Mock Questions Flashcards
What is meant by a composite benchmark (5 marks)
- A single indicator of performance
- made up from elements of a number of different indices
- in a fixed proportion
- dependent on funds objectives
- and risk profile
Explain main differences between UCITS and UCIS that can result in UCIS having greater risk (8 marks)
- UCITS authorised by EU
- UCITS retail distribution
- UCITS benefit from better liquidity
- UCITS regulated
- UCITS have investor protection
- UCITS have transparency
- UCITS have diversification rules
- UCITS have borrowing restrictions
State five types of investor whom UCIS may be promoted (5 marks)
- Existing holders
- Certified high net worth
- Enterprise and Charitable
- Employees of the fund
- Professional clients
- Sophisticated investors
Explain safeguarding regulations that govern UCITS in respect of diversification (6 marks)
- Not more than 10% value of fund
- in any one company
- No more than four companies at this maximum 10%
- Remainder maximum 5%
- So must be minimum of 16 holdings
- Max 10% unquoted companies
Explain safeguarding regulations that govern UCITS in respect of Borrowing (4 marks)
- Borrowing only
- Up to 10%
- On temporary basis
- if supported by expected receipts
Explain the terms fettered and unfettered (4 marks)
Fettered:
- only exclusively
- in house range
Unfettered:
- can use funds from other managers
- as well as their own
State and explain one advantage of fettered and unfettered
Fettered:
- Can be cheaper
- As no additional charge over and above underlying fund charge is allowed
Unfettered:
- Not restricted, broader choice of funds
- If one fund fails to perform it can be replaced as wide universe available
Explain how manager of manager fund works (5 marks)
- Overall manager decides on asset allocation
- appoints manager for each sector
- and monitors its performance
- can replace managers
- funds are segregated and
- discretionary
Explain two advantages and two disadvantages of MOM in comparison to FOF
Advantages:
- Bespoke mandate
- No requirement to sell a fund and buy a new one
- Can replace managers
Disadvantage:
- New manager left with what predecessor chose to buy
- could be tax implications
- limited number of managers willing to stick to mandate
State the main differences between a physical gold exchange traded commodity and a synthetic gold ETC (2 marks)
Physical:
- owns gold
Synthetic:
- purchases derivatives
State six benefits and four drawbacks of gold as part of portfolio (10 marks)
Benefits:
- Diversification
- Reduces overall risk
- Negative correlation with equities and bonds
- Hedge against inflation
- Safe haven
- CGT free
Drawbacks:
- No income
- Storage costs
- Price affected by supply and demand
- High transaction costs
Explain why the price of a synthetic gold ETC would differ from the spot price of
gold. (6)
Synthetic
• Uses futures/swaps/derivatives.
• Futures/derivative prices are higher than spot prices/contango.
• To reflect costs of storage/insurance/interest.
• Over the 3-month period.
• Ongoing charges/rollover cost.
• Market expectations.
State the type of futures contract you should enter into to compensate for a
fall in the price of gold and explain how it achieves this objective. (7 marks)
- Short futures contract
- involves obligation
- to sell
- at a specific price
- at a certain date
- if price falls can sell gold at higher price as per contract
- covering any losses
Explain why three month futures contract might not be the best way to hedge position (6 marks)
- Margin calls if market moves against him
- volatility of underlying commodity
- need for constant monitoring
- usually limited to professional investors
- complex investment
- possibility of unlimited loss
- underlying must be delivered
State five types of derivative or instrument that could be used to hedge
gold sovereign exposure. (5 marks)
- Spread betting
- Contracts for differences
- Options / Forwards
- Short exchange traded commodity
- Covered warrant
State the three elements that make up the definition of ‘equity’ for the return on
equity formula. (3 marks)
- Shareholders capital
- Reserves
- Retained profits
Formula for Return on equity (5 marks)
- net profit after tax and interest
- divided by equity (shareholder capital, reserves and retained profits)
ROCE Calculation (5 marks)
- Earnings before interest and tax
- Divided by shareholder funds (including retained profits) + long term borrowing
Describe the main drawbacks in using price-to-book (P/B) when valuing a company as a potential investment. (6 marks)
- Book value of assets may differ from market value
- Current value does not factor in future cash flow
- Not suitable for companies with intangible assets
- Can be easily distorted by share price movement
- Not suitable for comparing companies in different sectors
- Output not robust
From a behavioural finance perspective, state four reasons why a client may be
inclined not to sell, and explain one justification for each reason, based upon situation. (8 marks)
- Loss aversion - might be selling at a loss
- Anchoring - where paying round figures
- Endowment effect - sense of attachment
- Overconfidence - might think still a good investment
Identify five non-behavioural reasons why you might decide to retain shares in Lake company. (5 marks)
- sector scope for growth
- could be good ROCE
- may be oversold
- takeover target
- see effects of reduced borrowing
Outline the main factors that a financial adviser would take into consideration when constructing an investment portfolio (7 marks)
- Attitude to risk
- Capacity for loss
- Assets
- Emergency fund
- Tax status
- Time horizon
- Ethical preferences
State the main conditions that must be met for a property fund to qualify as a
property authorised investment fund (PAIF).
• At least 60%;
• of income;
• from exempt property business.
• Value of property assets must be at least 60% of total assets.
• Shares widely held.
• No corporate investor;
• holding 10% (or more of net asset value).
State the tax treatment of the three income components of a PAIF, if the PAIF is used to generate income (8 marks)
Dividend income:
- Paid gross
- At dividend rate relevant
- Once dividend allowance exceeded
Property Income Distribution:
- PID income paid net of basic rate tax 20%, could reclaim if non taxpayer or may owe more
- once personal savings allowance exceeded
Interest/other income:
- Paid gross
- At marginal rate of tax
How to calculate EPS
net profit attributable to ordinary share holders / number of shares in issue
How to calculate dividend cover
EPS / Dividend per share
3 risks of direct equities rather than investing in a fund
- Non systematic risk
- Diversification risk
- No FSCS protection
Explain what is meant by sequencing risk and its effects on an investment portfolio, given the need to generate an income from the investment (5 marks)
- Impact of volatility
- On the order and
- Timing of withdrawals
- and sustainability of future income
- long term impact on capital value
- greater in early years
Explain the main objectives of the rebalancing process. (6 marks)
- Realign a portfolio to its original asset allocation
- to match attitude to risk
- capacity for loss
- Review of individual funds
- Invest cash
- adjust portfolio to deal with any changes in circumstances
Identify ten main issues that a financial adviser should consider when rebalancing the portfolio once an investment portfolio is set up and generating an income (10 marks)
- Trading costs
- Whether to retain benchmark
- Potential tax liabilities
- Regulatory issues
- Is rebalancing automatic or manual
- Frequency of rebalancing
- Whether existing income will be affected
- Liquidity
- Timing of rebalancing
- On going suitability of existing funds
Explain the subscription rules and tax treatment of any new investment that if subscribe to a new Enterprise Investment Scheme (10 marks)
- Can invest up to £1,000,000
- Or upto £2,000,000 if excess £1,000,000 is in knowledge intensive companies
- 30% income tax relief
- upto income tax liability
- can carry back relief to previous year
- re-investment relief available
- if invests within 1 year before or 3 years after original gain
- any gains made in EIS exempt from CGT if held for 3 years
- qualify for business relief
- if held for 2 years
Explain briefly why the MWR is not considered appropriate when evaluating and comparing different portfolio returns and suggest a more suitable alternative
return measure (4 marks)
- strongly influenced by cash flows
- outside control of manager
- doesn’t identify whether returns are due to managers ability
- TWR is a better measure
Explain briefly to John the difference between positive screening and negative
screening with respect to socially responsible investing (2 marks)
- Positive screening invests in companies that meet laid down criteria.
- Negative screening avoids companies that fail to meet criteria
Explain four potential drawbacks of using Socially Responsible Investing
other than investment performance.
- Less diversification due to avoiding certain areas
- more expensive
- less research available
- higher risk
- approach differs
State the information you would have to provide when requesting an
Additional Permitted Subscription (6 marks)
- Deceased NI number
- date of birth
- and date of death
- proof of marriage
- full name
- address
State the qualifying investments that may be held within an Innovative Finance
ISA. (3 marks)
- Peer to peer lending
- Cash
- Bonds and debentures
Explain the main features of preference shares compared to ordinary
shares. (3 marks)
- Fixed dividend
- Higher priority in wind up
- Non-voting
Explain six relative differences between standard deviation and Beta in terms of
how they measure risk. (6 marks)
Measure
• Beta measures market risk;
• standard deviation measures fund risk
How they measure
• Beta measures volatility;
• standard deviation measures total risk
Benchmark
• Beta is relative to market;
• standard deviation based on actual return
Explain the potential impact of rising interest rates upon fixed interest and
equities asset classes (4 marks)
Fixed interest:
- yields rise
- capital values fall to remain competitive
Equities:
- debt costs rise
- profits fall, share price falls
Explain two reasons why a Fund may increase its exposure to its
equities and commodities asset classes in response to rising inflation. (4 marks)
- equities will have higher profits
- higher share price
- commodities demand increases
- resulting in higher prices
State three reasons why the price of index-linked fixed interest securities may fall even if inflation is rising and expected to continue to rise. (3 marks)
- Interest rates rising faster than inflation
- increased issuance to fund budget deficit
- inflation expectations are falling
- CPI difference
Describe briefly what is meant by current account and capital account. (6 marks)
Current account:
- imports minus
- exports
- in goods and services
- plus receipt from overseas income generating assets
Capital account:
- movement of all monies/assets
- into country
- out of country
Outline four potential economic consequences of the current account and capital account being in deficit over the medium to long-term. (4 marks)
- Rising interest rates
- Economic growth falls
- Currency devaluation
- Capital flight out of the UK
- Unemployment rises
- Inflation increases
State three benefits and three drawbacks, of using a stocks and shares ISA as a
long-term investment vehicle for retirement, compared to a
personal pension.(6 marks)
Benefits:
- accessible at any age
- tax-free withdrawals
- not limited to earnings
Drawbacks:
- no tax relief
- lower investment limit
- cannot write under trust
- funds not earmarked for retirement
Explain the diversification rules for a retail Undertakings for the Collective
Investment of Transferable Securities (UCITS) OEIC, based upon the minimum
number of permissible holdings and their respective percentages. (5 marks)
• Minimum 16 holdings in total
• Maximum 10%;
• in up to four companies.
• Maximum 5%;
• for rest/other companies.
State the maximum exposure a retail UCITS OEIC may hold in unlisted securities. (2 marks)
- 10%
- of total assets / fund
Explain the term capacity for loss (4 marks)
- The ability to
- absorb
- any negative investment event
- without it having a material effect
- on standard of living
List the non-financial factors that can influence an investor’s attitude to risk. (6 marks)
- previous experiences
- time horizon
- client objectives
- investor psychology
- framing
- economic environment
Explain why ATR may be higher for a pension than ISA (5 marks)
- longer term investments
- impact of short term volatility
- not accessible till age 57
- effect of tax relief
- capacity for loss considerations different
Describe the key principles of Modern Portfolio Theory, in respect of the construction of an investment portfolio. (10 marks)
- a diversified portfolio
- of non correlated assets
- investors risk adverse
- maximum return
- for given level of risk
- efficient frontier
- uses expected return of each asset
- standard deviation
- to produce optimal portfolio
- systematic risk cannot be removed
- non-systematic risk can be
- sensitivity to the market is expressed by beta as market risk
Why might consider using DFM as well as passive funds (5 marks)
- active management
- wider range of funds
- time markets
- bespoke
- influence asset allocation
- tax planning service
State the potential risks of using a DFM service (6 marks)
- might use unsuitable assets
- duplication with non dfm portfolio
- dfm acts outside of mandate
- regulatory issues
- overtrading / higher costs
- tax liabilities
- underperformance
State two reasons why may be putting off the decision to invest, identifying one
justification for each reason, from a behavioural finance perspective. (4 marks)
- Loss aversion, fear of losing money
- Overconfidence, timing the market
- Mental accounting, not looking at overall position
State five main risks to which may be specifically exposed to if invests in
high yielding alternative income products. (5 marks)
• Liquidity risk.
• Accessibility risk.
• Interest rate/gearing risk.
• Valuation risk.
• Diversification/correlation risk.
• Default/credit risk.
State the four main types of preference share and identify the key characteristic for each type. (8 marks)
Cumulative:
- has right to any unpaid dividend
Participating:
- additional dividend linked to company profits
Redeemable:
- Redeemable by company
Convertible:
- can be converted to ordinary shares on pre-set terms
Identify four important considerations that could impact on achieving income
objective in retirement. (4 marks)
• Changes in health/life expectancy.
• Changes in taxation.
• Changes in inflation.
• Market volatility/returns.
• Sustainability of income.
• Other savings.
State five benefits and five drawbacks to Efekan of transferring his existing assets to a platform, compared with holding them directly. (10 marks)
Benefits
• Everything in one place/consolidated valuations/reporting.
• Less admin
• Income flexibility.
• Pre-funding/cash account.
• Access to tools.
• lower fund charges.
Drawbacks
• May pay exit charges.
• Additional platform charges/pay for services not used.
• Unnecessary functionality/too complex solution.
• May have to sell assets.
• Time out of market.
• Risk of platform failure/outage.
• Unable to hold alternative income products.
Identify the three main categories of benchmark used by fund managers. (3 marks)
• Constraint;
• target;
• comparator.
Describe the key differences between M0 and M4 as measures of money supply. (4 marks)
• M4 includes deposits created by lending/all bank accounts.
• M0 includes operational deposits at the Bank of England.
• M4 is broad money.
• M0 is narrow money.
• M4 is indicator of economy.
• M0 is indicator of consumer spending/retail sales.
Explain briefly how the Bank of England could reduce the money supply and
state the effect on interest rates. (4 marks)
• Selling securities;
• reduces velocity of money
• reduces purchasing power
• Interest rate rise.
State two reasons why the money supply is not suitable as a benchmark for
an investment portfolio. (2 marks)
- not a measure of return
- economic not financial, stock market and GDP are different
Describe the general limitations of using investment ratios, such as P/E or ROE/ROCE, when analysing a company’s financial performance (5 marks)
- different accounting policies
- credibility of source of information
- distorted by one off events
- data is historical
- affected by macro trends
- can’t be considered in isolation
- can’t compare across sectors
Identify eight main factors, excluding ‘market movement’ that could affect share price. (8 marks)
- economic outlook
- regulation changes
- investor sentiment
- takeover activity
- profit / earnings expectation
- capital event
- dividend expectation
- change of managers
- competitors
- removal from index
Explain briefly how could use a Seed Enterprise Investment Scheme (SEIS)
to mitigate her Capital Gains Tax liability. (4 marks)
- Any gains on SEIS exempt if held for 3 years
- reinvestment relief applies, 50% gain exempt other 50% chargeable
- loss relief available
Explain briefly the initial Income Tax treatment of a new SEIS investment. (4 marks)
- 50% relief
- upto £200,000
- must be held for three years
- relief up to tax liability
- can go back one tax year
Describe what is meant by a momentum investment style. (4 marks)
Momentum
• Identify trend.
• Trend accelerating/continuing.
• Sell before trend ends.
• Ignores intrinsic value/fundamentals.
• Generally, short term.
Describe what is meant by a contrarian investment style (4 marks)
Contrarian
• Consensus usually wrong.
• Returns from going against the herd/ market sentiment.
• Positive when outlook negative/out of favour.
• Price less than intrinsic value/undervalued.
• Generally, long term.
Explain three main differences between the Sharpe ratio and the Information
ratio. (6 marks)
- IR uses benchmark
- Sharpe uses risk free rate of return
- IR can be used to compare funds
- Sharpe is absolute
- IR measures consistency over time
- Sharpe doesn’t
- IR uses tracking error
- Sharpe uses standard deviation
State four drawbacks of using the Sharpe ratio in investment planning. (4 marks)
- Need to consider other factors
- Can be distorted by fund
- Reliant upon standard deviation
- Can be distorted by costs / volatility
State the main rules that a fund must adhere to in order to qualify as a REIT. (8 marks)
- UK resident
- Closed ended
- At least 75% of profits
- At least 75% of assets
- relate to ring fenced business
- interest / borrowing coverage
- at least 125%
- at least 90% of profits must be paid out within 12 months
From a behavioural finance perspective:
State three main biases that may have influenced their investment decision and
provide one justification for each bias. (6 marks)
- Hindsight - may have done well in past
- Mental accounting - money for set objective
- Overconfidence - market timing
- Endowment effect - may already have these types of funds
Outline six main reasons why a financial adviser would use an investment trust
rather than an open-ended investment company (OEIC) when investing in the
same sector of the market. (6 marks)
- charges could be lower
- gearing / borrowing
- discount to NAV
- more flexible
- ability to change manager
- greater accessibility
- wider range of investments
- real-time pricing
List four open-ended fund structures that could be used to invest in UK equities.
Exclude OEICs from your answer. (4 marks)
- Unit trusts
- UCITS
- ETFs
- life fund / investment bond
- Non-UCITS
Explain three relative differences between what is measured by alpha and beta. (6 marks)
- Beta measures market risk
- alpha measures difference between expected return and actual return
- Beta explained by movements in market
- alpha not explained by market movements
- Beta measures volatility
- Alpha measures stock picking skills
TWR Calculation
- Period 1: V1 - C - V0 / V0 + 1
- multiplied by
- Period 2: V2 - V1 / V1 + 1
- minus 1 x 100
Explain briefly why would use the TWR, rather than the money-weighted rate of return (MWR), when evaluating performance (3 marks)
- TWR not influenced by money added
- TWR focuses on managers skills
- TWR shows change over entire period
Identify two aspects of personal taxation that would change if Irma and Christopherwere to get married and state how each could result in potential tax savings. (4 marks)
- inheritance tax
- unlimited spouse exemption / inherit nil rate band
- capital gains tax
- inter spouse disposal exempt
- income tax
- marriage allowance / transfer of 10% of personal allowance
Explain briefly the main drawbacks of holding a fund that invests on a single theme or thematic basis. (5 marks)
- smaller investment universe
- costs likely to be higher
- illiquidity of underlying holdings
- higher volatility
- lack of diversification
- risk of fund closure
Identify the due diligence factors solely relating to meeting income
needs that the adviser would consider when assessing a potential platform. (4 marks)
- ability to hold existing assets
- ability to continue paying out income without interruption
- cash account minimum balance
- charging structure
- range of income yielding funds available
Identify the main income options available via the cash account that would enable a platform to meet income needs. (3 marks)
- ability to pay natural income
- ability to pay fixed income
- ability to pay adhoc withdrawals
Describe how the investment bond could be used to generate the income and state the basic tax treatment of this figure. (5 marks)
- Take tax deferred withdrawals
- of up to 5% of initial investment
- tax deferred so no immediate income tax liability
- up to 20 years, at which point any withdrawals taken are added into any chargeable gain calculation
Briefly describe sequencing risk. (6 marks)
- effect of volatility
- on the order and timing of withdrawals
- and sustainability of income
- and impact on capital value
- greater effect in early years
State five actions that could be taken to mitigate the effects of sequencing risk (5 marks)
- Reduce / stop income
- Change the frequency
- Take only natural income
- Extend time horizon
- Secure proportion of income e.g annuity
- Diversification
- Hold at least 6 months in cash
Identify the main differences between an interim and a final dividend. (6 marks)
- Interim declared during financial year
- Final declared at AGM
- Interim declared by board
- Final declared by shareholders
- Interim can be revoked
- Final cannot be revoked
- Interim only if articles expressly permit
- Final not subject to articles
Describe briefly what it meant by the term ‘correlation’ in relation to investment planning. (3 marks)
- covariance between
- two assets
- adjusted for the risk
Identify the four components of an economy’s current account. (4 marks)
- Goods
- Services
- Investment income
- Transfer payments
State the main forms of ethical investment.
Exclude negative screening from your answer. (3 marks)
- Positive
- Sharia finance
- ESG
- Impact
Identify which other non-equity asset classes could be used for new money,
to diversify the existing portfolio while maintaining an overall ethical approach. (4 marks)
- Green bonds
- Renewable energy
- Social impact
- Social housing
Explain three reasons why an equity-based ethical investment strategy could
out-perform an equity-based non-ethical investment strategy. (3 marks)
- Small cap focus shown to outperform
- Greater concentration
- Invest at start of trend
- Government subsidies
State four fund-specific factors that an adviser would consider when researching
ethical funds for potential inclusion in the portfolio. (4 marks)
- Ethical criteria
- Appropriateness of benchmark
- Managers skill
- Ethical stance of management group itself
- Is it aligned with clients ethical views?
Identify three implications to a company of paying out an uncovered dividend. (3 marks)
- may have to cut / reduce dividend
- unless one off bad year
- use reserves
- may raise capital
Identify one ratio that would appeal to a growth-orientated fund manager and one
ratio that would appeal to a value-orientated fund manager and state two reasons for each selection.(6 marks)
Growth:
- P/E ratio
- High P/E suggests profits expected to rise quickly
- share price increase
Value:
- Dividend yield, Dividend cover of low P/E
- High dividend gives high income, high cover gives income consistency, low P/E could show share is undervalued
- Share price supported by income available
Gregor believes that the economy is moving into the latter stages of the business cycle.
(i) State two reasons why this view would likely have a positive impact on share price in the short to medium term. (2 marks)
- low P/E stocks become more attractive
- dividend yield increases
Gregor believes that the economy is moving into the latter stages of the business cycle
State two reasons why this view would likely have a negative impact on share price in the short to medium term. (2 marks)
- High P/E stocks become less attractive
- Equity risk premium reduces
- future profits less certain
Explain to the client the main differences between ROE and ROCE. (5 marks)
- ROCE considers all assets used in the business
- including debt / borrowing
- ROCE uses profit before interest and tax
- ROCE Useful to compare individual companies and their efficiency
- ROE is based on profit after interest and tax
- ROE is based on equity investment only
Explain why UK Government Treasury bills are a suitable measure of risk-free
return to use in the CAPM equation. (4 marks)
- minimal no default risk
- short duration
- minimal inflation and
- interest rate sensitivity
State seven main assumptions upon which the CAPM equation is based. (7 marks)
- Investors are rational and risk averse
- identical holding period
- no individual can affect market price
- ignores charges
- market is liquid
- information fully available
- risk free rate suitable to use
- investors can lend unlimited amounts
- beta is correct measure
Describe briefly Macaulay duration. (5 marks)
- Weighted
- average term
- in years
- for initial investment to be repaid
- taking into account coupon payments
- and redemption payment
Explain briefly what is meant by modified duration (4 marks)
- measures sensitivity of a bonds price
- to interest rates
State one reason why a fixed interest fund manager would use Macaulay duration and one reason why a fixed interest fund manager would use modified duration within a bond fund. (2 marks)
Macauley: matching liability / portfolio immunisation
Modified: Reduce interest rate risk
State the technical definition of a recession in the UK economy (5 marks)
- Two
- Consecutive
- Quarters of
- negative
- GDP growth
Describe briefly the four main factors that cause UK interest rates to reduce.
You should exclude recession/economic activity from your answer. (4 marks)
- Quantitative easing
- Reduction in gilt issuance
- Monetary policy loosening
- Reduction in inflation expectations
- Credit crisis / demand for sterling
State four changes that could be made within the client’s fixed interest portfolio
in the event of an anticipated recession. (4 marks)
- Increase duration
- Decrease high yield
- Increase investment grade
- Use derivatives
State the main product features of NS&I Income Bonds. (6 marks)
- Minimum £500
- Maximum £1,000,000
- Instant access
- Backed by government
- Taxable but paid gross
- Income must be paid out cannot be accumulated
- Variable rate of interest
List three benefits of investing in NS&I income bonds
- Provides diversification
- Protection in excess of £85,000
- No market risk
Identify two limitations on the use of NS&I Premium Bonds within the client’s
portfolio. (2 marks)
- Maximum deposit £50,000
- Interest rate notional, might not win anything
How to calculate standard deviation
- Step 1, calculate the mean of the numbers. So add these numbers together and divide by the number of numbers.
- Step 2, take each return and minus off the mean calculation
- Take these numbers and calculate to the power of the amount of numbers
- Add these results together
- Divide by the number of numbers
- Calculate square root
Describe briefly what standard deviation measures. (4 marks)
- volatility
- through variation in
- actual return
- against mean return
State the percentage of returns that fall within one and two standard deviations,
based upon the normal distribution of returns of a bell curve. (2 marks)
- 1 standard deviation 65%-70%
- 2 standard deviations 94% - 98%
Describe the semi-strong form of efficient market hypothesis (EMH). (7 marks)
- prices reflect
- all
- public information
- rapidly and
- unbiased
- cannot outperform market
- includes past prices and
- company information
State how the semi-strong form of EMH considers technical analysis and
fundamental analysis. (2 marks)
- Both fundamental and technical analysis is ineffective
- Neither adds outperformance
Identify five factors that should be taken into consideration if it is agreed at the meeting to rebalance the portfolio. (5 marks)
- costs
- potential tax liability
- interruptions to income
- ATR / CFL
- suitability of asset allocation
- change of benchmark
- time out of the market
List seven additional pieces of information relating to Fenna’s financial situation that a financial adviser would consider when determining her objectives and needs (7 marks)
- marital status
- state of health
- other assets
- liabilities
- emergency fund
- ethically / SRI
- capacity for loss
Explain the tax treatment of any investment that Fenna might make into a new VCT (8 marks)
- can invest up to £200,000
- 30% income tax relief
- up to tax liability
- if held for 5 years
- any gains within VCT exempt
- with no minimum period
- no loss relief / deferral relief
- dividends tax free
Explain the tax treatment of any investment that Fenna might make into a new VCT. (2 marks)
- all capital is at risk, no FSCS protection
- may not receive full income tax relief
Identify four additional risks to which Fenna would be exposed if she invested
into a VCT in comparison to her AIM shareholding. (4 marks)
- accessibility
- liquidity
- manager could breach qualifying rules
- manage risk
- may not be invested for a while
Compare the main differences in the tax treatment of the gains and withdrawals from onshore and offshore investment bonds (10 marks)
Onshore:
- corporation tax paid within fund
- on capital gains made / investment income
- deemed UK basic rate tax paid
- chargeable gains subject then to no further tax for BR, 20% for HR and 25% for AR
- taxed as top part of income
Offshore:
- withholding tax
- not subject to uk tax internally / gross roll up
- subject to 20% on gains for BR, 40% for HR and 45% for AR
- taxed as savings income
State whether strategic or tactical asset allocation would be more suitable for Fenna given her objectives and give two reasons for your choice. (3 marks)
- Strategic
- Investing for long term
- Objectives known at outset
Identify the main benefits of owning a gilt-based collective fund in comparison to a single gilt on a direct basis. (4 marks)
- active management
- diversification
- across yield curves / maturities
- can invest in new gilts
- access to market participants
Identify the main drawbacks of owning a gilt-based collective fund in comparison
to a single gilt on a direct basis. (4 marks)
- Exposed to duration risk
- loss of known redemption date
- investor protection limited upto £85,000
- subject to CGT on disposal
- daily dealing
- fund charges
State the three types of credit risk that apply to owning direct gilts. (3 marks)
- Default
- Downgrade
- Credit Spread
State the two options available to the client other than taking up the rights issue in full (2 marks)
- Do nothing
- Sell the rights
List four main smart beta strategies that may be suitable based upon the client’s
objectives. (4 marks)
- Weighting
- Earnings growth
- Dividend Cover
- Style
State four limitations of using alpha to measure a funds performance (4 marks)
- Doesn’t explain reason for outperformance
- Assumes CAPM is suitable
- Assumes beta is correct measure of risk
- Ignores costs / charges
- only suitable when comparing similar funds
Identify and explain briefly four main types of investment risk that would be
relevant to Clara’s investment in the OEIC fund. Exclude market
risk from your answer. (8 marks)
- Volatility
- Greater degree of movement
- Manager
- Stock picking risk
- Shortfall
- Returns less than needed
- Style risk
- Could be out of favour
- Non-systematic
- Corporate event
Identify and explain briefly four additional main types of investment risk that
would be relevant to Clara investing in investment trust . (8 marks)
- Liquidity
- unable to sell / achieve fair price
- pricing
- trades at discount / premium to NAV
- Currency
- returns affected by currency movement
- Gearing/interest rate risk
- equity returns affected by borrowing
- sector risk
- early stage potentially / speculative
State the maximum amount that Lucy could each contribute to a
Lifetime ISA in its first year and any Government bonus that may be payable. (3 marks)
- £4,000
- Government bonus of £1,000
Explain the main contribution and withdrawal rules for a Lifetime ISA. (8 marks)
- Part of overall ISA allowance
- £4,000 contribution per year
- must be 18 or over
- must make first contribution under 40
- must cease contributing at 50
- must be held for 12 months
- 25% withdrawal charge unless buying first home
- £450,000 or less
- aged 60 or over
- terminally ill
- bonus not paid if using H2B ISA
Outline the options available to Lucy in respect of her existing Help to Buy ISA. (4 marks)
- Increase contributions up to £200 pm
- Stop / decrease contributions
- withdraw / close
- transfer to a LISA
- transfer to different provider
State the information that an ISA administrator would require in order to process an additional permitted subscription (APS) request by a surviving civil partner. (6 marks)
- deceased name
- deceased proof of residency
- NI number
- date of death
- date of birth
- date of partnership
Describe the main differences in the structure of an OEIC and an Investment Trust. (8 marks)
OEIC:
- unlimited shares
- redeems shares linked to NAV
- may be standalone or sub fund of ICVC
- must appoint an ACD
- assets held by depositary
- can borrow on a temporary basis upto 10%
Investment trust:
- fixed number of shares
- shares bought / sold independent of NAV
- listed company
- has board of directors
- can borrow on permanent basis
- may have fixed life
Describe the main differences in the pricing of an OEIC and an Investment Trust. (8 marks)
OEIC:
- daily pricing
- based upon NAV
- single pricing
- may apply dilution levy
Investment Trust:
- real time pricing
- determined by supply and demand
- dual pricing / bidoffer spread
- can trade at discount / premium
Identify three advantages and three disadvantages of using a GIA for retirement planning, compared to a workplace pension (6 marks)
Advantages:
- accessible at any time
- can use CGT allowance, CGT rates lower than income tax rates
- no limit on contributions
Disadvantages:
- No income tax relief
- No employer contribution
- taxation within GIA
Identify six main benefits to Anshul of consolidating his existing collective funds onto a platform (6 marks)
- all info in one place
- multiple tax-sheltered products
- easier admin
- income flexibility
- access to tools
- transaction history
- lower fund charges
State the time limits within which CGT deferral relief would be available to Anshul on a new investment into an EIS. (3 marks)
- up to 1 year before
- up to 3 years after
- disposal
Explain briefly the CGT rules of any new investment into an EIS, if the investment
were made with the proceeds from the sale of the shares. (8 marks)
- existing gain
- deferred until disposal
- without limits
- can be deferred again
- any new gains within EIS
- exempt from CGT
- after 3 years
- if income tax relief obtained
- loss relief available
- offset against income or gains
Identify two factors that are relevant to Anshul, from a behavioural finance perspective and give one reason for each of these two factors. (4 marks)
Anchoring:
- holding on to round numbers
Endowment effect:
- valuing something more back he has it
Mental accounting:
- compartmentalising capital
Describe briefly the objective of Stochastic modelling. (5 marks)
- Estimate of
- Probabilistic
- range of returns
- and volatility
- under different scenarios
State the three main inputs required to generate an optimal portfolio via a
Stochastic modelling tool. (3 marks)
- Returns
- Standard deviation
- Time period
Identify four drawbacks of using a Stochastic modelling tool. (4 marks)
- Assumptions unrealistic
- Ignores sequencing risk
- over confidence
- difficult to understand
- expected return not accurate
- doesn’t factor in client circumstance
Describe what is measured by ROE metric (4 marks)
- ability to generate profit
- how efficiently it uses
- shareholders funds / capital
- relative performance against sectors
How to calculate quick ratio
assets (includes cash and trade debtors) / current liabilities
State the two main Asset headings within the balance sheet of a company’s
accounts and list two categories of assets that would be found under each
heading. (6 marks)
- Current
- Cash
- Stock
- Trade receivables
- Non current
- Tangible
- Intangible
- Investments
State the three main components of the UK’s capital account. (3 marks)
- Assets
- Loans / Borrowing
- Foreign currency
State the principal purpose of a capital account surplus within the UK’s balance
of payments. (3 marks)
- To fund
- a current account
- deficit
Explain briefly the macro-economic role of financial investment within the
economy. (4 marks)
- stimulates demand
- by increasing aggregate demand
- increases productivity
- and business investment
Describe briefly what is meant by the OCF in respect of a collective fund. (4 marks)
- single
- percentage figure
- that shows the
- annual cost of
- investing in a fund
Identify six main risks of investing in a global emerging markets equities fund and provide one reason for each risk. (12 marks)
- Currency:
- adverse exchange rate movement
- Economic:
- Different stage of business cycle
Concentration:
- Index composition
Political:
- political instability
Liquidity:
- may not be able to access quickly
Regulatory:
- lower accounting standards / less governance
Manager:
- may not have local knowledge
State the options that are available to Johanna at the forthcoming maturity of the issue of Index-Linked Savings Certificates. (3 marks)
- Renew at new term for same length
- Renew at new term for different length
- Cash it in
Explain briefly to Johanna how the total maturity value of the Index-Linked Savings Certificates is calculated. (4 marks)
- The original value
- Plus interest
- Plus inflation
- using CPI
Identify four main benefits of investing in NS&I products. (4 marks)
- no market risk
- highly liquid
- government backed
- above FSCS limit
- no charges
Outline the tax treatment of Johanna’s holding of NS&I Green Savings Bonds. (3 marks)
- all interest taxable in year of maturity
- taxed as savings income
- PSA can be used if applicable
Describe the main characteristics of a value-based investment style (7 marks)
- bottom up
- uses fundamental analysis to find
- undervalued stocks
- Low P/E
- or high dividend yield
- potential for re-rating
- often contrarian
- long term view
TWR Calculation
Period 1:
V1/V0
x by
Period 2:
V2 / V1 + C
- 1 x 100
Explain briefly why Mathieu and Johanna would use the TWR rather than the money weighted return (MWR) when evaluating the performance of the fund. (3 marks)
- better for comparison
- not influenced by cash flows
- as these are outside of managers control
- focuses on managers performance
- compounds multiple sub periods
Describe briefly the main functions of the authorised corporate director (ACD) in
respect of the structure and operation of an OEIC. (4 marks)
- compliance and regulatory reporting
- responsible for pricing
- oversees manager
- buys / sells shares
- maintains shareholder register
- maintains liquidity
- prepares accounts
Describe briefly the main functions of the depositary in respect of the structure and
operation of an OEIC. (4 marks)
- act as custodian
- safeguard assets
- pay income distributions
- monitor ACD
- on investment / borrowing limits
- deals with fund wind up
Explain briefly the tax treatment of dividends paid from a VCT and from a SEIS. (3 marks)
- VCT tax free
- SEIS dividends taxable at marginal rate, can use DA
Explain briefly reinvestment relief in respect of investment into a new SEIS.
(3 marks).
- 50% of gain exempt
- up to maximum £200,000
- must qualify for income tax relief available
Explain briefly disposal relief in respect of investment into a new SEIS. (3 marks)
- gain exempt
- if shares held for 3 years
- must have qualified for income tax relief
- applies to loss or gain
Outline the main benefits to Syed offered by segmentation of the onshore
investment bond. (5 marks)
- can encash whole segments
- may keep as BRT
- defers chargeable events for longer
- considers investment performance
- can reduce chargeable gains
- can assign segments
Describe the regular withdrawal facility of the onshore investment bond
including the tax treatment based upon Syed’s Income Tax position. (6 marks)
- up to 5% per annum
- of original investment
- cumulative
- deemed as return of capital
- tax-deferred
- to 20 years
- corporation tax paid internally
- 20% BRT deemed paid
Describe briefly the basic principle and objective of top-slicing relief. (4 marks)
- Divides excess gain
- By number of policy years
- in order to give average yearly gain
- in order to reduce / mitigate
- higher rate tax liability
Identify the main differences between an unfettered fund of funds and a manager of managers fund (4 marks)
- FOF is multiple funds, MOM is single fund
- FOF has additional charges, MOM does not
- FOF has to sell fund, MOM switches only manager
- FOF has no control over mandate, MOM has more control
- FOF less transparent, MOM is more transparent
- FOF affected by capacity
State the main component parts of the UK’s current account. (4 marks)
- Goods
- Services
- Investment Income
- Transfer payments
State the main component parts of the UK’s capital account. (3 marks)
- foreign assets
- foreign loans / borrowing
- foreign currency
Describe briefly three ways in which a current account deficit could be
balanced out. (3 marks)
- met by capital account surplus
- foreign investments
- sale of foreign currency
- central bank intervention
Explain limitations of relying on dividend cover and dividend yield (6 marks)
- Dividend info historical
- Dividend cover could be low
- Dividend can change
- Can be distorted by one off factors
- Will be affected by share buybacks
- ignores capital value
Identify 8 factors that could affect share price (8 marks)
- Economic Outlook
- Changes in legislation
- Change in sector sentiment
- Corporate event
- Investor sentiment
- Takeover speculation
- Change in management
- Accounting issues
- Inclusion / removal from index
State two factors why a client may be displaying anchoring (2 marks)
- Anchoring - could be focused on dividend figures / round numbers
- Mental accounting - compartmentalising, focusing on one thing at expense of another
State three advantages to Reg of owning a direct equity compared to his collective
funds. (3 marks)
- Greater potential growth
- No ongoing costs
- Greater control
- Direct link between share price and return
Explain the main objectives of the rebalancing process for an investment portfolio where the client has an income need. (6 marks)
- Realign portfolio to original
- asset allocation
- to match ATR / CFL
- correct portfolio style
- take profits
- top up underperforming funds
- maintain / increase cash
- ensure income can be maintained
- utilise tax allowances
Explain briefly the aim of Modern Portfolio Theory (MPT) and how it is achieved. (5 marks)
• Maximum return;
• for given risk;
• via diversification;
• of imperfectly correlated;
• asset classes.
State the key assumptions upon which MPT is based. (5 marks)
• Investors are rational;
• and risk adverse.
• Returns are normally distributed.
• Based on historical data.
• Investors have access to all information.
• Market is efficient/no one investor can influence market.
• Unlimited borrowing at risk-free rate.
• No costs/tax.
Explain briefly to Mitchell four main benefits of diversification within an investment portfolio. (4 marks)
- Reduce systematic risk
- Can remove non-systematic risk
- Gain exposure to different asset classes
- Increase stability of returns
Describe briefly what is measured by standard deviation. (4 marks)
- volatility through
- variation in
- actual return
- against mean
Identify six main risks relating to Mitchell’s existing investments and give one reason for each risk. (12 marks)
-Geographical
- Concentration risk - lack of diversification
- Sector - could be in same sector
- Economic risk - exposed to economic cycle
- Accessibility - where capital is in private companies
- Liquidity - no market for private shares
- Investor protection - no FSCS protection
Outline the main differences between the Consumer Prices Index (CPI) and Retail
Prices Index (RPI) measures of UK inflation. (5 marks)
CPI
• Key inflation measure/BoE target.
• National statistic.
• Geometric/lower than RPI.
• Used by government in payment of state pension/benefits.
• Excludes housing costs/mortgage interest payments.
RPI
• Used for index-linked gilts/planned to be replaced by 2030.
• Not a national statistic.
• Arithmetic/higher than CPI.
• Includes housing costs/mortgage interest payments.
Describe briefly the main differences between broad and narrow money. (4 marks)
• Broad includes;
• lending activities;
• and accounts;
• of UK residents.
Narrow includes;
operational deposits with the BoE.
- Broad indicator of economy.
• Narrow indicator of consumer confidence.
Identify the likely economic consequences of a sustained increase in the UK money
supply. (3 marks)
• Greater velocity/transmission of money.
• Increased borrowing/spending/
• Increase in prices
• Tightening monetary policy
State three drawbacks that Mitchell should consider when using ROE as a measure of a company’s performance. (3 marks)
- Only shows return on shareholder equity
- ignores borrowing
- difficult to compare with different companies
State five non-financial factors that could influence Mitchell’s attitude to risk. (5 marks)
- Expertise
- Age
- Investor psychology
- Economic outlook
- Society / media
State four ways in which capacity for loss can be mitigated. (4 marks)
- Invest only what can afford to lose
- Reduce ATR
- Hold sufficient cash
- Discussion and understanding
- avoid over reliance on tools
- establish risk able to take
what is over confidence and herding (4 marks)
• Overconfidence
• Overestimates own abilities/knowledge.
• Using economic data as own research/to support his view.
• Herding
• Following friend’s advice.
• Fear of missing out.
State four ways in which an Enterprise Investment Scheme (EIS) could provide Mitchell with greater tax planning opportunities compared to his stocks and shares ISA. (4 marks)
- Higher investment limit
- Can carry back tax relief
- 30% income tax relief
- CGT deferral available
- IHT business relief available
- loss relief available
Describe briefly the objective of gearing within an investment trust. (3 marks)
- To increase available funds
- without using cash / going to shareholders
- to increase exposure to other assets
- to increase returns
Explain briefly the possible consequences that could result from an investment
trust increasing its level of gearing. (4 marks)
- higher volatility
- gains and losses magnified
- increased sensitivity to interest rates
- increased borrowing costs
- forced seller if borrowing limits exceeded
- change in investor sentiment
Describe briefly what is meant by an investment trust trading at a discount. (3 marks)
- Share price
- below
- NAV
Identify five possible reasons for the current level of discount at which Strategic Long View plc is trading. (5 marks)
- holds unlisted securities
- sector out of favour
- manager out of favour
- poor recent performance
- ejections from index
- level of gearing
Identify the three main income options that could be available on the platform’s cash account to support Patrick in meeting his income need. (3 marks)
• Ability to pay just dividends/ natural income.
• Ability to pay fixed/regular levels of income.
• Ability to pay ad-hoc/one-off withdrawals.
Explain briefly to Patrick how tactical asset allocation differs from strategic asset allocation.(4 marks)
- strategic long term, tactical short term
- strategic has fixed allocation, tactical varied allocations
- strategic reviewed less frequently
- strategic trades less frequently
- tactical aims to take advantage of market movement
Describe five actions that Patrick could take to mitigate the effects of sequencing
risk. (5 marks)
- Work longer/defer retirement date.
- Reduce level of income.
- Take natural income only.
- Change the frequency of income.
- Purchase annuity/secure proportion of - income.
- Reduce equities/holding in Strategic Long View.
- Buy higher yield assets/fixed interest/diversify asset allocation.
- Hold sufficient cash.
State three main benefits of owning a gilt-based collective fund compared to
owning Gilts X and Y on a direct basis. (3 marks)
• Invest across range of maturities/durations.
• Invest across range of coupons.
• Fund manager expertise/potential for outperformance.
• Less administration/knowledge required.
• Able to access gilts at issue/not available directly.
State three main drawbacks of owning a gilt-based collective fund compared to
owning Gilts X and Y on a direct basis. (3 marks)
• Higher on-going charges.
• Annual interest/redemption yield not known.
• Less/no control.
• Potential CGT liability on sale.
• Manager may underperform/not add value.
• Investor protection limited to £85,000/subject to FSCS limit.
Identify three reasons why index-linked gilt prices would fall when inflation itself is rising. (3 marks)
• Interest rates increase faster than inflation
• Actual inflation exceeds expected inflation.
• Expectation of lower inflation in future
• indexation lag
• Uk downgraded
• Index linked coupons small part of overall return
• Increased supply
Outline the effects of increases in interest rates on conventional fixed interest
securities. (4 marks)
- Fixed coupon less attractive; so price/capital value falls.
- Yield rises/new bonds issue with higher coupon.
- Longer dated bonds see larger falls.
- Lower coupon bonds see larger falls.
State the main objectives of quantitative tightening (QT). (3 marks)
- Reduce consumer spending
- Reduce liquidity
- Raise interest rates
- Reduce inflation
Explain briefly to Tommaso the consequences of a central bank implementing QT. (3 marks)
- Increased supply of bonds causes prices to fall;
- and yields to rise
- Borrowing becomes more expensive
- savings rates increase
- inflation comes down
- lenders unable to lend as much
Identify four main factors that would cause the UK yield curve to steepen (4 marks)
- sell off in long dated gilts
- expectation of higher inflation
- excessive economic growth
- expansionary fiscal policy
- QT
- market shock
Comment on the investor protection when investing in gilts and state, giving your reasons why, whether all of Tommaso’s portfolio is protected. (4 marks)
- Gilt fund covered by FSCS
- up to £85,000
- directly held gilts backed by government
- without limit
- however still subject to credit risk
Outline nine factors that Silvia would take into consideration when conducting the
annual review with Tadeusz. (9 marks)
- change in needs
- change in health
- emergency fund
- liabilities
- use of tax allowances
- changes in legislation
- performance
- ongoing suitability
- ATR / CFL
- ethical considerations
- level of service
- additional monies to invest
Describe what beta represents and what it measures. (4 marks)
• Beta represents market risk
• a measure of sensitivity
• relative to the market.
Explain briefly the limitations of using beta as a measure of risk. (3 marks)
- Measures market risk alone
- Assumes risk free rate is correct
- Not stable
- Based on historical data
Identify the main differences between GAARP and growth investing. (3 marks)
- Lower P/E ratios than growth
- Only pay fair price
- Not pure growth
State the two main risk-adjusted ratios used to analyse an actively-managed fund and explain briefly what each ratio measures. (6 marks)
• Sharpe Ratio
• Excess return for every unit of risk/risk-free rate.
• Excess return over standard deviation.
• Information Ratio
• Excess return over benchmark/in relation to tracking error.
• Consistency of manager.
State the main rules that a fund must adhere to in order to qualify as a real estate investment trust (REIT). (8 marks)
• UK resident/listed.
• Closed-ended/only one share class.
• Property rental/ring-fenced business;
at least 75%; of total gross profits;
• of total value of assets.
• Interest on borrowing covered; at least 125%;
• by rental profits.
• Distributes;
at least 90% of exempt profits;
• within 12 months of accounting period.
State the two types of income payment that can be made by a REIT and describe
their tax treatment if received within a GIA. (8 marks)
• PID
• Paid net of 20%
• Could be reclaimed / might need to pay more
• PSA can be used if available.
• Dividend
• Paid gross.
• Subject to 33.75% dividend rate tax.
• DA available.
Outline four benefits of introducing commercial property to the asset allocation of a GIA portfolio (4 marks)
- Hedge against inflation
- Increased income
- Reduced equity market risk
- Reduced positive correlation
Identify four main risks when investing in physical commercial property through
open-ended collective funds and state one reason for each risk (8 marks)
• Liquidity
• Fund forced to sell properties/limited cash within OEIC/properties hard to sell.
• Accessibility
• Unable to access money/fund gated/dealing suspended.
• Pricing
• Swing pricing/pricing basis changes/dilution levy applied.
• Valuation
• Material uncertainty/unable to provide NAV.
• Void
• Loss of tenant/property empty.
• Income
• Loss of yield/unable to collect rent/reduction in rent.
State four of the main assumptions used in portfolio optimisation (4 marks)
• Risk.
• Historical data.
• Forecasts.
• Costs.
• Implementation.
Describe briefly the objective of Stochastic modelling. (5 marks)
• Forecast/predict the;
• probabilistic/potential;
• range of;
• returns/outcomes;
• using volatility/standard deviation;
• under different scenarios/simulations.
Identify four main drawbacks of using stochastic modelling.
• Assumptions unrealistic
• Over-reliance/over-confidence in output.
• Output unrealistic/unattainable.
• Difficult to understand
• not client specific
Describe what is meant by GDP and what it measures. (5 marks)
• Monetary value/;
• of all final goods/;
• and services;
• of an economy/;
• over a quarter/y
• measure of the size and growth
• of the economy
Explain briefly from an investment perspective the consequences of
globalisation (4 marks)
• Increased interconnectivity of trade.
• Increased correlation of equity markets.
• Market risk harder to diversify
• International exposure through domestic listed companies.
• Increased volatility risk.
• Greater sensitivity to political events
• Markets increasingly efficient
Explain briefly the tax treatment of friendly society policies within the fund and in the hands of the investor. (4 marks)
Within the fund
• Interest/dividends;
• capital gains
•tax-free
Hands of the investor
• Investment growth is tax-free/free
Identify five benefits of investing in a frontier markets equities fund, compared
to holding direct UK equities. (5 marks)
• Reduction in systematic risk.
• Reduction/removal of non-systematic risk.
• Geographical diversification.
• Exposure to higher growth economies/potentially higher returns.
• Potential returns from currency movements.
• Professional management.
• Potential for alpha/frontier markets not efficient.
• FSCS/investor protection.
• Reduced administration/less involvement.
State the main stages of the top-down investment process for a frontier
markets equities fund. (3 marks)
• Geographical allocation.
• Sector weightings.
• Individual stock/security selection.
Explain briefly the main investment-related factors that George and Rosemary
would take into consideration when deciding whether to choose active or
passive strategies for the investment into a collective fund. (7 marks)
Active
• Fund style/objective/mandate.
• Manager track record/expertise.
• Alpha/IR/Sharpe/does active justify the cost?
Passive
• Replication strategy/tracking error.
• is market efficient
• counterparty risk
Either:
• costs and charges
• choice of benchmark
State four main benefits and four main drawbacks of using a stocks and shares ISA as a long-term savings vehicle for retirement, compared to a personal pension plan. (8 marks)
Benefits
• Accessible at any time/before age 55/57.
• 100% tax-free lump sum.
• No need for/not linked to earnings.
No tax on any income withdrawal.
Drawbacks
• No Income Tax relief/employer contributions.
• Lower investment limit/no carry forward/AA is £60,000.
• Part of estate/can’t write under trust.
• Funds not ‘earmarked’ for retirement/can spend at any time.
• ISA limited to £85,000 FSCS.
State three ways in which an investment trust can raise capital. (3 marks)
- Rights issue
- Placement
- Borrowing
- Issue bonds
Describe briefly the concept of dilution in relation to the investment trust. (3 marks)
• Company issues new shares/number of shares increase.
• Existing shareholders;
• own less of company/shares worth less/NAV per share falls;
• unless buy additional/new shares.
State the time limits for reinvestment of the proceeds into an EIS within which
CGT deferral relief would be available to Kambiz. (3 marks)
• Up to 3 years;
• after sale
• Upto 1 year before sale
Outline the main differences between the tax treatment of an EIS and a VCT (5 marks)
• VCT no CGT deferral relief/EIS CGT deferral relief.
• VCT dividends tax free/EIS dividends taxable.
• VCT new gain exempt CGT immediately/EIS gain exempt after 3 years.
• VCT no loss relief/EIS loss relief available.
• VCT no business relief/EIS business relief available.
• VCT minimum period to retain Income Tax relief 5 years/EIS 3 years.
• VCT no carry back/EIS carry back available.
Identify three main benefits of investing into an EIS portfolio compared to a single
company EIS. (3 marks)
• Non-systematic risk can be reduced.
• Can invest across multiples sectors.
• Professional manager expertise/experience.
• All research, selection and investment decisions made by manager.
• Invest across different stages of underlying companies.
Identify three main drawbacks of investing into an EIS portfolio compared to a single company EIS. (3 marks)
• Investment not pooled/not technically a fund.
• Less visibility.
• Increased paperwork/administration/HMRC reporting.
• Low number of investment companies/non-systematic risk not removed.
• Additional layer of charges/discretionary management expensive.
