Chapter 9 - Taxation, Investment Wrappers, Trusts Flashcards
what are the main taxes for private investors?
income tax, capital gains, stamp duty, inheritance tax
what does domicile mean?
The country that an individual treats as their home
what are the three types of domicile?
Domicile of origin, domicile of choice, domicile of dependency
How does residency affect UK residenets and non residents?
UK residents - spent 183 or more days in UK, only home is in UK
Non - spent fewer than 16 days, work abroad full time
what are the three types of income tax?
Non-saving income - earnings from employment/pension income
Saving income - interest from banks and bonds
Dividend income - dividends payable by companies and investment funds
what are the tax-free incomes
- premium bonds
- interest on national saving certificate
- ISAs
- Gambling and lottery
- dividends on ordinary shares of a venture capital trust
what is interest income referred to as and where does it come from?
Non-dividend savings income. comes from interest from banks/BS, interest from GILTS, and corporate bonds
what are the rates to know for dividend income?
2024/25 = 500
sums above = 8.75% for basic tax payers, 33.75% for higher rate, 39.35% for additional
The different national insurance
national insurance is calculated by the employers.
the different types:
Class 1 primary NICS (employee contribution)
Class 1 secondary NICS (employer contribution)
what are the main two types of state benefits?
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
what is capital gains tax? the assets involved and exemptions?
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.
what are the charges for capital gains?
10-20% for individuals
18% and 28% for gains on properties
20% for trustee
10% for gains qualifying for business asset disposable relief
Inheritance tax what is it based on? the rate set? the exemptions?
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.
what was created that lowered the inheritance percentage?
Financial act in 2012 lowered rate from 40% to 36% if 10% or more was donated to charity.
what is stamp duty? the different types? exemptions?
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.
what is VAT? standard rate?
chargeable by firms and individuals whose turnover exceeds a certain amount. The standard rate is 20%.
what is corporation tax? when is it charged
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.
What are ISAs free of, who is responsible for setting the rules?
free of income tax + capital gains.
HMRC
what are eligibly requirements for ISAs, what cant you do with them?
must be UK Resident or non-resident UK Crown servant.
Cant be assigned, put in a trust, or joint-basis. £20,000 limit
Cash ISA - description, limit allowance, and main terms
savings account, £20,000, tax-free interest, available to over 16s
Stocks and shares ISA
investment account, £20,000, no tax on gains, must be over 18
Innovative finance ISA
Peer-to-peer lending account, £20,000, must be over 18
Lifetime ISA
Home deposit, pension, £4000, 25% top up, only age 18-39 can open
Junior ISA
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.
Help to buy ISA
first time buyers, £2,400, 25%, closed to new entrants.
what age are you are able to take out a pension?
55, expected to increase to 57 in 2028
what is the age where a state pension is payable?
66 currently, between 2026-2028, will be 67, from 2044, will be 68
what is the amount dependant on for a state pension?
National insurance contributions
what is an occupational pension scheme?
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
what is offered instead of a defined benefit scheme?
defined contribution basis
benefits of a defined contribution basis
the size is driven by contribution paid and investment performance.
+ poor investment performance is not employers probemn
how are occupational pension schemes structured?
trusts, with investment portfolio managed by asset managers.
there are trustees who appoint the asset manager, and have the asset managers report to them.
what are privation pensions/personal pension
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.
what happens if someone takes out a lump sum of their pension?
75% will be taxed, 25% is tax-free
what are the different investment pathways?
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
advantages of taking an investment pathway
ready-made, quick to arrange, do not require financial advice
drawback - not tailored to personal circumstance of individual
what age can you take out a state pension?
66, will rise to 67 between 2026-2028
what is a trust?
legal means by which one person gives property to another person to look after on behalf of another individual
person who creates the trust called as? the person who gives the property is called? The individual intended?
settlor, trustee, beneficiary
why are trusts used?
tax-planning, reduce inheritance tax, setting aside money
what is a bare or absolute trust
in which a trustee holds assets for one or more persons absolutely
what is an interest in possession trust?
in which the beneficiary has the right to the income during their life, and the capital passes to others on their death.
what is a discretionary trust?
in which the trustees have discretion over to whom the capital and income is paid.
