Chapter 5 Investment Taxation Flashcards
ISA Eligibility rules
- Limits
Junior ISA
16 -17
- Resident in UK or non resident and crown employee (or spouse /partner)
- 18 + S&S, innovative or Lifetime ISA
- Cash - 16 minimum
- Junior ISA - £9k limit for 20/21. Withdraw at 18. Cash & S&S only
- CAn transfer from CTF to ISA
LIMITS: £20k across cash, S&S, IFISA - Up to £4K in Lifetime ISA - 16-17 Can have Junior ISA and Cash ISA
ISA Tax treatment
- What if holder becomes non UK resident
- On death
- Interest yields from cash/fixed int/divs paid gross and tax free
- All encashment free of CGT
- Can keepISA if non - res, but cant add to it
Death:
Continuing ISA until earlier - Account closed, 3 years DRO date of death or administration of estate
- After 3/12/14 spouse/ civil partner camp be transferred to survivor by one off additional allowance
- allowance based on valued of deceased ISA at dod or when ISA ceases to be continuing account, whichever higher.
- Don’t actually have to inherit to get allowance
- Help to Buy ISA
- When finish
- Bonus?
- MAximum monthly saving
- Property purchase amount available - London or elsewhere
- from 1.12.15 to Dec 2019
- Bonus - every £200 isn’t time buyer saves, £50 government bonus
- Max monthly £200 - Up to maximum £3,000 on £12,000 savings
- London £450k max, Elsewhere £250k
- Lifetime ISAs Limit Bonus What for Penalty. Unless?
- available since 6/4/2017
£4K annual limit
- available since 6/4/2017
- 25% bonus
- First house purchase or retirement at age 60
- Bonus withdrawn and 5% penalty if other purpose (unless terminally ill)
- C hargeable gains
DAMPS
- Death
- Assigment for money or moneys worth (sale)
- Maturity
- Partial surrender in excess of 5%
- Surrender (full)
Chargeable Event in a Trust
- Who liable. What can they do
- If not (point one) who then liable and what rate
- if Trustees non uk resident
- What should trustees do to avoid high rates of tax
- If settlor alive and UK resident , they are liable, but can recover tax from trustees
- If settlor not liable, Trustees have liability- 20% up to standard rate band, then 45%, although credit given for 20% deemed taken at source for onshore bonds
- If Trustee non Uk resident, UK resident beneficiaries are liable to personal rates with no top slicing relief
- Trustees can consider assigning the policy to the beneficiaries in the year before the chargeable event
Reporting / Non Reporting Funds
- Taxation
- Reporting : Dividends ()7.5%, 32.5% or 38.1%) ; interest (o%, 20%, 40% or 45%)
- Starting rate for savings, personal savings allowance and dividend allowance apply
- CGT applies as normal
Non Reporting :
- Income accumulates - only taxed on disposal
- Gain calculated according to CGT principles. No CGT annual exempt amount allowable
- GAin taxed at 20%, 40% or 45%. No starting rate, PSA/DA.
REITS
(5)
- How taxed
- Must be tax resident in UK and be closed end company
- At least 75% of gross profits must originate from property letting (this part exempt from corporation tax) and 75% of fund in property
- At least 90% of the rental profits from exempt element must be paid as dividends to investors within 12 month accounting period
- interest on borrowing must be 125% covered by rental profits
_ Exempt from rental profits and capital gains - Paid as property income and paid net of BRT
(Property Income Distribution PID)- cant use PSA or /DA classed as non savings - Gains on sales of developed property taxed at 30% unless held for 3 years from completion
Tax :
from tax exempt element - Deemed property income and taxed accordingly - From taxed element
Treated as normal dividend and taxed accordingly
GH;
2 internal sub sections / 2 income streams - tax exempt ring fenced section contains property + non tax exempt provides property management services
“ All about the tax”
“We want you to be a rent collector”
-Top Slicing
5 Step process
- Step one Calculate total taxable income for year and identify how much of gain falls into relevant tax bands
- Step two - Calculate total tax due on gain and deduct basic rate tax deemed paid at source
- Step Three - Calculate annual equivalent (usually gain divided by number of years policy in force)
- Step four - Calculate tax due on annual equivalent, deduct basic rate tax deemed taken at source and multiply back up by number of policy years used in step three
- Step Five - Find top slicing relief due by deducting the amount in step four (relieved liability) for amount in step 2 (total liability)
Example:
50k gain, 5.5 years held. £30k after PA
30,000 @ 20%. = £6,000
Tax on gain:
500 @ 0% = £0
£7,000 @ 20% = £1,400
£42,500 @ 40% = £17,000
Step 2 Tax on gain : £18,400 Less basic rate deemed paid on £50k = (£10,000) Tax remaining £8,400 Step 3 Annual equivalent £50,000 /5 = £10,000 500 @ 0% = £0 7,000 @ 20% = £1,400 2,500 @ 40% = £1,000 Total. = £2,400 Step 4 Tax on annual equivalent £2,400 Less basic rate £10,000 @ 20% = £2,000 tax remaining. £ 400 Multiply back by 5 = £2,000 Step 5 Top slicing relief due Step 2. £8,400 Less Step 4 (£2,000) Top slicing relief £6,400
Liability after to slicing relief is £24,400 (total liability to tax) less £6,400 (top slicing relief) = £18,000
BAsic rate credit is 50,000 @ 20% = £10,000
leaves £18,000 less £10,000 = £8,000
OEIC
Unit Trusts Fund Issues Price Units/shares Charges protection of assets Managed
OEIC Fund in company Issues shares Open ended Single price Issues different classes of shares Charge paid from fund Independent depositary protects shareholder assets, Company law & FCA Managed by corporate director Internal gains exempt from Corporation tax
Unit Trust Fund in trust Issues units Open ended Dual price - bid/offer Only difference between units is accumulation or distribution Charges included in manager fees Trustee oversees fund Fund manager
Investment Trust:
Features:
Differences (5)
Compared to OEIC - costs , risk
- What can IT do, as opposed to UTs/ OEICS
- Investment Trust > Think Investment company> company law
- Costs or purchasing shares in ITs is lower
- Risk in IT higher
- ITS can borrow Money (gearing)
- ITs are closed ended - UTs/OEICS are open ended
= ITS are PLCs, whilst UTs are Trusts - ITS listed and trade on London Stock exchange . UTs and OEICS not listed
- ITS can be bought and sold any time of day, UTs / OIECS can only be bought/sold once per day.
GH:
ITs: Closed ended, priced by supply & demand, generally lower charges, different share classes, gearing, more specialised.
Unit Trust/OEIC : open ended, proceed to NAV, higher charges, often one share class, gearing capped at 10%, mainstream investments generally
Can invest: quoted/unquoted shares, Venture capital, worldwide
Income is always dividend - can use div allowance
INVESTMENT TRUSTS -
HMRC approval
- Investment Trust must be resident in UK
- At least 70% of ITs income must be from relevant investments
- ITs ordinary shares must be listed on recognised stock exchange ie LSE
- Can only retain maximum of 15% of its earnings
- Can’t invest any more than 15% of its assets in any one company
- ITs memorandum and articles of association must prohibit distribution of surpluses from disposals as dividends
Conditions an EIS must fulfil to qualify for EIS
- company must be unlisted when EIS shares issued (no arrangements to become listed).Being on AIM is ok\
- Pemanent establishment in UK
- Fewer than 250 employees (500 KIC)
- Gross assets not more than £15m before investment ands £16m after
- Qualifying trade (excluded dealing in land, commodities, financial instruments , financial activities, property development
- Cannot raise more than £5m (£10m KIC) in past 12 months from `EIS or VCT
- £12m cap(£20m KIC)
- IHT relief 2 years
-
EIS
Important points
- 30% tax relief (investor must be liable for IT)
- New shares only
- Unlisted company (can be on AIM)
- 100% shares
- Max £1 million (£2m KIC) per tax year
- Disposal exempt CGT If held 3 years and tax relief given at outset
- Can be used for CGT deferral- no more than 1 year before/3 years after original disposal. Gain becomes chargeable on disposal of EIS
- If disposal creates loss, amount of loss (less income tax relief given at outset) can be taken off capital gain or income
- Hev to be unconnected with company -CGT deferral available to everyone
- 80% of funds must be applied in year 1 and then 20% balance over 2 years
SEIS
- Maximum investment
- How long do shares have to be held
- CGT
- connected
- Maximum investment £100k
_ Relief withdrawn if held less than 3 years
-Relief can be carried back one year - Income tax claim can be made up to 5 years after 31st January following tax year of investment.
- Half of any chargeable gains can be reinvested and be exempt from CGT (up to £50k). DIsposal and reinvestment must take place in same year
- Disposal proceeds exempt from CGT if held 3 years. Must qualify for IT relief in 1st place
- Must invest in ordinary shares - no prior exit strategy
- Investor may be a paid Director of the company when shares are subscribed for
SEIS conditions
- Company must have been trading for less than 2 years. Unlisted
- gross assets less than £200k. Fewer than 25 employees
- 100% shares
- Single company structure
- Company must be unquoted at time of share issue
- Must be carrying on qualifying trade
- 100% IHT relief if held 2 years and still held at death
- Maximum 3 years t o apply funds to qualifying investment
VCT
- Tax relief
- Dividends
- CGT
- Death
- HMRC qualifying
- 30% income tax relief (holding period 5 years)
- Approved Investment Trust company
- Maximum investment £200,000
- No income tax on dividends
- Exempt from CGT on disposal. No holding period
- Can’t defer gain . No IHT relief
HMRC: - must not be a close company
- Must be listed on EEA stock exchange
- Income must be wholly or mainly derived from shares
- At least 80% must be qualifying unlisted trading companies
- AT least 70% of qualifying investment must be in shares- balance can be debt/ gilts
- VCT must not hold more than 15% of ordinary shares in any one company
- At least 10% of investments in any company must be in ordinary, no. Preference shares
- Companies have no more than £15m gross assets before or £16m after
- Fewer than 250 employees (500 KIC)
- Funds must be applied within 3 years
- MAximum annual investment by VCT £5m (£10m KIC)
- Generally not invest in cos more than 7 years old (10 KIC)
- CAp on investment of 312m (£20m KIC) applies EIS/SEIS/VCT
What cant you do /different with VCT/different to EIS or SEIS
(5)
- Holding period 5 years ( others are 3 years)
- Can’t carry back one year (can ESI/SEIS)
- No income tax on dividends
- Gains (CGT) exempt from outset ( no holding period of 3 years)
- No CGT deferral relief
What is an ETF
Benefits (4)
Physical v’s synthetic
“Passive fund for active investors” traded any time of day (buy & sell) Real time (trade like shares)
(OEIC valued and deal once per day)
ETF - Open ended fund index tracking
- No stamp duty
- Often tracks index, sectors ,commodities etc
- very cheap way of gaining exposure. Cheaper than collectives
- more transparent than fund
- Collection of stocks and securities - traded on exchange
- multiple underlying assets
- ETFs trade throughout the day (unlike mutual funds)
Physical: Investment house (Barclays)actually buying stocks eg FTSE 100. Arithmetic basis.
Synthetic: 3rd party agreement with counterparty. Will give movement in asset price ie buying a derivative with 3rd party - popular for commodities.No income stream fro synthetic. COUNTERPARTY risk
ETFS
- Advantages
- Disadvantages
Pros
- access to many stocks across various industries
- Low expense ratios and fewer broker commissions
- Diversification
Cons
- Actively managed ETFS have higher fees
- Single industry ETF has higher fees
- Lack of liquidity
EIS
Loss relief
HRT realised gain £51k. Invested £39k into EIS (gets 30% IT relief of £11,700)
Remaining £12k is covered by annual exempt amount
3 years later co. Goes into liquidation
net loss is £39k less IT relied of £11,700 - £27,300
Loss can be set against income tax or CGT
Income tax saving £27,300 @ 40% = £10,920
OR
Could set against CGT but would only be 20/28% as opposed to 40%
Zero Coupon
4 points
- No interest payments (coupon)
- Issued below par
- Return is gain at maturity on nominal value payment
- Income tax liability rather than CGT
Preference Shares
(3) key areas / differences
- Expectation for receipt of dividends
- No voting rights
- Return of capital if liquidated over ordinary shares
- Lower Risk than ordinary
- Dividend set at fixed rate
How is Offer/Buying price arrived at for Unit Trust
- Underlying assets market value
- Add dealing costs, stamp duty, broker fee
- add other UT assets
- Deduct tax,fees,charges and expenses
- Divide total by number of issued
- add initial charge
Advantages of indirect property investment
- Diversification
- professional management
- less administration and paperwork
- liquidity
- partial sale
- possibility of smaller /regular investments
- investor protection via increased regulation
- Potential CGT savings by partial sales
What is a REIT
- Corporation. Tax
- Qualifying conditions
- Company that own real estate
= Generates income through letting, renting and sales - Income distributed directly to shareholders
- Corporation tax exempt on letting part of business and qualifying chargeable gains depending on conditions met-Qualifying activity must be ring fenced
- corporation tax paid on other sources
Qualifying: - Single company owns and manages commercial or residential property on behalf of shareholders
- Must be UK resident
- Closed ended
- Quoted on a recognised stock exchange
- Corporation tax exempt ( on letting part) at least 75% of gross profits come from property letting and interest on borrowing is at least 125% covered by rental; profits
- Gains on sale of properties developed are taxable at 30%, unless held for 3 years from completion
- at least 90% of rental profits must be paid out within 12 months from end of accounting period
- Income from exempt part paid as property income distribution (PID). Paid net of 20%. Non tax payer can reclaim. HRT extra 20%. ART 25%
- Dividend from non exempt element. Paid gross
UK REIT itself pays no CGT on disposal of rentals. Investor pays CGT on gain from shares
Cash Investments
Risks (4)
- Interest rate variations - INTEREST RATE RISK
- No capital growth
- Default risk- FSCS £85k per individual . 5 - 20 days. Per institution. Temporary high balance £1m limit for max 6 months (eg lottery, sale of property)
Inflation risk - Exchange rate risk
Investment Trusts
Structure (8)
- PLC invests in. Other companies
- Shares (quoted/unquoted)
- venture capital
- Worldwide
- Regulated under company law
- Traded on exchange
- closed ended - supply & demand
Limited life - Share price disconnected from NAV
Benefits of Investment Trusts (4)
- Cost.
- Discount to NAV
- ## Continuously priced : Do it any time of day - Unit Trusts aren’t listed on stock exchange. Deal twice a day
PAIF
Property Authorises Investment Fund
Structure ?
- Open ended (REIT closed ended IT)
- Structured as OEIC )if your wanted money out you go back to fund)
- Contains cash element to aid liquidity
- Investor owns shares in. Property that invests in property ( 3 pots instead of 2)
Ring fenced property letting = at least 60% of overall gross profits & 60% of fund in property
NO 90% rule - No corporate investor can hold more than 10% of funds NET Asset value (NAV)
Cash element : Interest paid gross. Internal taxation : corporation tax as usual…Taxation of investors …usual interest treatment ie PSA, savings allowances etc
6 month encashment clause
REIT v’s PAIF Differences (5)
REIT: - Closed - IT - 75% min in property - 2 income streams (Property ring fenced) - Dividend (non) - Can be in ISA
PAIF - Open - OEIC 60% minimum in property - 3 income streams (property, non proiopety & cash) - Can be ISA
OEIC & UNIT TRUST Diversification rules for actively managed fund
Tracker
- Minimum holdings actively managed OIEC / UT= 16
- Maximum of 10% holding - 4 allowed
- Max 5% - 12 allowed
Gets 16
Tracker:
- 20% maximum in one company in any one index (could go up to 35%)
Gold: 5 benefits and 3 drawbacks of holding gold physically as part of a balanced portfolio
Benefits:
1) Diversification 2) reduce overall volatility 3) negative correlation with equities and bonds4) hedge against inflation 4) tangible 5) hedge against political instability 6) CGT free
Disadvantages: 1) No income 2) difficult to store /extra insurance 3) price arrested by supply & demand WIDE BUY & SELL SPREAD AND HIGH TRANSACTION COSTS
Property - Risks of direct investment
- Value falls
- Interest rates could increase which affects mortgages
- Maintenance costs
- Liquidity
- Void risk
What is ETF
- Passive (tracks index).Basket stocks or commodities. 1 share rather than whole lot
Advantage:
Cheap, simple, wide range of investments, easily traded. Access to what you might not get.No stamp duty. Charges less. Any denomination. Traded any time of day
Disadvantage:
Synthetic /options / futures. More risk. More complex. Not going to beat market. Don’t perfectly track - tracking error . Currency risk
Geared ETFs can magnify losses - extra cost
Additional information IFA would need in order top establish investment needs (7)
- ATR
- Capacity for loss
- Health
- Emergency fund
- Other assets liabilities
- Ethical/socially responsible preferences
- Future lump sums required
Investment Trusts - Split Capital
Three classes
Hurdle rates
Asset Cover
Benefits of buying at discount/premium to NAV
- Zero Dividend preference shares
No income, but set distribution of capital on wind up (low risk) - income shares:
Income during life and predetermined capital; return (medium risk)
Capital Shares:
No income. Remainder of assets (after zero and income shares) (High risk)
Hurdle rate - annual compounded rate of growth required to pay off people with prior claim. Hurdle rate differs depending on class of share. Can be negative
Asset cover: eg £70m assets, £100m liabilities
£70m /£100m = 0.7
Shortfall if ,1
Discount to NAV :if in demand will turn to premium. Higher yield. BUT discount may get larger, lower yields if purchased at premium
Investment Trusts- Warrants
Describe
- Normally issued at outset where set up costs high etc. offered on x for y
- Sweetener
- option to buy additional shares for a fixed price in future.
- Undiluted or diluted valuation
Undiluted : Assets/no. Shares (ignore warrants)
Diluted NAV : Assets - liabilities (value warrants) / No total shares (with warrants)
Unit Trust Manager Duties
- asked
- MAintain record of units
Responsible for day to day running
- Manages Trust in lime with regulation, Trust deed
- In return for annual management fee
- Responsible for promotion &. Advertising
- Selecting investments & fund administration
- Must have adequate financial resources
- Must supply info to Trustee when asked
- MAintain record of units
Trustee duties
- Legal owner of assets
- Must be regulated by FCA
- mustbe independently from management group
- Key role to ensure investors protected
- Hold assets
- Check managers actions and investments
- Responsible for register
- Distroibution of income to unit holders
UCIS: Unregulated Collective Investment Scheme
Who can be promoted to
- Not retail
- Liquidity limited - (investments might be wine, crops , timber)
- UCIS - unregulated (not authorised by FCA)
- No investor protection
- No redress
- underlying investments more risk
- Mostly offshore
promoted: certified high net worth, self certified sophisticated investor
Cant promote to normal investors
Fettered v Unfettered
Fettered: Multi manager selects funds they believe to be best in each asset class. MAnager can only select from within their organisation
Advantages - costs usually lower. Multi Manager has more access to underlying managers
Unfettered - Can select from any organisation and go for best. More to choose from investment styles and funds .Should be greater diversification
Manager of Manager
- How Work
- Advantage
- Disadvantage
- Overall manager decides asset allocation
- appoints manager to to run each sector/objective
- Monitors performance
- Can replace managers / replacement takes over existing assets
- funds are segregated
- discretionary
Advantage:
- Bespoke mandate/ overall manager has say in investments
- Can replace managers
- No requirement to sell a fund and replace
Disadvantage
- New manager left with whatever predecessor had
- Limited number of managers to run mandate
