chapter 5 Flashcards
pension fund young vs mature: liquidity time horizon tax status risk profile asset allocation other
young vs mature: low vs higher liquidity long time vs shorter time horizon both income and gains tax free high risk vs low risk high % equity vs less equity more lower risk (+naturally shorter term) bonds and bills DB min funding, LDI approach
life assurance fund vs general insurance fund: liquidity time horizon tax status risk profile asset allocation other
low vs very high liquidity
long term vs short term
both income and gains taxed
can take high risk vs v low risk
high % equity and long term bonds vs shorter term bonds and bills
life assurance = cashflow matching, both highly regulated and solvency margins
Life policies
term assurance
whole of life
endowment
life policies: term assurance
cheap, pays out if death within term
life policies: whole of life
pays out when you die
life policies: endowment
savings product with life insurance attached
fiscal tax year
aka income tax year: 6 April - 5 April
financial year
for company 1 april - 31 march
taxes an individual pays
income tax
national insurance contributions
capital gains tax
taxes companies pay
corporation tax
tax avoidance
not illegal - being efficient to minimise tax.
tax evasion
illegal - not paying tax where should be. tax fraud. e.g. not declaring property income from abroad
3 main categories of income
salary - employment, self employment, rent earned interest - bank, bond, gilts dividends (taxed in that order) then add capital gains after income tax (sidcup)
income tax bands
basic 0-£37,500, salary 20%, interest 20%, dividends 7.5%
higher £37,501-£150k, 40%, 40%, 32.5%
additional 150k, 45%, 45%, 38.1%
income tax personal allowances (PA)
personal - earn less than 12,500
personal savings allowance - 1k if basic taxpayer, 500 if higher, 0 if additional
dividend savings allowance - 2k for everyone
personal allowance high earners catch
after 100k it reduces (see google doc)
pension contributions tax relief
tax relief at highest rate being paid by taxpayer up to a max of annual earnings capped at 40k or 3,600k if not earning
pension contribution allowance decreases by
1£ for every £2 earned above 240k until a minimum of 4k
NI contributions classes
class 1 - payable by employee on their earnings class 1a, 1b - payable by employers. 1a: on certain types of non-monetary benefits given to employees e.g. company car. 1b: on employees earnings if an exceptional settlement agreement with hmrc class 2, 4: self employed. 2: if earnings are below small earnings exception, then now NICs are payable. 4: if profits exceed a threshold class 3: voluntary: for 35 years to get full state pension
taxation of trust income
1st 1000£ of income (standard rate band): 20% ‘basic rate’ on rent, savings, business income . 7.5% ‘dividend ordinary rate’ on dividends
income over 1000: 45% ‘trust rate’, 38.1% ‘dividend trust rate’
standard rate band applied to what first
non dividend income then dividend income
who may claim back tax charged on income received from trust
beneficiary
if settlor has more than one trust
standard rate band split between them to min of £200
capital gains tax charged on
chargeable disposal e.g. sale/gift/transfer of a chargeable asset e.g. shares or 2nd home by a chargeable person i.e. UK resident
1. shares 2. land and buildings 3. unit trusts/oeics 4. high value personal items >6k
capital gains tax annual exemption
12,300£
2 bands of CGT
basic rate: tax rate = 10%, residential property = 18%
higher+additional rate: tax rate=20%, residential property = 28%
CGT entrepreneurs benefit
10% up to 10£m lifetime allowance
items exempt from cgt
main private residence, private car, gilts and bonds, ISAs/pensions, gambling, NS+I savings certificates and premium bonds, foreign currency for personal use,
inheritance tax
tax on your estate at death and on any gifts ‘potentially exempt transfer’ (outside of trust) within the last 7 years. 40%.
Does not apply when wealth passes to spouse or civil partner.
inheritance nil rate band
0% ‘nil rate band’ on the first 325,000£ plus 175,000 up to property value ‘residence nil rate band’ where residence is passed to a direct descendant
Nil rate band can be transferred to a surviving spouse on % basis
are transfers into a discretionary trust a potentially exempt transfer?
No, they’re a chargeable lifetime transfer (CLT). subject to a 20% tax charge on transfer. further tax is due if donor dies within 7 years.
inheritance tax exemptions
- wedding gift up to 5k from parent, 2500k from grandparents, 1k from others
- spouses/civil partners
- charity
- annual exemption 3k
gift with reservation
incomplete gifts where donor continues to enjoy gifted asset
example of gift with reservation
home to the donor’s children but donor living rent free
income producing assets to someone else, with the income continuing to be received by the donor
residence
where you are considered to have lived for tax purposes during the year
residence categorisations
- automatically non resident: work overseas full time - pay UK income tax on income arising in the UK.
- automatically resident: 183 days+ in the UK in a tax year, work full time in UK or main/only home in UK: pay UK income tax on all income whether arising in UK or overseas
sufficient ties test
if individual doesn’t satisfy resident or non-resident tests then further series of test based on:
family connections, work, accommodation, days spent in UK
domicile
your “home” country. by default domicile of father. can elect a domicile of choice once 16 if intend to make another country your permanent home
if individual has >2,000 remitted from overseas a charge (RBC) may have to be paid how
30,000/yr if resident for at least 7/9 years
60,000/yr if resident for at least 12 of last 14 years
personal allowance is lost if remittance basis is claimed
remittance basis
pays tax on UK income and only remitted overseas income and/or capital gains
SDLT on residential property
0-500k = 0%
500,001-925,000 = 5%
925000-1500000 = 10%
1,500,000 = 12%
extra tax when own >1 residential property 3%
500,000 + purchased by corporate body = 15%
SDLT on non-residential property
0-150 = 0
150-250 = 2
250k+ = 5%
in increments so for 750, first 150 at 0, then etc etc
stamp duty reserve tax SDRT
0.5% rate to nearest 1p on amount paid to purchase shares.
payable in a paperless transaction by purchaser of:
-shares in UK company
-shares in foreign company
…and more?
stamp duty + stamp duty reserve tax only paid when
when buying
pension contribution limit
40k subject to tapering
tax relief on pensions
if aged under 75 at the marginal rate on contributions
tax free pension commencement lump sum
25% of accumulated funds can be taken at retirement. remainder used to produce an income subject to income tax
flexi access pension
gives access to individuals with defined contribution schemes at age 55. amoounts taken in excess of PCLS (lump sum) subject to income tax with future annual allowance for contributions capped at 4k
lifetime limit pension
1,073,100, if fund exceeds this, excess taxed at 25 if taken as income or 55 as lump sum
ISA
wrapper which adds a tax shield. investments exempt from income tax and CGT.
Cash and stocks and shares
annual limit: 20k. can be split as desired between 2 types
different ISA types
junior ISA (limit 9k/annum), innovative finance isa, help to buy isa (closed to new applicants), lifetime isa (retirement or house - make 4k annual with 25% from govt/yr), child trust funds (closed to new applicants)
collective investment schemes: tax on uk funds
no CGT
income taxed: open end - 20% within fund (unless dividend income), investment trusts: income taxed at corporate tax rate
tax on investor: CGT on gains, dividend tax on dividend distributions. if fund holds >60% interest bearing securities e.g. gilts, bonds etc, dividend is taxed as income not dividend
offshore CIS
tax on offshore funds - no tax payable
tax on investor: reporting fund (income paid/reported) CGT on gains and dividend tax on dividend distributions
non reporting fund (may accumulate income in fund) CGT on gains income tax on dividend distributions
real estate investment trusts
rental income and capital gains exempt within fund.
required to distribute most rental income as dividends
dividends paid to investors subject to 20% basic rate tax
investors subject to income tax on distributions + capital gains tax if on a higher rate than basic rate
EIS
company with an EIS wrapper, offers tax incentives to individuals to invest in new and growing businesses.
investors tax liability reduced by 30% of invested amount. max qualifying investment 1mil per year
Must hold shares for 3 years
No CGT for investor if held for > 3 years
CGT deferral by reinvesting gains in more EIS share
Losses on EIS may be offset against investors income
Seed EIS
start up company - 50% tax reduction
venture capital trust
company investing in multiple small EIS companies.
tax liabilities reduced by 30% of invested amount. max qualifying investment - 200k
have to hold shares for 5 years
dividend income tax free
no CGT
business property relief
Free of IHT if held for >2 years Available for investments in businesses that carry on trade inc -unquoted -aim companies -partnerships
social investment tax relief
- investors tax liability is reduce dby 30% of the invested amount
- max qualifying investment 1mil per year held for >3 years
capital gains tax planning
- spreading ownership of assets amongst family members
- phased encashments
- realise capital losses to offset gains
- bed and breakfasting: 30 day rule workarounds
- use tax free wrappers e.g. isas
income tax planning
- tax free wrappers e.g. isas
- tax free investment e.g. ns+I savings certificates
- use 5% withdrawal on single premium life bons
- transfer assets to lower tax rate spouse
- max tax allowance between married couples
- use pension conributions to qualify for tax relief
- make investments into EIS or VCTs to qualify for tax releif
