds?
Offshore funds are either classed as reporting or non reporting
Reporting - Pay out income. Taxed in same was as onshore. Normal CGT rules, & either equity or non equity funds (same as onshore funds) - NORMAL ALLOWANCES GIVEN such as CGT, divid allowance, savinsg allowance etc
Non reporting - Often ‘roll up funds’ (ie no income such as interest/dividends is paid). Therefore, full gain when investment is realised. Gains upon realisation of the fund are subject to CGT at INCOME TAX rates. NO ALLOWANCES GIVEN
because non reporting have no allowance people often prefer reporting funds
BUT, A large incentive for investing offshore is that the fund itself often suffers lower internal taxation than in the UK, e.g. corporation tax in Jersey is 0.5% compared to the onshore main rate of 25%., meaning investments can grow better
What is the European Savings Directive?
Provides an automatic exchange of information between member states and was set up to counter cross-border tax evasion on savings income. SEEN IN CHAPTER 6
When introduced, they must be listed on a recognised stock exchange (this can be the AIM market). They must also be UK resident for tax purposes and have only one class of share. They are closed ended
what IA THIS DESCRIBING?
REITs
A REIT has two elements, separate for tax purposes: What are they?
To qualify as a REIT, certain conditions must be met?
Income paid to the investor is in two parts, one from each of the two elements?
Ring fenced element (no corporation tax) - Property letting side of the business
Non ring fenced element 0 (subject to corporation tax) - the remaining part of the business such as property management services
To qualify as a REIT, certain conditions must be met:
At least 75% of the company’s total gross profit must be from the ring-fenced tax-exempt element and at least 75% of the entire assets must be in the ring-fenced element
Interest on borrowings must be at least 125% covered by rental profits (they cannot borrow heavily)
At least 90% of the profits from the ring-fenced element (income, not gains) must be distributed within 12 months of the end of any accounting period
Property development is allowable but must be intended to generate future income if it isn’t then it will be classified as non-ring-fenced activity and liable to corporation tax
Income paid to the investor is in two parts, one from each of the two elements.
Ring fenced element - pays PID income (property income distribution, ie property income)
Paid 20% net (with deduction of 20%).
-Non tax payers can reclaim
-BRTP have no further liability
-HRTP have to pay a further 20%
-ARTP have to pay further 25%
Because it is PID income it is NOT classed as savings income so savings allowance cannot be used
Non ring fenced -
Income is classed as dividends (Cii refer to this as non PID income in exam so be careful not to confuse with the above)
Dividend allowance is available
NOTE: REITs can be placed within an ISA wrapper in order to avoid all income tax and any CGT liabilities.
REITs can be placed within an ISA wrapper in order to avoid all income tax and any CGT liabilities.
tRUE OR FALSE
TRUE
What are Special Purpose Vehicles (SPVs)?
Limited partnerships set up in tax havens (such as the Channel Islands) or exempt UK unit or investment trust for property investments
They allow investments to be made from:
Registered pension scheme tax wrappers such as self-invested personal pension plans (SIPPs) and small self-administered schemes (SSASs)
Registered charities
SPVs usually involve a high level of borrowing, so although the rental income received might be impressive, it is often used to service the debt
Instead of buying directly in property, an investor can buy shares in one of the many property companies listed on the LSE (such as Persimmon, Barratt Development, Bovis Homes etc.).
Once purchased, the shares are taxed in exactly the same way as we saw for direct share ownership in chapter 9.
What are the qualifying rules for life assurance policies?
RULES =
Remember. If the rules are met, the proceeds tend to be free of higher rates of tax, even if the investor is a higher or additional rate taxpayer. If the rules are not met, the proceeds can be liable for additional income tax
READ 10.6 key info at the start. VERY USEFUL. Make some questions about this
What is a good way to tell the difference between a life assurance product and a collective investment
NOTICE HOW IT SAYS ‘LIFE FUND’ meaning it is insurance related
It is worth being clear about the taxation of the life fund first. It can be quite complex, but to simplify the situation for onshore (UK) life funds:
The fund is deemed to have paid 20% internally
These taxes are paid directly by the life office and so cannot be reclaimed by policyholders (even those who are non-taxpayers)
This means:
-Non tax payers pay 20%, but no further liability
-BRTP have no further liability
-HRTP have to pay a further 20%
-ARTP have to pay further 25%
onshore (UK) life funds are bad for non tax payers
These further liabilities are based on the value of the ‘chargeable gain’ that occurs after a chargeable event (DAMPS)
With any luck, the bond may have increased in value and the investor has got back more than they put in
Simplistically, the chargeable gain is therefore based on the difference between what they get back less the amount they invested. Once the chargeable gain is calculated, it is added to the investor’s income for that tax year to establish what tax band they are after the addition of the gain. LOOK AT 10.6 FOR A TABLE WHICH SHOWS THIS CLEARLY
ALWAYS THINK ABOUT CHARGEBLE GAINS RELAT TO ONSHORE INVESTMENT FUNDS. IF THERE IS A CHARGEABLE GAIN IT IS SUBJECT TO THE RATES ABOVE DEPENDING ON WHAT BRACKET IT PUSHES THE INDIVIDUAL INTO WHEN IT IS ADDED TO THEIR INCOME.
THE CHARGEBLE GAIN IS ADDED TO THEIR INCOME and whatever breacket they fall iunto because of this determines the tax paid on teh gain!!!!!!!! LOOK AT EXAMPLES
Income from Onshore & Offshore Investment Bonds is treated as savings income. Personal Savings Allowance can be used
Top slicing can also be used
Income from Onshore & Offshore Investment Bonds is treated as savings income. True or false
True, therefore can use any available Personal Savings Allowance
What is ‘top-slicing’?
This relates to the chargeable gain of an investment bond
Calculate average gain over number of years it has been accrued in the bond.
Take this average gain (sliced gain) and add it to current years income.
Calculate tax for the year.
Assume same tax has been paid all previous years so multiply back up again the number of years you originally divided by (add 1 year if the question includes any deferred withdrawals - Look at examples!!!!)
REMEMBER:
- For full surrenders, you average the gain only on fully complete years
- For part surrenders you can average the gain by full and PART years
BENEFIT of top slicing
This can be very beneficial for individuals who have been, for example, higher-rate taxpayers while they were funding the investment, but are now basic-rate taxpayers when they are looking to take the benefits because The ‘sliced’ gain, when added to their income, may keep them in the basic rate band for that tax year of assessment so therefore less tax will be assumed to have been paid in the previous years, because 20% is deemed to have already been paid. This means that no more taxed would have deemed to be paid in the previous years too resulting in 20% less tax (if the were a HRTP in previous years)
