Chapter 9 - Direct Investments

Question 1

At what rates would savings interest on cash deposits be taxed at falling into the savings, basic, higher and additional rate bands?

Answer 1

Savings = 0%
Basic = 20%
Higher = 40%
Additional = 45%

Question 2

What are the 2 payments an individual could receive as a result of a building society demutualisation?

Answer 2

Cash bonus

Free shares

Question 3

How is a cash bonus paid as part of a building society demutualisation taxed?

Answer 3

This would be a disposal for CGT purposes, if it exceeds the annual exempt amount CGT will be due at marginal rates

Question 4

How are free shares paid as part of a building society demutualisation taxed?

Answer 4

The issue of the shares is not subject to income tax or CGT but any disposal would be subject to CGT in the normal way with an acquisition cost of £0.

Question 5

Name 4 different National Savings and Investment products?

Answer 5

Any 4 from;

National Savings and Investment bank accounts
National Savings and Investment savings certificates
National Savings and Investment income bonds
Guaranteed income and growth bonds
Children’s bonds
65+ guaranteed growth bonds
Direct ISA
Investment bond

Question 6

Briefly describe the workings and tax status of National Savings and Investment bank accounts?

Answer 6

Can be either investment account or a saver account, both taxable as savings open to aged 16 and above, higher rate on the saver account but withdrawals on this account can only be made by phone or online.

Question 7

Briefly describe the workings and tax status of National Savings and Investment savings certificates?

Answer 7

Not available since 2011 but existing issue can still be rolled over. Lump sum invested with tax free interest paid for up to 5 years

Question 8

Briefly describe the workings and tax status of National Savings and Investment income bonds?

Answer 8

Pay monthly interest at a variable rate, taxed as savings. No notice required to withdraw

Question 9

Briefly describe the workings and tax status of Guaranteed income and growth bonds?

Answer 9

Not currently available but existing ones can be rolled over. Fixed rate of interest applied which pays out for the income option or is rolled up for the growth.

Question 10

Briefly describe the workings and tax status of Children’s bonds?

Answer 10

Can be bought for anyone under the age of 16. Tax free fixed rate of interest for 5 years. Can cash in early for loss of 90 days interest max £3k per child.

Question 11

Briefly describe the workings and tax status of 65+ guaranteed growth bonds?

Answer 11

“pensioner bonds” for 1 and 3 years. The 3 year paid 4% gross, credited and taxed annually but only paid on maturity. Max £10k per person

Question 12

Briefly describe the workings and tax status of Direct ISA National Savings and Investment?

Answer 12

Meets government CAT standards, variable interest rate. Taxable as savings

Question 13

Briefly describe the workings and tax status of Investment bond National Savings and Investment?

Answer 13

Available from April 2017 rate of 2.2% fixed for 3 years max £3k can only be opened online. Taxed as savings.

Question 14

What is the difference between a gilt, a local authority bond and a corporate bond?

Answer 14

A gilt is a loan to the government

A local authority bond is a loan to a local government authority

A corporate bond is a loan to a company

Question 15

How is a government gilt taxed and how often is the interest paid?

Answer 15

Fixed rate of interest paid twice a year, paid gross and taxed as savings. Can elect to have them paid net of 20% tax. Can be held to maturity or sold on stock exchange.

Question 16

How is a local authority bond taxed?

Answer 16

Fully taxable as savings income and CGT exempt.

Question 17

How is a corporate bond taxed?

Answer 17

Subject to income tax. Paid net of 20% tax so can be reclaimed if falls in PSA, fixed interest. Losses allowable in certain circumstances like if the loan is unrecoverable. Can be traded once issued.

Question 18

What is a deeply discounted security and how does it work?

Answer 18

A security that will mature for more than it was issued for.

If the maturity value is a 15% increase or 0.5% for every year it has run then it is a DDS.

Income tax paid on the excess and to save double tax they are not subject to CGT.

Question 19

What are permanent interest bearing shares (PIBS) and when do they mature?

Answer 19

High yielding fixed interest investments issued by building societies.

Listed on stock market and are undated so may never mature.

Interest paid twice a year gross and taxable as savings

Question 20

If a building society de-mutualises what do permanent interest bearing shares (PIBS) become?

Answer 20

Perpetual Subordinated Bonds

Question 21

How do fixed interest securities work?

Answer 21

Money is loan to an institution and in return a fixed rate of interest is pad for a set period of time.

At maturity the original capital is repaid.

Question 22

How do shares work and how does an investor get a return from one?

Answer 22

A share represents part ownership of a company.

Investment returns are generated through dividends and increases in the share price.

Question 23

How are shares taxed?

Answer 23

Subject to dividend tax on any dividends distributed.

Tax payable on amount in excess of dividend allowance at rates of 7.5% basic, 32.5% higher and 38.1% additional

Question 24

What is the dividend allowance for the 17/18 tax year and can this be tapered for high earners?

Answer 24

Dividend allowance is £5,000 for all UK individuals and this cannot be reduced

Question 25

What is a stock dividend and how is it taxed?

Answer 25

New shares are issued instead of a dividend payment.

For income tax purposes the cash equivalent is deemed to be received and added to income for that year.

Acquisition cost for CGT is cash equivalent amount of the stock dividend.

Question 26

How are overseas dividends taxed in the UK?

Answer 26

Taxed same as UK dividends but usually after a withholding tax

Question 27

What is an investment trust and how is it taxed?

Answer 27

Closed ended collective investment that is traded on the exchanges.

Taxed the same as direct shares

Question 28

How is an investment in property taxed?

Answer 28

Rental income is subject to income tax and any capital gains on property investment are subject to CGT

Question 29

Can property income be classed as relevant UK earnings for the purposes of personal pension contributions?

Answer 29

No

Question 30

Name 4 allowable deductions with regards to property rental.

Answer 30

Any 4 from;

Repairs
Interest on loans
Other expenses such as legal fees, 
rent collection, 
premiums for insuring the property, 
water rates, 
gas and electric

Question 31

Are property improvements an allowable expense to be deducted?

Answer 31

No

Question 32

What is the threshold for capital allowances to benefit from 100% income tax relief?

Answer 32

£200,000

Question 33

What amount is the writing down allowance after the capital allowance threshold?

Answer 33

18%

Question 34

What is the rent a room relief threshold and how does it work?

Answer 34

Available for people who let out a part of their home.

If gross receipts are less than £7,500 no tax is charged on the rent.

If the rent is more than £7,500 then the landlord can choose between being taxed on income minus expenses OR gross receipts over £7,500 with no relief for expenses.

They can choose the most beneficial option.

Question 35

What is the main benefit of renting a property as a furnished holiday letting and what are the main conditions?

Answer 35

The main benefit is that the rental income counts as earnings for pension contributions and can benefit from CGT holdover relief.

Can be difficult to qualify as a lot of conditions such as must be in UK or EEA,
must be available to let for 210 days a year as holiday accommodation and of those days must be let in 105 of them,
continuous periods of more than 31 days cannot total more than 155 days.