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R03 - Amended > Module 4 - Indirect Investments > Flashcards

Module 4 - Indirect Investments Flashcards

Indirect

1
Q

What is an indirect investment?

A

Investments held in a wrapper - such as registered pension schemes, ISAs, OEICs

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2
Q

How much tax relief on pension contributions can a non tax-payer get?

A

£3600 per annum

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3
Q

Investments held within a pension can grow tax free - true or false?

A

True

Aside from any non-recoverable withholding
taxes on overseas dividends.

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4
Q

How much of a pension can be taken tax-free from a pension and what is this called?

A

25% - pension commencement lump
sum

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5
Q

Once the initial tax free 25% ‘pension commencement lump sum’ has been taken - how is the balance taxed?

A

The balance is taxable to the extent that it is
removed from the fund will be taxed as earned
income.

As pensions can now be accessed flexibly and even taken as a lump sum, this can result in a significant amount of tax being paid where large lump sums are taken over and above the tax-free cash.

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6
Q

What year were ISAs introduced?

A

1999

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7
Q

What ISA’s are available to 16 year olds?

A

Cash & Junior ISA

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8
Q

How is the cash version of an ISA tax free?

A

Tax free interest

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9
Q

How are Stocks & Shares ISAs tax free?

A

Growth free of CGT
And income tax free

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10
Q

What are the 6 types of ISA

A
  • Cash
  • Junior
  • Help to Buy (defunct?)
  • Lifetime (taken place of help to buy?)
  • Innovative Finance
  • Stocks & Shares
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11
Q

Stocks & Shares / Cash ISAs are only available to…

A

UK residents or crown servants working overseas

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12
Q

Can stocks & shares ISAs hold cash?

A

Yes

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13
Q

Can stocks & shares ISAs also invest in AIM (alternative Investment market) shares?

A

Yes

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14
Q

How much can you invest in ISAs?

A

£20k across all ISAs

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15
Q

Where transferring investments between ISAs from the current year - what must happen?

A

The whole fund must be transferred and the new ISA effectively replaces the original one, allowing the investor to ‘top-up’ if they have not previously used their full allowance.

Funds in respect of earlier years may be transferred in part.

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16
Q

How much to start a help to buy ISA?

A

£1000

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17
Q

After initial £1000 - how much per month can get contributed into a help to buy ISA? How much will gov contribute and what is the max bonus?

A

£200 per month
Gov adds £50 per £200 contributed
up to total £3000 max bonus

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18
Q

What is the max property value for outside London / London with a help to buy ISA

A

£250K / £450K

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19
Q

Max investment into Junior ISA?

A

£9K

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20
Q

Who can open a JISA?

A

Only someone with parental responsibility.

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21
Q

What is an Onshore Collective Investment?

A

Collective investments are effectively just pools of different investors’ cash. This pooled money is placed in the hands of a fund manager who invests on behalf of all the investors.

This allows small investors to benefit from a
genuine spread of investments that wouldn’t be available to them were they to invest alone.

These collective investments can be held by the investor in their own right or alternatively through another wrapper like a pension or ISA, achieving different tax benefits as we saw earlier.

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22
Q

Name 3 types of UK Onshore Collective Investments?

A
  • Unit Trusts
  • OEICs
  • Investment Trusts
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23
Q

What two things does the tax status for investors holding onshore collectives depend on?

A
  • The type of collective being invested in
  • The investors broader tax position.
24
Q

In relation to onshore collective investments - what taxes are gains subject to and how is income paid?

A

Gains are subject to GCT
Income is paid as either interest or dividends

25
Q

What are the two types of offshore collective investments?

A

Reporting & Non Reporting

26
Q

What is a reporting fund?

A

An offshore funds that reports all income to HMRC.

UK investors will be told that this is the case and must therefore declare it in their tax return.

27
Q

With a reporting fund held by a uk taxpayer - are they liable to income tax if the income has not been distributed?

A

Yes - they are liable to income tax regardless of whether the income gets distributed or not.

28
Q

Where a reporting fund is set up as a company what tax rates usually are used?

A

Dividend rates

I.e nothing for non-taxpayers out that that falls in £2k allowance.

8.75% basic
33.75% higher
39.45% additional

29
Q

Where a fund holds 60% of its assets in fixed interest securities, income will be regarded as what?

A

Interest

Paid gross so no tax credit due so will be tax in full as per any other interest payment - subject to any personal allowance, saving allowance or starting rate.

30
Q

Name two types of reporting funds & how/what income they pay…

A

Equity Funds - pay dividends gross of income tax (8.75%, 33.75%, 39.35% - & £2k allowance)

Interest bearing fund - pays interest gross of income tax (20%, 40%, 45% & saving allowance etc

31
Q

Reporting funds tax is due…

A

As it is earned

32
Q

Non reporting funds tax is due…

A

As shares or units are sold

33
Q

What two things does HMRC want to tax in respect to non reporting funds? And when will they do this?

A

Income & CGT - when shares or units are sold so they can calculate the gain by determining the difference between price paid and price sold for

34
Q

How are non-reporting funds taxed?

A

CGT principles I.e gain calculated price sold minus price paid

But tax rate of based on income tax so 20, 40, 45%

35
Q

What is the benefit of a non reporting fund?

A

Investors can benefit from gross roll up which could be beneficial if their expect their tax rate to fall in the future.

36
Q

Can you use allowances as normal on reporting funds?

A

Yes

37
Q

Can you use allowances as normal on non reporting funds?

A

No

38
Q

For non-uk investors, offshore income with be free from uk tax?

A

Yes

39
Q

Dividend income received by offshore funds, regardless of reporting or non reporting status, will generally be subject to what?

A

A non-recoverable withholding tax which can’t be recovered by the investor.

40
Q

What are the two types of life policies?

A

Qualifying and non qualifying

41
Q

What is a purchased life annuity? How is it taxed?

A

What Is a Life Annuity?
The term life annuity refers to a financial product that features a predetermined periodic payout amount until the death of the annuity owner—called the annuitant. An annuitant typically pays into the annuity periodically when they are still working. Annuitants may also buy the annuity product in one large, lump-sum purchase—usually at retirement. Life annuities are commonly used to provide guaranteed and/or supplemental retirement income that cannot be outlived

Part is regarded as return of capital so tax free

The remaining part of each income payment is treated as interest and is taxed at 20% at source

42
Q

What is a purchased annuity certain?

A

An annuity certain is an investment that provides a series of payments for a set period to a person or the person’s beneficiary or estate.

It is an investment in retirement income offered by insurance companies.

The annuity may also be taken as a lump sum. Because it has a set expiration date, an annuity certain generally pays a higher rate of return than a lifetime annuity.

Typical terms are 10, 15, or 20 years.

43
Q

Is it possible for the income from a purchased life annuity to be paid gross?

A

Yes - non taxpayers can request it be paid gross.

This is one of the only ways interest is still paid net.

44
Q

What are traded endowment policies?

A

Endowment is a long term, regular premium qualifying policy.

Where these are no longer needed but surrendering policy particularly a with profits policy would result in loss of bonus on maturity - there is a market for second hand policies.

45
Q

What happens when a policy is sold to a third party?

A

The third party takes over the premiums and claims bonus on maturity or death of original policy holder.

46
Q

What needs to have happened for the original policyholder of an endowment policy to not have to pay tax?

A
47
Q

What is an OEIC?

A
  • collective investment
  • open ended investment company
  • investors buy shares in the company
  • open-ended, meaning there is no limit to how much can be invested in them,
  • normally priced once a day based on the total value of all their holdings, otherwise known as net asset value (NAV).
48
Q

What is a Unit trust?

A
  • Collective investment
  • similar to OEIC except units are bought rather than shares.
  • Unlike an investment fund which has a fixed number of shares a unit trust can create and cancel units.
  • open-ended, meaning there is no limit to how much can be invested in them,
  • normally priced once a day based on the total value of all their holdings, otherwise known as net asset value (NAV).
49
Q

What is an investment trust?

A
  • An investment trust is a company with a fixed number of shares in a stock exchange that it sells to investors and then pools the money to make investments on their behalf.
  1. Fixed supply of shares
    There are a set number of shares in circulation, meaning you may only invest when the trust is launched or if someone wants to sell.
  2. Freedom to borrow
    Some trusts borrow money to buy bigger stakes in investments, known as gearing.
  3. Ability to trade at a discount and at a premium Since investment trusts trade on a stock exchange, the share price depends on supply and demand, rather than the actual value of their combined holdings – known as net asset value (NAV).
  4. Regular cash flow for investors
    Investment trusts can withhold up to 15% of income generated from their investments to deliver back to investors in the form of a dividend payout at a later date, such as when returns are down.
50
Q

Onshore collective investments are paid net or gross and of what tax?

A

They are paid gross of income tax

51
Q

CGT is payable on what?

A

GAINS - so profit - so bought & sold

52
Q

What percentage of a fund should be held in fixed interest securities for it to be deemed to pay interest?

A

60%

53
Q

Dividend income from an offshore collective investment fund will usually be subject to what - regardless of whether it’s reporting or non reporting?

A

Non recoverable withholding tax

54
Q

When is the only time CGT is levied on a life policy?

A

When it’s been traded and so the person cashing it in is not the original policy holder - any other time it would be income tax.

55
Q

How many companies are you investing in with an EIS?

A

Just one unlisted company

56
Q

How many companies are you investing in with an SEIS?

A

Just one smaller, unlisted company

57
Q

How many companies are you investing in with a VCT?

A

Multiple

R03 - Amended (12 decks)

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