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Af1 > Indirect Investments > Flashcards

Indirect Investments Flashcards

1
Q

What are the 3 main stages to consider for tax wrappers

A

How the intial investment is treated
How the funds are taxed in the wrapper
How the proceeds are taxed on the investor

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2
Q

How many years can the carried forward allowance be used for pensions

A

3 years

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3
Q

How are the death benefits from a pension taxed before age 75

A

Tax free - within limits

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4
Q

Who claims relief from self assessment in respect of their pension contributions

A

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

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5
Q

When can a PCLS be taken

A

Anytime but only alongside a relevant pension

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6
Q

What types of pension investments trigger a tax

A

Residential property and tangible moveable assets

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7
Q

How much of can a pension fund borrow

A

50% of the net value of the fund

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8
Q

Who is eligible for an ISA

A

UK residents

Non UK residents who are crown employees working overseas and subject to UK tax on earnings - not their spouses

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9
Q

What is the minimum age for a cash ISA

A

16

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10
Q

What is the minimum age for a stocks and shares ifisa or lifetime ISA

A

18

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11
Q

What is the annual limit for a junior ISA

A

£4368

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12
Q

What is the annual limit for a lifetime ISA

A

£4,000 included in overall £20k limit

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13
Q

What is the treatment of an ISA on death

A 
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
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14
Q

What happens when an ISA holder dies and they are married

A

Benefits are passed to the spouse via an additional ISA allowance
In addition to their own annual allowance

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15
Q

Is carry forward permitted for a child trust fund

A

No

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16
Q

What is the annual allowance for a child trust fund

A

£4368

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17
Q

Who was entitled to a child trust fund

A

Children born between 31/08/2002 - 01/01/11

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18
Q

What types are child trust funds are there

A

Savings accounts
Accounts that invest in shares
Stakeholder accounts

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19
Q

What is the tax position of CTF

A

Free from income and capital gains

Exempt from the rule on taxing the parent of investment income exceeds £100pa

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20
Q

What is a UK collective

A

Investment trusts, unit trusts and OEICs

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21
Q

What is the difference between a unit trust and an OEIC

A

Purchase units in a unit trust and shares in an OEIC

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22
Q

What is the difference between unit trust & investment trusts

A

Unit trusts are open ended and investment trusts are close ended

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23
Q

What is the UCITS directive

A

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

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24
Q

What is the difference between reporting funds and non reporting funds

A

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

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25
Q

What are the advantages of a reporting fund

A

Normal rates of tax on dividends and can use dividend allowance
CGT rates on encashment
Use of annual exempt amount for CGT

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26
Q

What are the non reporting fund advantages

A

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

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27
Q

What is a structured product

A

Savings where the rerun is linked to equity investments

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28
Q

What advantage do capital bonds generally provide

A

Minimum guaranteed return

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29
Q

What is the tax position of a structured deposit

A

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

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30
Q

What is a qualifying life policy

A

A life policy with regular level premiums payable at least annually for at least 10 years - £3600 annual premium limit

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31
Q

What is an example of a non qualifying life assurance policy

A

A single premium investment

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32
Q

What is the tax position for the life company

A 
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
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33
Q

What is tax position for the policyholder of a UK life assurance policy

A

Income tax due on policy profits

Gains referred to as chargeable gains but not subject to CGT

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34
Q

What is the difference between qualifying and non qualifying policies

A

All gains from non qualifying policies are taxable

Gains from qualifying policies are only taxable in first 10 years

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35
Q

What are chargeable events for life policies

A 
Death (if benefit arises)
Maturity
Surrender and some part surrenders 
Assignment for money’s worth
Policy loan
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36
Q

What are non chargeable events for life policies

A

Assignment by way of mortgage assignment between spouses

Payment of critical illness

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37
Q

How do you calculate chargeable gain on maturity of a life policy

A

Amount paid out including capital payments

Less premiums paid including an previous chargeable gain

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38
Q

How do you calculate the chargeable gain on death for a life policy

A

Surrender value before death plus capital payments

Minus premiums paid including any previous chargeable events

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39
Q

How do you calculate the gain on assignment of a life policy

A

Price received plus capital payments
Less premiums paid including previous chargeable gains
If assignment was to a connected person then market value is used

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40
Q

What is the annual withdrawal allowance for life policies

A

5% and unused allowance can be carried forward

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41
Q

If the annual allowance for a life policy withdrawal is exceeded when is the chargeable gain said to be realised

A

At the end of the policy year

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42
Q

Who is liable to tax on a part surrender

A

The policy owner at the end of the year

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43
Q

How many steps are there to calculate the taxable gain

A

5

44
Q

What is the 5 step process to calculate the taxable gain

A
  1. Calculate the investors taxable income to see how much of the gain falls into each tax band
  2. Calculate the tax due on gain across each tax band and deduct 20% basic rate tax to show total liability
  3. 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.
  4. Calculate tax due on annual equivalent and deduct 20% to five relieved liability
  5. Deduct relieved liability from step 2 to give the top slicing relief
45
Q

If the life policy is jointly owned how is the chargeable gain taxed

A

Gain split in equal proportion to ownership

46
Q

Is an inter-spousal transfer a chargeable event

A

No

47
Q

What is the benefit of doing an inter-spousal transfer for a life policy

A

Could be a tax advantage to do so before a chargeable gain

48
Q

Is there any tax due on traded endowment policies

A

Not if policy is traded after 10 years ownership

49
Q

How is tax administered on a life policy

A

Life office will issue a certificate to policyholder on chargeable event. Certificate is used to complete self assessment

50
Q

What is the investment limit for a friendly society policy to be qualifying

A

£270 p/a or £25 pcm

51
Q

What is the benefit of a qualifying friendly society policy

A

Funds are free of UK tax

52
Q

What type of friendly society policies are issued to under 18s

A

Baby bonds

53
Q

Which part of a purchased life annuity is tax free

A

Capital content

54
Q

How is the interest element of a purchased life annuity taxed

A

Treated as savings income and taxed at 20%

55
Q

How is capital content of a purchased life annuity calculated

A

Purchase price divided by number of years an annuitant is expected to live (mortality tables given by HMRC)

56
Q

When is the capital content of a purchased annuity certain not tax free

A

When the annuity is paid to someone other than the person who paid the purchase price

57
Q

How is a pension annuity taxed

A

Taxed in full as earned income

58
Q

How is a deferred annuity taxed

A

As a purchased life annuity (capital content tax free and interest income as savings income at 20%) when the annuity is taken

59
Q

How is an annuity for beneficiaries taxed

A

As full investment income with basic rate deducted at source

60
Q

What is an annuity for beneficiary

A

An annuity under a will or trust

61
Q

How is the cash sum payable under a guaranteed annuity taxed

A

Tax free

62
Q

What is a structured settlement

A

An annuity paid in settlement for claim of damages

63
Q

How is a structured settlement taxed

A

Paid without deduction of tax and not taxable in hands of recipient

64
Q

How is an immediate needs annuity taxed

A

No income tax liability if used for long term care and payments made direct to the care provider

65
Q

What form do you complete to have an annuity paid gross

A

HMRC R89

66
Q

When can you elect for an annuity to be paid gross

A

If total income is less than personal allowance

67
Q

What anti avoidance legislation is there

A

A penal tax which effectively taxes a policyholder as if their investment yields 15% compound

68
Q

What is a special purpose vehicle

A

A limited partnership or exempt UK unit trust/investment trust set up to finance specific projects

69
Q

What investments does a spv allow to be made

A

Investments from SIPP, SSAS and registered charities

70
Q

How is the income of an spv used

A

To service debt so they only offer capital growth

71
Q

What is the benefit of investing in shares in a listed property company

A

More liquid than investing directly in property
Investment is diversified over a number of properties
Property shares move more rapidly than property market

72
Q

What is a REIT

A

Retail estate investment trust
Investment companies that enable investors to put money into residential and commercial property markets by investing in them

73
Q

What are the 7 conditions that need to be met for a REIT

A

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

74
Q

How are REIT distributions treated for tax

A

The tax exempt element - classed as property income and taxed at 20%
Non exempt element - dividend payment made gross
Gains are subject to CGT

75
Q

Can insurance company property funds use gearing

A

No

76
Q

What is the value of insurance company property funds linked to

A

Directly linked to the underlying properties

77
Q

What is the benefit of insurance company funds as opposed to direct property investments

A

Higher liquidity but notice periods may apply

78
Q

What is the benefit of property unit trusts price and investment companies compared with insurance company property funds

A

More tax efficient

Permitted to be held in ISA

79
Q

What is the tax relief amount available on EIS

A

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

80
Q

How long does an EIS need to be held for to qualify for cgt exemptikn

A

3 years

81
Q

Can investors be connected to a company when suvmbscribing to an EIs

A

No

82
Q

In order to qualify for EIS tax relief what can an investor not have

A

A pre-arranged exit strategy

83
Q

Does an investor have to be UK resident for EIS investment

A

No but must have UK tax liability

84
Q

What are the 6 criteria’s a company needs to meet to be qualifying EIS

A

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)

85
Q

What are excluded qualifying trades for EIs investment

A

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

86
Q

When is EIS relief withdrawn

A

If shares disposed within 3 years

If company ceases to be qualifying

87
Q

How does CGT deferral work

A

Gains realised reinvested into shares that qualify under EIS

88
Q

What is the maximum potential tax relief offered by a EIS investment

A

58% - 30% tax relief and 28% cgt

89
Q

What are the differences between SEIS and EIS

A

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

90
Q

What are the qualifying criteria for SEIS investment

A

Trading for less than 2 years with gross assets of less than £200,000
Fewer than 25 full time employees

91
Q

What is the tax relief available from VCT

A

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

92
Q

Can you use a VCT to defer CGT gains

A

No

93
Q

How long do you have to hold VCT shares or the income tax relief is withdrawn

A

5 years

94
Q

What type of companies does a VcT invest in

A

Unlisted trading companies

95
Q

What are the 7 criteria for a qualifying company for VCT

A

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

96
Q

What are the qualifying conditions for VCT investment

A

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

97
Q

What is the maximum term after a firms first commercial sale takes place are investors permitted to invest in EIS, SEIS and vCTs

A

7 years/10 years + for knowledge intensive firms

Unless the investment represents more than 50% ave turnover for previous 5 years

98
Q

What do KIFw chose between to determine when the 10 / 7 year limit begins for eis and vct investments

A

First commercial sale or point at which turnover reached £200k

99
Q

What is the cap on investment into a firm for eis, Vct seis

A

£12m (20m for kif)

100
Q

Are eis and vct able to find buyouts

A

No

101
Q

What is the tax relief for social enterprises

A

Social investment tax relief = 30% income tax relief on up to £1,000,000 per tax year

102
Q

Can tax relief form sitr be carried back

A

Yes to previous tax year

103
Q

Is cgt deferral available on SITR

A

Yes

104
Q

What is the CGT position on social enterprises

A

Disposals are exempt

105
Q

What are eligible organizations for social enterprises

A

Must have a defined and regulated social purpose
Have fewer than 250 employees
Gross assets of no more than £15m

Af1 (18 decks)

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