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R06 CII June > Investments > Flashcards

Investments Flashcards

1
Q

What are the four investment classes?

A

-Cash
-FIS
-Property
-Shares/equities

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2
Q

What checks do you need to make regarding a client investments (12)

A

-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

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3
Q

Whats risks are GILTS exposed to?(3)

A

Inflation risk-Could affect buying power
Legislation-could make gilts more/less attractive
Interest rate risk-if rates fall, will affect saleability

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4
Q

What risks are AIM shares exposed to? (3)

A

Default risk-smaller companies=more chance
Liquidity risk-harder to sell due to nature
Investment risk-can fall and rise dramatically

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5
Q

What risks are unit trusts exposed to? (3)

A

Systemic-exposed to market wobbles
Investment risk-could rise of fall
Legislation-change in tax laws could affect

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6
Q

What are the two types of screening done for ESG investments?

A

-positive screening-specifically selecting companies which pro-actively protect environment/value match with client
-negative screening/count out certain types of company eg tobacco

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7
Q

What environmental factors are considered under ESG? (7)

A

-climate change policy
-green products/processes/ops
-emissions
-water usage
-waste disposal
-green employee policies
-renewable energy adoption

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8
Q

What social factors are considered under ESG? (7)

A

-Diversity and inclusion
-Treatment of employees
-Staff turnover
-Customer satisfaction
-Corporate position on wider social issues
-Supply chain ethics
-Company mission statement/purpose

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9
Q

What governance factors are considered under ESG? (7)

A

-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

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10
Q

What are OEICS (10)

A

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

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11
Q

How does the ACD of an OEIC recoup cost? (3)

A

Initial
Annual management
Exit charges

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12
Q

How is an OEIC taxed? (4)

A

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

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13
Q

What is a unit trust (6)

A

-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

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14
Q

What is bid/offer spread in relation to unit trusts (3)

A

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

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15
Q

What is bid/offer spread in relation to unit trusts (3)

A

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

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16
Q

What is an investment trust (9)

A

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

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17
Q

How do gilts payout?

A

Income every 6 months

Return of capita at end

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18
Q

What dictates the trade price of a gilt?

A

Dependant on how much interest (coupon) has accumulated

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19
Q

How is the price of a gilt determined and how is it issued (3)

A

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

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20
Q

What length are Gilt maturity dates

A

5,10 and 30 years

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21
Q

What are index linked gilts v conventional gilts

A

Index linked reflects the actual borrowing rates, not just the rate set at the time like conventional

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22
Q

How does the interest element of an index linked GILT work?

A

Annual real coupon is quoted and paid half per 6 months

An adjustment factor for the increase in rpi

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23
Q

What is a gilt yield?

A

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.

24
Q

How do you buy and sell gilts (3)

A

-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

25
Q

Whats are aim shares and what are rhe benefits/drawbacks (7)

A

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)

26
Q

How does an investment bind drive tax efficiency in a portfolio!

A

5% withdrawal facility

27
Q

What is considered a v.agressive risk profile

A

85% equities
10% bond
5% cash

28
Q

What is an agressive risk profile asset mix?

A

75% stock
20% bonds
5% cash

29
Q

What is a medium risk profile?

A

55% stock
40% bonds
5%cash

30
Q

What is a conservative risk profile?

A

40% equities
40% bonds
20% cash

31
Q

What is a very conservative risk profile mix

A

20% equities
50% bonda
30% cash

32
Q

Regarding portfolio construction, what order do you pick stocks? (3)

A

World region (asset allocatiom)
Sector
Specific Stock

33
Q

What is an investment bond (6)

A

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

34
Q

How does an offshore investment bond work? (4)

A

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

35
Q

How does an onshore invesment bond work? (5)

A

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%

36
Q

What is the purpose of top slicing?

A

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

37
Q

What is top slicing used for? (2)

A

Investment bonds aka investment with minimal life policy cover

Onshore/offshore

38
Q

How does top slicing work (2 steps)

A

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

39
Q

Features of investment bonds (5)

A

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

40
Q

What two methods can bring down the impact of a chargeable gain with an investment bond

A

Top slicing
Policy segmentation

41
Q

What is the purpose of policy segmentation? (3)

A

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

42
Q

Why is the 5% withdrawl a good idea?(4)

A

Treated as a return of capital

Doesnt affect personal allowance

Doesnt affect tax credits

Doesnt affect child benefit

43
Q

What are the pros of having a discretionary fund manager (6)

A

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

44
Q

What are the cons of discretionary fund manager? (5)

A

Costs/charges

Need ensure risk profiles match yours

Needs good communication (tax allowances etc

Loss of investment control

No guarantee of return

45
Q

Describe an EIS (7)

A

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

46
Q

Describe an SEIS (5)

A

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

47
Q

What the difference between vct and eis

A

Eis is direct, vct is indirect

48
Q

What is a vct (5)

A

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

49
Q

What is an etf? (7)

A

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

50
Q

What is a unit trust? (7)

A

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

51
Q

What policies give rise to chargeable gains? (5)

A

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

52
Q

What events result in a income tax charge on a non qualifying policy? (5)

A

Death of the life assured that gives rise to payments of benefits

Maturity of the policy

Full surrender of the policy

Assignemnet

Part surrender

53
Q

Considerations for collective commercial property investment? (8)

A

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

54
Q

What is bed and breakfasting? (3)

A

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.



55
Q

Process for establishing ESG investments (6)

A

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

56
Q

How do you obtain the additional permitted subscription? (9)

A

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

R06 CII June (22 decks)

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