Tax

Question 1

What is the taxation on preference shares?

Answer 1

• Return of profit is through dividend payments as they are classified as equity they are subject to the usual dividend 10% notional tax credit.
• The 10% tax credit is non-reclaimable
• Dividend tax treatment is the same as other shares.
• Also subject to capital gains tax
• Can be held in tax wrappers such as ISAs and SIPPs.
• Buyers pay a 0.5% stamp duty.
• Zero-coupon preference shares may be interesting to additional-rate income tax payers due to the large difference in income tax rates and CGT.

Question 2

What is the taxation of UK authorised Funds?

Answer 2

• UK funds are subject to corporation tax rate of 20% on their taxable net income - income less expense.
• Very funds pay income tax in practice as they usually benefit from tax on dividend income or distributions are deductible from the funds taxable profit.
• Equity funds dividend income is exempt from tax in the UK.
• Distributions paid by bonds funds are treated as interest. The interest distribution is deductible from the funds taxable profits and so bond funds do not have any taxable net income when pursuing a full distribution policy.

Question 3

What is the taxation of equity funds?

Answer 3

• Income:
  
  • Tax charge of 20% on taxable income less allowable expenses.
  • Dividend income exempt from tax, so in practive very few funds have net taxable income.
• Gains within:
  
  • Exempt
• Capital gains:
  
  • None from 01/04/14

Question 4

What is the taxation of bond funds?

Answer 4

• Must have 60% of assets in interest bearing securities
• Income:
  
  • Tax charge of 20% on taxable income less distributions.
  • As funds are required to distribute all net income, these funds should not have net taxable income.
• Gains within:
  
  • Exempt

Question 5

Why would an investor invest in a VCT?

Answer 5

A VCT is an investment in an closed-ended investment vechile that pools investors money and then invests in often unlisted stocks (70% should be in unlisted stocks)

• Tax merits:
  
  • Invest up to 200k and get 30% income tax relief
  • If held for 5 years, then pay no CGT
  • No dividend taxes
• Tax Drawbacks:
  
  • Losses on CGT are no offsetable against other gains
  • No IHT benefits
• Investment advantages:
  
  • Exposure to small faster growing companies that offer growth and diversification
  • Liquidty to pooled open nature of VCT
  • Benefit from manager knowledge.
• Investment drawbacks:
  
  • Higher risk
  • Unlikely to produce reliable income
  • Tax benefits only after 5 years so limited flexibility