Investment Taxation

Question 1

CGT status of corporate bonds?

Answer 1

Directly held qualifying corporate bonds do not have CGT payable on them.

non-qualifying corporate bonds are those which are convertible, because they can be converted into stock which is not exempt from CGT.

Question 2

what is the income tax and CGT status of letting a room via rent-a-room relief

Answer 2

Income Tax:
Tax free allowance of £7,500 or £3,750 pp.

CGT:
No CGT on main residence

Question 3

what is the income tax and CGT status on letting whole properties

Answer 3

Income Tax:
Income chargeable as investment income (not earned for pension contributions).
Taxable income is income less expenses.
Overseas property tax separately.
Mortgage interest relief is 20% tax deduction.

CGT:
18/24% on sale of property.

Question 4

what is the income tax and CGT status of letting furnished holiday lets.

Answer 4

Taxed as investment income as for letting whole properties.

CGT is the same as for whole properties

Question 5

what is the income tax and CGT status of Woodlands

Answer 5

Commercial profits are exempt.

Commercial woodlands are exempt.

Question 6

Conditions for rent-a-room relief to apply?

Answer 6

The relief does not apply to a self-contained unit or to unfurnished accommodation.
The property must be UK-based.
The let accommodation must be used as a residence (i.e. not for office or business purposes).

Question 7

What are the two choices for how rent-a-room income can be taxed?

Answer 7

Using rent-a-room limit - Tax is only on gross receipts over £7,500. No deduction for expenses is allowed.

Using the normal basis - Tax is on income less expenses.

Normal basis is usually best if individual has relevant expenses.

Question 8

What is the property allowance and what options does an individual have?

Answer 8

At its simplest, this allows for the full relief on income tax if the turnover on a rental property is less than £1,000. It need not be claimed, it can simply be ignored. Joint owners can both claim the £1,000 allowance.

Where property income exceeds £1,000 then the property owner has a choice. Either;

apply the £1,000 property allowance as a deduction of income or
deduct their actual expenses as normal.

Question 9

In some cases, property lettings services are deemed substantial enough, the lettings can be taxed as a trade.

Such as when the landlord provides similar services to a hotel (daily meals, washing etc.)

The potential advantages include…

Answer 9

Greater scope to set-off losses
Possibility of tax relief on pension contributions against the income
More CGT and IHT reliefs available

Question 10

Explain the tax advantages if Gethin uses Rose Cottage as a qualifying furnished holiday let (FHL) when compared to a buy-to-let.

Answer 10

• Full mortgage interest relief available for FHL
• compared to buy to let (BTL) which is limited to a basic rate deduction.
• Profits count as UK relevant earnings when making pension contributions.
• CGT rollover relief/holdover relief may be available.
• Business asset disposal relief may be available on disposal.
• IHT Business Relief (BR) may be available after 2 years if ‘additional services’ are provided.

Question 11

What are the conditions which need to be met for a furnished holiday let to be treated as a trade?

Answer 11

Being situated in the UK or the EEA.
Furnished and let on a commercial basis.
Available for let for at least 210 days of a tax year…
and actually let in this period for at least 105 days (an average over 2 or more properties can be used).
If accommodation is let for continuous periods of more than 31 days, it is not considered a holiday let. Also, the total of any periods of ‘continuous letting’ must not total more than 155 days in a tax year

Question 12

If the conditions are met, and the activity treated as a trade, then what benefits does this provide?

Answer 12

Losses can be offset against income from the same furnished holiday lettings business.
Pension contributions can be made on the basis of the income.
CGT rollover, holdover and business asset disposal reliefs become available on disposal.

Question 13

What is the 60% rule?

Answer 13

If at least 60% of the assets that the collective holds are interest-bearing (so cash and fixed-interest), when that collective distributes income then the whole of that income is deemed to be interest.

If less than 60% of the collective’s assets are interest-bearing, then the whole of the income is deemed to be dividends.

Question 14

What are the rules around help to buy ISAs

Answer 14

Introduced in December 2015, these ISAs were closed to new investors from 30 November 2019.

Existing HTBISA-owners can continue to contribute to their ISA until 30 November 2029.

It is a variation of a cash ISA (so not stocks and shares) with the additional benefit that the government pays a bonus to eligible savers.

Individuals could save up to £1,200 in the first calendar month of funding and then up to £200 a month thereafter.

The government pay a bonus of 25% of the closing savings balance. The maximum closing balance is £12,000, so the maximum bonus is £3,000. The bonus itself is paid towards the completion of the saver’s first home, and not at the holding-deposit stage.

Question 15

Rules surrounding the LISA

Answer 15

Allows individuals to invest up to £4,000 per tax year.

investors must be over 18 but under 40 when they open a LISA.

Once open, investors can continue to save into the Lifetime ISA until their 50th birthday.

Question 16

Rule surrounding JISAs

Answer 16

The limit for contributions is £9,000.

The money is locked away for the child, who can withdraw the proceeds when they reach age 18. They can, however, take ‘control’ of the account, and therefore the investment decisions, from age 16.

From 6 April 2024, you have to be over 18 to open an adult Cash ISA, therefore then loophole for holding an adult cash ISA (£20,000) and a JISA (£9,000) no longer exists.

Question 17

What is the tax treatment of an ISA on death of the holder?

Answer 17

It will form part of their estate for IHT purposes.

The ISA becomes a continuous ISA, no new payments allowed, but continues to have tax-free status until the sooner of:

It’s closed by your executor
Your estate administration is completed
Three years and one day pass after your death

Spouse/civil partner can apply for APS within 3 years of death which provides ISA subscription of value of ISA in addition to their £20k.

Question 18

What are child trust funds?

Answer 18

Most UK citizens born between 1 September 2002 and 2 January 2011 were given a child trust fund investment voucher by the UK government – worth between £50 and £750 (depending on your circumstances and date of birth).

Parents were asked to open a child trust fund with the voucher, but if they didn’t get around to doing so, the government invested the voucher on the child’s behalf. That’s why many people don’t know they have a child trust fund.

The money can only ever be accessed by the child the account was opened for and only when they turn 18.

You can’t open a new child trust fund anymore, but you can open a junior ISA.

If you have a CTF you are ineligible for the Junior ISA. Since April 2015 you have been able to move your CTF into a Junior ISA.

Question 19

Explain the options the Child Trust Fund (CTF) provider has if one does not take control of his CTF upon reaching age 18

Answer 19

• The CTF provider must place the CTF into a protected account
• with a tax advantaged status.
• This can be a matured CTF account or a cash or stocks and shares ISA
• offered by the original CTF provider.
• No new subscriptions can be accepted into the account.

Question 20

Explain the options if one does take control of a CTF at age 18.

Answer 20

Ben can encash the account
* or transfer the account to an ISA
* and the transfer amount will be disregarded for the ISA subscription limit
* unless the transfer is made to a Lifetime ISA, in which case the LISA limits are kept

Question 21

Taxation of purchased life annuity?

Answer 21

Annuity payment is split into two parts:

1. return of capital which is free of tax.
2. interest element taxed at 20% at source, higher/additional rates pay 20/25% on top.

Annuitant can use PSA, SRA, PSA to eliminate or reduce tax on the interest element.

Question 22

Taxation of pension annuities

Answer 22

Taxed in full as earned income via PAYE.

Question 23

What are the two categories which offshore funds fall into with regards to taxation and what are the effects of either?

Answer 23

Reporting:
dividends and interest taxed as in the UK and normal CGT rules apply
all income must be declared to HMRC distributed or not

Non-reporting:
Often ‘roll-up’ funds, no income is distributed and no dividends paid out.
Gains calculated on CGT principles but chargeable to income tax

THESE ARE NOT OFFSHORE BONDS

Question 24

Income tax relief by using an EIS?

Answer 24

Income tax relief at 30% for qualifying investments.

No min into EIS however tax relief is limited to £1m per year (£300,000), £2m for knowledge-intensive companies.

Contributions can be carried back if previous years allowance wasn’t used. This means he can retrospectively reduce his tax bill for the previous year.

Shares must be held for at least three years from the date of issue or the tax relief will be withdrawn.

If shares are disposed of at a loss, the investor can elect that the amount of the loss - less Income Tax relief - can be set against income of that year or the previous year.

Question 25

Capital Gains reinvested relief for using an EIS?

Answer 25

A gain made on the sale of other assets can be reinvested in EIS shares and deferred over the life of the investment.

There’s no upper limit on the value of gains that can be deferred.

It’s the gain, not the proceeds of the sale that should be reinvested. For example, if an asset was sold for £50,000 and cost £10,000, this would result in a gain of £40,000. This £40,000 would need to be reinvested in EIS-qualifying shares in order to defer the gain.

To qualify for deferral relief, the reinvestment into EIS-qualifying shares needs to be made no earlier than 12 months prior to, or three years after, the original gain was made.

The gain will be deferred until the earliest of any of the following events:

The EIS shares are sold.
The company ceases to be EIS-qualifying within three years of investment.
An investor ceases to be a UK resident within three years of investment.

When the deferred gain comes back into charge, it’s subject to capital gains tax at the relevant rate at that time.

Question 26

Capital Gains Relief for using an EIS?

Answer 26

If an investor holds EIS shares for at least three years, any capital gain realised on the disposal of the shares will be capital gains tax free, provided income tax relief has been given and has not been withdrawn.

AND THE ORIGINAL INVESTMENT WASNOT A DEFERRED GAIN

Question 27

Explain briefly the CGT rules of any new investment into an EIS, if the investment were made with the proceeds from the sale of the shares.

Answer 27

• Existing gain;
• deferred until disposal;
• without limits/unlimited;
• can be deferred again.
• New gain;
• exempt from CGT;
• after 3 years;
• if Income Tax relief obtained.
• Loss relief available;
• offset against income or gains

Question 28

Income Tax relief by using SEIS (seed)?

Answer 28

50% back of the amount you invest as a reduction in your Income Tax bill up to a maximum of £200,000 invested, providing £100,000 of tax relief.

For example, say you invested £10,000 in an SEIS-eligible company. When you file your tax return, you list the details of your SEIS-qualifying investment to reduce your Income Tax bill by £5,000.

shares must be held for a period of three years from the date of issue for relief to be retained. If they are disposed of within the three-year period, relief will be withdrawn or reduced.

IHT BR relief if held for 2 years.

Question 29

Capital Gains reinvestment relief by using SEIS (seed)?

Answer 29

CGT re-investment relief can apply if income tax relief is claimed. This relief reduces capital gains made on disposal of other assets by 50%.

The maximum gain reduction is £100,000 per annum (50% of £200,000). The gain must arise in the tax year in respect of which SEIS income tax relief is given (i.e. either in the tax year of investment or the preceding tax year if a carry back claim is made). The remaining 50% of the gain remains chargeable.

For example: this would mean that, should an additional or higher rate taxpayer sell shares gained other than the SEIS and realise a £40,000 gain, where usually they would be liable to pay £8,000 in CGT (20%), using SEIS reinvestment relief, should they reinvest the full sum of the gain into SEIS qualifying shares, this charge would be reduced by 50%, saving the individual £4,000.

IHT BR relief if held for 2 years.

Question 30

Capital Gains relief by using SEIS (seed)?

Answer 30

When you come to sell your shares, usually you’d pay Capital Gains Tax on the profit you make, so long as income tax relief has been granted.

Question 31

Tax advantages of using VCT

Answer 31

Dividend relief: dividends from ordinary shares in VCTs are exempt from income tax for investments of up to £200,000 per tax year.

Income tax relief: available at the rate of 30% for purchases of newly issued VCT shares up to a maximum of £200,000 per tax year. Income tax relief is clawed back if the shares are not held for at least five years.

Disposal relief: capital gains made on the disposal of shares in a VCT are free of capital gains tax (CGT) at any time, provided that the VCT was approved both when the shares were acquired and when they were sold, and the investor is aged 18 or over when selling the shares.

Tax relief withdraw if not held for 5 years.

Not eligible for BR as you are not holding direct shares

Question 32

In relation to investment bonds, what are the chargeable events?

Answer 32

1. Death
2. Assignment for money or money’s worth
3. Maturity
4. Partial surrender (in excess of cumulative 5%)
5. Surrender (full encashment)

DAMPS

Question 33

Why is Assignment for money or money’s worth not a concern to look at?

Answer 33

Assigning a policy simply means changing the official owner of the life assurance plan; the ‘assured’.

The ‘money or money’s worth’ element simply means the investment bond isn’t gifted away – the original owner receives some sort of financial recompense.

The key here is that genuine gifting (changing the owner of the policy) without financial recompense is not a chargeable event and therefore does not create an immediate tax liability on either the donor or the done.

Question 34

Why is an onshore investment bond not suitable for a non-tax payer

Answer 34

because you cannot reclaim the 20% basic rate tax deemed paid at source, even if the full gain falls within the Personal allowance.

Question 35

What part of ESDL are onshore bonds taxed under?

Answer 35

Onshore bonds are taxed as the top part of income, so after dividend income. They benefit from a non-reclaimable 20% tax credit, reflecting the fact that the life company will have paid corporation tax on the funds.

This tax credit will satisfy the liability for non and basic rate taxpayers. Further tax is only payable if the gain when added to all other income in the tax year falls in the higher rate band and above.

Question 36

What part of ESDL are offshore bonds taxed under?

Answer 36

Offshore bond gains are aggregated with all other savings income and taxed after earned income but before dividends. As there’s no UK tax on income and gains within the bond, there’s no credit available to the bond holder. Gains are taxed 20%, 40% or 45%. Gains will be tax free if they’re covered by an available allowance:

ESDL:

1. Non-savings (Earned income)
2. Savings
3. Offshore bond gains
4. Dividend income
5. Redundancy payments (Over £30k)
6. Onshore bond gains

Question 37

What is top-slicing?

Answer 37

Top slicing is where we work out the ‘average’ gain over the number of years that the investment bond has been held, to get an idea of an annual growth.

Question 38

What are the 6 steps for calculating top slice relief on investment bonds?

Answer 38

1. Calculate income as normal using full gain, to see impact on her various allowances (reduction of PA etc.)
2. Calculate tax liability using calculated allowances, do not use charity donations to extend bands.
3. Calculate tax due on bond across the bands, deduct basic rate tax deemed paid at source - known as individual liability
4. Calculate annual equivalent of the gain
5. Calculate the relieved liability on the annual equivalent
6. Deduct relived liability from individual liability to get top slicing relief.

deduct top slice relief and onshore bond tax credit from individual’s full tax calculation

Question 39

Explain the steps taken to calculate step

1. Calculate taxable income as normal using full gain, to see impact of her various allowances

for the top slice relief calculation

Answer 39

*Calculate taxable income position as normal, to work out if any allowances are reduced and what the tax liability will be without top slicing relief.
*Gift aid can be used to extend the basic rate band

Question 40

Explain the steps taken to calculate step

2. Calculate taxable income using calculated allowances, do not use charity donations to extend bands.

for the top slice relief calculation

Answer 40

*Calculate the taxable income for the year and determine how much of the gain falls within each of the bands.
*Pension contributions can extend bands, gift aid contributions cannot.
*Ignore redundancy payments and aggregate onshore and offshore bond gains together.
*All bond gains sit after dividend income:

Non-savings > Savings>Dividends>All bond gains

Question 41

Explain the steps taken to calculate step

3. Calculate tax due on bond across the bands, deduct basic rate tax deemed paid at source - known as individual liability.

for the top slice relief calculation

Answer 41

*Calculate tax due on gain across all bands
*deduct 20% basic rate relief from all bond gains (onshore and offshore)

Question 42

Explain the steps taken to calculate step

4. Calculate annual equivalent of the gain

for the top slice relief calculation

Answer 42

*Calculate annual equivalent of the gain by dividing it by the complete years held since being taken out.
*If we are dealing with a part surrender, this is complete years since last chargeable event.
*This provides the gain of one slice

Question 43

Explain the steps taken to calculate step

5. Calculate the relieved liability on the annual equivalent

for the top slice relief calculation

Answer 43

*workout the tax due on one slice of the gain, using the annual equivalent gain in the previous step.
*As this gain is lower than the total gain, look out for PA being reinstated, PSA being increased to £1,000.
*Deduct 20% basic rate tax credit for both onshore and offshore bonds.
*Once we have the tax liability for one slice, this is multiplied back up by the number of years used to calculate the average gain.

Question 44

Explain the steps taken to calculate step

6. Deduct relived liability from individual liability to get top slicing relief.

for the top slice relief calculation

Answer 44

*deduce the relieved liability (step 5) from individual liability (step 3) to get top slicing relief.

minus the top slice relief and (if an onshore policy) 20% basic rate tax credit, from the original total bond gain calculated in step 1.

Question 45

What is time apportionment relief?

Answer 45

For an offshore bond,

Within step 4, calculating the annual equivalent gain.

If the policy was set up or altered after 6th April 2013 the number of years used will depend on whether the individual has been UK resident throughout the period of ownership.

If they have been resident the whole time, then it will be calculated much like the onshore version, where the years are either back to the start of the policy or to the last chargeable event.

However, if there have been periods of overseas residence then the years available will be reduced to reflect the overseas residency:

Question 46

How do you calculate the individual’s liability

Answer 46

This is based on the full gain using the priority order of income tax as we know and love it (ESDL). For this part we put both onshore and offshore bonds after dividends, and we don’t include any redundancy payments.

A key difference from a normal calculation is that we are not able to use of gift aid to extend the bands.

The implication of doing the calculation in this way means that an offshore bond is unlikely to benefit from PSA, as it now put after dividends and, as we are limiting our band extender, there may be more tax at higher rate.

Individual liability is the tax on the gain minus the tax credit of 20% which is treated as paid for both UK and offshore policies in this process. (Even though it isn’t for offshore ones!!)

Question 47

How do you calculate the relieved liability

Answer 47

The relieved liability is using the annualised gain, so the slice of income.

We divide the gain by the full policy years the bond was held to get the top slice, which is then added to income to find out where the income falls in our ESDL bucket.

The PA may well be regained at this stage as the loss is re-worked. However, if the PSA was reduced earlier in the tax calculation, it will not be altered here. So, if on the individual liability there was only £500 PSA this still applies.

Relieved liability is the top sliced gain minus the tax credit of the slice. Again, this is applied whether onshore or offshore, and then it is all multiplied back by the number of slices.

Question 48

How do you calculate the Top slice relief

Answer 48

This is then the individual’s liability minus the relieved liability and can be taken away as one of the last stages in the income tax calculation as a tax reducer.

Having completed the top slicing calculation to find the tax reducer that needs to be applied, the final part is to take off both this and the onshore bond tax credit from the individuals full tax calculation.

Question 49

Describe the Income Tax treatment of the gain when an Onshore Investment Bond was surrendered during the estate administration timeline.

Answer 49

• As the bond was surrendered during the period of the administration of the estate
• the personal representatives/Annabelle and Gethin are liable to Income Tax on the gain
• at the rate applicable to personal representatives/20%
• which is covered by the 20% tax credit.
• The gain will be taxed as estate income when distributed to the beneficiaries
• and taxed at the beneficiaries’ marginal rate
• less a credit for tax paid by the personal representatives.
• Top slicing relief is not available.

Question 50

Explain how the taxation of the gain would have differed if the Onshore Investment Bond had been assigned to beneficiaries prior to surrender - i.e. not surrendered during estate administration. Assume beneficiaries are basic rate taxpayers

Answer 50

• The personal representatives are not liable to tax as the assignment to beneficiaries is not a chargeable event.
• The beneficiaries would be liable to tax on the gain
• and as they are basic rate taxpayers
• they would benefit from top slicing relief
• which would reduce or eliminate any liability to tax at the higher rate

Question 51

What is a REIT?

Answer 51

A REIT is an investment vehicle that has a tax treatment that is closely aligned to the tax arrangements in place for direct investment in property.

A REIT is Close ended.

Question 52

State the main rules that a fund must adhere to in order to qualify as a REIT.

Answer 52

• UK resident/listed.
• Closed-ended/only one share class.
• Must be listed on stock exchange
• 75% of the company’s total gross profits have to originate from property letting.
• Interest on borrowing has to be at least 125% covered by rental profits
• At least 90% of the rental profits from each accounting period must be paid as a dividend to investors.

Question 53

Distributions from REITs consist of two elements:

Answer 53

A payment from the ring-fenced element that is exempt from corporation tax, which is classed as property income and is typically paid net of 20% tax. (Paid gross in an ISA/SIPP). known as property income distribution.

• non-taxpayers can reclaim 20% tax credit
• basic rate nothing else to pay, higher/additional = 20/25

A dividend payment from the element that is not exempt from corporation tax, which is taxed as any other UK dividend. Paid gross. Dividend allowance can be used to offset tax.

Question 54

Key consideration if you see PID payment in an income tax calculation question?

Answer 54

Property Income Distribution is paid net of 20% tax. Candidates therefore needed to gross the PID up by 20% to ensure that the higher-rate liability was calculated - if the client is higher rate taxpayer.

Would need to gross by 0.55 for additional.

Question 55

Describe, in detail, the qualifying conditions for an existing property rental
company to qualify as a Real Estate Investment Trust (REIT).

Answer 55

• Must be UK resident for tax purposes.
• Structured as a closed-ended company (not an OEIC).
• Listed on a recognised stock exchange (including AIM).
• Property rental business must represent;
• at least 75% of the REIT’s total profits.
• Interest on borrowing has to be at least 125% covered by rental profits.
• 90% of rental profits must be distributed each year;
• within 12 months of the end of the accounting period.

Question 56

Describe, in detail, the taxation consequences of a property rental
company that has successfully claimed REIT status for both the REIT and
the investor.

Answer 56

) * The REIT is exempt from Corporation Tax on rental income and gains.
* Distributions from the exempt element are classed as property income;
* and paid net of 20% tax.
* Non-taxpayers can reclaim.
* Higher-rate and additional-rate must pay additional tax.
* Distributions out of other income or gains (outside the REIT ringfence);
* paid as a gross dividend.
* The dividend allowance can be used;
* above this the usual Income Tax rates apply.
* Gains are subject to CGT.

Question 57

What is a PAIF?

Answer 57

A property authorised investment fund (PAIF) is an FCA-authorised OEIC that invests mainly in property (including UK and non-UK REITs). The point of taxation moves from the fund to the investor, in the same way as would apply to a direct investment in property.

PAIFS are open ended

Question 58

What are the three income distributions from a PAIF

Answer 58

1. property income – this is usually paid net of 20% income tax (non-taxpayers can reclaim the tax or it can be paid gross, if the fund is held within an ISA or a pension wrapper, the income is also paid gross)
2. dividends – paid without the deduction of any tax, i.e. they are also paid gross
3. interest income – distributions of interest are paid gross

Question 59

What the main conditions which have to be met for a PAIF

Answer 59

• At least 60% of the PAIF’s net income in an accounting period must be from the exempt property investment business.
• At the end of each accounting period, the value of the assets involved in the property investment business must be at least 60% of the total assets held by the PAIF.
• Its shares must be widely held, with no corporate investor holding 10% or more of the fund’s NAV.