Investments Flashcards
Explain the key risks associated with Simon shares in Wickrow Publishing Ltd
Illiquid as they are unquoted
If Simon is unable to work due to illness then they are unlikely to provide any income
Tax benefits such as business relief and entrepreneurs relief may be reduced or removed
What is the tax treatment of the shares if Simon was to dispose of them in his lifetime
Shares qualify for Entrepreneurs relief which means the CGT rate will be 10% on the gain that exceed his annual exemption
This is because Simon is a direct of the company and has held more than 5% of the shares and voting rights for more than 2 years and he is entitled to at least 5% of the profits available for distribution
No CGT payable if he was to die
What is the tax treatment of the shares if Simon was to die while holding them
100% business relief would be available on death as the shares are held in an unlisted company and Simon has held them for more than 2 years
This will reduce the IHT value to nil
Factors to take into consideration when advising Simon whether to encash shares and premium bonds and invest in a VCT
He will be able to invest the whole amount in to a VCT as it is less than the £200k max permitted in the year
He will be entitled to income tax relief of 30% of the amount invested paid as a tax reducer in the the tax year the shares are issued
The income tax relief is capped at the income tax paid in the year the shares are issued to which Simon is unlikely that he will pay enough tax to receive the full benefit and you can’t carry it back
The income tax relief will be lost if the shares are not held for 5 years
All gains within the VCT are immediately exempt from CGT and there is no minimum holding period for this
The income VCT’s provide is free of income tax which is beneficial as Simon is HRT and they do not use DA
VCT’s are high risk but in line with Simon’s ATR
The return on the VCT is likely to be higher than the premium bonds
Whether he will incur a CGT liability on the sale of his UK company shares
He will be out of the market whilst the VCT shares are being purchased
They have sufficient C4L and can hold the investment for a sufficient amount of time
Outline the factors before advising the couple on Bed and ISA of their shares in the OEIC
The sale of the shares will give rise to a capital gain and if the gain exceeds their exemption it will be taxed at 10% for Grace and 20% for Simon
They will be out of the market whilst the transaction takes place so could lose growth
If they re-purchase shares in the OEIC they may they may buy fewer shares than they sold
They can choose to invest elsewhere allowing Grace to invest in line with her medium ATR and ethical preferences and Simon to invest more adventurously
If they invest elsewhere the returns might not be as good
Future divideneds will be tax free which will benefit Simon as a HRT and reduce their annual tax liability increasing their income
Whether UK shares have achieved more or less capital gain and the return compared to the OEIC
The UK shares are certificated so would have to be sold to ISA wrap them
They could fund their ISA allowance by cashing out Simon’s premium bonds which are out of line with their ATR and likely to lose against inflation thereby increasing the overall return on their investments
Any capital losses could be brought forward
What are the key risks of investing in a UK commercial property fund
Liquidity risk
Value of property not guaranteed/ it is the valuer’s opinion
Any forced sale of property held in the fund reduces the fund value
Cash holdings dilute the returns within the fund
Higher ongoing charges/costs
Income returns not guaranteed, systematic risk
No geographical diversification
Taxation risk
What are the potential drawbacks of Grace investing in Targeted Absolute Return fund
Complicated
Reliant on fund managers expertise to manage the instruments and returns may suffer if this is not done well
Can include performance fees/higher charges
Doesn’t guarantee positive returns over the specified time period
Performance track record likely to be relatively short/ hard to compare against
Funds tend to be targeted toward people in drawdown and Grace needs growth
Returns unlikely to be high and better returns could be available for a similar risk level via other fund choices offered by the pension
Explain in detail the ways Simon & Grace could use the offshore investment bond to provide tax efficient funds for uni living costs
As no tax paid within the fund, all gains will be subject to income tax
The couple could withdraw 5% of £55k for each year the bond has been in existence, tax deferred
This would currently give them at least £13,750
They could assign the bond into Grace’s name as she is BRT and Simon is HRT
They will save 20% income tax on the proceeds and top slicing relief can be used if req’d
Assign segments to Harry & Emma so they can encash and the income will be tested against their tax status
Proceeds likely to be tax free as they have personal allowance, starting rate band and savings allowance
As the funds will be used to pay for living expenses at uni it is likely the gifts will not count for IHT
Assignments are not chargeable events
Outline 6 benefits of using a wrap platform for OEICs and ISAs
Greater fund choice
Access to different asset classes
Automatic re-balancing available
Ease of administration/everything in one place/online access
May offer reduced costs
Re-registration/ no CGT/not out of the market
Easier to use CGT/ISA allowances
Explain the factors you would consider when reviewing the tax efficiency of Simon & Grace’s pensions and investments (Bank Account & Bonds)
No tax on interest in bank as falls within their savings allowance
Premium bonds - winnings would be tax-free
Explain the factors you would consider when reviewing the tax efficiency of Simon & Grace’s pensions and investments (Offshore Bond & UK Shares)
No tax paid within the fund (gross roll up)
5% tax deferred withdrawals not tax efficient over the longer ter
Chargeable event would be taxed at 40% for Simon and 20% Grace
Assignment to Grace will reduce tax payable (top slicing available)
Assignment to children would allow tax-free withdrawals
Shares - Dividends use up all of Simon’s DA
The excess will be taxed at 32.5%
Explain the factors you would consider when reviewing the tax efficiency of Simon & Grace’s pensions and investments (OEIC’s & ISA’s)
OEIC - in excess of DA so Simon paying tax at 32.5% on reinvested income and Grace paying at 7.5%
Placing the investment fully in Graces name would save 25% tax on half the holding
Can be used to fully fund both their ISAs and future years
CGT payable on sale exceeding exemption amount at 20% for Simon and 10% for Grace
ISAs - tax efficient especially for Simon (HRT)
ISA wrapping will remove tax on future growth and income
Tax efficiency maintained on first death
Comment on Simon and Grace’s investment portfolio
Simon is HRT
Grace is BRT
They not used their ISA allowances this year
Simon has premium bonds which do not match his ATR
They have £62k on deposit which is more than they need as emergency fund (6 months expenditure)
Their portfolio is not well diversified
Deposit accounts should be held in Grace’s name to utilise her savings allowance, Simon could then offset his against the bond
The investments are only protected up to £85k for FSCS
How can CGT be avoided on the disposal of the OEICs
Payment of tax on a capital gain can be deferred by reinvesting the gain into an EIS
It must take place on year before and ending 3 years after the share disposal
The deferred gain is charged when/if shares are disposed of
30% income tax relief available limited to total liability
SEIS offers 50% but only up to £100k
100% business relief for IHT is also available
