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AFA > Investments Topic 12 - Tax Free Investments > Flashcards

Investments Topic 12 - Tax Free Investments Flashcards

1
Q

Underlying investments stocks and shares ISA can hold

A
  • Shares and corporate bonds
  • Gilts
  • UK-authorised unit trusts and OEICs
  • UK-listed investment trusts
  • Life assurance policies
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2
Q

Underlying investments that can be held in a cash ISA

A
  • Bank and building society deposits
  • Units or shares in unit trusts and OEICs that are money-market schemes
  • Stakeholder cash deposit products
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3
Q

Lifetime ISA

A

replaced help to buy ISA, for buying a house

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4
Q

Main difference between a standard ISA and a flexible one is that

A

cash withdrawn can be replaced in a flexible one (in the same year) without affecting that year’s annual limit.

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5
Q

Key rules of a flexible ISA

A
  • Providers must record withdrawals and deposits
  • Replacement must take place in the same year
  • Cash accumulated over the years can also be replaced e.g. if the account has £100,000, the whole amount could be taken out and replaced even if the annual limit is £20,000
  • Replacement of funds must go back into the same account
  • Reinvestment can only replace the amount withdrawn within the year
  • Interest and dividends can be replaced as part of the reinvestment
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6
Q

Investments that can be held in a stocks and shares ISA

A
  • Shares – must be listed on recognised stock exchange, but shares already held cannot be transferred, must be bought through the ISA
  • Unit trusts and OEICs – must be UK authorised
  • Investment trusts
  • Gilts
  • Corporate bonds
  • Certain structured products – only ‘capital at risk products’ such as income bonds and growth bonds
  • Life insurance policies meeting strict criteria – pg.340 for list, this is rare for policies to be accepted
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7
Q

Innovative finance ISA (IFISA)

A

This is when investors use P2P lending, which is when they lend investors’ money to individuals or businesses but lends to multiple people to spread risk.

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8
Q

Basic rules of IFISAs

A
  • Can use P2P lending platforms
  • Can use investment-based crowdfunding (buying retail bonds to help companies)
  • Payments of capital (including any gains) and interest is tax-free
  • Payments from borrower made to the ISA manager
  • Investor must be 18+
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9
Q

Key points of a lifetime ISA

A
  • For UK residents between 18-40
  • Max. of £4k per year, gov. adds 25%
  • Contributions are part of annual allowance
  • Will run until the saver is 60
  • Money can be released tax-free to buy a deposit
  • Property must be a first home in the UK worth up to £450k
  • Penalty charged if funds are withdrawn early for a reason other than serious illness or property purchase – 25% of the fund
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10
Q

Taxation of ISAs

A
  • Interest received gross and not taxable
  • Interest from bonds held directly in an ISA is free from tax and tax deducted at source can be reclaimed
  • No liability to tax on dividends
  • If at least 60% of a unit trust/OEIC fund is invested in bonds, cash or money markets, it is not subject to tax
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11
Q

ISA transfers

A
  • Transfers out of a cash or stocks and shares ISA must be allowed
  • Innovative finance ISA has rules set by the managers
  • Transfers in never HAVE to be accepted
  • Transfer must be made from manager to manager, if made to investor then it would cease to be an ISA
  • Transfers between categories of ISA is allowed
  • All of accumulated previous years’ money in an ISA can be transferred without affecting the annual allowance
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12
Q

Child trust fund

A

These are not available to kids born after December 2010, and they were an incentive for parents to save for their kid’s future. It started off with a £250 deposit from the government, they could be opened with a number of providers. Replaced by junior ISAs.

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13
Q

Key factors of child trust funds (CTFs)

A
  • Parents, family and friends can contribute up to £9k total per year
  • CTF belongs to child, can have access at 18, no withdrawals before that
  • The parent can change the type of account or provider at any time
  • Fund grows free from income tax and CGT
  • 3 main types available – savings, equity-based accounts (OEICs etc.) and stakeholder accounts
  • CTF can be transferred to an ISA when 18 without using limit, and can be transferred to junior ISA whenever
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14
Q

Junior ISAs

A

Launched in November 2011. Long-term tax-free savings for kids, must be under 18 and live in the UK.

  • Contributions from anyone
  • No tax payable on interest or gains
  • Can invest in cash, stocks and shares or both
  • Cannot withdraw until 18, if they leave money in it becomes an ISA
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15
Q

Friendly societies

A

These are small mutual organisations that offer a fund that members contribute to and help out any member in a time of need (ill-health). There are not many left in today’s world. The funds are exempt from income or capital gains tax

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16
Q

Key features of friendly societies

A
  • Plan is similar to an endowment
  • No minimum age limits
  • Max. investment in £5 a week
  • Plan must meet qualifying rules for life assurance policies
  • Most plans have a ten-year term
  • Encashment before 7.5 years would be a chargeable event
17
Q

Basic rules that apply to both EIS and VCT schemes

A
  • Company must be qualifying – unquoted trading company with a permanent establishment in the UK
  • Money raised through the schemes must not be used to fund acquisitions of other businesses
  • ‘knowledge intensive’ company is one that meets strict definitions, but broadly means they are involved in intellectual property creation, and must have spent at least 15% of their operating costs on R&D in one or more of previous 3 years
  • Investments can only be made in companies whose whole assets are less than £15m
  • Firms that started trading more than 7 years before the proposed EIS/VCT investment are not eligible
  • Max. number of full-time employees a qualifying company can employ is 249 (499 for knowledgeable companies)
  • Qualifying companies can receive up to £5m in combined schemes investment each year (£10m for knowledgeable companies)
  • Lifetime limit of £12m (£20m for knowledgeable companies
18
Q

Enterprise investment schemes (EIS)

A

Aim is to encourage investment into small unquoted companies. Tends to be riskier as the companies are very new and investor typically buys shares direct from the company rather than pooled investment.

19
Q

Tax relief of an EIS

A
  • Tax relief of £1m per year (£2m for knowledge intensive companies)
  • Relief given at either 30% if the investor is higher-rate or above, then 20% if they are basic rate
  • For relief to be granted, holdings must be less than 30%
  • Income tax relief withdrawn if shares are withdrawn within 3 years
20
Q

Seed EIS (SEIS)

A
  • Scheme applies to companies who are carrying on a new business with less than 25 employees and assets of up to £200,000
  • 50% tax relief up to £100,000
  • Reinvestment relief available – if capital gain is made then reinvested there is tax relief on CGT
21
Q

EIS funds

A
  • Investors make investment into fund and one day the fund closes tio new investments
  • No units, each investor has certain number of shares in the EIS company
  • Can be approved or unapproved
  • Approved – fund that has received prior approval from HMRC (this has no impact on quality of fund at all)
  • Unapproved – has slightly different rules and hasn’t been approved by HMRC
22
Q

Venture capital trusts (VCTs)

A

Aim to encourage investments in unquoted companies and now also AIM-listed companies. These are listed companies whose shares are quoted on the stock exchange.

These are very similar in structure to investment trusts, and so the VCT fund is also exempt from CT and CGT.

23
Q

VCTs divided into 3 broad sectors:

A
  • Generalist – private equity and development capital
  • AIM
  • Specialist – range of business sectors
24
Q

Main features of a VCT

A
  • In 2019, minimum of 80% of the fund must be held in eligible shares of qualifying unquoted trading companies
  • Balance of the fund can be invested in more mainstream investments like cash and bonds
  • The VCT has 12 months to invest at least 30% into qualifying investments, they will typically invest in cash/bonds first then move investments over when needed
  • Max. of 15% can be held in one single company
25
Q

Taxation of VCTs

A
  • 30% relief up to £200k, relief clawed back if shares are not held for at least 5 years
  • Dividends from shares acquired through a VCT are free from income tax up to the £200k limit
  • Gains made are exempt from CGT

AFA (38 decks)

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