Review Kathy's Investments Flashcards
How would CGT work on Alan’s former OEIC passed to Kathy
No CGT payable on transfer
As no loss, no gain principle
As married at the time of transfer
When sold, Alan’s base cost is deducted
Annual exempt amount is deducted
Any other losses are deducted
Depending on tax band, net gain is is charged at 18% or 24% or both if straddling threshold
CGT would have been charged at 10 or 20% if the sale happened before October 24
Tax efficiency of Alan’s former OEIC
Kathy is basic rate taxpayer
Mid-cap equity fund allows yse of dividend allowance of £500
Tax after is 8.75%
Fixed interest funds
Allows use of £1000 on interest as a savings allowance
Further interest is charged at 20%
Kathy can use her CGT allowance of £3000 if cashing, plus losses and Alan’s base cost
She will then be liable to CGT on the remaining at 18% or 24% or mix of both if straddling higher rate tax threshold
She could gradually bed and ISA over several years
To make use of CGT allowance and protect funds from CGT charge and
to shelter future funds from CGT and income tax
Inside estate for IHT
Comment on Alan’s former UK mid-cap sutabilty for Kathy
Diversification
-Adds diversification to overall all portfolio
-single asset class lacks diversification
-single geographic location lacks diversification
-single sector
Risk
-less volatility and risk than small-cap
-more volatility and Risk than large-cap
-potential Inflation protection
-market risk hedge (can move in different direction to market)
-may experience sector risk
-does not match ATR
Specifics
-actively managed
-easily switched if desired
-easily accessed
-not aligned with ESG
-gives income but may not be needed right now
-performance not known
Taxation and charges
-allows div allowance
-allows CGT allowance
-can bed and ISA over time for tax efficiency
-Higher charges may erode the value of funds
-Liable to CGT on encashment
-Liable to dividend tax on dividend distribution
-holding in estate on death
Comment on Alan’s former UK fixed interest sutabilty for Kathy
Diversification
-adds diversification to overall portfolio
-fund itself is diversified between gilts and corporate bonds
-lacks diversity of assets
-single geographic location
Risk
-Diversified risks between gilts and bond
-may match causious to medium risk
-no currency risk
-no political or regualtory risk
-limited protection from inflation
specifics
-should be easily switched to different funds
-funds can be accessed easily at any time
-not aligned to ESG
-provides an income, but it may not be needed right now
-performance not known
-exceeds FSCS
Tax and charges
-enables use of personal savings allowance
-Enables use of CGT annual exempt amount
-can bed and ISA for tax efficiency
-charges may erode the value of fund
-liable to CGT on encashment
-liable to income tax on interest distribution
-holding in estate on death
What are the benefits of Kathy keeping Alan’s investments?
Potential for growth
Hedge against inflation
Can use CGT annual exempt amount in the future
Adds diversification
May provide dividends and savings income
Dividend allows use dividend allowance
Saving income allows use of savings allowance
Can bed and ISA overtime using CGT allowance
OEICs tend to have low charges
What are the drawbacks of Kathy keeping Alan’s investments?
May not meet ATR
Not online with ESG
May require advice
Income not guaranteed
May be taxable for dividends, savings income, and CGT as not in ISA
Could make a loss
May be included by the local authority when assessing her ability to pay LTC costs
Why should Kathy consider drip, feeling some of her OEICs into hef ISA wrapped actively managed UK and global funds?
To use ISA allowance in future tax years so it is not wasted
Would give tax-free growth and a hedge against inflation
Can choose a high yielding fund to produce immediate income.
Provides additional tax-free income in retirement
Provides diversification
Benefit from fund manager expertise
Asset and geographical diversification
Doesn’t match ATR or ESG, but it could choose one that does
Matches capacity for loss as other assets
Benefits from pound cost averaging
What happens to Alan’s ISA as a result of his death?
On death, it became deceased’s continuing ISA
No further funds can be added
Income tax and CGT free until the earlier of the estate being administered, ISA closing or 3 years AND 1 DAY from death
Kara can invest ISA as an ‘aditional permitted subscription’ at the higher value of the continuing ISA on death or the date the ISA investments are passed to her
This protects the wrapper
And is an adition to Kathy’s own allowance
Must be registered with the APR provider
Can transfer ‘in specie’
Or sell and transfer cash to ISA up to APS value
Or use her own money to fund APS
APS can be used the later of 3 years from death
Or 180 days from Estate wind up
Comment on the sutability of Alan’s global equity ISA for Kathy
Diversification
-adds over all diversification to Kathy’s portfolio
-add global geographical diversification
-single asset class lacks diversification
Risk
-does not match Kathy’s ATR
-or ESG preference
-potential hedge against inflation
-may have currency risk
-may have regualtory and political risk
Specifics
-potential for growth
-actively managed
-easily switched
-exceeds FSCS
Tax and charges
-free from income and CGT tax
-but falls into estate on death
-so using ISA funds rather than pension will reduce estate
-charges could erode value
Comment on the sutability of Alan’s UK fixed interest ISA for Kathy
Diversification
-adds diversification to overall portfolio
-single geographic location lowers diversification
-lacks asset diversification besides
-fund being diversified between gilts and corporate bonds
-which each have different risk ratings
Risk
-May be in line with Kathy’s Cautious to medium ATR
-may be eroded by inflation
-no currency risk
-no regulatory or political risk
Specifics
-may not match Kathy’s ESG preferences
-actievly managed so has potential to beat market
-easily switched to other fund
-no restrictions on access
-limited growth potential
-provides income which may not be needed now
-performance not known
Taxes and charges
-no income or CGT tax as in ISA
-but is in estate for IHT
-using funds from this rather than Kathy’s pension will lower estate
-charges could erode funds
What is the endowment effect and its potential effect on the advice given to Kathy
-The danger Kathy holds onto investments just because she inherited them
-An emotional response that requires a rational discussion
-Especially as it affects Kathy’s overall portfolio diversification
-and how her investments match her ATR, objectives and ESG preferences
-Inheritance should be invested in a manor suitable for the client
-rather than in it’s current form
-as the deseased may have had differing needs, wants, and lived in different circumstances
Evaluate the tax efficiency and sutability of Kathy’s own in investments
We don’t know if Kathy has used her ISA allowance for the year
Assuming afordability, she should continue to top up her s&S IDA as this will provide accessible tax-free income in retirement
Her ISA is above FSCS of £85,000
She should consider opening another ISA with a separate provider to combat this
Kathy’s deposit savings account allows her to use her £1000 personal savings allowance
There after interest is taxed at 20% as a basic rate tax payer
She may suffer reinvestment risk on her depoist account invest when it matures in Jan 26, and she may be unable to reinvest at the same rate
She is also unable to access this money in an emergency
Kathy is a curious to medium investor
Kathy is interested in ESG but her holdings don’t reflect this
Kathy would benefit from keeping her assets under review to check performance, alignment with ATR and confirm the likely future adaquacy
Comment on the sutability of Kathy’s UK Equity Income Isa
Diversification
-adds diversification to overall portfolio
-single geographic location lowers diversification
-Diversified over multiple UK sectors
-single asset group lowers diversification
Risk
-potential hedge against inflation
-potential for growth
-no regualtory or political risk
-no currency risk
-may not match ATR
-may not match ESG preferences
Specifics
-provides income
-but may not require income currently
-actively managed
-over FSCS
Tax and charges
-No income or CGT tax as in ISA
-Is in estate for IHT
-Can easily switch funds with no tax issues due to being in an ISA
Can draw and use from ISA to lower Estate for IHT
-income focus can affect potential growth
Outline the process you would follow to enable you to review the performance of Kathy’s investments
Gain details from Kathy or gain a letter of authority to do so on her behalf
Confirm date of purchase
Confirm base costs/further investments/withdrawls/switches
Identify any invested income
Calculate gain
Access the asset allocation
Identify suitable benchmark
Compare against benchmark
Review charges
Compare to risk-free return
Review risk rating on fund
Access funds against ATR and attitude to risk
Explain to Kathy what is meant by ESG
Refers to the main factors that socially responsible investors may choose when de iding an investment strategy
Environmental (polution, etc.)
Social (community engagement, etc.)
Governance (corruption, etc.)
Fund managers may incorporate ESG into their decision-making.
There are active and passive funds available
The benchmarks for ESG are the FTSE4good index, FTSE4good RAFI and FTSE4 good emerging
