Chapter 9 - Taxation, Investment Wrappers And Trusts

Question 1

3 types of domicile

Answer 1

Domicile of origin - every person acquires at birth
Domicile of choice - person residing in a country with the intention to do so permanently or indefinitely
Domicile of dependency - arises in respect of children, married women and Ill persons. Domicile will generally be the same as and change in accordance of the person on whom they are deemed to be legally dependant

Question 2

Domicile and related concepts are important as they help to determine

Answer 2

Who has the right to inherit assets in death
The form of any will or testimony dispositions that are permitted
Who inherits (if there is no will countries have rigid rules)
How much IHT is payable

Question 3

You are a UK resident if

Answer 3

You spent 183 or more days in UK in the tax year
Your only home was in UK - must have lived in it for at least 91 days and spent at least 30 days there in tax year

Question 4

You are not a resident of UK if

Answer 4

You spent fewer than 16 days in UK (or 46 if you’ve not been a UK resident for 3 years)
You work abroad full time and spent fewer than 91 days in UK of which no more than 30 days u spent working

Question 5

Income tax

3 types

Answer 5

Non savings income - employment and pension
Savings income - interest from bank accounts/ bonds
Dividend income - includes dividends payable by companies and investment funds

Question 6

Some income is tax free such as

Answer 6

ISAs
Lottery wins
Dividends on ordinary shares of a venture capital trust (VCT)

Question 7

Savings interest referred to by HMRC as non dividends savings income and is taxed after income. Examples….

Answer 7

Interest from banks and building societies
Interest from GILTs and corporate bonds
Purchased life annuities
Taxable amount on deep discounted securities (zero coupon bonds)
Distributions from Unit Trusts

Question 8

From 2016 a new personal savings allowance was introduced

Answer 8

£1k for basic rate tax payers
£500 for higher rate tax payers
Additional rate taxpayers don’t receive an allowance

Question 9

Dividend income - 2016 dividend allowance

Answer 9

For 23-24 the allowance is £1000 and sums above that are taxed at 8.75% for basic and 33.75% for higher rate tax payers and 39.35% for additional

Question 10

National insurance contributions

Answer 10

Employers responsible for calculating, deducting and paying class 1 primary NICs to HMRC on behalf of their employees

Employers must pay class 1 secondary NICs as employers contributions

Question 11

State benefits can be claimed if you are:

Answer 11

Unemployed
On low income
Ill, disabled, injured
Have dependants
Over 60
Pregnant or if u have a baby

Question 12

If eligible a single universal credit payment is made…

Answer 12

Monthly in england and wales
Fortnightly in scotland and Northern Ireland

A separate job seeker allowance can be claimed if someone loses their job and is payable for 6 months. Can be claimed in addition to universal credit

Question 13

Capital gains tax

Answer 13

Only pay when asset is disposed of or if you receive a capital sum as an insurance payout for a damaged asset

Nearly all types of assets caught by CGT

Question 14

Exemptions of CGT

Answer 14

Property is not exempt, but your main home is exempt
Your car or possessions worth up to £6k
Gains on GILTS
ISAs etc
Lottery
Transfers between spouses

Question 15

Annual tax free allowance is the annual exempt amount which allows them to make certain amount of gains

Answer 15

10-20% for individuals
18-28% for sale on residential properties
20% for trustees
10% for gains qualifying for business asset disposal relief

Question 16

Inheritance tax

Answer 16

Based on the value of the assets that are transferred during lifetime or that are remaining at death

Question 17

Nil rate band

Answer 17

Each person has a nil rate band which is set at 325,000 and any transfers in excess are charged at 40%.

Since 2007 it is possible to transfer any unused NRB to the second partner when they die. Can increase threshold to £650k

Question 18

The residence nil band rate

Answer 18

To be eligible an individual must pass their home or a share of it to their children, grandchildren etc

Providing certain conditions are met, the RNRB gives an additional allowance to be used to reduce the IHT against that persons home

Home allowance is 175k and is frozen until 2026

Question 19

Exemptions of IHT

Answer 19

Assets left to:

the deceased persons spouse
Charities
Gifts made more than 7years before death

Question 20

The financial act 2012 introduced a reduction in the rate of IHT from

Answer 20

40% to 36% where 10% of the persons net estate is left to charity

Question 21

Stamp duty is

Answer 21

Paid on uk share trades when a stock transfer form is used

Question 22

Stamp duty reserve tax is

Answer 22

payable when an individual buys shares electronically and no stock transfer form is used. The rate is 0.5% of the purchase price

Question 23

Stamp duty land tax

Answer 23

Is payable by the purchaser of purchases of land and property in the UK

For most residential properties the amount due is a percentage of purchase price

If buying more than one property individuals pay 3% on top of normal rate

Question 24

Value added tax

Answer 24

Chargeable by firms and individuals whose turnover exceeds a certain amount when they supply what are known as goods and services

Standard vat is 20%

Question 25

Corporation Tax (CT)

Answer 25

Is paid by limited companies and other bodies on profit and gains

Charged for accounting periods. These are usually for one year apart from in the year the company starts and ceases and if there’s a change in accounting date. If this spans a change a rate in tax the period must be apportioned between the periods for each rate

Tax is charged on adjusted profit

Question 26

ISAs

Answer 26

Investment wrapper

Shields return on savings and investments held in it from tax

Firms offering this must be approved by HMRC, approved entity is known as the ISA manager

HMRC responsible for setting ISA rules

Question 27

Types of ISA

Answer 27

Cash 20k
Stocks and shares 20k
Innovative finance 20k

Lifetime ISA 4k

JISA 9k

Help to buy £2,400 (close to new entrants)

Question 28

Eligibility of an ISA, an investor must be able to meet the following

Answer 28

Uk resident for tax purposes or non uk resident subject to UK income tax on their earnings

If ISA holder ceases to be resident in uk, they can keep ISA retain the tax benefits but cannot pay in any further money

Limit of one ISA of each type per tax year

Question 29

Pensions - main tax incentives

Answer 29

Tax relief of contributions made by individuals and employers
Pension funds are not subject to income tax and CGT and so the pension fund can grow tax free
An option to take a tax free lump sum at retirement
Include death benefits as part of scheme

Question 30

State pensions provided out of current NICs. What is the issue

Answer 30

The potential support ratio which is the proportion of working people to retired people is forecast to fall from 4:1 in 2002 to 3:1 by 2030 and 2.5:1 by 2050

Question 31

As a result of state pension concerns for future, what changes were made

Answer 31

The age at which the state pension is payable is rising. For those born after 1968 the pension age will increase from 66 to 67 and then to 68

State pension used to be in two parts a basic state pension and an additional state pension. This has been replaced by a flat rate pension

Question 32

Occupational pension schemes

Answer 32

Run by companies for their employees
Companies also make contributions on behalf of its workers

Question 33

Advantages of occupational pension schemes

Answer 33

Employers must contribute
Running costs are lower than for personal schemes and costs are often met by employer
Employer must ensure fund is well run and for defined benefit, schemes must make up any shortfall in funding

Question 34

The occupational pension scheme could take the form of a defined benefit scheme

Answer 34

This is also known as final salary scheme
Eg might provide an employee with 1/60th of their final salary for every year of service. Employee could then retire with an annual pension size of which was related to the number of years’ service

Employers stopped providing these because of raising life expectancies and volatile returns

Question 35

Occupational pension schemes are now typically provided to new employees on a defined contribution basis

Answer 35

Where the size of a pension fund is driven by the contributions paid and the performance of the fund

Defined benefit schemes are more expensive so defined contribution are preferred

A key advantage is that investment performance isn’t the employers problem, it’s the employee who will end up with smaller pot

Question 36

Occupational pension schemes structure

Answer 36

Trusts with the investment portfolio managed by professional assets managers

Question 37

Private/personal pensions

Answer 37

They are 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 may be used in addition to an existing pension scheme and they are used by the self employed

Many employers actually organise group personal pension schemes for their employees by arranging the administration of these schemes

Self employed who do not have access to occupational schemes have to organise their own personal pension schemes.

Individuals have option to run a self invested personal pension SIPP commonly administered by stock broker or IFA. In a sipp it is the individual who decides which investments are included in the scheme

Question 38

Accessing pensions

Answer 38

It’s is now possible for an individual to take their entire pension as lump sum but only 25% will be tax free
Otherwise they can select adjustable income to take cash out on lump sums

Question 39

In 2018 what did the FCA conduct

Answer 39

Retirement outcomes review and found that around 33% of those who did not seek financial advice before deciding on how to access their pot were limiting their pensions pots ability to earn a return

Therefore FCA intervened by introducing drawdown pathways in 2021

Question 40

Investment pathways

Answer 40

Essentially retirement income choices are off the shelf investment products designed for those who wish to draw on their pension without paying for financial advice on the rest of the investment pot is invested. Four pathways shown below:

Investment pathway:

1) I have no plan to touch my in next five years
The associated investment strategy will aim for long term, risk controlled growth through a broad range of assets

2) plan to use money to set up guaranteed income within the next five years
The strategy here aims to preserve the annuity purchasing power of the pension pot

3) i plan to start taking money as long term income in the next five years
Aims for capital growth with long term income target

4) i plan to take all money in next 5 years
Capital preservation is main aim here

Question 41

Advantage of investment pathways

Answer 41

Ready made
Quick to arrange
Do not require financial advice

Drawback:
Not tailored to the personal circumstances of the individual and do not take other circumstances into account

Question 42

Main uses of trusts

Answer 42

Providing funds for specific purpose
Setting aside funds for disabled in order to protect and provide their financial maintenance
To reduce future inheritance tax liabilities by transferring assets into a trust and so out of settlors ownership
Separating out rights to income and capital so that the spouse of a second marriage receives the income from an asset during their life and the capital passes on that persons death to the settlors children

Question 43

Types of trusts

Answer 43

Bare or absolute trusts - trustee holds assets for one or more persons absolutely

Interest in possession trusts - in which a beneficiary has the right to the income of the trust during their life and the capital passes to others on their death

Discretionary trusts - trustees have discretion over to whom the capital and income is paid