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R03 > Chapter 10 - > Flashcards

Chapter 10 - Flashcards

1
Q

Offshore collectives - reporting funds;
- how is it reporting, dividend and interest taxation, CGT and compared to normal funds

Non-reporting funds;
- taxed when, gain taxation and allowances

A

Reporting funds

  • granted when fund reports details of all its income to HMRC
  • UK investors subject to dividend rates on distributed and undis equity income and subject to income tax rates on interest distributions
  • profit on disposal subject to normal CGT rules
  • taxed same way as normal funds

Non-reporting funds
- income not taxed as arises, only on disposal
- gain on disposal calculated as per CGT (without allowance) but subject to income tax rates
- personal savings allowace, dividend allowance and savings income not applicable for these
-

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2
Q

Reporting funds vs non-reporting funds - tax treatment;
- which is preferable for who and why, roll up and taxed when

Non-reporting advantages;
- accumulation, future taxation, overseas investors and offshore investments

A
  • reporting funds generally preferable for UK investors due to taxation rules on dividends and gains
  • non-reporting - investment rolls up gross interest apart from withholding tax on divs and tax only paid when all or part of fund is cashed in.

Non-reporting advantages;

  • income can be accumulated therefore investment can grow faster
  • UK investors can roll-up income and realise profits when they are a low tax rate or non tax payer
  • overseas investors not subject to UK tax
  • offshore investments are excluded property for non-UK domicile investors and so escape IHT
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3
Q

Tax treatment of offshore funds;

- dividends, what funds are mot efficient for who and why and tax levy

A
  • if invested in equities, dividends subject to non-reclaimable withholding tax
  • fixed interest funds more tax efficient for UK residents as funds choose investments that pay income gross
  • some jurisdictions levy small tax on offshore funds
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4
Q

Offshore funds - growth?

Disadvantages;

  • reporting - income tax
  • non-reporting - income tax
A
  • should grow faster as in a low-tax environment

Disadvantages;

  • if reporting fund, UK investor pays income tax on income even if rolled-up
  • non-reporting, UK investor pays income tax on whole eventual profit
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5
Q

Protected and guaranteed (structured) equity products;

- what are they, growth products provide what (2), income products provide what (2), roll up and held in what wrappers

A
  • these products provide returns linked to equities e.g. FTSE100
  • growth products - provide guaranteed minimum return (usually capital investment) + some proportion of the growth in value of the chosen index
  • Income products - provide fixed income and return of capital linked to performance of linked index
  • some policies roll up return and pay out at end of term therefore good if expected to be lower tax rate in later years
  • can be held in ISAs and SIPPs
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6
Q

Protected and guaranteed equity products - tax vehicles;
- can use what bonds, if investment trust taxed how and subject to what, listed bonds and MTNs taxed how and have what allowances available and what other account can be used

A
  • can use offshore and onshore bonds
  • investment trusts - taxed as divs and subject to CGT
  • listed bonds or MTNs - taxed as savings therefore available for £5k starting rate band and personal savings allowance. Then taxed at income tax rates
  • deposit accounts
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7
Q

UK life assurance policies - life company taxation;
- pays tax at what rate on what income (3) and what exempt, gain taxation

Policyholder taxation;
- subject to income tax when and falls in what band

A

Life company taxation;

  • fund pays tax at 20% on interest income, property rental income and offshore income gains. Divs exempt
  • if funds sells asset for profit, gain taxed at 20%

Policyholder taxation;

  • subject to income tax on chargeable event and chargeable gain
  • falls within highest tax band
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8
Q 
Chargeable events for non-qualifying & qualifying;
non qualifying (5, think past exam)

Qualifying;
- think ten years

Not chargeable events;
- assignment (2), CIC and moneys worth

A

Non;
- death, maturity, surrender, part surrender and assignment

Qualifying;
- if within ten years or three quarters of term if sooner policy is full oor part surrendered or converted into paid up policy

Not chargeable events;

  • assignment by way of mortgage
  • assignment between spouse or living together
  • payment of CIC
  • pre 06/82 assigned fro moneys worth
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9
Q

Chargeable gain at termination of policy - formula

  • how taxed, classed as what income therefore what allowances available
A

Maturity value +part surrenders - capital investment - previous chargeable gains = chargeable gain

  • Subject to tax at higher or additional rate minus 20%
  • as gains classed as savings income, personal savings allowance and 0% starting rate are available
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10
Q

Friendly society policies - limit per policyholder annual and monthly, free of what (2), limit applies to what and taxation similar to?

A
  • limit of £270 per policyholder a year when paid annual or £25 per month
  • free of income tax and capital gains
  • limit applies to all products not per policy
  • taxation similar to qualifying life policies i.e. ten year rule etc
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11
Q

Annuities - how are these taxed;

Purchased Life Annuities
Purchased Annuities
Pension Annuities 
Deferred annuities
Annuities for beneficiaries 
Immediate needs annuity
A

Purchased life annuities - partly taxed as savings income and partly tax free
Purchased annuities certain - as above
Pension annuities - tax as income
Deferred annuities - taxed as PLA
Annuities for beneficiaries - taxed as savings income

Immediate needs annuity;
- no income tax liability if used for LTC and paid directly to care home

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12
Q

Purchased Life Annuities;

- capital, taxed part tax as, capital, based on (3)

A
  • split into capital element and interest element
  • capital deemed as return of capital investment therefore not taxable
  • interest element taxable as savings income
  • tax deducted at source
  • capital content is fixed
  • based on purchase price, underwriting and mortality tables
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13
Q

Purchased annuities certain;
- term, how taxed, deducted, if paid to another and best way to set up

Pension annuities;
- taxation

A
  • payable for certain term regardless of death
  • capital not taxed whilst interest taxed as savings income
  • tax is deducted at source at 20%
  • no tax-free capital if annuity paid to another
  • best way to do this is give capital amount to beneficiary as then wont get taxed

PA;
- subject to income tax in full

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14
Q

Annuities for beneficiaries;

- excluded, deduction of tax and capital

A
  • excluded for purchased life treatment
  • life office deducts basic rate and may be subject to further tax based on marginal rate
  • ben can demand capital value back
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15
Q

Offshore life policies;
- established where, taxation, post 83 policies are, time in uk

Offshore vs onshore;
- taxation of each, withholding tax and effect, expenses and advantage of rollup

A
  • usually established in low tax countries
  • liable to income tax at highest rate on whole of gain
  • all post 83 offshore policies are non-qualifying
  • may benefit from time apportionment relief if not in UK the whole time when calcing gain

Offshore vs onshore;
- onshore pays highest rate minus 20% whilst offshore normal tax rates
- income from offshore may be received after deduction of non-reclaimable withholding tax reducing effect of gross roll up and possible double taxation
- expenses reduce effect of gross roll up
- compounding effect of roll up can make a big difference in returns
-

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16
Q

Personal portfolio bonds;

- gain and how much, on top of and top slicing

A
  • subject to deemed gain
  • deemed gain is 15% of total premium at the end of the policy year + total deemed gains for the previous year (i.e. charged on 15% growth even if lower)
  • calculated on top of normal tax charge
  • no top slicing relief for chargeable gains
17
Q

Taxation of life assurance policies in trust - income tax;

- settlor alive, settlor dead, settlor dead and no trustees

A
  • if chargeable event occurs, then chargeable gain calculated
  • if settlor alive, gain subject to their rate of income tax
  • if settlor dead, trustees chargeable at trust rate (45% dis)
  • if settlor dead and trustees not in UK then taxed at beneficiaries rate
18
Q

Taxation of life assurance policies in trust - inheritance tax;
- regs and expenditure, single premium, bare trust, IIP taxation

A
  • if regular premiums, they all count as transfer of value for IHT purposes
  • can be claimed under normal expenditure, however
  • single premium counts as transfer value
  • for bare trusts, first payment treated as PET
  • interests in possessions trust taxed at 20%
19
Q

EIS;
- relief and up to, how relief given?, investment amount carry back, CGT exemption, IHT business relief, connected, residency, risk minimisation

A
  • income tax relief is at 30% up to £1m per tax year
  • relief given by deducting tax liability
  • investment amount can be carried back to previous year if not reached (£1m)
  • disposal of shares usually exempt from CGT if held for three years
  • for AIM and unquoted shares, IHT business relief usually available
  • cannot be connected with company with subscribing to shares
  • don’t have to be UK resident
  • must not be prearranged exit provisions designed to minimise investment risk
20
Q

EIS - Qualifying companies;

- shares must be, employees, amount raised, trades, issue

A
  • gross assets must be no more than £15m before investment and £16m thereafter
  • trading for less than 7 years
  • must have permanent establishment in the uk
  • must be unlisted when shares are issued (AIM counts as unlisted)
  • fewer than 250 employees
  • raised no more than £5m under EIS and cap of £12m
  • must carry on qualifying trades
  • must be newly issued shares
21
Q

EIS - withdrawal of tax relief;

- disposed within, value and cessation

A
  • if shares disposed of within three years (except to spouse & death)
  • if receive value (selling back shares, loan and gift) within three years
  • if company ceases to be qualifying
22
Q

EIS - CGT deferral;
- how to defer CGT and max rate

To claim;
- residency, reinvestment timescale, limit, when chargeable (2)

A
  • can defer chargeable gains by reinvesting it into EIS shares
  • max potential rate of 58% (30% relief and 28% deferred CGT liability)

To claim;

  • must be a UK resident
  • reinvestment must take place within three years
  • no upper limit on the amount that can be deferred
  • deferred gain brought into charge when EIS disposed of
  • also charge if no longer UK resident
23
Q

SEIS;

- relief and limit, who can buy if?, requirements (4), CGT exemption, highest rate of relief available

A
  • income tax relief given at 50% on investments up to £100k
  • if not connected (under 30% shareholder), investor can be paid director at time shares subscribed for
  • company must be trading for less than two years, new trade, gross assets of no more than £200k and fewer than 25 employees
  • can qualify 50% CGT exemption on gains that are reinvested under SEIS
  • For higher rate CGT, total tax relief is 60% (50% income tax relief and 20% CGT exemption on reinvested gain) and can be higher if residential property due to 28%
24
Q

VCT;

- tax relief and limit, how relief is given, CGT and min period, dividends, CGT deferral and tax relief withdrawn

A
  • income tax relief at 30% up to £200k in newly issued ordinary shares
  • relief given as income tax reduction
  • exempt from CGT on disposal and don’t have to be held for min period
  • dividends up to £200k are tax free
  • cannot defer capital gains through reinvestment into VCT
  • income tax relief withdrawn if shares disposed within five years
25
Q

VCT - qualifying companies;
- what % in what, limit to one company, what shares (%), asset limit, corporate tax, employee count, max amount raised and company age

A
  • must not be a close company
  • must be listed
  • income derived wholly from shares or securities
  • at least 80% must be in qualifying unlisted trading companies
  • no more than 15% in one company or group
  • at least 10% of investment held in ordinary shares
  • gross assets of no more than £15m and £16 thereafter (like EIS)
  • VCT pays no corporation tax on gains
  • must have fewer than 250 employees
  • max annual amount that can be raised for a company is £5m and cap of £12m
  • cannot be over 7 years old

R03 (9 decks)

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