Investments Flashcards
What are the four investment classes?
-Cash
-FIS
-Property
-Shares/equities
What checks do you need to make regarding a client investments (12)
-ATR
-How much outside of risk category
-What taxpayer band are they?
-comfortable with changing ownership
-How would each investment be taxable on
-Are investments tax efficient currently?
-Have cgt allowances been utilised £6000)
-if not, any sheltered gains
-any losses brought forward (claimed within three years prior 4 including current) carried forward indefinately
-How will each investment pay out when realised?
-Past performance of existing
-How competitive is interest rates
Whats risks are GILTS exposed to?(3)
Inflation risk-Could affect buying power
Legislation-could make gilts more/less attractive
Interest rate risk-if rates fall, will affect saleability
What risks are AIM shares exposed to? (3)
Default risk-smaller companies=more chance
Liquidity risk-harder to sell due to nature
Investment risk-can fall and rise dramatically
What risks are unit trusts exposed to? (3)
Systemic-exposed to market wobbles
Investment risk-could rise of fall
Legislation-change in tax laws could affect
What are the two types of screening done for ESG investments?
-positive screening-specifically selecting companies which pro-actively protect environment/value match with client
-negative screening/count out certain types of company eg tobacco
What environmental factors are considered under ESG? (7)
-climate change policy
-green products/processes/ops
-emissions
-water usage
-waste disposal
-green employee policies
-renewable energy adoption
What social factors are considered under ESG? (7)
-Diversity and inclusion
-Treatment of employees
-Staff turnover
-Customer satisfaction
-Corporate position on wider social issues
-Supply chain ethics
-Company mission statement/purpose
What governance factors are considered under ESG? (7)
-Diversity of leadership
-Conflicts of interest
-transparency with shareholders
-Board remuneration
-pay and bonuses relating to ethical value
-Opportunities for shareholders to vote
-accuracy of accounting
What are OEICS (10)
Private limited companies
Governed by company law as opposed to trust law
Investors purchase shares (you own some of the underlying assets)
Shares created/cancelled on demand (open ended)
Assets held independantly from
Company
Operate by board of directors
Day to day running is by authorised corporate directors (decides what investments to buy/share)
Comes with 20% tax credit already paid via corporation tax
Provides dividends and interest
Switching between share classes in fund is not a disposal for cgt
How does the ACD of an OEIC recoup cost? (3)
Initial
Annual management
Exit charges
How is an OEIC taxed? (4)
Within fund=subject to corporation tax
If cash/FIS= income distribution (SRS/PSA)
If equity/shares=dividend distro £1000 allowance
With tax credit for corp tax paid
What is a unit trust (6)
-Units created/cancelled as needed
-Fund manager buys bonds/shares in funds
-Cost of unit determined by underlying fund
-Setup under trust deed as open ended investment
-unit price based on bid/offer spread
-Taxed as income/divs
What is bid/offer spread in relation to unit trusts (3)
Bid-lowest-covers cost of cancelling the unit-when demand is low cost will be close to this
Offer-highest buyer will pay based on demand
Includes initial charge
What is bid/offer spread in relation to unit trusts (3)
Bid-lowest-covers cost of cancelling the unit-when demand is low cost will be close to this
Offer-highest buyer will pay based on demand
Includes initial charge
What is an investment trust (9)
Pooled investments
For adventurous investors
A PUBLIC limited company (unlike oeics)
Close ended-cannot issue new
Articles of association outline what they invest in
Taxed as dividend
Independent board of directors
You become a shareholder by investing with them
Can borrow/gearing to enhance returns-but might not and lead to worse outcomes
Can retain up to 15% of income to smooth over the years
How do gilts payout?
Income every 6 months
Return of capita at end
What dictates the trade price of a gilt?
Dependant on how much interest (coupon) has accumulated
How is the price of a gilt determined and how is it issued (3)
Issued in £100 units
Based on supply and demand. Could be £90, could be £110
Gilts may lose selling power if interest rates rise as they get older
What length are Gilt maturity dates
5,10 and 30 years
What are index linked gilts v conventional gilts
Index linked reflects the actual borrowing rates, not just the rate set at the time like conventional
How does the interest element of an index linked GILT work?
Annual real coupon is quoted and paid half per 6 months
An adjustment factor for the increase in rpi
What is a gilt yield?
Gilt yield is the return on the original investment as a percentage of its current price, calculated by dividing the coupon by the price paid for the bond. It’s commonly called the cost of borrowing – as it’s the amount of interest the issuer will pay.
How do you buy and sell gilts (3)
-originally from the Dmo
-then on the open market
-can buy as part of etf’s bia derivative where you take an option on rise/fall
Whats are aim shares and what are rhe benefits/drawbacks (7)
High risk (default and investment risk)
2 years hold IHT free
-income tax relief at 30% of investment
-CGT exempt
-liquidity issue-harder to sell
-volatile
-ongoing monitoring/complex
-not held in isa-potentially not tax efficient
-legislation may change
-alternative investment market (sub market of London stock exchange)
How does an investment bind drive tax efficiency in a portfolio!
5% withdrawal facility
What is considered a v.agressive risk profile
85% equities
10% bond
5% cash
What is an agressive risk profile asset mix?
75% stock
20% bonds
5% cash
What is a medium risk profile?
55% stock
40% bonds
5%cash
What is a conservative risk profile?
40% equities
40% bonds
20% cash
What is a very conservative risk profile mix
20% equities
50% bonda
30% cash
Regarding portfolio construction, what order do you pick stocks? (3)
World region (asset allocatiom)
Sector
Specific Stock
What is an investment bond (6)
Like an isa-you can out money in and take out as you wish
single premium non-qualifying WOL policy
Single premium-single lump sum, top ups allowed which makes it non qualifying
Non qualifying-no tax benefits-tax paid when gets to investor
Whole of life-no fixed term, can surrender at any time
Policy-minimal cover on joint of own life
Return of cash+% of growth in index
Returns can be locked in if reaches certain % at any point in time
5% withdrawal allowed tax free
Taxed as income
How does an offshore investment bond work? (4)
Gross roll up-income/gains accumulate in fund. Good for hr/ar due to timing
Taxes as savings income (psa, srs)
Gain is added as income
May have witholding tax in country abroad
How does an onshore invesment bond work? (5)
Fund pays 20% due to corporation
Tax
Receive a 20/25% tax credit
Taxed as savings income
5% cumulative withdrawal
Taxed when chargeable event occurs eg death or surrender or withdrawal above 5%
What is the purpose of top slicing?
Individual taxpayers may suffer extra tax by being charged in a single year on gains that have accrued over a period of time.
Top-slicing relief may assist. It allows chargeable gains to be divided by the number of complete years the bond has been in force to recognise the fact that the chargeable gain has accrued over the whole period for which the bond was in force and not merely in the tax year in which tax is to be assessed on the chargeable gain
What is top slicing used for? (2)
Investment bonds aka investment with minimal life policy cover
Onshore/offshore
How does top slicing work (2 steps)
Workout tax due as if all taxed in one year (pushes you into higher tax bracket)
Minus
Tax due as if one year of chargeable gain (apply psa, srs, tax band) x no. Of years
Features of investment bonds (5)
Single premium wol policy
5% withdrawal allowed-not chargeable event
Commonly used for loan and discounted gift trusts
Gains on joint policies are taxed 50/50
Full surrender may push you into higher earnings affecting DWP
What two methods can bring down the impact of a chargeable gain with an investment bond
Top slicing
Policy segmentation
What is the purpose of policy segmentation? (3)
To bring down chargeable gain amount
Full or part surrender
Full surrender of one segment will be chargeable gain but less that excess withdrawal
Partial surrender of all segments not a chargeable gain
Why is the 5% withdrawl a good idea?(4)
Treated as a return of capital
Doesnt affect personal allowance
Doesnt affect tax credits
Doesnt affect child benefit
What are the pros of having a discretionary fund manager (6)
Specialist or general
Handles the active management of funds if little experience in investments
Reviewed regularly to maximise opportunities
Reviewed regularly to maximise tax efficiency
Wider range of investments available/potentials saving costs
Consolidated report of all and tax statement
What are the cons of discretionary fund manager? (5)
Costs/charges
Need ensure risk profiles match yours
Needs good communication (tax allowances etc
Loss of investment control
No guarantee of return
Describe an EIS (7)
30% tax reducer
Company up to £2m
Traded on AIM
gains are cgt free if held for 3 years
Reinvestment relief-can defer gains until shares disposed of
Business relief/iht free if held for two years
Describe an SEIS (5)
50% IT
50% of gain reinvested becomes tax free (2 year hold)
Business relief/iht free after 2 years
Max £100k
Gains in fund tax free
What the difference between vct and eis
Eis is direct, vct is indirect
What is a vct (5)
A listed company that invests in other privately listed companys pools investments
30% tr up to £200k
5 year hold
Cgt free on gains
NO Cgt defferal
What is an etf? (7)
Tracker funds of index’s all over the world
Type of pooled investment
Quarrterly divs
Traded as single share on stock exchange
Broker fees, management charges
Counterparty risk
No stamp duty on etfs
What is a unit trust? (7)
Open ended
Setup under a trust deed
Mixtures of securities in underlying fund
Units created and cancelled
Equalisation dates-when income added to unit price/worth half yearly
Taxation-20% corp tax, dividends-already paid-franked income
Gains-against cgt allowance
What policies give rise to chargeable gains? (5)
Non qualifying policies
Policies which are single premium (must be regular premium to be qualifying)
Policies that are less than 10 years
Policies where the sum assured is <75% of premiums paid
Offshore policies are all non qualifying
What events result in a income tax charge on a non qualifying policy? (5)
Death of the life assured that gives rise to payments of benefits
Maturity of the policy
Full surrender of the policy
Assignemnet
Part surrender
Considerations for collective commercial property investment? (8)
Not massively correlated to other asset classes-provides diversification
Retail, office industrial
Geographic diversification should provide safety against risk of economic environment in one area
Can be susceptible to economic trends/change in work environment/reduced demand post covid
Needs to suit higher risk profiles
Could be liquidity issues
Charges
Commercial property has longer lease than residential-more prolonged returns
What is bed and breakfasting? (3)
investing strategy where an investor sells a security at the end of the day on the last day of the financial year and buys it back the next morning.
A bed and breakfast strategy allows investors to minimize the amount of capital gains taxes they must pay/use cgt allowance each year.
The 30-Day Rule of 1998 banned the practice of “bed and breakfasting,” forcing investors to wait 30 days before being allowed to repurchase the security they had just sold.
Process for establishing ESG investments (6)
Explain ESG/explain screening
Establish their ESG position/areas of concern
Research info on ESG
Assess clients current position re esg equities
Realign portfolio
Document the Esg position and any changes made
How do you obtain the additional permitted subscription? (9)
Must be married to person/living together on date of death
Obtain value of ISA at point of death
Claim APS
Aps protects the isa wrapper
Can still use own isa allowance
Can be applied for up until 3 years after death
Can retain existing own isa
Can transfer existie holdings in that isa to yourself
You can then invest these assets in lime with you atr
