Indirect Investments Flashcards
What are the 3 main stages to consider for tax wrappers
How the intial investment is treated
How the funds are taxed in the wrapper
How the proceeds are taxed on the investor
How many years can the carried forward allowance be used for pensions
3 years
How are the death benefits from a pension taxed before age 75
Tax free - within limits
Who claims relief from self assessment in respect of their pension contributions
Higher relief for relief at source arrangements
Pre July 1988 retirement annuity contracts
Gp/dentists who are taxed as self employed
Members of NHS pension scheme
When can a PCLS be taken
Anytime but only alongside a relevant pension
What types of pension investments trigger a tax
Residential property and tangible moveable assets
How much of can a pension fund borrow
50% of the net value of the fund
Who is eligible for an ISA
UK residents
Non UK residents who are crown employees working overseas and subject to UK tax on earnings - not their spouses
What is the minimum age for a cash ISA
16
What is the minimum age for a stocks and shares ifisa or lifetime ISA
18
What is the annual limit for a junior ISA
£4368
What is the annual limit for a lifetime ISA
£4,000 included in overall £20k limit
What is the treatment of an ISA on death
Becomes a continuing ISA of the deceased Income and gains are tax free until the earliest of Estate being administered Continuing ISA being closed Or 3 years from death
What happens when an ISA holder dies and they are married
Benefits are passed to the spouse via an additional ISA allowance
In addition to their own annual allowance
Is carry forward permitted for a child trust fund
No
What is the annual allowance for a child trust fund
£4368
Who was entitled to a child trust fund
Children born between 31/08/2002 - 01/01/11
What types are child trust funds are there
Savings accounts
Accounts that invest in shares
Stakeholder accounts
What is the tax position of CTF
Free from income and capital gains
Exempt from the rule on taxing the parent of investment income exceeds £100pa
What is a UK collective
Investment trusts, unit trusts and OEICs
What is the difference between a unit trust and an OEIC
Purchase units in a unit trust and shares in an OEIC
What is the difference between unit trust & investment trusts
Unit trusts are open ended and investment trusts are close ended
What is the UCITS directive
Undertakings for collective investments in transferable securities
Sets a common standard
Provides a single market passport
If registered with a national authority then can be marketed to other member states
What is the difference between reporting funds and non reporting funds
Reporting funds investors (UK) are subject to income tax in share of the funds income whether it is distributed or not. Profit in encashment is liable to CGT
Non reporting funds have no income tax liability if gains are not distributed but gains on disposal are calculated on the CGT principles and liable to income tax so no CgT annual exempt allowance
What are the advantages of a reporting fund
Normal rates of tax on dividends and can use dividend allowance
CGT rates on encashment
Use of annual exempt amount for CGT
What are the non reporting fund advantages
Accumulate income in a low tax environment
Roll up income and take profit when your tax liability reduces
If non UK res then income and gains are tax free
If non UK domicile income and gains not remitted so no UK tax
It is excluded property so for non UK domiciles there is no IHT
What is a structured product
Savings where the rerun is linked to equity investments
What advantage do capital bonds generally provide
Minimum guaranteed return
What is the tax position of a structured deposit
Can receive income or gains
If gains then cgt annual exempt allowance can be used
If income then the tax liability can be deferred if interest rolls up
Can be held in an ISA or pension to mitigate tax
IHT May be reduced due to illiquid nature - it could be worth less on death than at maturity
What is a qualifying life policy
A life policy with regular level premiums payable at least annually for at least 10 years - £3600 annual premium limit
What is an example of a non qualifying life assurance policy
A single premium investment
What is the tax position for the life company
No tax on dividend income 20% tax on rental, interest and offshore income Gains taxed at 20% Paid by life office Cannot be reclaimed by policy holder
What is tax position for the policyholder of a UK life assurance policy
Income tax due on policy profits
Gains referred to as chargeable gains but not subject to CGT
What is the difference between qualifying and non qualifying policies
All gains from non qualifying policies are taxable
Gains from qualifying policies are only taxable in first 10 years
What are chargeable events for life policies
Death (if benefit arises) Maturity Surrender and some part surrenders Assignment for money’s worth Policy loan
What are non chargeable events for life policies
Assignment by way of mortgage assignment between spouses
Payment of critical illness
How do you calculate chargeable gain on maturity of a life policy
Amount paid out including capital payments
Less premiums paid including an previous chargeable gain
How do you calculate the chargeable gain on death for a life policy
Surrender value before death plus capital payments
Minus premiums paid including any previous chargeable events
How do you calculate the gain on assignment of a life policy
Price received plus capital payments
Less premiums paid including previous chargeable gains
If assignment was to a connected person then market value is used
What is the annual withdrawal allowance for life policies
5% and unused allowance can be carried forward
If the annual allowance for a life policy withdrawal is exceeded when is the chargeable gain said to be realised
At the end of the policy year
Who is liable to tax on a part surrender
The policy owner at the end of the year
How many steps are there to calculate the taxable gain
5
What is the 5 step process to calculate the taxable gain
- Calculate the investors taxable income to see how much of the gain falls into each tax band
- Calculate the tax due on gain across each tax band and deduct 20% basic rate tax to show total liability
- Calculate the annual equivalent of the gain which is the gain divided by N - N is:
Onshore policies full surrender = divide gain by number of full years since outset
Onshore policies partial surrender = divide gain by number of full policy years since last chargeable event
Offshore policies full surrender pre April 2013= divide gain by full number of years since outset
Offshore policies post April 2013 if UK resident whole time = divide gain by number of full years since last chargeable event
Offshore policies post April 2013 not UK res the whole time = divide gain by number of full years since outset and make reduction for years of non residence. - Calculate tax due on annual equivalent and deduct 20% to five relieved liability
- Deduct relieved liability from step 2 to give the top slicing relief
If the life policy is jointly owned how is the chargeable gain taxed
Gain split in equal proportion to ownership
Is an inter-spousal transfer a chargeable event
No
What is the benefit of doing an inter-spousal transfer for a life policy
Could be a tax advantage to do so before a chargeable gain
Is there any tax due on traded endowment policies
Not if policy is traded after 10 years ownership
How is tax administered on a life policy
Life office will issue a certificate to policyholder on chargeable event. Certificate is used to complete self assessment
What is the investment limit for a friendly society policy to be qualifying
£270 p/a or £25 pcm
What is the benefit of a qualifying friendly society policy
Funds are free of UK tax
What type of friendly society policies are issued to under 18s
Baby bonds
Which part of a purchased life annuity is tax free
Capital content
How is the interest element of a purchased life annuity taxed
Treated as savings income and taxed at 20%
How is capital content of a purchased life annuity calculated
Purchase price divided by number of years an annuitant is expected to live (mortality tables given by HMRC)
When is the capital content of a purchased annuity certain not tax free
When the annuity is paid to someone other than the person who paid the purchase price
How is a pension annuity taxed
Taxed in full as earned income
How is a deferred annuity taxed
As a purchased life annuity (capital content tax free and interest income as savings income at 20%) when the annuity is taken
How is an annuity for beneficiaries taxed
As full investment income with basic rate deducted at source
What is an annuity for beneficiary
An annuity under a will or trust
How is the cash sum payable under a guaranteed annuity taxed
Tax free
What is a structured settlement
An annuity paid in settlement for claim of damages
How is a structured settlement taxed
Paid without deduction of tax and not taxable in hands of recipient
How is an immediate needs annuity taxed
No income tax liability if used for long term care and payments made direct to the care provider
What form do you complete to have an annuity paid gross
HMRC R89
When can you elect for an annuity to be paid gross
If total income is less than personal allowance
What anti avoidance legislation is there
A penal tax which effectively taxes a policyholder as if their investment yields 15% compound
What is a special purpose vehicle
A limited partnership or exempt UK unit trust/investment trust set up to finance specific projects
What investments does a spv allow to be made
Investments from SIPP, SSAS and registered charities
How is the income of an spv used
To service debt so they only offer capital growth
What is the benefit of investing in shares in a listed property company
More liquid than investing directly in property
Investment is diversified over a number of properties
Property shares move more rapidly than property market
What is a REIT
Retail estate investment trust
Investment companies that enable investors to put money into residential and commercial property markets by investing in them
What are the 7 conditions that need to be met for a REIT
Must be UK tax resident
Close ended company
Listed on a recognized stock exchange
At least 75% of the company’s gross profits have to originate from property letting (to qualify for corporate tax exemptions)
Interest on borrowing must be 125% covered by rental profits
Gains from property development will be taxed unless held for 3 years from completion
At least 90% of rental profits paid as dividends
How are REIT distributions treated for tax
The tax exempt element - classed as property income and taxed at 20%
Non exempt element - dividend payment made gross
Gains are subject to CGT
Can insurance company property funds use gearing
No
What is the value of insurance company property funds linked to
Directly linked to the underlying properties
What is the benefit of insurance company funds as opposed to direct property investments
Higher liquidity but notice periods may apply
What is the benefit of property unit trusts price and investment companies compared with insurance company property funds
More tax efficient
Permitted to be held in ISA
What is the tax relief amount available on EIS
30% tax relief on qualifying investments up to £1m (£2m of excess Over £1m invested into knowledge intensive companies)
Disposals exempt from cgt if held for 3 years
How long does an EIS need to be held for to qualify for cgt exemptikn
3 years
Can investors be connected to a company when suvmbscribing to an EIs
No
In order to qualify for EIS tax relief what can an investor not have
A pre-arranged exit strategy
Does an investor have to be UK resident for EIS investment
No but must have UK tax liability
What are the 6 criteria’s a company needs to meet to be qualifying EIS
Gross assets less than £15m prior to investment (£16m after)
Qualifying trade
Permanent establishment in UK but does not need to be resident or trading I. UK
Unlisted when EIS shares issued
Fewer than 250 full time employees (500 knowledge intensive firms)
No more than £5m raised under EIS (£10m for knowledge intensive firms)
What are excluded qualifying trades for EIs investment
Dealing in land, commodities, futures, shares or securities
Banking and insurance
Property development
Legal and accountancy services
Forestry and timber production
Companies benefiting from renewables obligation certificates
And or the renewable heat incentive
When is EIS relief withdrawn
If shares disposed within 3 years
If company ceases to be qualifying
How does CGT deferral work
Gains realised reinvested into shares that qualify under EIS
What is the maximum potential tax relief offered by a EIS investment
58% - 30% tax relief and 28% cgt
What are the differences between SEIS and EIS
SEIS are targeted at smaller start up companies
Income tax relief is up to 50% up to £100,000
Cgt exemption is limited to one half of the investment
What are the qualifying criteria for SEIS investment
Trading for less than 2 years with gross assets of less than £200,000
Fewer than 25 full time employees
What is the tax relief available from VCT
30% income tax relief on investments up to £200,000 per tax year
Dividends from VCT ARE TAX FREE UP TO £200k per year
CGT exempt on disposal of VCT shares
Can you use a VCT to defer CGT gains
No
How long do you have to hold VCT shares or the income tax relief is withdrawn
5 years
What type of companies does a VcT invest in
Unlisted trading companies
What are the 7 criteria for a qualifying company for VCT
Not a close company
Must be listed on stock exchange
Income derived wholly or mainly from shares or securities
80% of investment by value in qualifying unlisted trading companies
No more than 15% in one company
At least 10% of holdings in new ordinary shares
At least 70% of investments by value in qualifying holdings must be in new ordinary shares
What are the qualifying conditions for VCT investment
Less than 250 employees (500 knowledge intensive firms)
Less than £15m of gross sssets before investment and £16m after
Annual maximum investment is £5m in one company (£10m for knowledge intensive firms) has
What is the maximum term after a firms first commercial sale takes place are investors permitted to invest in EIS, SEIS and vCTs
7 years/10 years + for knowledge intensive firms
Unless the investment represents more than 50% ave turnover for previous 5 years
What do KIFw chose between to determine when the 10 / 7 year limit begins for eis and vct investments
First commercial sale or point at which turnover reached £200k
What is the cap on investment into a firm for eis, Vct seis
£12m (20m for kif)
Are eis and vct able to find buyouts
No
What is the tax relief for social enterprises
Social investment tax relief = 30% income tax relief on up to £1,000,000 per tax year
Can tax relief form sitr be carried back
Yes to previous tax year
Is cgt deferral available on SITR
Yes
What is the CGT position on social enterprises
Disposals are exempt
What are eligible organizations for social enterprises
Must have a defined and regulated social purpose
Have fewer than 250 employees
Gross assets of no more than £15m
