Chapter 8-other indirect investments including life insurance-based products

Question 1

Explain briefly what are you understand by the term market value reduction

Answer 1

The MVR is applied to unitised with profit funds and was previously known as the market value adjustment factor. Life offices usually reserve the right to reduce the amount paid on surrender for a policy during times of adverse market conditions and do this by applying the MVR

Question 2

Which bonds separate income and capital so that the income paid reflects the income generated by the fund, leaving the capital intact? For which type of investor are they suitable?

Answer 2

Distribution bonds-suitable for cautious investors while requiring income.

Question 3

State the various with profit savings plans which are currently in force

Answer 3

• Conventional with profit endowments
• Low-cost endowment savings plan.
• A unitised with profit fund for a unit linked to contract.

Question 4

What are the main types of life assurance policies for the investment of lump sums?

Answer 4

• Guaranteed income bonds;
• high income bond;
• guaranteed growth bonds;
• unit linked bonds; distribution bonds;
• guaranteed/protected equity funds;
• with profits bonds

Question 5

What are the chargeable events for nonqualifying policies?

Answer 5

• Death of the life assured;
• majority;
• surrender or final encashment of a policy;
• certain part surrenders;
• assignment for money or money’s worth.

Question 6

What is the aim of a real estate investment trust?

Answer 6

To provide the private investor with liquid markets in property investments through a widely accessible savings and investment vehicle, which has a tax treatment that is closely aligned to the tax arrangements in place for direct investment in property.

Question 7

Describe the tax position of an investor receiving income from a retail estate investment trust

Answer 7

Distributions from retail estate investment trusts can comprise of two elements 

1 - A payment from the ring fenced (exempt from corporation tax) property letting elements. For individual investors, this is treated as UK property income, and will be paid net of base rate tax (20%). Nontaxpayers can reclaim the tax deducted. ISA investors receive payments gross. Higher – and additional rate taxpayers will pay extra.

2 - A dividend payments from the non-ring fenced (non-exempt) element. This will be treated in the same way as any of a UK dividend. Whether they owe any tax depends on the investors individual tax position.

Question 8

Explain how capital gains tax reinvestment relief operates for an enterprise investment scheme

Answer 8

reinvestment must take place in the period beginning one year before an ending three years after the disposal given rise to the gain:

• Deferred gain is brought in to charge when the EIS shares are disposed of, unless a further qualifying investment is made.
• CGT rate applied to a deferred gain will be the rate at the time the deferral ends and the gate intercom is liable for tax.
• Gains arising on the disposal of a EIS investments that qualify for income tax relief are exempt from CGT as long as the shares have been held for three years.
• Losses on EIS investments are allowable where either income tax relief or CGT deferral relief has been obtained, although a deduction is made for the initial income tax relief that has been given. A loss can be to set against either chargeable gains or incomE

Question 9

Who is eligible for a junior ISA?

Answer 9

Any UK resident child aged under 18 who does not have a child trust fund

Question 10

What happens to a junior ISA with a child reaches age 18?

Answer 10

At age 18 the junior ISA will be defaulted become an adult ISA. The funds of them accessible to the child.

Question 11

If a UK equity fund manager believes that there is going to be a sharp downturn in the market in the short term and wants to protect the value of the fund, apart from selling part of the portfolio, what else can They do?

Answer 11

Sell FTSE 100 futures or buy FTSE 100 put option.

Question 12

What are the four broad categories of hedge fund strategy?

Answer 12

• Long/short funds;
• relative value funds;
• event driven funds;
• technical trading funds.

Question 13

Give three drawbacks of investing directly in securities

Answer 13

Three from:

• there may be higher volatility in performance because fewer investments will be held down within a collective investment.
• For smaller portfolios, the cost may be higher.
• Direct investment generally requires greater involvement in investment manager, particularly for an advisory clients.
• The result may be more variable because they depend largely on individual managers and the performance of one or two stocks could have a disproportionate effect on the overall portfolio.
• In large portfolios, CGT may be payable on gains realised within the directly invested portfolio. It may be necessary to switch individual investments more frequently than collect investments, thereby possessing incurring a CGT charge.
• There may be more administration than with collective investments, although this will usually be minimised by the use of nominee and other service is such as dividend collection.
• value-added tax will be charged on management fees, which are not tax relieved in any way.

Question 14

Chargeable gain of an encashed offshore bond

Answer 14

(Number of days policyholder was resident in the UK/number of days the policy has run) X total gain

Essentially the time spent in the country as a fraction of time the bond ran multiplied by the total gain