4. Investment Tax Wrappers Flashcards
A. Individual savings accounts (ISAs) - page 2
- free of income tax and CGT
- firms offering ISAs must be approved by HMRC and are known as the ‘ISA manager’
A1. Types of ISA (page 2)
CASH ISA
STOCKS & SHARES ISA
INNOVATIVE FINANCE ISA - covers peer-to-peer lending to match lenders with borrowers so each enjoys better rates
LIFETIME ISA - see next card
A1A. Lifetime ISA (page 3)
- commenced April 2017
- for investors aged 18 - 40
- lets them save for retirement and first home at the same time without having to choose between them
- can contribute £4,000 per annum (counts towards the normal ISA allowance of £20,000)
- get tax-relief of 25% (also called a bonus)
- individuals can continue to contribute and receive government bonus up to age 50
- can open more than one during lives but can only pay into one each tax year
- savings and bonus can be used on first house purchase up to £450,000
- can be cash and/or stocks & shares
A1B. Help to buy ISA (page 3)
- similar to Lifetime ISA in that it offers first time buyers a bonus
- Can be transferred into a Lifetime ISA
- CASH ISA only
- For every £200 saved a £50 bonus is added
- Bonus ONLY available for home purchase
- Up to a maximum of £12,000 savings plus £3,000 bonus
- Initial deposit maximum £1,000
- Regular deposit maximum £200 per month
- House purchase maximum £450,000 in London and £250,000 elsewhere
- closed to new savers 30 November 2019
A1C. Junior ISA (pages 3 & 4)
- replaced CTFs in 2011
- for children under 18
- cash and stocks & shares available
- child can only hold a maximum of one of each type
- subscription limit of £9,000 per annum
- at age 18 is stops being a Junior ISA
A2. Child trust funds (CTFs) (page 4)
- replacec by JISAs in 2011
- cannot open new ones any more
- can contribute to existing CTFs
- same subscription limit as JISAs
A3. ISA Characteristics and benefits (page 4)
- investor must be UK resident for tax purposes
- can subscribe to one of each type in a tax-year
- details of ISAs does not need to be reported to HMRC
- transfers can be carried out from Cash to S&S and vice versa
- no rule in having to accept transfers
A3A. ISA flexibility
- flexible ISA is where cash withdrawn can be re-invested without it using up more ISA subscription
- flexible ISAs can only be offered in respect of cash
B. UK and offshore life policies (page 5)
Two main types of life assurance contract:
- those that provide protection only
- those that have protection and investment elements
Three types of whole of life:
- non-profit (guranteed sum only)
- with-profit (guaranteed sum plus profits)
- unit-linked
B1. Unit-linked funds (page 5)
- difference bid and offer usually 5%
- usual AMCs of 0.75% and 1.00%
Two types of unit:
- Initial/Capital units (higher AMC to recoup initial costs)
- Accumulation units (charged normal AMC)
- can take 5% of value as a tax-deferred income up to 20 years (when 100% of original value of capital deducted)
- segmentation can be used for encashments
B2. Investment bonds (pages 5 & 6)
- designed primarily as a wrapper to hold investments
- have very little life cover
- most written as whole life
- can be single/joint life to continue after first death
B2A. Types of investment bond (page 6)
- Cash bonds
- With-profits bonds
- Unit-linked bonds
- Structured bonds
B2B. Fund choice (page 6)
ABI classifications:
- mixed-asset funds (limits on equity content)
1a. 0-35% shares
1b. 20-60% shares
1c. 40-85% shares
1d. flexible investment (equity content at discretion) - distribution funds
- UK equity funds
- overseas equity funds
- fixed-interest funds
- property funds
- other funds
B2C. Charges (page 7)
- generally lower in the UK than on OEICs/UTs
- may levy charges over first 5 years and apply exit penalties
- annual fees highest where external funds offered
- offshore charges higher than onshore (because a UK company can claim tax relief on expenses)
B2D. Tax (pages 7 & 8)
- gains subject to savings income
- basic rate tax deemed to have been paid at source
- personal savings allowance can be used
- top slicing available where gain pushes basic-rate taxpayer into the higher-rate tax band
- higher rate tax subject to a further 20% / 25%
- 5% of the original investment amount can be withdrawl as tax deferred income each year up to 20 years (when 100% of original capital has been withdrawn)
Top Slicing:
- partial: includes current year
- full: takes into consideration previous years only
B3. Offshore bonds (page 8)
- bonds can be written and based in offshore tax havens such as the Isle of Man, Dublin or Luxembourg
B3A. Types (page 8)
- offshore bonds have a significantly wider investment choice
- include hedge funds, ETFs, non-UK funds and property funds
B3B. Charges (pages 8 & 9)
Charges tend to be higher than onshore bonds for a number of reasons:
- higher expenses as a result of worldwide marketing
- high regulatory costs due to needing to meet compliance costs in multiple juristictions
- wider investment choice may bring higher costs
- tax relief cannot be claimed against life offices’ expenses
B3C. Tax treatment (page 9)
- tax treatment of bond governed by the tax rules of the country in which it is established
- life usually pays no tax on income or gains, but income may be subject to witholding tax
- policyholder gains are fully taxable at time of encashment or if income exceeds 5%
- BR taxpayers suffer a 20% liability
- money can accrus tax free when investors are higher rate taxpayers
B3D. Advantages and disadvantages (pages 9 & 10)
DISADVANTAGES:
- higher charges
- tax benefit is small
ADVANTAGES:
- where an investor is moving abroad and will be subject to local taxes
- investor will be a non-UK taxpayer at time of encashment
- investment term long enough for offshore bond to outperform onshore bond
B4. Investment bonds versus collective funds (page 10)
This debate has gone on for some time, however, collective funds now dominate investment choice
B4A. Advantages of direct investment in collective funds (page 10)
- bond holders suffer CGT within the bond which collective holders can avoid via CGT allowance
- offshore bond holder suffer a full income tax charge on gains
- with-profits funds are not transparent
- non-taxpayers cannot reclaim tax on onshore bonds
B4B. Advantages of investment bonds (page 10)
- wider investment choice (over 2,000 funds with offshore)
- switches between funds give no immediate rise to a personal tax liability
- CGT limit can be exceeded with no tax liability
- tax deferred withdrawals of 5% allowed
- bonds have simpler administration
- unless they exceed 5% withdrawals, there is no complicated self-assessment reporting
B4C. Other considerations (page 10)
- important to consider what the investor is trying to acheive and where a wrapper is needed
- consider costs too
- tax can be deferred via a bond but not direct collectives
C. Pensions (page 11)
C1. Types of pension arrangement (page 11)
- ageing populations
- pensions offer tax relief on contributions
- tax-exempt growth within pensions
C1A. Occupational pension schemes (pages 11 & 12)
- schemes set up by employers
- employers make contributions
- tax-relief on contributions
Contributory: employee makes a contribution
Non-contributory: employer makes all contributions
DB: pension payable related to an individual’s final salary and length of service
DC: value of fund dependant on contributions and growth of the pot
Auto Enrolment: commenced in 2012 and rollout continued until 2018.
- minimum contribution at April 2019 are 3% for employers and 5% for employees
C1B. Personal pensions (page 12)
C1C. Self-invested personal pensions (pages 12 & 13)
- SIPPs have:
1. a scheme provider
2. a scheme administrator (ensures rules followed)
3. a scheme trustee (holds and safeguards assets) - higher charges than personal pensions
- initial fees, set up fees, admin fees
C1D. Small self-administered pension scheme (page 13)
- offer a pension vehicle for long-term planning and family protection
- offer short-term company planning
- SSAS is an occupational pension scheme
- usually limited to controlling directors
- maximum 11 members
- established under irrevocable trust
- must appoint a pensioner trustee
- can be used to buy commercial property
- SSAS can make loans for a fixed term and of a commercial rate of interest of at least base rate + 3%
- scheme can also borrow money
C2. Investment choice (page 13)
- Depend on pension type
- usually pooled investments
Chapter 4 Key Points (page 14)
Not written as such a short chapter
