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J10 - Discretionary Investment Management > 4. Investment Tax Wrappers > Flashcards

4. Investment Tax Wrappers Flashcards

1
Q

A. Individual savings accounts (ISAs) - page 2

A
  • free of income tax and CGT

- firms offering ISAs must be approved by HMRC and are known as the ‘ISA manager’

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2
Q

A1. Types of ISA (page 2)

A

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

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3
Q

A1A. Lifetime ISA (page 3)

A
  • 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
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4
Q

A1B. Help to buy ISA (page 3)

A
  • 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
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5
Q

A1C. Junior ISA (pages 3 & 4)

A
  • 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
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6
Q

A2. Child trust funds (CTFs) (page 4)

A
  • replacec by JISAs in 2011
  • cannot open new ones any more
  • can contribute to existing CTFs
  • same subscription limit as JISAs
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7
Q

A3. ISA Characteristics and benefits (page 4)

A
  • 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
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8
Q

A3A. ISA flexibility

A
  • 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
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9
Q

B. UK and offshore life policies (page 5)

A

Two main types of life assurance contract:

  1. those that provide protection only
  2. those that have protection and investment elements

Three types of whole of life:

  1. non-profit (guranteed sum only)
  2. with-profit (guaranteed sum plus profits)
  3. unit-linked
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10
Q

B1. Unit-linked funds (page 5)

A
  • 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
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11
Q

B2. Investment bonds (pages 5 & 6)

A
  • 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
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12
Q

B2A. Types of investment bond (page 6)

A
  1. Cash bonds
  2. With-profits bonds
  3. Unit-linked bonds
  4. Structured bonds
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13
Q

B2B. Fund choice (page 6)

A

ABI classifications:

  1. 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)
  2. distribution funds
  3. UK equity funds
  4. overseas equity funds
  5. fixed-interest funds
  6. property funds
  7. other funds
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14
Q

B2C. Charges (page 7)

A
  • 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)
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15
Q

B2D. Tax (pages 7 & 8)

A
  • 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:

  1. partial: includes current year
  2. full: takes into consideration previous years only
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16
Q

B3. Offshore bonds (page 8)

A
  • bonds can be written and based in offshore tax havens such as the Isle of Man, Dublin or Luxembourg
17
Q

B3A. Types (page 8)

A
  • offshore bonds have a significantly wider investment choice
  • include hedge funds, ETFs, non-UK funds and property funds
18
Q

B3B. Charges (pages 8 & 9)

A

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
19
Q

B3C. Tax treatment (page 9)

A
  • 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
20
Q

B3D. Advantages and disadvantages (pages 9 & 10)

A

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
21
Q

B4. Investment bonds versus collective funds (page 10)

A

This debate has gone on for some time, however, collective funds now dominate investment choice

22
Q

B4A. Advantages of direct investment in collective funds (page 10)

A
  • 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
23
Q

B4B. Advantages of investment bonds (page 10)

A
  • 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
24
Q

B4C. Other considerations (page 10)

A
  • 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
25
Q

C. Pensions (page 11)

C1. Types of pension arrangement (page 11)

A
  • ageing populations
  • pensions offer tax relief on contributions
  • tax-exempt growth within pensions
26
Q

C1A. Occupational pension schemes (pages 11 & 12)

A
  • 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

27
Q

C1B. Personal pensions (page 12)

C1C. Self-invested personal pensions (pages 12 & 13)

A
  • 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
28
Q

C1D. Small self-administered pension scheme (page 13)

A
  • 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
29
Q

C2. Investment choice (page 13)

A
  • Depend on pension type

- usually pooled investments

30
Q

Chapter 4 Key Points (page 14)

A

Not written as such a short chapter

J10 - Discretionary Investment Management (15 decks)

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