Investment Taxation Flashcards
1
Q
Outline the criteria which an Investment Trust must satisfy to gain HMRC approcval under the Income and Coporation Taxes Act 1988 (7):
A
- Must be resident in the UK
- Must not be a close company
- At least 70% of the investment trust’s income must come from eligbile investments
- Can only retain a maximum of 15% of its earnings
- Ordinary shares must be listed on a recognised stock exchange
- Must not invest 15% of assets in ordinary shares in one company.
- Must pay dividends
- Memorandum and articles of association must prohibit distribution of surpluses from disposals as dividends
This approval is important under ICTA 1988 as it means the trust will be exempt from capital gains taxes such as CGT.
2
Q
Taxation of cash and FI investments - key points:
A
- If savings income falls wholly within first £5,000 of taxable income, starts at 0%
- BR and HR taxpayers have PSA of £1,000 and £500 respectively
- Interest is paid gross from OEICs, UTs, PIBs.
- If paid net, e.g. gilts where elected to receive payment net or interest element of PLAs need to gross up (divided by 0.8).
- HR taxpayers pay 20% additional
- AR pay 25% additional
- No CGT to pay on directly held cash and FI investments.
3
Q
Unit trust pricing - order of offer/ buying price calculation:
A
- Market value of underlying securities
- Add in dealing costs
- Stamp duty
- brokerage
- Add in other trust assets
- Un-invested cash + accrued income
- Deduct tax, fees, charges and expenses
- Total divided by number of issued units
- Initial charge added
- Price rounded to four S.F.
4
Q
Unit trust pricing - order of bid/ selling price calculation:
A
- Fund valued at market selling price
- Relevant charges deducted
- Brokerage charges
- Add accrued income
- Deduct any AMC, trustee and audit fees and outstanding tax
5
Q
OEIC vs Unit Trust - key differences:
A
- OEIC
- Fund is a company
- Issues shares
- Open-ended
- Single price - initial charge separate
- Can issue different classes of shares with differing charging structures or in different currencies
- Charges paid from fund
- Independent depositary protects shareholder assets
- Managed by Authorised Corporate Director
- Unit Trust
- Fund is a trust
- Issues units
- Open Ended
- Dual price (bid offer price, including initial charge)
- Only difference between units is whethere they are distribution of accumulation.
- Charges included in manager’s fees
- Trustees oversee fund on unit holders behalf
- Managed by fund manager
6
Q
Investment Trusts vs UT/OEICs - key points:
A
- Costs of purchasint IT shares often lower
- Risk of investing in ITs usually greater as usually trade at a discount to NAV
- Discount can get smaller should there be increased demand for the IT shares
- ITs can borrow money to inves (gearing). UTs/ OEICs have much tigher restrictions (unless UCITS).
- ITs are closed ended while UTs/OEICs are open-ended.
- Investment trusts are PLCs while UTs are trusts, effectively shares v units
- ITs listed on LSE and can be traded at any time in the day, UTs / OEICs not listed and so limited to once dails trading.
7
Q
Property investment - advantages and disadvantages:
A
- Advantages:
- Diversification
- Gearing
- Income stream (rent)
- Inflation hedge
- Disadvantages
- Interest rate risk: mortgage cost increases
- Capital/ market risk: capital values fall
- Liquidity risk: unable to sell at a specific price at a specific time
- Income/ tenant risk: falling rent/ void periods/ tenant default
8
Q
Property - profits, taxation, allowances and accounting periods:
A
- Profits calculated on ordinary accounting principles - accounts must be made up to 31 March or 5 April. Eligible expenses that can be deducted include:
- Repairs and maintenance
- Interest payable on a related loan or overdraft
- Allowance of £1,500 per property for energy efficiency expenditure
- Legal fees, debt collection, eviction, property management, rent collection
- Insurance, water rates, ground rent, council tax and other utilities paid by the landlord
- Plant and machinery for capital expenditure
- Replacement of furniture (Replacement furniture relief)
9
Q
Property - profits, taxation, allowances and reliefs:
A
- Furnished holiday lets or landlords who provide substantial services can class themselves as providing a trade giving more scope for offset of losses, pension conts, CGT rollover, holdover and business asset disposal relief
- Where part of private principle residence is let and landlord remains in residence, CGT on that part is reduced to lower of £40,000 (per owner), amount of gain that is exempt because of PPR relief or the gain attriubtable to the let part
- Rent-a-room relief where property owner can receive up to £7,500 tax-free with the excess not allowable to relief for expenses, or taxed the usual way and be taxed on income less expenses.
10
Q
Qualifying features of a furnished holiday let - key points:
A
- Must be in the EEA
- Furnished
- Let on a commercial basis for 210 days per tax year
- Must be actually let out for 105 days per tax year (can be averaged over more than one property)
- Can be continuously let for mor than 31 days but no more than 155 days per tax year
11
Q
Property yield calculation:
A
yield = gross rent - expenses / market price + cost of purchase
12
Q
REITs - advantages of indirect property investment:
A
- Diversification
- Professional management
- Less direct admin and paperwork
- Liquidity
- Partial sale
- Possible to make smaller/ regular investments into the fund
- Investor protection via increased regulation
- Potential CGT savings by making partial sales
13
Q
REITs - tax benefits/ qualifying requirements:
A
- Single/ company or group that owns and manages commercial or residential proeprty on behalf of shareholders
- Company must be UK resident, close ended and quoted on a recognised stock exchange
- If at least 75% of the company’s total gross profits come from property letting and interest on borrowing covered 125% by rental profits then company is exempt from corp tax on property letting portion of business.
- Gains on sales of developed properties taxed at 30% unless held for at least 3 years from completion
- At least 90% of rental profits must be paid to investors within 12 months
- Payment from tax exempt element is paid net of 20% tax (treated as income)
- Divs paid from non-exempt element and paid gross
- UK REITS itself will pay no CGT on gains made on disposal of rental properties, nor will the investor. Investor will pay CGT on gains from share disposal.
14
Q
REITS - summary of key points:
A
- 90% of rental profits from each accounting period must be paid to shareholders as divs. Divs to sharheolders are taxable but company is exempt from corporation tax on ring-fenced profits.
- Dividends from the ring-fenced letting element are taxed as property income with 20% deducted at source. This can be reclaimed by non-taxpayers and can be held in an ISA or SIPP to be tax-free.
- Dividends from the other element (non-property element) taxed as share dividends and paid gross.
- Gains made from REIT shares are subject to CGT
- The REIT is taxed at 30% and any gains made from property development within the ring fenced element unless held for at least three years from completion.
15
Q
Hedge Funds - key features:
A
- High fees - May have performance charges, ongoing fees and additional costs.
- Investment strategies:
- Absolute return - do not just have a long only strategy using bonds an equities but may use a range of options
- Limited correlation - ability to achieve returns even in market downturn such as through use of derivatives
- 130/30 strategy - Involved investing 130% of portfolio value in long positions and 30% in short for example. Net market exposure of 100%. Typical of strategy used by absolute return funds.
- Risks:
- Liquidity risk (can usually only be sold back to manager)
- Regulatory risk (based in countries with light regulation regimes)
- Gearing risk (within fund)
- Regulatory protection (non-existent)
