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Cemap 2&3 Self Testing > 22. Other Repayment Vehicles For Interest Only Mortgages > Flashcards

22. Other Repayment Vehicles For Interest Only Mortgages Flashcards

1
Q

Who is eligible to have an isa? (3)

A
  1. UK resident (not uk worker/taxpayer)
  2. 18+ (16+ for cash isa)
  3. Single names / no joint policies
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2
Q

What types of isa are available? (5)

A
  1. cash
  2. stocks and shares - shares, collective and corporate bonds
  3. innovative finance - peer to peer lending
  4. help to buy
  5. Lifetime
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3
Q

What are the benefits of ISAs? (3)

A
  1. tax free
  2. can transfer between the different isa products
  3. Can withdraw without penalty (so can be used to reduce mtg payments)
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4
Q

What are the disadvantages of ISAs? (2)

A
  1. No life cover included
  2. Can’t be assigned to lender
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5
Q

What do we mean by standard ISAs?

A

Cash and stocks and shares isas

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6
Q

Which type of ISA is the only realistic option for paying off an I/O mortgage?

A

Stocks and shares - due to time span needed for capital growth

Rest should only be used to build deposit

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7
Q

What types of investment are permitted within a stocks and shares ISA? (6)

A
  1. shares
  2. Unit trusts/OEICs
  3. investment trusts
  4. life assurance
  5. gilts
  6. corporate bonds
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8
Q

what age is a cash isa available?

A

16

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9
Q

What is your money invested into when you put it in a cash isa? (4)

A
  1. savings accounts
  2. fixed interest/cash unit trusts
  3. OEICS
  4. NS&I
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10
Q

What is a ‘flexible’ ISA? What are examples of this? (3)

A

ISAs which allow you to withdraw and reinvest it back in within the same year without the withdrawal counting towards your annual allowance

  1. Cash
  2. Stocks and Shares
  3. Innovative finance

(not, help to buy, lisa, or fixed rate accounts)

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11
Q

What is the eligibility criteria for help to buy isas? (3)

A
  1. 18+
  2. 1st time buyers
  3. purchase price up to 250k (450k london)
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12
Q

When was/is the following for help to buy isas?
1. last date able to open
2. last date for investments to be paid in
3. last date to claim bonus

A
  1. 30th Nov 2019
  2. Nov 2029
  3. 1st Dec 2030
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13
Q

What are the deposit limits for help to buy isas:
1. first month
2. subsequent

A
  1. £1200
  2. £200 per month
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14
Q

What is the rate of bonus on help to buy isas? what is the minimum and maximum bonus payable?

A

paid at 25%

min= £400 (would need £1600 saved)
max=£3,000 (would need £12,000 saved)

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15
Q

What happens to a help to buy isa on death?

A

Account closes and no bonus payable, but spouse can claim additional permitted subscription

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16
Q

What other type of isa can you not have at the same time as a help to buy isa? why?

A

Cash, because help to buy is a type of cash isa also

Only exception is if you have a portfolio which contains multiple types of isa and a small part is invested into each

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17
Q

What are the age limits on a LISA?

A

18-39 to open
up to 50 to contribute

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18
Q

Can you get a LISA alongside a Help to buy isa?

A

Yes, but your annual allowance is across all isa products, not each

AND only one can be used towards a house purchase

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19
Q

What is the maximum deposit you can put into a LISA each year?

A

£4000

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20
Q

When can you withdraw money from a LISA?

A

If you want it to be penalty free:
1. to buy a house
2. retirement

otherwise, you can withdraw any time, but there is a 25% penalty (first 20% is them taking the bonus back, but you lose an extra 5% of your money as a penalty)

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21
Q

What bonuses are available on a LISA? How is this paid?

A

25% of ANNUAL CONTRIBUTIONS (not full fund value) PAID MONTHLY

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22
Q

When is the earliest you can withdraw lisa funds to purchase property?

A

12 months after opening

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23
Q

What are the purchase price limits for buying a house using a LISA?

A

450k anywhere in the uk

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24
Q

help to buy isas and LISAs are paid to the conveyancer if being used for a house purchase. At what point in the conveyancing process do they receive the funds?

A

Help to buy = completion

LISA = Exchange of contracts

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25
Q

What happens to funds within a LISA on death?

A

Tax wrapper is removed and funds form part of the estate. No withdrawal penalties and spouse can apply for additional permitted subscription

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26
Q

Can a help to buy isa be transferred into a lisa?

A

Yes, but it will form part of the LISA’s annual limit

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27
Q

When a death of an ISA holder occurs, tax advantages can continue until the earliest of which 3 events occurs?

A
  1. Closure of the account
  2. Completion of the estate administration
  3. 3 years after death
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28
Q

How long does an ISA holder’s widow have claim an additional permitted subscription? (2)

A
  1. 3 years after the death
  2. 180 days after the estate is finished being administered

whichever is earlier

29
Q

What does the deceased’s widow benefit from if they have an additional permitted allowance?

A

an increased isa allowance equal to the amount of fund’s held within the deceased’s isa account for 1 year.

30
Q

What are the disadvantages of using ISAs as a repayment vehicle? (4)

A
  1. not guaranteed to pay off mtg
  2. no life cover
  3. as risky as the funds chosen
  4. can affect eligibility for means tested benefits
31
Q

True or flase, OEICS and Unit trusts can be held within ISA wrappers?

A

True, usually within stocks and shares isas

32
Q

How do you calculate the fund value of OEICs and unit trusts?

A

Divide the fund value by number of unit shares

33
Q

what is an actively managed OEIC or unit trust?

A

one where a manager or director regularly reviews or changes the fund

34
Q

What is a passively managed oeic or unit trust?

A

One that follows a benchmark, e.g. FTSE100

35
Q

How are OEICs and Unit trusts taxed?

A

Share based = taxed as dividends over dividends allowance

If the fund has more than 60% of it’s value invested into fixed interest or cash investments, tax will not be deducted at the source and will be treated as savings for tax purposes. You would have to submit a self return

36
Q

Are OEICs and Unit trusts subject to CGT?

A

While funds remain invested? No

Upon disposal - yes

37
Q

What is another name for a defined contribution scheme?

A

Personal pension

38
Q

Who can have a pension arranged for them? (2)

A
  1. UK residents
  2. Under 75
39
Q

How much pension can be paid in by the following each year?
1. Employee
2. Employer
3. Unemployed

A
  1. 100% of earnings
  2. Unlimited
  3. Up to £3,600
40
Q

How are pension contributions taxed?

A

Tax free up to annual allowance. Tax due on highest marginal rate applicable to the person for anything above annual allowance.

Basic rate tax relief if given at 20% at source, HRT & ART can claim difference in relief back in their tax returns

41
Q

How can employers get tax relief from contributing to employee pensions?

A

Claim it back in business expenses

42
Q

Are the following pension contributions paid net or gross of tax?
1. employee
2. employer

A
  1. NET
  2. Gross
43
Q

What is a tapered annual allowance in relation to pensions? Who does it apply to? (2)

A

High income earners get their annual allowance reduced

to apply, you must have both:
1. Threshold income exceeding a certain limit
2. Adjusted income exceeding a certain limit

44
Q

How is threshold income calculated?

A

Total income - personal gross contributions to registered pension scheme

45
Q

How is adjusted income calculated?

A

Total income + employer contributions to registered pension scheme

46
Q

How much does a tapered annual allowance reduce by?

A

£1 for every 2 over limit until minimum is reached

47
Q

What is a Money Purchase Annual Allowance?

A

Those drawing down a pension using FAD or UFPLS can only pay in £4000 into defined contribution pensions without being taxed

BUT rest of annual allowance can be used to pay into defined benefit pension instead if you have one

48
Q

What is the Lifetime allowance?

A

Maximum amount you can hold in a pension at the time when you take the benefits

Amount changes but is INDEX LINKED

49
Q

What charges occur if you exceed the lifetime allowance? (2)

A
  1. Lump sums - 55% of anything exceeding LTA
  2. From income - 25% of anything exceeding LTA
50
Q

What is an Lifetime allowance protection scheme?

A

Because LTA is index linked, it can go lower than you thought and you may go over with the funds you have invested whereas you may not have previously. The schemes protect against this and make it possible for LTA to be higher for certain people in these situations

51
Q

When can you access pension benefits?

A

Age 55+

52
Q

When will you be able to access pension benefits in 2028?

A

Age 57+ (10 years below the state pension age)

53
Q

What is a pension commencement lump sum?

A

25% tax free lump sum everyone is entitled to

54
Q

What are the three main options for receiving pension benefits? Do you have to pick one or can you have a combo?

A
  1. UFPLS
  2. FAD
  3. Annuity

Most pensions allow you to crystallise parts at different times and have a combo

55
Q

How does UFPLS work?

A

You can make as many or few withdrawals as you like, 25% of each one will always be tax free

56
Q

What is the main disadvantage of UFPLS?

A

75% of each withdrawal is taxable, and when added to you income this could take someone over the HRT or ART threshold

it is unlikely to be the most tax efficient way to pay off a mtg

57
Q

How does FAD work?

A

Totally tax free withdrawals, either one lump sum or multiple smaller ones, until 25% of the fund has been taken. After this, rest of fund can be drawn down but is FULLY TAXABLE in the same way as earned income

58
Q

What is the most tax efficient pension withdrawal method to pay off a mortgage?

A

FAD- Flexible access drawdown

59
Q

What is an annuity?

A

Purchased to provide an income for the rest of someone’s life

60
Q

If you purchase an annuity, are you still able to have a tax free lump sum?

A

Yes

61
Q

What types of annuity are available? (6)

A
  1. fixed
  2. Increasing by set % each year or INDEX LINKED
  3. INVESTMENT LINKED
  4. Reducing income
  5. Defined term
  6. Joint-life
62
Q

What is a reducing income annuity?

A

for those who need extra funds earlier on in retirement

63
Q

What is a define term annuity?

A

Doesn’t continue for life, has a set term

64
Q

What is a Joint Life annuity?

A

If you die whilst the annuity is being paid out, your spouse or dependent will carry on getting all or part of your annuity for the rest of their life

65
Q

What happens if a pension policyholder dies before the age of 75?

A

Tax free

unless JOINT LIFE or GUARANTEED ANNUITY was in payment BEFORE 6TH APRIL 2015 (in which case, beneficiary would have to pay tax as if it was part of their income)

66
Q

What happens if a pension policyholder dies after age 75?

A

Taxable at the beneficiary’s highest marginal rate (all types)

67
Q

What are the advantages of using a pension as a repayment vehicle for mtg?

A
  1. Tax relief on contributions
  2. tax free lump sum
  3. tax free growth before withdrawal
  4. wide fund choice
  5. choice in how to take benefits
  6. free from IHT & can be passed on to beneficiaries
68
Q

What are the disadvantages of using pensions as a repayment vehicle for mtgs? (6)

A
  1. limits on contributions to get tax relief
  2. final fund value not guaranteed
  3. there would be less to use to live off in retirement
  4. funds are locked in until age 55/57 (might be longer than term for young borrowers)
  5. you get an increased tax bill on 75% of benefits
  6. charges if you go over lifetime allowance

Cemap 2&3 Self Testing (29 decks)

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