Learning Outcome 6 - 15 standard / 7 multiple response questions / Analyse the characteristics, inherent risks, behaviours and relevant tax considerations of investment products Flashcards
What are the maximum amounts that can be invested for income tax relief purposes in an EIS?
£1m or;
£2m if at least £1m is in knowledge-intensive companies
How long does an EIS investment have to be kept in order to qualify for the income tax relief? And what exceptions are there?
3 years (except to a spouse, and not on the death of an investor)
To qualify for 100% business relief for IHT purposes as unquoted companies, how long should the shares be held for?
At least 2 years
Is an EIS qualifying company listed or unlisted?
Unlisted
What is the maximum number of employees a company can have to be qualifying for raising money through an EIS?
250 or;
500 if knowledge-intensive
What is the maximum amount of gross assets a company can hold before the issue of shares, to be a qualifying company for EIS? And immediately afterwards?
£15m and;
£16m
If an investor invests £100,000 into an EIS in August 2023, when would it qualify for business relief?
September 2025
How long should an EIS investment be kept for to retain income tax and capital gains tax relief?
3 years
EIS schemes can be very high risk and shares illiquid; true or false?
True
Describe the tax treatment on friendly policies
No income tax or gains on disposal
How often are prices for exchange-traded funds updated?
Daily
Trading of ETFs are subject to brokerage fees like single shares, all except which one?
Stamp duty
Typical management fees for an ETF are how much (in percentage terms)?
Less than 0.5%
ETF swaps are also known as what?
Synthetic replication
Which type of risk is an investor exposed to when an ETF uses synthetic replication?
Counterparty
What is it known as when an ETF tracks an index by investing in just a subset of the index?
Sampling or optimisation
What is a tracking error and how does it occur?
The difference between a funds return and the index return; due to management and trading costs
What tax is an investor subject to with ETFs?
Income tax on dividends
Capital gains on disposals
Can ETFs be eligible for inclusion in ISAs?
Yes
How are returns paid to the investor with an ETN if not by interest like a regular bond?
Performance of the market index it tracks, less management fees
What are the 2 additional risks that an ETN might have that an ETF doesn’t?
ETNs can be affected by the companies credit rating of the issuer so the value might still drop despite the underlying index.
Secondly, default risk - investors may receive nothing at all
Why are indirect investments into property shares more volatile than direct investment?
Because of the level of gearing
Which type of tax and on what, are the property companies themselves liable for with listed property shares?
Corporation tax on capital gains and rental income
Funds that invest substantially in properties can delay redemption to raise money to pay investors for how long as a maximum?
6 months
How do the share price and NAV correlate with property investment trusts?
Independent of eachother, depending on demand
Are funds that invest directly in property eligible for ISAs?
Yes
What is the CGT treatment on unit trusts and investment trusts to the investor?
Subject to CGT
What is the eligibility criteria for a JISA?
Residency, age and other products.
UK resident
Under 18
Do not have a CTF
Can a child hold a cash ISA in addition to a JISA?
Yes, one of each
Who is eligible to open a JISA?
Anyone with a parental responsibility to the eligible child
If a child wants to open their own JISA, what is the minimum age?
16
Who manages the JISA on behalf of the child until they are 16?
The person with parental responsibility
What age does the child need to be before they assume natural responsibility for their JISA?
16
Withdrawals are not permitted until the child reaches 18 with a JISA , except in which 2 circumstances?
Terminal illness
Death
How many JISAs can a child have at one time?
Two - cash and stocks and shares
What happens to a JISA when the child reaches 18?
It becomes an adult ISA and funds become accessible
Children born on or after what date, but before JISAs came out, we’re eligible for a child trust fund?
1 September 2002
What are the 3 types of CTF?
Savings
Share accounts
Stakeholder accounts
When did JISA replace CTF?
2011
What happens to a CTF at maturity?
It remains a CTF until instruction is received by account holder to encash or transfer to an ISA
What is the benefit of a multi-manager fund to the investor?
Greater diversification
In-house fund of funds may not levy an additional annual charge on top of the fees of the underlying fund. True or false?
True
External fund of funds do not usually have the additional expense of the charges of the underlying fund. True or false?
False
Does switching between funds by the manager in a fund of funds create any CGT liability?
No
Who decides on an appropriate asset allocation for the fund in a manager or managers funds?
The overall fund manager
Who runs the specific asset class in a portfolio of a manager of managers funds?
External investment manager
Who is responsible for identifying competitive managers and monitoring exactly what each of the investment managers is buying and selling in a manager or managers fund?
The overall fund manager
Who has direct control over the fund’s assets in a manager of managers funds?
The overall fund manager through its custodians
Costs are more transparent in which of the following; fund of funds or manager of managers fund?
Manager of managers
How are additional fees for the individual investment manager paid for in a manager of managers fund?
From the AMC
Who holds the assets for the investor on 1) a Unit Trust and 2) an OEIC?
UT = trustees
OEIC = independent depositary
Who regulates the sale and marketing of unit trusts and OEICs?
FCA
Who oversees the investment association sectors?
Sectors Committee
Who checks the funds monthly on the IA to ensure they comply with the sector definition?
Independent monitoring company
According to the IA association, funds must invest at least how much of their assets in the relevant asset class?
80%
To qualify as an income fund, each fund in the IA sector must yield no less than how much of the relevant index on an annual basis?
90%
If an index-tracking fund is large enough, the managers may be able to replicate the component shares of the index exactly, what are the 2 alternatives if not?
Sampling (stratification)
Computerised model (optimisation)
Which generally make lower charges; index-tracking funds or actively managed funds
Index
When are government gilts most volatile?
During changes in interest rates
Which specialist FCA sourcebook sets out the rules for establishing and operating authorised schemes in the UK, including the spectrum of markets and types of securities in which funds can invest?
Collective Investment Schemes (COLL)
At least how much of a securities fund must be in approved securities?
90%
Markets must meet certain criteria to qualify as an eligible market for a particular fund. Who’s duty is it with a Unit Trust and OEIC?
Unit trust = managers and trustees
OEIC = authorised corporate directors (ACDs)
As well as ensuring the market is liquid, what are the 4 other standards that should be met in an approved security fund?
Regulated
Operating regularly
Recognised (e.g. by a statutory body or government agency)
Open to the public
The FCA requires firms to carry out a review of markets they consider eligible for each fund and, if necessary, update the fund’s scheme particulars in which the eligible markets must be listed. How often should they be reviewed?
Annually
For investors to benefit from CGT treatment on an offshore reporting fund, the fund must have retained reporting status for how long?
Throughout the period of their ownership
What kind of tax is applied on foreign dividends when received from an offshore reporting fund?
Income tax
What is the tax-treatment to the investor where an offshore reporting fund holds more than 60% of its assets in interest-bearing securities, and distributes income?
Income tax at normal rates, can be offset against PSA
Does an offshore reporting fund have to distribute all of its income?
No, but must report it to HMRC
What is meant by a roll-up fund?
All income is accumulated and no dividends are paid
A gain made on a non-reporting fund is calculated using CGT rules but how is it actually taxed?
As income
The price of shares are directly linked to the value of the underlying investments in a PAIF. True or false?
True
The price of shares are directly linked to the value of the underlying investments in a property investment trust. True or false?
False
What’s the maximum a corporate investor can hold in shares in a PAIF?
No more than 10% of the NAV
Rental profits and other property-related income are exempt from taxation in a PAIF fund. True of false?
True
Property income in a PAIF is ring fenced, but what type of tax and rate is taxable income subject to?
Corporation tax 20%
Under the PAIF a non-taxpayer can reclaim the tax deducted from any property income. True or false?
True
Which offers greater diversification; listed property shares or direct property investment?
Listed property shares
Can you have listed property shares in an ISA?
Yes
What is a futures contract?
Legally binding agreement to buy or sell an asset at a specified future date and price
Which position do buyers take in a futures contract?
Long position
Which position do sellers take in a futures contract?
Short position
What is the purpose of the initial margin on a futures contract?
Collateral in case the buyer or seller don’t see the contract through
How is the initial margin deposited on a futures contract?
NYSE Liffe / London Clearing House (LCH)
How often are positions on open contracts re-valued with futures?
Daily
What is the variation margin on a future?
Profits and losses resulting from the daily price changes
In which 2 circumstances might the daily revaluation of a futures contract stop?
- At expiry
- Investor decides to close the open position
What is an option?
Contract that gives the buyer the right, but not obligation, to buy or sell a specified asset at a fixed price by or on a certain date in the future
What is the fixed price on an options contract also known as?
Strike or exercise price
Call option gives the buyer the right to…
Buy
Put option gives the buyer the right to…
Sell
What are the 3 choices open to the holder of an option?
- Exercise the option
- Sell the option before expiry
- Let the option expire worthless
What is a European-style option?
One that can only be excerised at expiry
What is an American-style option?
One that can be exercised at any time during its life
A call option will have intrinsic value if the current price of the underlying asset is where in comparison to the strike price?
Above it
A put option will have intrinsic value if the current price of the underlying asset is where in comparison to the strike price?
Below it
Options with intrinsic value are referred to as what?
In the money
When is an option at-the-money?
Strike price and underlying asset current price are the same
Options with intrinsic value are in or out-the-money?
In
Options without intrinsic value are in or out-the-money?
Out
What is the options time value?
When the market value of an option exceeds its intrinsic value
What are the 2 major uses if futures and options?
Hedging and speculation
What is the object of hedging?
To protect an existing exposure against future adverse price
movements (stick a hedge in the way!)
What is the purpose of speculation?
To try to profit by correctly forecasting future price movements, at the risk of making losses if the forecasts are wrong
A fund manager may expect to receive a large amount of cash in the next few months, which is to be invested across the FTSE 100 market. If the fund manager is concerned that the market is going to rise before the money is received, what 3 options do they have?
- Wait until money is received and buy at the higher price (do nothing)
- Borrow sufficient funds to invest immediately, repaying with interest when the cash is received
- Use derivatives (futures and options)
If a UK equity fund manager believes that there is going to be a sharp downturn in the market in the short-term and wants to protect the value of the fund, what 2 options do they have?
- They could sell part of the portfolio
- They could use derivatives (futures and options)
What is the taxation treatment to an investor using futures and options?
Subject to CGT
Unless gilt or qualifying corporate bond
What does a diluted NAV calculation consider that an undiluted one doesn’t?
Outstanding warrants
Convertible loan stocks exercised
What is the diluted NAV formula?
Net assets plus money subscribed by warrant holders divided by Number of ordinary shares in issue plus new shares issued to warrant holders
When is an investment trust said to be trading at a premium?
When the share price is higher than the NAV per share
What are the two main types of investment trust?
Conventional and split capital
When is an investment trust said to be trading at a discount?
When the share price is lower than the NAV per share
What affects the discount or premium in an investment trust?
Investor sentiment
Value of investments it holds
What does a positive or negative discount/premium figure suggest?
Positive - trust is trading at a premium
Negative - trust is trading at a discount
If ABC Investment Trust share price is currently 90p and the NAV is £1, what is the trust trading at?
10% discount to NAV
If ABC Investment Trust share price is currently 110p and the NAV is £1, what is the trust trading at?
10% premium to NAV
The share price of of an investment trust company published in the press is the mid-market price, although dealers actually quote two prices, which are…
- Higher, buy/offer price
- Lower, sell/bid price
The difference of the higher and lower prices quoted on the stock exchange for an investment trust company is known as the…
Market makers’ spread or turn
How would a hedge fund manager normally expect to limit downside risk?
Buying put options
If a clients portfolio contains a significant discount to net asset value, what type of investment does she hold?
Shares in an investment trust
How much can the following borrow and on what basis?
Non-retail UCITS
Retail UCITS
QIS
Non-retail UCITS - 10% of funds property, permanently
Retail UCITS - 10% of funds property, temporarily
QIS - 100% of NAV
How much can the following borrow and on what basis?
Non-retail UCITS
Retail UCITS
QIS
Non-retail UCITS - 10% of funds property, permanently
Retail UCITS - 10% of funds property, temporarily
QIS - 100% of NAV
Which exchange-traded products may carry counterparty risk?
Commodities (ETC), and notes (ETN)
Which exchange-traded products are eligible for ISA?
All of them; ETF, ETC, ETN
Can the NAV of an investment trust be more than was paid for it?
Yes (i.e investor invests £10,000 into an investment trust, but it’s now worth more)
Where is the dilution levy paid to in an OEIC?
To the fund
What type of ISA is a Help to buy ISA?
Cash
Can a Help to buy ISA be transferred to a LISA?
Yes
What is the government bonus on a Help to buy ISA?
£50 for every £200 saved, to a maximum bonus of £3,000
If £12,000 is saved in a Help to buy ISA, what do the government top it up to?
£15,000
The Help to buy bonus is available for home purchase of up to how much in London and up to how much elsewhere?
£450,000
£250,000
What is the maximum monthly saving into a Help to buy ISA?
£200
Savers can save into a Help to buy ISA and a Lifetime ISA, but can only use the Government bonus from one of their accounts to buy their first home. True or false?
True
What does an innovative ISA contain that cash and stocks and shares ISAs don’t?
Peer to peer loans
What age do you need to be at the outset to open a LISA?
18 - 40
What is the maximum contribution allowed into a LISA each year?
£4,000
At what age can you no longer invest into your LISA?
50
What is the government bonus applied on a LISA?
25%, and up to a maximum of £1,000 a year
What is a split-capital investment trust?
One that aims to provide both growth and income
What is the limited initial life span on a split-capital investment trust?
5-10 years
What is a hurdle rate?
The minimum rate of return required for a company or investor to move forward on a project
Pound cost averaging applies to both regular and single premium investments; true or false?
False - you can only benefit from this on regular premiums
What is the logic behind pound cost averaging?
Buying at peaks and troughs in the market to level out gains
What is the aim of an absolute return fund?
To achieve a positive absolute return for investors in all market
conditions
What might an absolute return fund do in order to limit downside risk?
Use derivatives
What are the minimum and maximum requirements for investment in equities in the flexible investment sector of a multi-asset fund?
None
When do EIS shares become IHT free?
2 years
What is the income tax relief in an SEIS?
Up to 50%, if held for at least 3 years
What is the maximum investment in an SEIS per tax year?
£100,000
When do shares in an SEIS become inheritance tax free?
After 2 years of holding, upon death
With an SEIS, you can either use income tax relief or reinvestment relief, not both. True or false?
True
SEIS shares become CGT free after how long of holding?
3 years
What are the 5 conditions that should be met to qualify as an SEIS?
- be unquoted at the time of issue of the shares;
- employ 25 people or less;
- be no more than two years old;
- have less than £200,000 in gross assets; and
- meet the qualifying trade rules.
Matthew has an investment that allows him to select a quarterly guaranteed level of protection. What product does he have?
Protected equity bond
Barton Investments’ hedge fund always adopts a market-neutral strategy. This fund is referred to as a[n]:
Relative value fund
What is the most popular strategy of hedge funds?
Market neutral approach
Josh is a non-taxpayer who has invested into a real estate investment trust. The distributions he receives from his investment will comprise of how many elements at which tax rates?
one element paid net of 20% tax that he can reclaim and one element paid with no tax deducted.
