Chapter 7-indirect investments-unit trusts, OEICS and investment trust companies Flashcards
For an open-ended investment company who is responsible for establishing and maintaining the register of shareholders
The authorised corporate director (ACD)
What percentage of securities fund must be in approved securities?
90%
What must the unit trust register of unit holders contain
The register must contain:
- the name and address of the unit holders;
- the number of units of each type held by each unit holder;
- the date on which the holder was registered.
What does an equalisation payment represent?
An equalisation payment will usually be included in the first distribution of a units holder and represents a partial refund of the original capital invested (as the price paid per unit included accrued income). It is not subject to income tax and is instead treated as a deduction from the purchase price for capital gains tax purposes.
What is an investment trust?
A collective investment (in the form of a public limited company) that pools the money of money investors, spreading it across a diversified portfolio of stocks and shares that are selected and managed by professional investment managers. Investment trusts issue a fixed number of shares that are regulated by company law, and the shares are traded on the London stock exchange.
List the principles lay down by the FCA for a company seeking a listing as an investment trust
- Investment managers must have adequate experience. There must be an adequate spread of investment risk.
- The company must not control, or seek to control, or be actively involved in the management of the companies in which it invests.
- the trust must not, to a significant extent, be a dealer in investments.
- The trust must have a board that can act independently of its management.
Name the two types investment trust
Conventional and split capital
Conventional is One main class of equity share, known as ordinary shares. Which produce both growth and income.
Like the conventional, split capital, can produce both growth and income income. The difference is that split capital can have many different share classes

What does the redemption yield measure?
The redemption yield measures the capital and income return on a particular share until wind up, expresses an annual percentage.
What are the main characteristics of zero dividend preference shares (zeros)?
- Zeros have fixed redemption rates, typically no more than 10 years. They pay no income and have preferential rights over the distribution of capital.
- They are issued at an initial value, which rises at a pre-determined compound annual growth rate until it reaches the final redemption value.
What is financial gearing?
Financial gearing is one investment trust managers borrow money to take advantage of a good investment opportunity which they would not otherwise be able to take due to a lack of free capital.
Summarise the tax position of investment trust
 investment trust approved by HMRC are not subject to any tax on gains made from the sale of shares over holdings in their portfolios.
They are not subject to any tax on Franked income.
They have to pay corporation tax on unfranked income. Trusts may reduce the tax liability by offsetting their own expenses against the unfranked income.
Investors are liable to CGT on their profits, if they are selling investment trust shares for more than the initial cost.
Formula for the diluted net asset value per share
Net assets + money subscribed by warrant holders/number of ordinary shares in issue + new shares issued to warrant holders
Formula for gearing
(Total gross assets/net assets) x 100
Essentially
All capital/all capital - borrowed capital
Characteristics of UTs and OEICs
They allowed the individual investor to participate in large portfolio of shares with many other investors
Units or shares are sold to investors, each unit representing a small but equal fraction of a portfolio of perhaps 50 or 100 different shareholdings
Assets of a unit trust are held for investors by trustees and are invested by managers, whereas the assets of an open-ended investment account I held by an independent the depository
There is generally an initial charge, which covers setting up costs and also an annual management fee. Where a fund does not have an initial charge, I like to charge maybe applied.
What is a UCITS and what is a UCIS
Both are forms of pooled investments, essentially both are unit trusts/OEICs.
However
UCITS is a scheme that meets FCA requirements and, once authorised, can be marketed to all retail investors. Must have a minimum of 16 shareholdings but usually has 50-100,only 4 of which can hold 10% of total fund value the rest cannot exceed 5%
UCIS is an unregulated scheme and therefore cannot be marketed to retail investors in the UK, these do not hold the same restrictions as UCITs and so are considered high risk and possibly not even covered by FSCS
What is a non-mainstream pooled investment, and give examples of both none and mainstream
NMPIs are investment vehicles That have had promotion banned to the majority of UK retail investors, and are only marketed to sophisticated investors
NMPIs - Units in qualified investor schemes, traded life policy investment, units in UCIS and securities issued by special-purpose vehicle pooling investment in assets other than listed or unlisted shares or bonds
Not NMPIs - Exchange traded products, overseas investment companies that would meet the criteria for investment trust status based in the UK, real estate investment trusts (REITs), venture capital trust (VCTs), enterprise investment schemes (EIS) and seed enterprise investment schemes
Trustees of unit trusts are usually what type of organisation
Major banks and insurance companies
Income tax on dividends distributions from equity unit trusts
To pay dividends are unit trust must hold less than 60% of its investments in interest bearing investments such as cash, gilts and corporate bonds
Dividends are subject to income tax, the first £2000 of dividend income is tax-free after this it is 7.5% for basic rate tax payers, 32.5% for higher rate tax payers and 38.1% for additional rate taxpayers
Taxation on discretionary trust dividends
There is no £2000 tax free allowance however dividends that fall within the standard rate band of £1000 will only 7.5% tax anything above this will be taxed at 38.1%
Taxation of nonequity unit trust
Qualify for this year trust must hold at least 60% of its investments in interest bearing investments, such as cash, gilts and corporate bonds
Basic taxpayers earn £1000 allowance, higher tax rate payers have a £500 allowance however, there is no allowance for additional rate tax payers the rest is at 39.35%
What is capital gains tax and when is it applicable
This is tax on realised gains from the sale of units
The profits are made in gross any losses can be deducted and carried forward indefinitely, there is an annual exempt amount of £12,300 the taxable gain remaining after that is 10% or 20% depending on offer income for the year
Do unit trusts, OEICs and UCITS qualify to be held in an ISA?
Yes, meaning they can be exempt from CGT
What is bid offer spread
The bit of a spread is the difference between the buying and selling prices, expressed as a percentage of the buying price and includes dealing costs and initial charges. This is usually in the range of 5 to 7% for equity funds
Product structure of an open-ended investment account
OEICS is not an investment trust or trading company, it’s also differs from a unit trust in a few ways. Issue shares rather than units with different share classes. It has appointed directors, including the ACD. Single pricing is usually used. There is a limit on borrowing which it cannot exceed 10% of the fund, so it can’t get up like an investment trust.
Who is the depositary
The depository is an independent authorised person of an OEIC who is responsible for overseeing the management of the week in relation to investor protection. Including; valuation, safekeeping of assets, collection of income and ensuring that the ACD correctly exercises the investment and boring powers
What is single pricing
Investors buy shares in the chosen fund and the value of each share of the same class represents an equal fraction of the value of the securities and other assets in the fund. Assets contained in the old are valued at; the mid market price where there is a market dealing spread in the assets themselves or the only price if you that is all that is available from the relevant market
Do most UK investors prefer reporting or nonreporting funds
Most UK residents in the UK domicile investors prefer reporting funds. The main advantages of a reporting fund that any capital gain on a sale is subject to the usual CGT rules, but non reporting are subject to normal income tax.
CGT is better because it has £12300 allowance with 10 - 20% on anything over dependent on other earnings where as normal income is 20,40,45
Who runs and investment trust
The board of director runs and investment trust; this may be either as a self managed to trust or by the directors in playing an external management company
If an investor borrows money to invest in equities in an investment portfolio, what is like to happen to the size of any gains or losses
This is magnified
What are the income tax rates for UK domicile investors
20% basic, 40% higher, 45% additional
How are dividends taxed from a equity unit trust
First £2000 is free then at basic tax rates after being
7.5% basic, 32.5% higher and 38.1% additional
Income tax rates
Dividend tax rates
CGT rates
20%, 40%, 45%
£2000 free then 8.75%, 33.75%, 39.35%
£12,300 free then 10% or 20% after
