Chapter 8 - Other Indirect Investments

Question 1

Life assured based investments - higher protection = what and results in (risk and premium) and higher investment aspect = what?

With profit policies - bonuses are what (3, added how often, guaranteed and taken), reflect what (yield and term), final bonuses paid when (3), final bonuses are what (vol, market changes and guaranteed) as they represent what (capital) and changing surrender policy

Market Value Reduction;
- applied at who’s discretion and reduced what when and why, does not apply when (2) and aims to prevent what (value leaving and underlying assets)

Answer 1

Higher protection = higher risk for company = higher premium
Higher investment aspect = lower risk

Bonuses - added to value of policy annually, not guaranteed, cannot be taken away once added.

• reflect income yield on inv in smooth, long term fashion.
• final bonuses can be paid on death, surrender or maturity
• final bonuses more volatile, directly affected by changes in markets, can vary and are not guaranteed as they represent capital growth of company.
• can reserve right to change surrender policy in adverse market conditions.

MVR;

• applied at insurers discretion to reduce amount payable at surrender if adverse investment conditions.
• Does not apply on death or maturity
• aim is to prevent value leaving fund to exceed value of underlying assets.

Question 2

Life-assurance based investments - Unitised with profit policies - premiums buy what (easy), price guaranteed to what, under fixed price - unit price never what, what happens when regular bonus is added and cant be what? And usually increased how often by what rate, under variable price - unit price increases how and guarantee

Advantages of unified with-profits funds;
- bonus rate declared when and can be what, easier to understand what (value), switches and MVR, involve who less and final bonus is payable when (2)

Conventional w/p;
- initial sum assured is increased how, bonuses are declared when, inv can see build up in what and how are they secured and hard to calc what

Answer 2

Unitised;

• premiums buy units in with profit fund
• unit price guaranteed not to fall
• under fixed price - unit price never varies. When regular bonus added, extra unit are allocated to this policy and cant be taken away by life office. Usually increased daily by a % of annual bonus rate.
• under variable price - unit price increased through addition of regular bonuses and guaranteed not to fall.

Advantages of unitised with profit funds;

• bonus rate declared in advance annually but can be amended
• easier to understand current value of investment
• switches can be made, although MVR may apply.
• involve insurance company less
• final bonus payable on death or maturity in addition to units

Conventional;

• initial sum assured increased by bonuses
• bonuses declared annually in arrears
• investor can see build up in eventual proceeds which are secured each year by bonus declaration
• hard to calculate current value

Question 3

Life assurance investments - with profit performance - performance depends on (underlying and profitability)

Advantages of w/p;
- exposure to what, bonuses are steady how, can outperform what, allows inv to participate in what, mutual life office w/p represents what and thus adds what

Disadvantages;
- understanding and transparency, returns depend on what (judgement and objectives), flexibility and generate poor returns when (2)

Answer 3

Performance depends on;

• underlying performance on investments
• profitability of their business

Advantages of w/p;

• provide exposure to equity markets
• bonuses can be steady as call on reserves in bad years
• outperform inflation
• can allow to participate in profits of insurance company
• mutual life office w/p represents ownership rights and thus add profits

Disadvantage

• difficult to understand and lack transparency
• returns depend on subjective judgement and marketing objectives
• inflexible and may generate poor returns on early surrender or MVR applicable

Question 4

Closed with profit funds - have high proportion invested in and small amount invested in, allocation of equities depends on what (insurer) and has following consequences;
- funds in what not likely to perform as well as and this will restrict what and where pay no what charges will?

Policyholders need to consider;
- strength, asset allocation, bonus, performance, surrender value, penalties and time until w hat

Policies with no what will be taking what (fund value) which leads to what (strength)

Answer 4

Most closed funds have high proportion invested in FIS and small amount of equities. Allocation of equities depends on financial strength of insurer and has following consequences;

• funds in FIS not likely to perform as well as equities over long term
• this will restrict bonus payment
• where paying no bonus, charges will erode investment

Policyholders need to consider;

• strength of insurer
• asset allocation of fund
• bonus rate
• long term performance of fund
• current surrender value of policy
• penalties such as MVR or exiting fund
• length of time until end of policy or MVR free encashment date

Policies with no exit penalties will be taking more than fair share of the fund leading to the fund becoming considerably weaker.

Question 5

Life assurance - unit-linked funds - managed funds - value of life assurance policy measured how and this depends on what, when first set up what is lower than what and why (price and termination)

Managed funds - invest in what?

Unit linked returns depend on what factors (performance and set up and cash in)

Cashing in - pound cost averaging - yield depends on what (price) and lower unit price throughout lifetime leads to what and if sudden rise before encashment

Answer 5

Value of life assurance policy is measured by total value of units allocated to it and depends on performance. When first set up, surrender value lower than premium due to buying and selling price of units and early termination policies.

Managed - They invest in a balanced spread of equities, FIS, property and cash.

Unit-linked returns depend on two factors;
- fund performance and day set up and cashed in.

Performance straightforward but cashing in -Pound cost averaging;

• yield obtained from policy depends on bid price of units on day of cash in
• lower unit price throughout lifetime = more units bought with regular premiums and if suddenly rises before encashment, will get better return.

Question 6

Investment appeal of life assurance - unique funds for life assurance polices including (w/p, guaranteed what bonds (2), property with assets where and m funds)

Conventional w/p endowment savings plan;
- term, premiums, purchase what and payable when, bonus added when and final bonus when and eventual return is what + what

Low cost endowment savings plan;
- basic sum assured lower than what, amount payable on maturity is what + what

Answer 6

Some unique funds for life assurance policies including w/p, guaranteed income and growth bonds, property funds with assets in property rather than shares and mixed and managed funds.

Conventional with-profit endowment savings plan;

• policies have ten year term
• level premiums paid
• purchase a guaranteed sum assured payable on maturity or death
• bonuses added annually and final bonus added on death or maturity
• eventual return = sum assured + bonuses

Low cost endowment savings plan;

• basic sum assured lower than death sum assured
• amount payable on maturity is basic sum assured plus bonuses

Question 7

Life assurance investments - early encashment of regular premium savings policies - usually what and lead to much lower return as;
- surrender value incorporates what, may be possible to do what (sell) and this may produce greater sum than…, bonus may only be payable when but some include this when

Segmentation - what is it (clusters) and advantages of this are;
- saver not committed to what, policies can be what when, other policies can continue how with premiums being (2) and if the latter sum assured will be what but bonuses will?

Answer 7

Usually penalties and lead to much lower return due to;

• endowment surrender values incorporate penalty element.
• may be possible to sell w/p policy on open market and produces greater sum than surrender value.
• bonus may only be payable on maturity or death and not early encashment. However, some do include this in their surrender value.

Segmentation - writing plan as a cluster of individual policies and advantages of this are;

• saver not committed to taking all money at same time
• individual polices can be encashed as required
• other policies can continue independently with premiums paid or paid-up. If paid up, sum assured will reduce but bonuses continue to be added.

Question 8

Life assured - Investment bond - is a what, most written as, structured primarily as what, used as who’s investments, amc %, single pricing systems mean no what but charged what + what if encashed in first 5 years

Guaranteed income bond;
- single premium provides what and terms up to, on maturity, what is returned and combo of what make it attractive for who and rate offered depends on what

High income bond;
- based on packages of what, offer high level of what but capital return is, return of capital depends on what, if this meets target then capital is what and if not then payment is what

Answer 8

• investment bond is single premium life assurance policy
• most are written as whole of life policies
• structured primarily as investments
• used as trustee investments
• AMC typically 1%
• some use single pricing system which means no initial charge but will be charged AMC + exit charge if encashed in first 5 years.

Guaranteed income bond;

• single premium provides guaranteed income each year for terms up to 5 years
• on maturity, capital returned and combo of security and returns make it attractive for basic rate tax payer
• rate offered depends on market conditions

High income bond;

• based on packages of derivatives
• offer high level of income but do not guarantee return of capital
• return of capital depends on index or average of 2/3
• if index meets pre set target over term, capital returned in full and if not, payment on maturity is less.

Question 9

Life Assurance - Investment Bonds - guaranteed growth bonds;
- don’t pay what but pay what at maturity and terms usually, free of what and basic tax deducted from?, can do what at maturity (2), underlying assets are usually what, high returns are based on what (tax), cannot do what at any time

Unit linked bonds;
- good for who, can take what % without taxation, can get what compared to others (return), written as what or cashed when and flexibility

Answer 9

Guaranteed growth bonds;

• pay no income but guaranteed capital sum at maturity (1-5 years)
• free of CGT and basic rate tax deducted at source
• at maturity, can be encashed or rolled into another bond
• underlying assets are usually gilts and other short to med term instruments
• high returns available are based on advantageous tax position.
• cannot encase at any time otherwise penalties

Unit-linked bonds;

• good for higher rate taxpayers
• can take 5% of bond annually without taxation
• can get high net return compared to other taxable investments - would need 8.33% yield to take 5% on fully taxable investment - if fund growing at rate >5% then get capital growth as well.
• written as whole of life or can be cashed in whenever
• main advantage is flexibility as withdrawals can be made whenever

Question 10

Life assurance - Investment Bonds - distribution bonds;
- distinguishes between what so income reflect what and leave capital intact compared to what where what is encashed and causes…, ABI classification says bond must have max % what in what and min % in what and yield at least what % in what index

Guaranteed equity bonds;

• these are what type on bond that guarantee what on maturity + growth
• guarantee operates on what otherwise valued how
• how is guarantee achieved (deposit and bond + index)

Protected equity bonds;

• allows investors to select what
• typically what % and bond is protected against (falls) what regardless of what (index)

Answer 10

Distribution bonds;

• distinguish between income and capital so that income paid reflects income generated by fund. This leaves capital intact compared to unit linked where units are encashed and may cause decline in capital value.
• ABI classification says dis bond must have max 60% in equities, min 50% sterling based assets and yield of at least 110% of FTSE All Share yield.

Guaranteed equity bonds;

• unit linked bonds that guarantee original capital on maturity + % of growth in the index which it is linked to.
• guarantee operates on fixed maturity date otherwise valued by current units if encashed early.
• guarantee usually achieved via fixed term deposit or zero-coupon bond + exposure to growth via market index.

Protected equity bonds;

• allows investors to select quarterly guaranteed level of protection
• typically 95-100% of capital at start of quarter and bond will be protected against falls in excess of selected level regardless of performance of index.

Question 11

Life assurance - investment bonds - disadvantages for guaranteed/protected equity linked bonds;
- some capital value lost due to, protected equity bonds may still product what, don’t allow for what income and better the guarantee, lower the what

Bonds are good investment for how looking for what (growth) as;
- variety and risk, generate no what and reduces (costs and admin), underlying fund pays lower what, policies can be assigned to who and taxation on transfer and may be able to do what with no tax and what % can be withdrawn tax free

Chargeable gains liability if what happens (3);

• creators of trusts gain is treated as what and can do what from trustee
• if creator dead, trustees have chargeable gain of % for income above what and what rate if within this band
• what extra % charge (above) can be avoided if beneficiaries are what

Answer 11

• whilst receiving capital value, some is lost due to inflation
• must be held to maturity for guarantee of capital protection
• protected equity bonds with 95% rolling guarantee may still produce 20% loss
• don’t make allowance for dividend income
• better the guarantee, lower the ultimate return.

Bonds are good investment for trustees looking for long term capital growth as;

• variety of funds that meet different risk levels
• generate no taxable income and therefore reduce costs and admin for trustee
• underlying life fund pays lower corp tax
• policies can be assigned to beneficiaries of a trust and no income tax charge on transfer. Bens may be able to encash with no additional tax
• up to 5% can be withdrawn each year

Chargeable gains liability if over 5%, full and death of life assured;

• creator of trust’s gain is treated as income and can recover tax from trustee
• if trust creator is dead, trustees have chargeable gain of 45% for income above trusts standard rate band and 20% within this.
• 25% extra above standard rate band (as above) can be avoided if bens are basic rate or non taxpayers.

Question 12

Offshore bonds - taxation on income and gains (known as) whereas onshore pay what % on income or gains, gross roll up reduced due to what and some income received after what tax and uk policyholders liable to what tax at what rate on gain

Encashment;
- when is this a chargeable event and calc

Taxation of gain;
- charged at what %

Top slicing;

• top sliced back to when if full surrender
• for partial withdrawals, need to apply what
• if not to the above, top slicing set back to when
• if yes, TS from when but period is what to reflect what

Answer 12

• advantage is that offshore bond imposes little or no tax on income or gains in underlying fund (gross roll up) whereas onshore can pay 20% on income or gains.
• gross roll up may be reduced due to higher charges and some income may be received after withholding tax taken.
• UK policyholders with offshore bond policies are liable to income tax at highest rate on whole of their gain.

Encashment;
- if encashed and a gain arises, this is a chargeable event and calc’d = total gain*number of days in the UK/number of days policy has run

Taxation of gain;
- for basic or higher rate tax payer, whole gain charge at 20%

Top-slicing;

• a chargeable gain on offshore policy is always top-sliced back to the start date of the policy where it is a full surrender.
• for partial withdrawals, depends on whether time apportionment relief (time abroad) applied;
• if not, top slicing period is back to last chargeable gain
• if it does, the top-slicing period is still from start date of policy but period reduced to reflect overseas

Question 13

Offshore vs onshore bonds - offshore not always preferable as;

• gains on onshore benefit from what and net gain taxed at what whilst offshore taxed at
• some income received after deduction of what and can lead to
• charges higher for which one
• onshore management expenses may be what from what (income) for what purpose whilst not for offshore and can reduce what

Offshore bonds and offshore funds compared;
- switches in bond does not give rise to what, funds subject to what tax whilst bonds governed by what (tax regime), charges higher for what, easier to place which one in trust and 5% applies to which one only

Answer 13

Offshore bonds not always preferable as;

• gains on onshore fund benefit from indexation relief with net gain being taxed at 20% or 25% whilst offshore gains are taxed at 40% or 45%
• some income from offshore fund may be received after deduction of withholding tax and no credit for this in chargeable gain leading to possible double taxation.
• charges higher on offshore bonds
• in onshore, management expenses may be deductible from the funds income for tax purposes whilst not the case for offshore bonds and can reduce effect of gross roll up

Offshore bonds and offshore funds compared;

• switches between funds in bond does not give rise to personal tax liability, which is not the case for offshore funds.
• gains on offshore funds may be subject to either income tax or CGT, whereas bonds governed by less favourable tax regime.
• charges for offshore bonds higher
• generally easier to place and maintain offshore bonds in trust
• 5% rule applies to bonds but not funds

Question 14

Taxation of life assurance policies - dividends, all other income taxed %, gains on what exempt from corp tax, gains on what taxed at what %, expenses offset against what type of income and means companies with higher what pay little what giving better what

Qualifying policies - endowment must pass the following to qualify;
- term, premium frequency, min level of cover % of total premiums, prem payable in one cannot be what compared to another year, prem cannot be lower than what fraction of what over the term and limit to premiums payable

Qualifying pol - early encashment;

• not subject to what tax and why
• only taxable when and then taxed how
• basic rate taxpayer and tax amount

Answer 14

Taxation of life assurance funds;

• dividends exempt from tax
• all other income taxed at 20%
• gains on gilts and corp bonds exempt from corp tax
• gains on assets such as equities and property are taxed at 20%
• expenses can be offset against unfranked income (FIS etc) so that companies with high expenses pay little to no tax and therefore provide better returns.

Qualifying policies- endowment must pass the following to qualify;

• at least ten years
• premiums payable at least annually or more frequently
• min level of cover is 75% of total premiums payable
• premiums payable in one year cannot be double those payable in another
• premium cannot be >1/8th of total premiums payable over the term
• limit for premiums payable under qual policy is £3.6k

Qual pol - early encashment;

• surrender before maturity cannot be subject to income tax as it is a chargeable event.
• tax only payable if surrender value exceeds total gross payments and then tax highest ban -20%
• basic rate taxpayer no tax payable

Question 15

Taxation of life assurance funds - qualifying policies - proceeds on maturity are, if policy surrendered after how many years how taxed, don’t pay tax if bond surrendered how long into term

Taxation of non-qualifying policies;
- gains are what and only payable if; what occurs, what arises and when what is added together and puts them into what bracket

Chargeable event;
- when dot hey happen (5, straightforward apart from last), must issue what, is amount that exceeds, chargeable gain on full surrender formula

Answer 15

Tax free lump sum - proceeds on maturity free of tax.

• if policy surrendered after ten years, no tax even if term is more
• rules also stated if surrendered 3/4 into term then no tax liable.

Taxation of non-qualifying policies;

• all gains on non-qual are taxable but only payable if;
• chargeable event occurs, chargeable gain arises, when the gain added to annual income put them into a higher or add rate bracket.

Chargeable events;

• death, maturity, surrender, certain past surrenders & moneys worth/assignment
• if occurs must issue certificate
• chargeable gain is amount that exceeds allowance (5% of original investment carried over each year if not used)
• on full surrender, chargeable gain = ((fund value + withdrawals) - original investment) - excess over 5% in previous chargeable gain

Question 16

Segmentation - may reduce what, provides alternative to what and why, maximises benefit of what as gains are spread over what and comparison to part surrender (allowance spread back to when), can choose to make surrenders on each segment how and no disadvantage as part surrenders taken from where rather than?

Preferable for following reasons;
- prefer gains later because? And seg will always do what (defer), cashflow effect of deferring and thus defers what, greater top slicing relief can lead to what and if when (rate and withdrawals) and if until death, deferring beneficial as (income tax and estate)

Answer 16

• may reduce actual amount of tax payable
• provides alternative to repeated part surrenders as complete segments can be surrendered.
• maximises benefit of top-slicing as gains are spread over period since inception. In comparison, for part surrender, allowance only spreads back to date of last chargeable event.
• can choose to make part or whole surrenders of segment and can select method that is most favourable for investor.
• no disadvantage in segmentation as part surrenders can be taken from all segments rather than surrendering whole segments.

Segmentation preferable for following reasons;

• most prefer gains to occur later as tax rate may be lower (eg in retirement) and segmentation will always defer gains.
• cash-flow effect of deferring gains and therefore defers tax - deferred tax is tax saved.
• greater top-slicing relief given by seg can lead to less tax payable if higher rate and regular withdrawals.
• if held until death, deferring beneficial as tax rate is usually lower in year of death + income tax reduces estate for IHT purposes.

Question 17

Second-hand policies - when what is sold and attractive for;
- policyholder as what is higher than what, buyer as yield when may what, policies mostly traded are (w/p and w/p+g)

Must be authorised by who and requirements are;
- must tell client about what option when surrendering and same with who else, when advising buyers must quote what value, must explain what (arrangements, claims and life assured) and ensure buyer knows what (tax)

Taxation on seller - if sold after when = no chargeable event, and when is it a chargeable event (2), chargeable gain when and taxation of gain and subject to

Income tax - qualifying policy - if held to maturity or death claim, tax liability?
- non-qualifying - as above

CGT - gain reduced by what tax paid

Answer 17

When an endowment is sold and attractive for;

• policyholder as selling price may be higher than surrender value
• buyer as yield on maturity may be good and life assured may die early.
• policies traded most are w/p endowments and some w/p & guaranteed bonds

To carry out this business, must be authorised by FCA & requirements are;

• adviser must tell client when surrendering that may get higher value through secondhand market.
• as above with life office
• IFA advising buyers must quote life offices surrender value
• IFA must explain arrangements for assignment
• IFA should explain claims procedure and arrangements for checking if life assured has died.
• IFA must ensure buyers knows tax position

Taxation on seller;

• if sold after ten years or 3/4 of term then no chargeable event
• if sold within or non qualifying, there is a chargeable event
• chargeable gain if sale price exceed premiums paid and if higher or add tax payer, taxed at their band -20%.
• gain subject to top-slicing

Income tax - if buyer hold policy to maturity or death claim, no chargeable event and therefore no income tax liability.
- as above but non-qual then chargeable gain if maturity value exceed total premiums paid by buyer and seller. If gain arises, subject to income tax at their highest band - basic rate and subject to top slicing.

CGT - taxable gain reduced by any income tax paid

Question 18

Investment bonds - main advantages - can do what without CGT arising, higher rate tax payers may pay less what at maturity and why and amount that can be withdrawn annually without tax charge

Drawbacks - underlying funds and tax therefore not suitable for who, allowance means that and bond may lead to paying this and should be wary when (tax band)

Answer 18

• can switch from one fund to another without CGT charge arising
• for higher rate taxpayers, the rate of tax they pay at maturity may be lower than tax they expect to pay on income and capital gains due to paying later on in life when tax band may drop.
• up to 5% can be withdrawn annually without an immediate tax charge and does not form part of income

Drawbacks;

• underlying funds are subject to tax and cannot be reclaimed and therefore not suitable for non-tax paying investors.
• few investors are subject to CGT due to allowance and bond may lead them to paying tax on gains.
• if tax band expected to rise then should be wary as will pay more tax in the future.

Question 19

Regular premium policies - advantages - what type of pol and therefore free of what when (3)

Disadvantages - flexibility such as term and varying premium

Considerations - underlying assets subject to what tax therefore not good for who, as tax paid on gains there is a loss of what for who and who benefits from these policies

Answer 19

Advantages - likely to be qualifying policy and therefore free of personal tax on maturity or early encashment under rules (3/4 and as long as 3.6k limit not exceeded)

Disadvantages - qualifying subject to inflexible rules such as held for at least ten years and difficult to vary regular premium level.

Considerations;

• underlying investments subject to insurance companies tax rates therefore not good for non-taxpayers & no longer neutral for basic rate taxpayers
• as tax paid on internal gains, loss of tax efficiency for someone who does not exceed allowance.
• higher rate taxpayers should benefit

Question 20

Offshore bonds - taxed same as what and why more attractive;
- free of what and good for those that want (portfolio management), charge on gain may be greater why (income and CGT exempt), divs subject to what tax, income tax not better than what but adv for income from what assets, proceeds subject to what and therefore may be what, fees and better if what (tax rate and resident)

Answer 20

Taxed same as UK bonds but can be more attractive for some investors due to taxation on underlying funds;

• free of capital gains tax so good for those who want actively managed portfolios with a lot of switching
• ultimate charge on gain may be greater as treated as income in year of encashment and no CGT exempt amount to use
• dividends may be subject to withholding tax
• income tax not better than uk bonds but some advantages for income derived from deposits and FIS
• proceeds of plan subject to basic and higher rate tax and therefore may be double taxation if already suffered withholding tax
• higher set up and management fees for offshore
• long term savings from offshore bond better if lower rate on encashment or non-uk resident

Question 21

Exchange traded products - ET Funds;
- type of fund and traded how, variety, subject to what fees but no what and AMC less than %, what is synthetic replication (use of what to replicate what and subject to what risk), subject to what tax on divs and gains, error and ISA

ET Commodities - tracks what and may track what else in what situation

ET Notes - type fo fund and give access to what, what wrapper type issued by who and have what date but don’t pay?, returns linked to what minus what, ownership of shares and use what instead and value affected by what rating

Answer 21

Funds - index tracking funds and are traded like a single share

• covers wide variety of trackers
• subject to broker fees but no stamp duty and AMCs of <0.5%
• synthetic replication - use of swaps to replicate returns and could be subject to counterparty risk
• can be subject to tracking errors
• subject to income tax on divs and CGT on gains
• eligible for inclusion in ISAs

Commodities - tracks performance of commodity and may track an index designed to measure value of commodity if complications tracking physical commodity.

Notes - also trackers and give access to specialist market niches

• type of bond issued by the bank and have a maturity date but don’t pay interest
• returns linked to index - amc
• ETNs don’t own anything in tracker (shares) but use derivatives instead
• value is affected by credit rating of issuer
• subject to default risk

Question 22

Property based investments - shares in listed property companies differ from direct investment by;
- liquidity and diversification, share price affected by what (management, borrowing and assets), shares usually what meaning what, share prices fluctuate based on (2), company liable for corp tax on what (2)

Property unit and investment trusts;
- liquidity, diversification and investment amounts, can invest in what of property companies (2), if large amounts can delay what by max how long and ITs required to invest in what and less of what

Answer 22

Shares in listed property companies differ from direct investment by;

• liquid and diversified as invested in a number of different properties
• share price affected by management quality and level of borrowing + underlying asset value
• property shares highly geared so more volatile
• share prices will fluctuate depending on supply and demand + systematic risk
• company liable for corp tax on gains and rental income

Property unit and investment trusts;

• good liquidity, diversification and small amounts can be invested
• unit trusts can invest directly or in shares of property companies
• if large amounts invested in property, allowed to delay redemption by max six months to raise money
• investment trusts required to invest in shares and only little bit in direct prop

Question 23

Property based investments - property authorised investment funds - what type of instrument, taxation moves from who to who, what related income are exempt from tax in fund and other income taxed how, distributions to inv through (3), at least what % of net income from where, at end of acc period value of assets in what must be at least what % of total assets and no corp invest can hold >% of total what

Insurance company property;
- value of what linked to value of what, borrowing, liquidity higher than what and income and gains subject to % tax

Answer 23

Property authorised investment funds - FCA auth OEIC

• point of taxation moves from fund to investor
• rental profits and property related income exempt from tax in fund but other taxable income taxed at 20% corp tax
• distributions to investors via - property income, interest and dividends
• at least 60% of net income must be from the exempt property investment business.
• at end of accounting period, value of assets in investment business must be at least 60% of total assets
• no corp investor can hold >10% of funds NAV

Insurance company property funds;

• value of units linked to value of property
• funds cannot borrow money
• liquidity higher than with direct property investment
• income and capital gains are subject to 20% tax within the fund

Question 24

Real estate investment trusts - aims to provide savings vehicle that;
- provides what market in property investment, accessibility and taxation aligned with what

Characteristics;

• close ended, residency, issue what class of shares and listed where
• two elements for tax purposes - ring fenced property letting which is exempt from what and non ringed fenced where what are subject to what tax

Must meet to qualify;
- what % of profits from what bit of business, value of assets in ring fencing what % and interest on borrowings covered by what % of rental profits

Answer 24

Aim is to provide savings vehicle that;

• provides liquid market in property investment
• widely accessible to investors
• taxation aligned to tax for direct investments in property

Characteristics;

• must be closed ended, UK resident, only issue one class of o shares and listed on recognised exchange
• two separate elements for tax purposes - ring fenced property letting business which is exempt from corp tax and non ringed where profits and gains are subject to corp tax.

Must meet to qualify;

• 75% of total profits must be from prop rental business
• at start of each accounting period, value of assets in ringfencing part must be at least 75% of total assets
• cannot have excessive debt borrowings and interest on borrowings must be at least 125% covered by rental profits

Question 25

Private equity - generally have higher what and why (time spent…), involves what to get what (think previous chapter)

Enterprise investment scheme- income tax relief at what % and max amount invested in shares and relief given how, relief withdrawn when, may carry back tax relief to previous what and payment of CGT delayed when

EIS risks;
- failure, held for min for benefits and illiquid

Answer 25

These products generally have higher charges as more time spent researching and meeting with management team of fledging companies. Involves providing medium to long term finance for potential high returns.
Types; EIS, SEIS & VCT

EIS - income tax relief at 30% is given for qualifying investments and max up to £2m invested in EIS shares. Relief given as reduction to tax liability.

• relief is withdrawn if shares are disposed within three years (except to spouse or death of investor)
• investor may carry back income tax relief to previous tax year
• payment of CGT can be delayed by reinvesting it into EIS

EIS risks;

• unlisted companies have higher risk of failing
• must be held for at least three years to benefit from income tax & CGT relief
• market illiquid

Question 26

Venture capitalist trusts - designed to encourage what (invest, higher risk and listed), run by who, income tax relief at what % up to max of what for new issues of what, divs received up to what amount are exempt from what and gains arising from disposal of shares exempt from what and min period of holding

To qualify as VCT must;
- listed, money used within, income is from what (2) and don’t retain what % of income, at least what % of shares where, no more than what % in single company, what % of qual holdings in what type of shares, number of employees and raised no more than what amount during what period and no more than what amount during lifetime

Risks;
- liquidity and demand for existing shares

Answer 26

Designed to encourage investment in small higher risk trading companies not listed on official list on any stock exchange.

• similar to ITs in that both investment companies and run by fund managers
• income tax relief is at 30% up to max of £200k in new issues of o shares
• divs received from VCT up to £200k are exempt from income tax
• Gains arising from disposal of VCT shares are exempt from CGT with no min period of holding
• Losses on shares are not allowable losses for CGT purposes and cannot use to offset against other capital gains.

To qualify as VCT must;

• be listed on LSE
• all money raised must be used within two years
• income from shares or securities and do not retain more than 15% of income
• at least 80% of shares must be in qualifying holdings (unlisted companies)
• no more than 15% in single company
• 70% of qualifying holdings must be in ordinary shares
• 10% of total investment in one company must be in ordinary shares
• cannot have more than 250 employees when raising money
• raised no more than £5m 12 months after date of investment and no more than 12m during companies lifetime.

Risks;

• may be difficult to sell shares
• demand for existing shares low as tax relief only available on subscriptions of new shares

Question 27

ISA - tax advantages - straightforward ones (not listed but you know) then property income distributions are paid what

Invalid ISAs - if go over allowance what happens (gains and reporting)
- if holds life assurance policy, policy must and may give rise to what if what (gain and premiums), manager repays tax at what rate then investor responsible

Non-eligible investments - shares in what companies

Transfers between ISA managers - possible to transfer what from innovative ISA but not?, time limit for cash ISA&LISA TF and S&S

Answer 27

• property income distributions from REITs are paid gross to ISA managers, others you know.

Invalid ISAs - if they go over allowance, investor given details of any gains and must be reported if due to pay tax
- if ISA holds life assurance policy, policy must end. May give rise to taxable gain if proceeds are greater than premium paid. Manager will repay tax at basic rate but investor will have to pay more if higher rate payer.

Eligible investments;
- Shares in unquoted companies do not qualify - pretty much everything else they can have.

Transfers between ISA managers;

• possible to transfer cash from innovative ISA to other ISA but maybe not inv
• ISATF should take no longer than 15 working days for Cash&LISA and no more than 30 for S&S ISA

Question 28

ISA stakeholder standards - three products

Cash ISA (deposit) - min deposit no higher than, payments in, withdrawals, interest rate and if increases then max time period

S&S (medium term investment product) - max amc (think normal stakeholder stuff), min deposit, what % in riskier assets, payments in and prices of units

Smoother MTIP;
- smoothing account, policyholders charged more if, info availability and funds benefit for who

Answer 28

Stakeholder products - three products that can be held in ISA;
- deposit, MTIP and smoother MTIP (like w/p)

Cash ISA (deposit);
- min deposit cant be hgiher than £10, payments made every way, unlimited withdrawals, interest paid no less than 1% below BoE base rate and if increases then min rate must increase within a month

S&S ISA (MTIP)
- max amc 1.5% then down 1% after 10 years, min deposit not higher than £20, no more than 60% of fund in risky assets, contributions in every way and prices at which units are bought and sold in fund must stay the same.

Smoothed MTIP;

• good year returns are paid into smoothing account
• if smoothing account needs extra, policyholders can be charged more
• info about smoothing and charging must be available
• funds are for benefit of policyholder

Question 29

NS&I Products - Purchased Life Annuities - two elements - capital - taxation and capital, what is fixed at outset and if annuitant survives what received tax fee. Income - taxed how - more tax efficient than what

Answer 29

PLA’s are split into two elements;

• Capital - tax free and part return of original capital. Capital element fixed at outset and if annuitant survives for expected time, purchase price is received tax free
• Income - taxed as savings income
• more tax efficient than pension annuity as this is taxed as full income

Question 30

Derivatives -contract that gets value from where, can be either (think market), OTC is tailored to needs of who whilst ET has standard what meaning its what (cost and trade), allows investors to get exposure to what without requiring what

Futures - what type of market contact (above) and what is it (think repo), buyers said to have what and hope that and same for sellers and benefits are (cost, dealing and liquidity)

Trading futures;
- what are open positions (rights and ongoing), deposit what and held by who, variation margin (what results in daily changes), clearing house pay what and receives what from who

Delivery;

• short side must deliver what at expiry
• long side must pay what

Answer 30

Financial contract that derives value from value of underlying investments. - can be either exchange traded or OTC

• OTC tailored to needs of client whilst ET has standard terms and conditions and are therefore cheaper and easier to trade on an exchange.
• allows investors to gain exposure to UA without actually requiring ownership of trust

Futures - ET contract and legally binding contract to buy or sell asset a spec date at price agreed when contract is made

• buyers are said to have long position and hope that price will rise
• sellers are said to have short position and hope price will fall.
• benefits are lower dealing cost, speed of dealing and liquidity

Trading financial futures;

• open positions are those were rights/obligations to the market are ongoing
• buyer and seller initially deposit a margin and held by third party
• variation margin - profit and losses resulting in daily price changes
• clearing house pay profits to one side and receives losses from other
• position in futures contract undergoes daily revaluation until contract reaches expiry date or investor decides to close out open position

Delivery;

• short side must deliver to long side agreed quantity of underlying assets at expiry of contract.
• long side will pay short side exchange delivery settlement price (closing price at expiry date)

Question 31

Derivatives - options - gives buyer what (right and obligation) to do (think repo) and fixed price known as what;
- what is call option and put option

Choices to option holders (3)
- European and American style - can be exercised when

Selling option before expiry has two components;

• Intrinsic value - call option has this if what is above options what and put option is what
• Time value - amount inv is prepared to pay for option in hope of what and directly related to what (time)
• greater time = greater chance end up in…
• at expiry worth only

Answer 31

Gives buyer right but not obligation to buy or sell specific asset at fixed price before or at certain date. Fixed price known as strike price or exercise price.
- call option gives right to buy asset whilst put option right to sell

Choices to option holders - exercise option, sell before expiry or let expire worthless
European style option - one that can only be exercised at expiry
American style - can be exercised at any time (majority of uk)

Selling option before expiry has two components- intrinsic value - call option has intrinsic value if underlying asset is above options strike price and put option if it is below.

• time value - is the amount an investor is prepared to pay for the option above intrinsic value in hope that it will increase before it expires. Directly related to how much time left in options life as value erodes.
• greater time til expiry greater the chance it ends up in-the-money
• at expiry, only worth intrinsic value

Question 32

Hedge Funds - what are they (pooled) and use what strategies including;
- downturns, trade classes and enhancing tools

Hedging investment objectives;
- absolute return - don’t adopt what strategy and aim for what with limited what. Limited correlation relationship with markets they operate in

Investment strategy;

• long/short funds - combine what with what to reduce what
• relative value funds - rely on what (pricing)
• event driven funds - how achieve returns
• tactical trading funds - like what

Risks;
- gearing, costs, transparency and best for who

Answer 32

Pooled investments where fund managers invests in traded securities. Use alternative investment strategies including;

• hedging against market downturns
• investing in trade classes that are trading below their true value
• using return enhancing tools such as gearing, derivatives and arbitrage

Investment objectives;
- absolute return - don’t adopt long term strategy and aims for an absolute return with limited volatility. Seek higher risk adjusted rate of return.
Limited correlation - using have limited or negative correlation in markets they operate in.

Investment strategy;

• long/short funds - combine long term instruments with short sales of derivatives and securities to reduce market exposure.
• relative value funds - rely on identifying and exploiting pricing anamolies for their returns.
• event driven funds - use price movements from anticipated corp events to achieve returns
• Tactical trading funds - like long/short

Risks;

• if highly geared, risks magnified if go wrong
• funds of hedge funds used to spread risk but are costly with AMC 2%
• lack transparency in how they operate
• best for high net worth individuals with adventurous risk profile

Question 33

Structured products - designed to offer what and characteristics include;
-term, withdrawals, can return what, guarantees, pre specified returns, kick out, returns based on what and secondary market

Benefits;
- variety, management style, upside potential, capital and transparency

Answer 33

Designed to offer tailored combination of risk and return and offer some form of capital protection. Characteristics include;

• Usually stated fixed term
• Some allow partial withdrawals
• Either return of capital or income but not 100% return of cap in all cases
• Structured product can offer guarantees if they are deposits or life pols
• min or max returns are pre-specified
• kick out or auto call features where plan matures early if max return reached
• returns usually based on index
• no secondary market therefore cannot trade

Benefits of SP;

• wide range of underlying assets are available
• no exposure to managers style unless product linked to fund or port
• degree of upside potential will be explicitly stated
• capital protection generally included
• risk and return factors are fixed and transparent

Question 34

Structured Products - drawbacks - caps and returns, kick out and growth, averaging, secondary market and maturing, terms and encashment and falls

Need to ensure account for following risks (5, straightforward)

Investment notes - what are they, listed where and selling

Answer 34

Drawbacks include;

• caps will limit returns investors can make even in strong perf market
• kick out features mean investor can miss out on future growth
• averaging of index measurements may dilute returns in rising market
• cannot be sold in secondary market & maturity may happen in falling market
• fixed terms and early encashment not possible
• falls can be significant enough to lose capital protection

Need to ensure account for the following risks;
- return, risk profile, costs, encashment and credit

Investment notes - structured products that are listed on LSE. Can sell this note before maturity.

Question 35

Features of direct investments - good for people who, optimal diversification, risk appetite, cost of switching and why, tailoring portfolio, ethical, transparency, larger portfolios, smaller port costs, investment manager, admin and VAT

Answer 35

• people interest in having direct holdings in companies
• optimal portfolio diversification achieved after investing in 20 stocks
• interest investors with higher risk appetite as more volatile (stocks)
• low costs of switching as transfer can be made without sell and repurchase of investments
• portfolio can be tailored to investments requirements
• easier to exclude stocks for ethical reasons
• greater transparency of costs
• gains subject to CGT
• Larger portfolios can enjoy economy of scale compared to collective investments
• for smaller portfolios, costs may be higher
• greater involvement for investment manager
• more admin than with CI
• VAT charged on management fees

Question 36

Collective Investments - advantages of UT&O’s management services;
- variety, risk spread, diversification, specialised and exposure, CGT, VAT and SDRT

Disadvantages;
- fees, switching funds cost and why, involvement and changing investment managers

Answer 36

Advantages of UT&O’s management services;

• wide variety available
• spread of risk can be achieved even in smaller portfolios
• further diversification can be obtained through managed portfolio
• specialised UT&Os can give exposure to particular markets or sectors that are expensive or difficult to directly invest in.
• CGT not payable on gains realised in UT&Os
• VAT not payable on annual charges levied in funds
• no SDRT

Disadvantages;

• further management fees in add to initial and AMC
• changes to portfolio of funds may be expensive due to price spread
• little direct involvement by investors
• changing investment managers may involve higher costs