Chapter 9: Taxation, Investment Wrappers And Trusts

Question 1

Domicile

Answer 1

Is the country that a person treats as their permanent home, or lives in and has a substantial connection with. Three types:

1. Domicile of origin - birth place
2. Domicile of choice - residency nation
3. Domicile of dependency - nation of who you’re dependent on

Question 2

Residency

Answer 2

An individuals residency status is one of the factors that decides what tax is paid and on what types of income and gains.

UK resident if:
- spent 183 or more days in UK in the tax year
- only home is in UK - owned or rented for 91 days and lived there for 30 days in tax year

Non UK resident:
- you spent fewer than 16 days in UK
- you work abroad full time and spent fewer than 91 days in UK - no more than 30 spent working

Question 3

Income types

Answer 3

Individuals are liable to income tax on earnings etc

Three types of income:
1. Non savings income - earnings from employment and pension
2. Savings income - interest from bank accounts and bonds
3. Dividend income - from dividends

Question 4

Dividend income

Answer 4

Taxation of dividends changed in April 2016 when a dividend allowance was introduced where a certain amount of dividend income is tax exempt.

Allowance for 2022/23 is £2,000 and sums above that amount are taxed at 7.5% for basic tax payers, 32.5% for higher and 38.1% for additional rate tax payers.

Question 5

National insurance contributions (NICs)

Answer 5

Built entitlement to certain UK social security benefits. Type of level of NIC paid depends on how much people earn and whether they’re self employed or not. Cease the year individuals reach state pension age.

Employers are responsible for calculating, deductions and paying class 1 primary NICs to HMRC on behalf of all their employees and earning above the earnings threshold.

Question 6

State benefits

Answer 6

Mechanism to redistribute income to people on lower wages and their main purpose is to help families on lower pay make ends meet.

Universal credit - a benefit for working age people

Question 7

Capital gains tax (CGT)

Answer 7

A tax levied on an increase in the capital value of an asset. CGT may be required if:
- sell, give away, exchange or transfer all of or part of an asset
- receive a capital sum

Exemptions of CGT:
- although property is chargeable, any chain on sale of home is exempt
- your car or personal possessions worth up to 6k
- gains on gilts and certain sterling bonds
- gains on ISAs
- betting, lottery or pools
- transfer between spouses

Question 8

Annual exempt amount

Answer 8

Any net gains in excess are chargeable as follows:
1. 10 and 20 % for individuals
2. 18 and 28 % for gains on sale of residential properties
3. 20% for trustees or personal representatives
4. 10% for gains qualifying for business asset disposal relief (BADR)

Question 9

Inheritance tax (IHT)

Answer 9

Paid on the estate that someone leaves when they die.

Based on the value of assets that are transferred during the individuals lifetime or that are remaining at death. Each individual has a nil-rate band (NRB) which is set at £325,000 and any transfers in excess of NRB are charged at 40%.

The residence nil rate band (RNRB) was introduced in April 2017. To be eligible an individual must pass their home or a share of it to their children etc.

Providing that certain conditions are met - the RNRB gives an additional allowance to be used to reduce the IHT against that persons home. Home allowance remains at £175,000.

It can be be possible to transfer any unused NRB to someone else. Between £325,000 to £650,000.

Finance act 2012 introduced a reduction in the rate of IHT from 40% to 36% where 10% of a deceased persons net estate is left to charity.

Question 10

Stamp duty

Answer 10

Tax paid on UK share trades when a stock transfer form is used. Stamp duty reserve tax (SDRT) is payable when an individual buys shares electronically and no stock transfer form is used. The rate is 0.5% of the purchase price and paid only by the purchaser.

No stamp duty payable on most foreign shares, bonds, open ended investments companies, unit trusts and ETFs.

Stamp duty land tax (SDLT) is payable by the purchaser on the purchases of land and property in the UK. Individuals pay 3% on top of the normal SDLT rates.

Question 11

Value added tax (VAT)

Answer 11

VAT is chargeable by firms and individuals whose turnover exceeds a certain amount. Standard rate of VAT is 20%

Question 12

Corporation tax (CT)

Answer 12

Paid by limited companies and other bodies on their profits and gains. Not paid by sole traders.

Question 13

ISAs

Answer 13

Individuals savings accounts - free of income tax and CGT.

Referred to as an investment wrapper because it is essentially an account that holds other savings and investments, such as deposits, shares, OEICs and unit trusts and allows them to be invested in a tax-efficient manner.

The ISA acts as a wrapper, shielding the return on savings and investments held in it from tax.

Question 14

Types of ISAs

Answer 14

1. Cash ISA - savings account - £20,000 annual allowance - tax free interest
2. Stocks and shares ISA - investment account - £20,000 annual allowance - tax free gains and must be over 18
3. Innovative finance ISA - p2p lending A £20,000 annual allowance - tax free interest and must be over 18
4. Lifetime ISA - cash or stocks - £4,000 annual allowance - 25% gov top up, tax free interest, 18-39 only
5. Junior ISA - cash or stocks - £9,000 annual allowance
6. Help to buy ISA - £2,400 annual allowance - 25% gov top up

Question 15

Benefits of pensions

Answer 15

1. Tax relief on contributions
2. Pension funds are not subject to income tax and GCT
3. Take a tax free lump sum at retirement
4. Include death benefits as part of the scheme

Question 16

Occupational pension scheme

Answer 16

Run by companies for their employees. The employer makes pension contributions on behalf of its workers.

Advantages:
1. Employers must contribute to the fund
2. Running costs are often lower than for personal schemes and the costs are often met by the employer
3. The employer must ensure the fund is well run

Structured as trusts - investment portfolio manager by professional asset managers.

Question 17

Private / personal pensions

Answer 17

Individual pension plans. Defined contribution schemes that might be used by employees of companies that do not run their own scheme or when employees opt out of the company scheme; or they might be used in addition to an existing pension scheme.

People who are self employed usually use these and go through asset mgmt or insurance companies. They can run a self invested personal pension (SIPP), commonly administered by a stockbroker or IFA on their behalf. They are tax exempt.

Question 18

What is a trust?

Answer 18

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

The person who creates the trust is known as the settlor. The person they give property to is known as trustee and individuals for whom it is intended are known as beneficiaries.

Question 19

Uses of trusts

Answer 19

1. Providing funds for a specific purpose
2. Setting aside funds for disabled children
3. To reduce inheritance tax
4. Separating the rights to income and capital

Question 20

Types of trusts

Answer 20

1. Bare/absolute trusts - trustee holds assets for one or more persons
2. Interest in possession trusts - beneficiary has right to the income of the trust during their life and the capital passes after death
3. Discretionary trusts - trustees have discretion over to whom the capital and income is paid