M 7, 3, 4 Flashcards
What are the Stamp Duty land tax brackets
Tax is tiered as below 0 - 125k 0% 125k - 250k 2% 250k - 925k 5% 925k - 1.5m 10% 1.5m + 12% Nothing on first home up to £500k
Key issues in selecting a benchmark?
Is it sector/region specific? Is it Multi asset?
Currency overlays/currency futures applied in order to hedge?
Accumulation / distribution and the effects of charges?
Asset classes and their distributions / geographic.
Is the benchmark achievable and investable? (liquidity of representative assets)
What are the mechanics of a repo agreement?
A sale (of an asset usually gilts) and repurchase agreement. At a later date for a pre determined price. In the end the borrower returns the assets and the lender returns the collateral. Difference in sale and repurchase price is the repo rate.
- Counterparty risk, Market risk (asset value falls) and legal risk. An initial and variation margin - Margin calls may be marked to market throughout the term depending on value of underlying asset. Can be mitigated by use of a tri-party agent.
Purpose when implemented by central banks is to provide or remove liquidity from the money markets.
A tri-party repo would involve a custodian bank/clearing house to act as an itermediary
Key details of a CFD?
No stamp duty Free from typical broker fees. A cheap means of shorting a share Most brokers require 10 - 30% margin requirement of the contracts value so investors can leverage larger positions than the balance they hold. CGT is chargeable
Key info of QE?
The ECB (or central bank) - Purchase of government debt of the member states (in the case of the EU) who in turn increase money supply to their real economy buy purchasing government and corporate bonds from private sector companies usually insurance companies, pension funds and high street banks inflating government bond prices and lowering yields of the debt sold to the central bank and generating new money to encourage lending. Low intrest rates are good for borrowers and bad for savers. Monthly purchases in public and private sector securities will amount to €80 billion and deposit rate to -0.4%
- Theoretically after the economy has recovered the central bank will sell the bonds it bought and destroy the cash to effectively make it as though no extra cash was created.
- Negative effect of ballooning asset prices and reducing yields used to pay pensions.
- Not an exact science and central banks are struggling to maintain credibility.
What are the option greeks?
Key factors affecting an options premium?
Strike price
Underlying asset price
Time to expiry
Underlying asset volatility
Risk free interest rate.
Delta - ratio of change in price of option / change in price of the underlying. 0 to 1 for calls and negative for puts. Closer to ITM is closer to 1.
Gamma - rate of change for delta -small when deep out or in the money. large when near the money and short dated.
Vega - change in options value for 1% in implied volatility.
Theta - Measures time decay of an options value as it decreases approaching maturity.
What is the pension PCLS? (pension commencement lump sum)
On crystalisation of a pension from the age of 55 you may take a tax free lump sum of up to 25%. The residual can be utilised into either an annuity or a income drawdown in which income form the pension is income taxable and further withdrawals are subject to marginal rates of tax. Drawdown favourable as it allows assets to be bequeathed.
What is p2p lending?
Peer to peer is either private/personal or corporate/commercial sectors with different risk prfiles.
Higher rates of returns than banks and most IG bonds.
Loosely regulated and not covered by the FSCS yet low reported default rates.
High illiquidity as no secondary market.
Low allocations only after assessing the risks to be recommended.
How does a final salary pension work?
a 1/80th salary means on retirement you get 1/80th of your final salary. So if you end up with 20/80ths of a £30,000 salary you would be entitled to a 3 times lump sum in the first year for retirement and terminal illness. only 1/80 pays a lump sum not 1/60/40.
For terminally ill persons a cash equivelant transfer out of 20x may be applied for.
What are the pension pot IHT rules?
Pension pots now act as a type of Inheritance tax free wrapper. If you die before 75 then the entire holding can be given to beneficiaries in drawdown or lump sum completely tax free. If the member dies after 75 then the beneficiaries will need to pay their marginal rate on withdrawals but the pot is still tax exempt for IHT purposes.
This is subject to sums within the £1m lifetime allowance.
What are the two equity release schemes?
- A way of raising capital for elderly clients. Often expensive with reduction of the persons estate on death. -
- It makes it difficult to move house when entered into equity release contracts.
Lifetime Mortgages - when interest rates are low
Home reversion - when interest rates are high
What is a lifetime mortgage?
- Most providers insist you are at least 60 or 65 and then you may take out a loan secured against your primary residence.
- You can borrow up to to 60% of the value of your property.
- A portion of the property may be ringfenced for IHT
Interest can be ‘rolled up’ and added to the loan or paid as you go. Debt can increase quickly. - On death or movement into care the house is sold and loan repaid in full.
- It is worth checking if smaller lump sums can be taken. If you can take smaller lumps then the interest will be less than a single large lump sum.
What is Home reversion?
- Minimum age 60 or 65 depending on provider you may sell all or some of your home to a home reversion provider at usually at 20% to 60% of the market value for a tax free lump sum and remain a tenant for your lifetime. - – - The older the client the more they can expect from the provider due to less life expectancy and time risk to the provider.
- Care over how often the house is inspected
- Lump sum or regular payments often available.
- Very expensive and favourable only if interest rates are very high which would make lifetime mortgages expensive over the long run.
- Sale on death and repayment to the provider.
What is Solla?
- Society of later life advisers - Accredited by the financial skills partnership for elderly or vulnerable people.
- Suitability reports are essential.
A not for profit organisation which can find and supply qualified specialists in a postal area. - Under mifid ii it states firms must ensure suitability of advice that it gives.
- Equity release advisers must hold level 4 and CF8 Long term care qualifications under mifid ii
What is the key test for suspicious transactions reporting?
Grounds to believe there may be market abuse and exceptionally large transactions.
Raise a SAR
Disclosure to ‘nominated officer’ or MLRO. Sent to SOCA. ‘Serious Organised Crimes Agency’ who will investigate the SARs for money laundering
Refer to POCA - proceeds of crime Act 2002.
Care not to ‘tip off’ individuals when suspending transactions
What is the RPI? what is the CPI? What is the CPIH Housing? What is the RPIJ J? What are gilts linked to?
Both RPI and CPI are measures of inflation measuring the changes in cost of a basket of products through different arithmetical means.
RPI is used to index incomes, tax allowances, pensions and gilt linkers. RPI INCLUDES housing costs, council tax and mortgage interest payments.
CPI= Basis of govt inflation targets. Does NOT include housing costs which take on average 10% of spending costs. Council tax is not included too.
CPIH = includes OOH costs ‘owner occupier housing costs. The large cost of paying your mortgage.
RPIJ = will be measured as a geometric mean such as the CPI but addressing the issue of how clothes prices are measured.
why might a company share buy back rather than pay out a dividend?
a companys purchase of its own shares in the market to then cancel.
- return capital to shareholders giving a capital gain back to shareholders and greater share of earnings to remaining share holders.
- Tax advantages because of this.
Companies may want to consolidate moving more to value and away from growth.
Main Features of a QROPS? 9 points
Qualified Recognised Overseas Pension Scheme.
They can receive the transfer of UK Pension benefits without incurring unauthorised payment.
- Must apply to be approved by HMRC and meets HMRC Requirements.
- Typically UK residents emigrating permanently
- Or people having built up benefits with HMRC returning to home country to retire.
- Must be established in EU Member state, Norway, Liechtenstein or Iceland with a double tax agreement with the UK.
- Or countries with double tax agreements.
-Must satisfy that 70% of funds will provide the member an income for life.
-No payment before the member reaches retirement age unless in ill health.
-Closed 300 schemes in Guernsey and now primarily in Malta, IoM and Gibraltar.
-Can avoid heavy UK taxation so popular with UK expats.
