Chapter 4: Taxation of Investors and Investments

Question 1

If a company received unfranked income, it is:

A. Income received from a UK company distributing profits
B. Interest income received that has already suffered corporation tax
C. Interest income from a deposit account paid gross by the host bank
D. Income received from a UK company paid on shares held in an ISA

Answer 1

C. Unfranked investment income is any income that has no tax withheld.

Unfranked investment income is not specifically mentioned in the text.

Below are a couple of definitions of unfranked income:

• Investment income from deposits, gilts and foreign dividends, that has not already borne corporation tax, unlike domestic share dividends.
• Income received that does not carry with it a tax credit. For institutional investors this includes income from gilts, cash deposits, company dividends.

Question 2

Top Props Ltd is a property company that buys quality residences around England and Wales. Top Props makes a new purchase, their 50th property, of a £600,000 property in Cardiff. What is the stamp duty land tax liability on this purchase?

A. £20,000
B. £38,000
C. £48,000
D. £90,000

Answer 2

D. £90,000

Tops Props is a non-natural person buying a property above £500,000, so is liable to a flat SDLT charge of 15%.
SDLT = £600,000 x 15% = £90,000

Question 3

The Qualified Intermediaries Scheme requires non US financial Intermediaries to relay information to the IRS on US asset beneficial owners in the areas income relating to:

A. Interest and dividend income for corporates and individuals
B. Interest income for individuals only
C. Interest and dividend income for individuals only
D. Interest and dividend income for corporates only

Answer 3

A. Interest and dividend income for corporates and individuals.

The information would be in an annual report to the IRS, enabling the IRS to police its tax returns.

Question 4

Louis Hamilton, a UK resident, has investments outside the UK that produce income. What tax may be deducted by a foreign country?

A. Income tax
B. Income tax and capital gains
C. Withholding tax
D. Inheritance tax

Answer 4

C. Withholding tax.

Withholding tax is, literally, the tax withheld by the country in which the income is earned. Despite this, tax will be due in the country of residence for the investor too. Often there is a tax treaty between nations allowing investors to claim a relief on the lower of the two tax liabilities. Clearly, if withholding tax is greater than the tax in the country of residence, there will be no refund.

Question 5

Ania, a basic rate taxpayer, owns £30,000 nominal value of 3.25% coupon gilts. If this is the only interest income generated which of the following is true?

A. The gilts will pay the coupon net of 20% tax but there will be no further tax liability on the income
B. The gilts will pay the coupon net of 20% tax and there will be a further tax liability on the income of 20%
C. The gilts will pay coupon gross and there will be a tax liability on the income of 20%
D. The gilts will pay coupon gross and there will be no tax liability on the income

Answer 5

D. The gilts will pay coupon gross and there will be no tax liability on the income.

This is because the coupon paid (£30,000 x 3.25% = £975) is below the personal savings allowance of £1,000 for basic rate taxpayers. As this is the only interest income received by Ania, she can use his allowance and pay no tax.

Question 6

Which of the following best reflects when inheritance tax will be paid?

A. IHT is paid on death only
B. IHT is paid on death and is paid in life on a potentially exempt transfer
C. IHT is paid on death and is paid in life on an exempt transfer
D. IHT is paid on death and may be paid in life on a chargeable lifetime transfer

Answer 6

D. IHT is paid on death and may be paid in life on a chargeable lifetime transfer.

A chargeable person can be liable for IHT on lifetime transfers. For example, some transfers into a trust.

Question 7

Gains on chattels of over what amount are chargeable to capital gains tax?

A. £5,000
B. £6,000
C. £7,000
D. £8,000

Answer 7

B. £6,000.

A chattel is tangible, moveable property.
If a chattel is purchased and sold for no more than £6,000, it is exempt from tax.

Question 8

Toni is a higher rate taxpayer. She purchases a commercial-use property. If she sells it in the future for a profit, and assuming that she is still a higher rate taxpayer, what are the tax implications on the purchase and sale?

A. Toni will pay stamp duty land tax at the normal rate on the purchase, but suffer no capital gains tax on the sale of a property
B. Toni will pay stamp duty land tax at the normal rate on the purchase, and suffer capital gains tax at 20% on the sale of a property
C. Toni will pay stamp duty land tax at a 3% higher rate on the purchase, and suffer capital gains tax at 20% on the sale of a property
D. Toni will pay stamp duty land tax at a 3% higher rate on the purchase, and suffer capital gains tax at 28% on the sale of a property

Answer 8

B. Toni will pay stamp duty land tax at the normal rate on the purchase, and suffer capital gains tax at 20% on the sale of a property.

Toni has bought a commercial-use property so she will pay stamp duty land tax at the normal rate on the purchase. Although the new tax rates of 10% and 20% for capital gains do not apply to residential property, they do apply to commercial property.

Question 9

The mandatory disclosure regime (MDR) requires disclosure in respect of which of the following?

A. A notifiable interest in a public company being reached
B. The discovery of a reportable suspicion not being reported
C. Cross-border tax planning perceived as potentially aggressive
D. Failing to prevent the facilitation of tax avoidance

Answer 9

C. Cross-border tax planning perceived as potentially aggressive

The mandatory disclosure regime (MDR) requires taxpayers and intermediaries (eg, banks, asset managers, financial advisers, funds, accountants and lawyers) to disclose information to the relevant tax authorities on what may be perceived to be potentially aggressive cross-border tax planning.

Question 10

Deeds of variation must be made within how many years of the death of the legator?

A. 1 year
B. 2 years
C. 3 years
D. 5 years

Answer 10

B. 2 years.

For a deed of variation to be valid, it must: - Relate to a valid will, to an intestate estate or to a trust - Be signed by all the parties who would have benefited had the variation not been made (all of whom must be over 18 and must be of sound mind) - Be executed within two years of the death of the ‘legator’ (the person who left the money) - Not be made for any consideration (i.e. no one should have received money or value as encouragement for them to sign)

The deed must also contain a statement to the effect that it is intended that the inheritance tax effect of the variation will be the same as if the deceased had made that variation himself.

Question 11

Helen has put in an offer for her first property. It is costing her £500,000, but her sister is helping put up a 10% deposit. What stamp duty land tax will Helen need to pay?

A. £0
B. £10,000
C. £15,000
D. £27,500

Answer 11

B. £10,000.

Helen is a first time buyer and can benefit from 0% on the first £300,000 and 5% on the remainder up to a total value of £500,000. Above £500,000, the SDLT reverts to the normal rates.

£300,000 x 0% = £0

£200,000 x 5% = £10,000

Note: the help from the sister is irrelevant.

Question 12

Upon spending £10,000 to buy into a UK equity unit trust, Paul Fry receives 2,000 units. His first distribution payment is worth £2 per unit, and he receives the income split into two parts of £1.50 and 50p. He notices that the £1.50 payment is referred to as the distribution and the 50p payment referred to as an equalisation payment.

Since Paul is a higher rate taxpayer, what tax would he need to pay to HMRC?

Assume any dividend allowance has already been used.

A. £262
B. £750
C. £1,012
D. £1,181

Answer 12

C. £1,012.

As the equalisation payment is simply a return of the investor’s money, it is not liable to income tax. The tax is only applied to the normal distribution of £1.50. Total taxable income received = 2,000 x £1.50 = £3,000. Tax to be paid = £3,000 x 0.3375 = £1,012

Question 13

Rainbow plc is quoted as 500-504. For IHT purposes, what would be the value using the quarter-up rule?

A. 500
B. 501
C. 503
D. 504

Answer 13

B. 501.

The quarter-up rule takes the bid price, plus a quarter of the difference between the bid and the offer.
500 + [(504 - 500) / 4] = 501

Question 14

During the administration period of a deceased estate, at what rate will any income be taxed?

A. There is no tax liability
B. Basic rate of tax
C. Higher rate of tax
D. The rate applicable to trusts

Answer 14

B. Basic rate of tax.

The personal representatives are liable to income tax at the basic rate on any income arising during the administration period. The income arising is classified in the same way as in accordance with the rules for individuals. Personal representatives are not, however, entitled to personal allowances or the starting rate tax band.

Question 15

What is the terminology for the amount an individual can earn without paying any National Insurance Contributions?

A. Lower earnings limit
B. Primary threshold
C. Earnings threshold
D. Primary limit

Answer 15

B. The primary threshold is the amount of earnings that is exempt from NI.

Question 16

Dana Bradshaw has a high level of earned income and pays the higher rate of income tax. She has invested in an OEIC that invests mostly in interest bearing securities that pay a regular dividend. Which of the following is correct?

A. The dividend will be received net of 10% tax with no further liability
B. The dividend will be received net of 20% tax with no opportunity to reclaim
C. The dividend will be received gross, with a liability of 40% tax
D. The dividend will be received net of 33.75% tax with an opportunity to reclaim

Answer 16

C. The dividend will be received gross with a liability of 40% tax.

If the majority of the investments held in a CIS are interest bearing securities, any distributions will be made as interest income. Bond funds pay gross distributions, which are taxed as savings income.

Question 17

On which of the following goods and services will a business need to add value added tax (VAT)?

A. Office stationery
B. Insurance
C. Congestion charge
D. Membership subscriptions

Answer 17

A. Office stationery.

Office stationery is liable for VAT. Insurance and membership subscriptions are exempt from VAT and fees fixed by law, such as the congestion charge, are outside the scope of VAT.

Question 18

Before which date must at least one of a married couple be born to qualify for married couple’s allowance?

A. 6 April 1945
B. 6 April 1940
C. 6 April 1935
D. 6 April 1930

Answer 18

C. 6 April 1935.

This allowance, and the restrictions on it, also applies to civil partnerships.

Question 19

Marie Sanchez has taxable earned income of £33,200 (after taking into account her personal allowance). She realised a capital gain of £5,000 after using her CGT allowance. How much CGT is due on this gain?

A. £nil
B. £400
C. £550
D. £600

Answer 19

C. £550.

The basic rate band ends at £37,700. Marie’s gain moves beyond this band. For this reason she will be taxed on the gain partly at the basic rate (10%) and partly at the higher rate (20%).

The first £4,500 of the gain is taxed at 10%: £4,500 x 0.10 = £450
The remaining £500 is taxed at 20%: £500 x 0.20 = £100
The tax due on the gain is: £450 + £100 = £550

Question 20

An investor invests funds within a collective investment scheme where any income earned by the fund is accumulated. Which of the following is true?

A. The investor is not liable for income tax on this income as it has not been distributed
B. The investor will be liable to income tax on this income but only when they eventually sell their investment
C. The investor will not be liable to income tax on this income but will be liable to capital gains tax on it
D. The investor will be liable to income tax on this income in this tax year

Answer 20

D. The investor will be liable to income tax on this income in this tax year.

Investors need to pay income tax in this year on any income either paid out or accumulated in the fund.

Question 21

With what type of trust is the trust itself effectively ignored for taxation and instead the beneficiary’s tax rates and personal allowances apply?

A. Absolute Trusts
B. Discretionary Trusts
C. A & M Trusts
D. Interest in Possession Trusts

Answer 21

A. Absolute Trusts.

Absolute or bare trusts are taxed on the beneficiary’s tax rates and allowances.

Question 22

What class of national insurance contributions are paid as a percentage of a self-employed person’s profits?

A. Class 1
B. Class 2
C. Class 3
D. Class 4

Answer 22

D. Class 4 NI is paid on a self-employed person’s profits.

Question 23

Which of the following do not normally pay income gross?

A. Gilts
B. NS&I Investment Account
C. Eurobonds
D. REIT dividends

Answer 23

D. REIT dividends are property income distributions and are sent to the investor net of 20% tax.

Question 24

Tyson is a higher rate taxpayer with an income of £110,000. For the fiscal year 2021/22, what is his personal income allowance?

A. £5,000
B. £7,570
C. £11,070
D. £12,570

Answer 24

B. £7,570.

The standard personal allowance for FY2021/22 is £12,570. However, this is reduced for those earning above £100,000 at a rate of £1 for every £2 earned above that threshold. Tyson earns £10,000 above that threshold, so his personal allowance is reduced by £5,000 to £7,570.

Question 25

‘cum testamento annexo’ means?

A. With a valid will
B. Without a will
C. With the will annexed
D. With the will detached

Answer 25

C. With the will annexed.

This phrase is used with letters of administration. When these letters are issued ‘cum testamento annexo’ (with the will annexed) it shows that when a will was left, owing to some small defect in the will, probate could not be granted.

Question 26

Under the pre-owned asset tax rules, no charge is made if the value of the benefit does not exceed what figure per annum?

A. £5,000 p.a.
B. £6,000 p.a.
C. £7,000 p.a.
D. £10,000 p.a.

Answer 26

A. £5,000 p.a.

The POAT exemption is applied where the benefit is valued at less than £5,000 per year.

Question 27

A self-employed person wishes to voluntarily top up their National Insurance benefits. Which class of NI contributions would you recommend that they top up to maximise their benefits?

A. Class 1
B. Class 2
C. Class 3
D. Class 4

Answer 27

B. Class 2.

For a self-employed person topping up Class 2 NI will provide higher benefits than topping up Class 3, and cost less.

Question 28

Which of the following investments relates to franked income?

A. Government bonds
B. Futures
C. Ordinary shares
D. Options

Answer 28

C. Ordinary shares.

Ordinary shares pay out a dividend income, which is paid after corporation tax has reduced profits. When a UK company receives dividends from another UK company it is considered franked.