indirect investments Flashcards
1
Q
Unitised With profit
A
- the premium buys units in the unitised profit. The price of units is guaranteed not to fall.
- under the fixed price system the unit price never varies. When bonuses added extra units with the smart price are allocated to the policy.
- under the variable price system the unit price is increased through the addition of regular bonuses and is guaranteed not to fall.
advantages:
- the bonus rate is declared annually
- it is easier to understand the current value of the investment
- switches can be made to and from other unit linked funds if MvR does not apply
- unitised with profit policies involve the insurance companies many in less initial commitment of reserves than traditional with profit policies.
- A final bonus may also be paid on death or maturity in additional to the value of units
2
Q
conventional with pride policies
A
- investor can see the build up of policies.
- bonuses are deflated annually in areers
- a conventional has an initial sum assured. The bonuses are not units.
- ie 3% bonus this year ( will be paid by profits
3
Q
Advantages of with profit
A
- equity market for low risk investor
- bonuses are not directly linked to investment performance. This provides cushioning effect which helps to strike balance between low performance
- allow investors to participate in the profits of the insurance company’s transiting activities
- mutual life office sometimes allows ownership in life office. This will allow shares if they become a bank
4
Q
disadvantages
A
- many ones do not offer it
- MVR can be inflexible
- returns depend on subjectivity ie they will smooth the bonus when it’s high. They will also award lowered bonuses when it’s lo
- they are difficult to understand
5
Q
With Profit complex
A
- if no bonus fees will erode value
- if with profit in fixed interest then won’t perform as good
- financial strength of insurer
- long term performance
- surrender value
- penalty
- length of time to end
6
Q
unit linked
A
- depend on the investment performance and the timing when policy cashed in. The value is measured by the total units allocated and as soon as the policy is set up the surrender value is lower than the premiums paid.
7
Q
A
8
Q
conventional with profit
A
- endowment
- many will be ten years they need to be to qualify
- eventual return this the trial of the guaranteed sum plus bonuses and final bonuses
9
Q
low cost endowment savings
A
- these are cheaper
- basic sum assure bonuses calculated lower than death assured
- amount after is basic sum assured and bonuses
- low cost low start endowment are between five and ten and can’t be double the initial premium
10
Q
unit linked savings plans
A
- they are unit linked contracts and can have unitised in them
- they allow additional and higher rate to put in £3,600 ( this would be after contributions) so is tax efficient . Can also have ISA
11
Q
early surrender regular
A
-For with profit and unit liked there are often no surrender value in the first year
- any encashment had lower returns for the following reasons
-the endowment surrenders are a penalty element as they will jot get the expenses of the unpaid premium - it may be possibility to sell a traditional with profits on tbe open market. this will produce a greater surrender value
- final bonus may only be payable on maturity or death and may not be applied in earlier ones. Some office now include an element of this.
- fixed term endowments are only suitable when they will not need the money for the whole time
12
Q
segmentation - with profit
A
- split into several ones
- lower bonus percentage
- surrender value is better
13
Q
Guaranteed income bond
A
- in return for a single premium these bonds provide a guaranteed income every year
- life offices will limit the amount or time
- often up to 5 years
- it varies according to market conditions
14
Q
guaranteed growth
A
- they don’t pay income
- at maturity the bond can usually be e cashed or possibly rolled into another
- will use gilts or other short to medium
15
Q
unit linked bonds
A
- many higher rate tax payers prefer this as they can be used to provide an income. Corporation tax is charged within the fund for basic rate tax. The investor can take 5% of the original premium without an immediate liability
this can be continued for 20 years until initial capital returns
to receive a net return 5% in a fully taxes investment a higher rate taxpayer paying 40% tax would need a gross yield of 8.33
if the underlying funds are growing more than 5% then the capital spend payable on final encashment will also be growing
16
Q
guaranteed protected equity bonds
A
- these are unit bonds with some form of guarantee
- usually have a fixed term deposit or 0 coupon bond and then a all equity holding. Guaranteed to get the investment and some gain.
protected equity bonds allow investors to select quarterly guaranteed level of protection. The bond will be protected against falls in excess of this selected level of guarantee regardless of the performance of the index to which it is linked.
- market indicies can often be used
17
Q
offshore bonds
A
- onshore there is 20% tax charge - paid by the funds.
- for offshore there is no 20% from the fund manager.
- when a gain arises there is a chargeable event. to calculate this it’s the rise times number of days resident / number of days in inception.
if resident whole time then all of it is chargeable.
18
Q
bonds - events
A
- taking out 5%
- death
- if individual who created trust died before event or resident outside uk the trustees are chargeable on the gain but without the relief of top slicing. The tax for a discretionary is 45%. It is therefore 25% for a UK policy due basic rate tax credit.
19
Q
taxing an offshore
A
- when e cashed income can be at 0 basic rate higher rate or additional rate.
- basic rate while gain is 20 but if earnings don’t reach basic band it’s 0. There is a £5,000.00 savings allowance applicable on chargeable events.Higher rate pay 40% on gain and additional rate higher
- for when you are being pushed into the next bracket topslicijg is used.
- for partial it goes back to last one or if time reduction applies it is start of policy but this period will reflect the of offshore element
20
Q
offshore and on shore compared
A
- gains made on inshore benefit from indexation relief up until 2017. The net being taxed at 20%-25 under the chargeable gains rules encashment by higher and additional rate taxpayers. with an offshore bond gains for higher and additional rate taxpayers are taxable at 40%-45.
- fees on offshore are higher
- some investment income reduced by offshore fund may be receives after deduction of non reclaim value wuthokgond tax
- sometimes on onshore expenses can be deducted from funds income for tax purposes. An offshore fund doesn’t have this tax to deduct from.
21
Q
personal bond
A
- single investment-
- now there is an assumption of 15% growth
- as well as assumption of other years
- the deemed gain is on top of the normal tax charge that would arise on part of surrender
- the usual rules apply for gains no non resident reliefs
- the deemed gain can be deducted from a final termination gain.
- HMRC wanted to bring an end to these types of bond for uk resident
22
Q
friendly society
A
- no tax on income gained or gain
- now they can be invested in anything
- the limit is £270 a year or if monthly £300
- can also do taxable
-FCA and FSCS apply
23
Q
taxation of life assurance funds
A
- dividends are exempt
- all other income such as fixed cash and rental is 20
- gilts are exempt from capital gains
- capital gains in other assets such as shares and property are subject to corporation tax at 20 %
24
Q
qualifying policies
A
- most regular premium life assurance policies taken out are endowments
- they have to be 10 years
- premiums must be paid annually or more for 10 years
- minimum level of life assurance is 75% of the total premiums payable
- premiums payable in any one year must not be more than double those payable in any other year
- no premium is to be more than one eight of the total premiums payable over the term of the policy.
- the annual limit for premiums payable under qualifying policies that are not except is £3,600
25
qualifying policy - early en
- if it's paid out before 75% if the term
-often the terms are 10 years
- tax is payable if surrender value is more than premiums ( the chargeable amount)
- it is paid at your lower rate of tax
- surrender can loose other allowances.
-Premouks pad in exceeds of £3,600 will be subject to chargeable event rules
26
tax free lump sum qualifying
- completely tax free if it's after 10 year period
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for non qualifying partial
- is determined at the end of the policy year when all withdraws for year are added
- up to 5% if original investment may be withdrawn each policy year without attracting a tax liability at the time
- this means the potential liability can be deferred
- if the allowance is not used in may year it may be carried forward in a cumulative basis for future year
- provided the tosha l withdrawn does not exceed the cunmaltoge allowance there is no fee
- if the amount withdrawn plus others is more than that then it is chargeable
- it's a 20% fee
- Using partial can defer the tax liability to a date when they do not have to pay income
- calculate the tax take 20%.
- caul ate the entail equivalent
- deduct the liability at step 4 fork liability at step 2 to give the amount of tip slicing relief
- if it's in joint ownership then the married couple are both eligible to pay 50% of tax on the gain
_ if they are married they may have to pay a child benefit payment or loose other benefits.
-
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segmentation
- it provides an alternative to partials
- can reduce the amount of tax payable
- full would look at all withdrawals then check it at 5%
- partial would look at all withdrawals
- by segmenting you could take the money out without being checked at the alst withdrawal
- it defers the tax to when you are paying less
- if you are basic rate at this time you don't have to pay
- there is no disadvantage of segmentation
- tax differed tax saved
29
second hand policies
- they can be sold
- seller must have a deed of assignment
- this is an FCA authorised activity ie win
- most of the ones sold are so the profits with few years left
- The seller will not be chargeable event if owned for ten years
- if they do have to pay on the sale then they will benefit from reduction
- there is no CGT on the seller provided they are the original owner
30
second hand buyer
- there will be a CGT fee
- if it's over 10 years it's qualifying
- if it's not then they can pay a reduced rate anyway ( when the premiums aren't don't add up to initial )
- if it's not qualifying the capital gain is reduced by tax paid
31
overall bond advantages
- switch funds with no Capital gain would usually be 10% to 20%
- they can allow higher rate and additional rate lower taxes
-5% rule means that there is no immediate tax charge on a withdrawal
32
disadvantages of bonds in general
- UK investment bonds are subject to tax on underlying funds and this tax can not be reclaimed by non taxpayers. They are not suitable for people who don't pay tax
- When postponing tax you could end up paying higher
- although they don't count towards income they do for total income so child benefit may be affected
33
off shore bonds general
- they are taxed the same way
- underlying funds are free of UK Calital gains tax (like others)
- But the CG Tax is better than normal unit trusts
- But tax charge may be grater the capital gains are tested as income in the year of e charlene and there fire there is no annual exempt amount use
- there isn't tax on investment income but dividends may be subject to non reaimable withholding tax form their countries of of origin.
-There is no tax advantage over uk bonds for equity but there are for income derived from deposits and fixed interest investments held within the offshore fund.
- If the fund is linked to private porto logo there will be an additional tax
- they are subject to both basic and higher rates of tax. This could mean that there would be an element of double taxation on income of equity investments that have already suffered withholding tax.
- there are higher fees for offshore
- Offshore bonds will be useful if the investment is fixed interst income of deposit income or nil yielding equities that will produce capital gains.
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35
property based investment shares
- companies on LSE are more liquid
- can borrow to purchase
- will rise and fall independent of the underlying asset
- will pay corporation and capital gains
- shares will be affected by the quality of management
36
Authorised investment funds
- an FcA authorised OEIC that invests ms inky in property such as UK and non UK Reit
- Taxation moves from fund to investors
- rental and other property related are exempt from taxation in fund
- propert income is find fenced but other tacanalw income is taxed at 20%
- non taxpayers can reclaim and if it's in isa or sipp it's gross
- insterested income - distributions are paid gross
- dividends - paid without the reduction of any tax ie they are also paid gross
- only OEIC can qualify as PAIf so an authorised unit trust would she. to convert to OeIC
- no investor can hold more than 10% for tax
37
insurance company funds - property
- can't borrow money
- value of unit directly link to properties
- income tax and capital gains are subject to to 20% tax with the fund
- liquidity is significantly higher than with direct property investment.
- they specialise in direct holdings
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39
reit
- closed ended and are on stick exchange.
- 75% must be from ring fenced part execmpt from corporation tax
- another part that's not ring fenced
- can't borrow much
- the execmpt part doesn't pay corporation tax. Higher and additional tax payers have to make pay the taxes.
- Dividends from the non exempt part have to pay dividend fees and CGT
40
41
enterprise investment scheme
- max 2 million with over 1 in knowledge
- income tax relief 30%
- capital gains deferred by reinvesting in company.
- when sold the cgt is paid
- must not be connected until
after purchase
- non uk tax payers are eligible but can only claim
tax on uk
- agates bit redeemeable for 3 years
- qualifying company must not be listed when issuing shares
- since 2015 companies benefiting from susbeidies for renewable energy can't,"
42
seed enterprise
- this allows people to put money into business that aren't listed - this is risky
- can carry back tax allowance
- money invested capped at £200,000 gets 50% relief
- employs 25 less
-not raised 250,000
- not have 350000 in assets
43
venture capital
-shares need to be held for five years
- income tax relief at 30% for money up to ten times £20000
- No CGT if shares bought in the company.
- must be on london stock
- 70% must be in normal shares ie no rights
- income must be mainly from shares and company keep income
- no more than 5 million previously raised in year
- 250 employees
- must not be begfiting from renewable subsidies
Think
- income tax for 5 years - but this is not passed on
- no CGT and corporation tax so can be distributed
-high risk.
- they are collectively pooled
- Investment trusts as well are ran by fund managers who are memebers of larger investment groups. Investments made by subscribing to shares when a trust is launched or purchasing shares
44
Risks of a VCT
- high risk company
- get tax relief but people may not want to buy the shares as tax relief only allowed on subscription to new shares
45
ISA Tax
dividends interest and income distributions execmpt from act income tax and don't have to be reported to HMRC
- withdrawals made any time
- in life policies no tax in income and capital gains not on when cashing - helps tax
- manager receives infesrst distribution from corporate bond and mixed funds that hold both equities and bonds (where 60% of bond is held within bonds without the reduction )
- ISAs reduce the risk of higher tax
- SAYE can be used and put into an ISA (even if funds wouldn't be eligible!)
- if the savings scheme has an invalid subscription then the excess are not valid and will losses with ISA manager and investor. The investor needs to let tax office know .
46
Investments in IsA
- Bonds recognised
- shares recognised in any market
- UCITS recognised by FCA
- UK investment trusts
- gilts must be EEa
- SAYE put in even if not eligible themselves
47
cash statehood
- no more than £10 deposit
- minimum interest must be no more than BoE leas 1%
- no fees on stakeholder cash ISA
48
stakeholder ISA
- 60% max in higher risk
- minimum ivestment is £20
- 1.5% fund fee reducing to 1%
- prices of units bought and sold has to be same.
smoothing
--------------------—---------------------
- if extra is needed the fees can go up
- when good investments occur some will be held back
49
fess on isas
- structures not regulated
- many have initial fees that can range - need to shop
- non collective investment isas ioerate an annual fees and will have minimum fees.
- commission is often on there
50
other ISA
- can transfer
- if the LISA is transferred to another type they get a 25% fee
- on death it goes to probate and then the married person passes ok the one of amount. This is either the earlier of estate being admin , 3 years or cloure. They can encashment this or use other funds as allowance
51
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investing on childrens behalf
-anyone under 18 can have a JISA.
- can only have one of each
- anyone can contribute
-£9k limit
- when they are 16 they manage it
- no withdrawals until 18 unless they are critically i'll.
- Child trust funds were for children who were born on or after 1 September 2002 they could have savings share accounts or stakeholder accounts.
- they assume management when they are older.
- can transfer into a Junior or ISA and keep limit but if they invest in a LISAthere are limits.
- CTFs we're replaced in 2011
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54
derivative
can be exchange traded or over the counter
exchange traded are easier to sell
sold on specialist exchanges
55
futures
- they have an obligation to buy it
- they issue deposits which are held if they fail to pay or sell these are taken and an equal is bought or sold and billed to client
56
option
- the option to buy and sell
- call option gives buyer the right to buy for a piece
- put option gives the option sell the asset
- seller of call option must sell the asset
- -seller if about option must buy
- the buyer of an option receives a premium.
- call option will have an intrinsic value if the current price of the underlying asset is above the options strike price
- a put option will have intrincinvalue if the current price of the underlying asset is below the options strike price
- before it expires the market value of the option will exceed intrinsic value
57
hedging futures and options
- using options if a fund manager thought that the stock market was going to go up they can use options. Ie they but they right at a cheaper price if it goes up they make a profit if it goes down they don't but they don't except use it
- using futures the same but don't shave the option.
58
writing options
- the risk for buyers of options (calls and puts) id limited to premium paid.
- the reward for a buyer of a call in not limited
- the reward for buyers of out is best if the price of asset falls to zero
59
options calls and outs
- they are derivative
- a call option gives the folder the right to buy and a put option gives the holder the right to sell
- the reward for buyers of a call ( the right to buy) is unlimited the more prices rise the reward
- the reward for puts is greatest st when it falls to zero
- the put tighter sells protection but has to but stock
- the right of buyers of puts (right to sell ) is greatest if assets fall to 0
- writers of call options do it as they believe that the share price is likely to either stay the same or fall. if that happens the writer simply pockets the premium and will not have to deliver the shares. They do this as the buyer will think they are buying losses
The put writer hopes the put will not be exercised this will
occur our if the asset has a value above the price at expiry
60
taxing derivatives
- profits of futures and options are usually chargeable to CGT
- there is no individuals subject to CGT for gilts and corporate bonds
- if a call option is used (but) it is tested as party of total cost purchase
- if a put is used it is treated as an allowable deduction of gain
- is not exercised it is treated as disposable for CGT purposes giving a capital loss on date of expiry
- when a futures position is closed any money is trashed as consideration for the disposal of futures contract and money paid is grated as an incidental cost of disposal
- if the futures contract is not closed out each party is treated as having made a disposal of an asset. any payment made of received is treated as consideration for it an incidental cost of the disposal
61
hedge funds
they are pooled investments
- not traditional
-they don't adopt a long only strategy (long means to buy and hold, short means to sell) for equities and or bonds
- they want an absolute return will limited volatility rather than benchmarking against an index
- they don't often corrrlate to market
- they are offshore or is investment firms mainly out of cayman islands to avoid regulations
Strategies
- there is now hedge fund funds to allow investors to benefit
- they are more risky, they are more costly, they aren't guarantees and it's hard to determine risk as you won't know the strategy
62
hedge fund strategy
-long short - investments in wuities and bonds as well as sales and derivatives. They do not have to be equal. Can be weighted to one or the other or have a market neutral approach
- event driven - use price movements form anticipated corporate events to achieve returns. It is not correlated to investments but when market does well it tends to
- relative fund value - they rely on produce returns. they find pricing commodities between similar combination. They are made market neural
- tactical trading funds - less used but is currency and commodities
63
structured products
- they often offer a guaranteed based on OTC derivatives. They are not a fund / product in own write and can be in an ISA or SIPP as well as other.
- for example there is a no coupon bond that pays an amount at strike along with a call option. This allows for a guatnwteed gain in theory.
- can have 100% capital protection, partial capital protection or no capital protection.
- May be on the london struck exchange if it is listed. If it's not they are hard to sell
- need to know what the capital protection is.
- is there a kick out clause ie if it drops to a certain amount where it would mature.
- remember that they need to consider cost , return, risk profile, encashment and credit.
- they allow investors who are cautious to invest
64
strengths an disadvantages structured product
- they offer diversify
the risk and return are clear on fixed interst element.
but
- caps on participation limit the returns investors could have made in a strongly rising market.
- kick out features can means product matures early and the investor misses out on future growth
- averaging index measurements may dillite the returns
- if the product can't be fold in secondary market then maturity could take place during a fall. Meaning any profits that might have been made will either be reduced or disappear.
- most retail products are for fixed terms and early encashment may be costly .
65
structured product risk
- return - precise details of how the return will be calculated. what factors m if jt change the estimates
- risk profile - the assets that form a structured product .Any capital protection.
- costs - costs and fees associated with buying. Tax implications
encashment - early encashment penalties. the transparency of pricing if the product can be sold on stock market. Transparency of pricing
- credit risk - the creditworthiness of issuer. The credit worthiness of any counter parties involved in underlying derivatives.
66
direct investments
- Investirs who have a higher attitude for risk.
- gains go up but more volatile.
- easier to do moral ones
- gains are subject to CGT
- changing investment manager will not trigger CGT as can be transferred as stock.
- larger get cheaper rate
- smaller ones costs are higher
- in larger portfolio it may be necessary to switch investments more than collective investments - this is CGT.
- VAT on management .
67
sharia compliant investment
Sharia compliant funds include equity funds commodity funds Ijarah funds
The sharia board confirms which companies can be invested in. Puts are not allowed
they can't invest in tobancco and pork . Commodities
are allowed to hold assets and asset backed investments are usually rent. This is a sukuk
bank account interest is not allowed, The money generates profits in islamic allowed products
FSCS protection 85k
68
advantage of unit trust oeic -
- all have same unit price
- no VAT on management
a- No stamp my duty or corporation tax.
69
disadvantages of unit trusts and OEIC
- most broker but units ar creation price or creation price
- low charging unit trust and OEICs
70
Investment trust vs unit trust
- the cost of purchasing shares in investment trust is lowe
- there may be a charge for disposing of investment trust shares which is not usually the case with a unit trust. Stamp duty is paid in investment trust share price at 0.5%.
- on balance it's chapter to invest in most investment trusts rather than most unit trusts
- the risk and reward of investing in investment trust is often said to be greater than the risk and rests if investing in unit trusts.
- Investment trusts trade with a discount to NAV.
- discounts can widen if the market does not like the way an investment trust is being managed and there are more investors trying to sell. Investors in unit trusts and OEICs have no power to make changes-.
-investment trusts can borrow to invest however the others have tighter restrictions.
- ibestment trusts can provide higher levels of income than the equivalent unit trust or oeic if there is a discount to NAV. the same amount of money buys exposure to more securities within an investment trust with a discount to NAV and as a consequence a greater annual income.
- There are several different types of investment trust securities that have specialist uses. Such as shares split in capital trusts and warrants for instance split capital shares divide out investment returns from trust to different classes of shareholders. The shares all involve different degrees of risk from lower risk zeros to higher risk capital shares. all investors in a unit trust or OEIC have an equal entitlement to any income and capital gains and near the same amount of risk. there are some types of unit trusts and OaeIC that don't have an equivalence in trust form
71
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difference between JISA and trust fund
- trust fund is the only one that has a stakeholder
73
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ETFs
- tracking funds that are listed on many stock exchanges
- traded through stockbroker
- subject to commission but there is no stamp duty or SDTR on them
- some ETFs use swaps this is synthetic replication - please remember counterparty risk
- can be Put in ISA
- Are subject to CGT and income tax on dividends
- many are offshore though so may be reporting / non reporting
