Chapter 9: Taxation, Investment wrappers and Trusts

Question 1

what is the meaning of domicile?

Answer 1

the country that a person treats as their personal home or lives in and has substantial connection with

Question 2

what does an individual’s residential status decide?

Answer 2

where they pay taxes and what types of taxes are paid on income and gains

Question 3

what determines if someone pays taxes in the UK or not?

Answer 3

spend 183 or more days in the UK, only home is in the UK

Question 4

what is savings income?

Answer 4

income earned from interest on bank deposit or coupons from a bond

Question 5

what income is tax free?

Answer 5

premium bond prize, interest on national savings certificates, income from individual savings accounts, gambling and lottery wins, compensation for loss of employment (up to £30,000),

Question 6

what does non-dividend savings income come from?

Answer 6

interest from deposits, interest from bonds an gilts, purchased life annuities (income competent), taxable amounts on deep-discounted securities, distributions from unit trusts

Question 7

what is the dividend allowance and tax rates for 22-23?

Answer 7

allowance up to £2k, sums above are taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers

Question 8

what do NICs do?

Answer 8

national insurance contributions, build entitlement to certain UK social security. paid dependant on how much people can earn and whether they are employed or self-employed. employers responsible for calculating, deducting and paying NICs

Question 9

what assets are liable to CGT?

Answer 9

shares, unit trusts, certain bonds, property (except the main home)

Question 10

what are the notable exemptions to CGT?

Answer 10

sale of home, car or personal possessions up to £6,000, gains on gilts and certain other sterling bonds, gains on assets held in accounts benefitting from tax exemptions

Question 11

what are the different rates of annual tax-free alloance?

Answer 11

allows individuals to make a certain amount of gains tax-free each year. 10-20% for individuals, 18-28% for property gains, 20% for trustees, 10% for gains qualifying for (BADR)

Question 12

what is inheritance tax?

Answer 12

usually paid on the estate and the value of assets that are transferred during an individual’s lifetime or that are remaining at death

Question 13

what are the exemptions from inheritance tax?

Answer 13

assets left to the spouse, assets lefts to charities, gifts made more than 7 years before death

Question 14

what is stamp duty?

Answer 14

tax paid on UK share trades when a stock transfer form is used. SDRT (stamp duty reserve tax) is payable when an individual buys shares electronically and no stock transfer is used, SDLT (stamp duty land tax) used when an individual buys property or land

Question 15

what is VAT?

Answer 15

Chargeable by firms whose turnover exceeds a certain amount when they supply taxable

Question 16

what is corporation tax?

Answer 16

paid by limited companies and other bodies on their profits and gains, not paid by individuals and businesses as sole traders. charged for accounting periods usually one year

Question 17

what is an ISA?

Answer 17

Investment wrapper account that holds other savings and investments and allows them to be invested in a tax-efficient manner.

Question 18

what are the different types of ISA and their features?

Answer 18

cash ISA is a savings account with a £20,000 annual allowance with tax free interest and is available to over 16s. stocks and shares ISA is an investment account with annual allowance of £20,000 and has tax free gains and dividends for over 18s. innovative finance ISA is a p2p lending account with annual allowance of £20,000 with tax free interest for over 18s. lifetime ISA: cash/stocks/home deposit, £4,000 annual allowance, 25% gov’t top up, between 18-39. Junior ISA: cash or shares, under 18.

Question 19

what are the benefits of pension?

Answer 19

tax relief, can take the pension from age 55 (increase to 57 from 2028)

Question 20

what is a state pension?

Answer 20

provided out of NICs with no investment for future needs, problems with dependancy ratios

Question 21

what is an occupational pension?

Answer 21

employer makes pension contributions, running costs are often lower than for personal schemes and they must ensure that it is well run. can include ‘final salary scheme’ where the pension received is related to the number of years in service

Question 22

what is a private/personal pension?

Answer 22

defined contribution scheme that might be used by employees of companies that do not run their scheme. can also be used to those who are self-employed and do not have access to occupational schemes. can run a SIPP (self-invested personal pension) run by stockbroker of IFA. tax-exempt

Question 23

what is a trust?

Answer 23

legal means by which one person gives property to another person to look after on behalf of another individual or set of individuals.

Question 24

what are the different roles within a trust?

Answer 24

the person who creates the trust is the settlor, the trustee is the one who looks after it, the individuals for whom the trust is for are known as the beneficiaries

Question 25

what are the uses of trusts?

Answer 25

providing funds for a specific purpose, reduce future inheritance tax liabilities, separating out rights to income and capital, can act as the underlying structure for many major investment vehicles e.g., pension funds, charities etc.

Question 26

what is a bare/absolute trust?

Answer 26

where the trustee holds assets for one or more persons absolutely

Question 27

what is an interest in possession trust?

Answer 27

where the beneficiary has a right to the income of the trust during their life

Question 28

what is a discretionary trust?

Answer 28

where trustees have discretion over to whom the capital and income is paid within certain criteria