Chapter 9 - Taxation, Investment Wrappers, Trusts

Question 1

what are the main taxes for private investors?

Answer 1

income tax, capital gains, stamp duty, inheritance tax

Question 2

what does domicile mean?

Answer 2

The country that an individual treats as their home

Question 3

what are the three types of domicile?

Answer 3

Domicile of origin, domicile of choice, domicile of dependency

Question 4

How does residency affect UK residenets and non residents?

Answer 4

UK residents - spent 183 or more days in UK, only home is in UK
Non - spent fewer than 16 days, work abroad full time

Question 5

what are the three types of income tax?

Answer 5

Non-saving income - earnings from employment/pension income
Saving income - interest from banks and bonds
Dividend income - dividends payable by companies and investment funds

Question 6

what are the tax-free incomes

Answer 6

• premium bonds
• interest on national saving certificate
• ISAs
• Gambling and lottery
• dividends on ordinary shares of a venture capital trust

Question 7

what is interest income referred to as and where does it come from?

Answer 7

Non-dividend savings income. comes from interest from banks/BS, interest from GILTS, and corporate bonds

Question 8

what are the rates to know for dividend income?

Answer 8

2024/25 = 500
sums above = 8.75% for basic tax payers, 33.75% for higher rate, 39.35% for additional

Question 9

The different national insurance

Answer 9

national insurance is calculated by the employers.
the different types:
Class 1 primary NICS (employee contribution)
Class 1 secondary NICS (employer contribution)

Question 10

what are the main two types of state benefits?

Answer 10

Universal credit - benefit for working age people, paid monthly in the UK and Wales, paid fortnight by Ireland and Scotland
Job-seeker allowance - claimed by someone who looses their job

Question 11

what is capital gains tax? the assets involved and exemptions?

Answer 11

tax on the increase in value on an asset
the assets:
- shares, unit trusts, bonds, property
exemptions:
- ISAs, property except if its main home, possessions up to 6K, gains on GILTS, lottery.

Question 12

what are the charges for capital gains?

Answer 12

10-20% for individuals
18% and 28% for gains on properties
20% for trustee
10% for gains qualifying for business asset disposable relief

Question 13

Inheritance tax what is it based on? the rate set? the exemptions?

Answer 13

based on the value of assets the person has when they die, known as the estate of the deceased, or what they have transferred.
Each individual will have NII-Rate, which is set at £325,000 and 40%.
Exemptions: assets left to deceased person’s spouse, assets left to charities, gifts made 7 years before.

Question 14

what was created that lowered the inheritance percentage?

Answer 14

Financial act in 2012 lowered rate from 40% to 36% if 10% or more was donated to charity.

Question 15

what is stamp duty? the different types? exemptions?

Answer 15

Tax paid on UK shares when a stock transfer is used.

Stamp duty reserve tax (SDRT) is payable when an individual buys shares electrically and no transfer takes place, this rate is 05.%
Exemptions = if asset is foreign, OEIC, AUT
Stamp duty land tax (SDLT) is payable by the purchaser of the land, and is calculate as percentage of value.

Question 16

what is VAT? standard rate?

Answer 16

chargeable by firms and individuals whose turnover exceeds a certain amount. The standard rate is 20%.

Question 18

what is corporation tax? when is it charged

Answer 18

Paid by limited companies and other associations/clubs on their profit and gains. Charged for accounting periods, usually one year. but this is exempt if its the year the company starts/deceases.

Question 19

What are ISAs free of, who is responsible for setting the rules?

Answer 19

free of income tax + capital gains.

HMRC

Question 20

what are eligibly requirements for ISAs, what cant you do with them?

Answer 20

must be UK Resident or non-resident UK Crown servant.

Cant be assigned, put in a trust, or joint-basis. £20,000 limit

Question 21

Cash ISA - description, limit allowance, and main terms

Answer 21

savings account, £20,000, tax-free interest, available to over 16s

Question 22

Stocks and shares ISA

Answer 22

investment account, £20,000, no tax on gains, must be over 18

Question 23

Innovative finance ISA

Answer 23

Peer-to-peer lending account, £20,000, must be over 18

Question 24

Lifetime ISA

Answer 24

Home deposit, pension, £4000, 25% top up, only age 18-39 can open

Question 25

Junior ISA

Answer 25

Cash or stocks and shares for under 18s, £9000, opened by parent of child if 16 and older. if under 16, managed by parents. No withdraws until child is 18.

Question 26

Help to buy ISA

Answer 26

first time buyers, £2,400, 25%, closed to new entrants.

Question 27

what age are you are able to take out a pension?

Answer 27

55, expected to increase to 57 in 2028

Question 28

what is the age where a state pension is payable?

Answer 28

66 currently, between 2026-2028, will be 67, from 2044, will be 68

Question 29

what is the amount dependant on for a state pension?

Answer 29

National insurance contributions

Question 30

what is an occupational pension scheme?

Answer 30

run by companies for their employees. known as “defined benefit scheme/ final salary” it is based on factors, such as NIC, number of work years
+ employers contribute
+ running costs lower
+ employer must ensure its well run
- the employer bears the risks

Question 31

what is offered instead of a defined benefit scheme?

Answer 31

defined contribution basis

Question 32

benefits of a defined contribution basis

Answer 32

the size is driven by contribution paid and investment performance.
+ poor investment performance is not employers probemn

Question 33

how are occupational pension schemes structured?

Answer 33

trusts, with investment portfolio managed by asset managers.
there are trustees who appoint the asset manager, and have the asset managers report to them.

Question 34

what are privation pensions/personal pension

Answer 34

They are defined contribution schemes that are used by employees who opt out of pension scheme, or whose company doesn’t offer, or self-employed. these are arranged by insurance companies or asset manager.

Question 35

what happens if someone takes out a lump sum of their pension?

Answer 35

75% will be taxed, 25% is tax-free

Question 36

what are the different investment pathways?

Answer 36

investment pathways = retirement income choices

investment pathway 1 = I have no plan to touch money in next 5 years. long-term
investment pathway 2= I plan to use money to set up a guaranteed income (annuity) within next 5 years. aims to preserve annuity power
investment pathway 3 = I plan to start taking money as long-term income in next 5 years. aims for capital growth and long-term
investment pathway 4 - i plan to take out all my money in next 5 years

Question 37

advantages of taking an investment pathway

Answer 37

ready-made, quick to arrange, do not require financial advice

drawback - not tailored to personal circumstance of individual

Question 38

what age can you take out a state pension?

Answer 38

66, will rise to 67 between 2026-2028

Question 39

what is a trust?

Answer 39

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

Question 40

person who creates the trust called as? the person who gives the property is called? The individual intended?

Answer 40

settlor, trustee, beneficiary

Question 41

why are trusts used?

Answer 41

tax-planning, reduce inheritance tax, setting aside money

Question 42

what is a bare or absolute trust

Answer 42

in which a trustee holds assets for one or more persons absolutely

Question 43

what is an interest in possession trust?

Answer 43

in which the beneficiary has the right to the income during their life, and the capital passes to others on their death.

Question 44

what is a discretionary trust?

Answer 44

in which the trustees have discretion over to whom the capital and income is paid.