AF4: Direct investments

Question 1

Share terminology (part 1):

1. What is a split capital share?
2. What is a scrip issue?
   www. pstgroup.co.uk

Answer 1

1. This is a type of investment trust which splits its shares into capital shares (those that pay no ‘income’) and income shares (that just provide dividends / income but do not offer any growth).
2. This is where additional shares are given to existing shareholders as an alternative to making a dividend payment.

Question 2

Share terminology (part 2):

1. What is a warrant?
2. What is a rights issue?

Answer 2

1. A warrant is not a share, but a right to buy a pre-determined number of shares, in the future, at a pre-determined price. They are often offered as ‘sweeteners’ on new investment trusts and can be bought/sold on the stock market.
2. A rights issue is how a ‘struggling’ company can raise extra capital. It does so by offering the existing shareholders the ability to buy further shares at a discount.

Question 3

For VCTs, EISs and SEISs:

1. How much income tax relief do they attract?
2. What is the maximum subscription limits for each?
3. How long must the investment be held for to avoid income tax being clawed-back?

Answer 3

VCTs EIS SEIS

Income tax relief* 30% 30% 50%

Max subsriptions £200K £1M £100K

Min investment 5 years 3 years 3 years

term

* tax relief is only payable where the individual has an equal or greater income tax liability.

Question 4

For VCTs, EISs and SEISs:

1. What is the CGT position for each?
2. What is the IHT position for each?

Answer 4

VCT EIS SEIS

Growth free of CGT: Yes Yes (if held for 3 years)

Gains from other No deferral/relief Deferral 50% qualifying gains investments:

BPR relief: No Yes Yes

Question 5

What is special about the income received from a VCT?

Answer 5

Income from the first £200,000 invested in a VCT per tax year is free from any further taxation. So for higher and additional rate tax payers there is no further liability.

Question 6

1. What are derivatives?
2. How do futures and options differ?

Answer 6

1. They allow investors to have an exposure to an underlying asset without actually owning it. They are traded and can be used to lower risk by diversifying or leverage position to increase risk/returns.
2. An option is just that: it gives the buyer/seller the ability to exercise their option to buy/sell an asset at a fixed price at or before a stated future date.

A future is a legally binding agreement to buy/sell at an agreed price and a future agreed date.

Question 7

What are the main rules for ‘rent a room’?

Answer 7

Must be occupied as the main residence.

One exempt amount per residence of £7,500

Must be furnished and part of the main residence

It can be let to anyone

The rent taken into account is the payment for the accommodation plus any payment for related goods and services e.g. cleaning & meals

• No tax is payable if the gross rent for a tax year, before deducting expenses, does not exceed £4,250
• If the rent exceeds £4,250, taxpayers have a choice:

1. Choose to pay tax on the excess over £4,250, with no deduction for expenses; or
2. They can be taxed on the gross rent received, less expenses, with no rent-a-room relief

A client would only choos option 2 if the actual expenses were more than £4,250 in a tax year. Rent a room is an ‘election’ which can be changed each tax year.