Taxation on Investment strategies

Question 1

The different types of income resulting in what kind of tax?

Answer 1

Withdraw capital = capital gains tax
Dividend income = dividend allowance
interest - personal allowance

Question 2

Gilts are referred to as?

Answer 2

treasury gilt/treasury stock (index link gilts- coupon+index adjustment)

2/3 gilts are owned by insurance co./pensions

Payments are semi-annually

Question 3

What are National Savings and Investments? NS&I Bonds?

Answer 3

Principal guaranteed by the gov.: 1. NS&I Premium bonds: guarantees principal but return is a lottery prize.
2. Guaranteed income bonds: discontinued but grandfathered in to those who already own them. 1-3 yr. w/guaranteed monthly interest.
3. guaranteed growth bonds: Discontinued to new investors, but grandfathered in for current: 1-3 yrs, paid annually, compounded.
4. Income bonds: variable rate, paid monthly, no minimum term.
5. Green Savings: 3 yr. fixed term, paid as lump sum. not liquid until matures. used for environmental projects from government.

Question 4

What are NS&I ISA and Savings certificate?

Answer 4

Issued when Gov. needs to, can place limits of 15k per investor. Existing holders at maturity can still get issued a new one though.

• Direct ISA - cash savings Acct.
• NS&I Index Saving: Tax free lump sum grows w/RPI index helps w/ inflation
• NS&I Fixed interest Savings: Tax-free lump sum with guaranteed interest

Question 5

What are Individual Saving Account?

Answer 5

ISA: cash, stock or shares ISA, subject to contribution limits.
Lifetime ISA has it’s own limits.

Question 6

What is a Pension account?

Answer 6

No contribution limit but tax relief is only on greater of £3,600 or their earned income or total of £40k.

• Income greater than £240k and their income (after contributions/gift aid donations) is still greater than £200k, 40k allowance is reduced by £1 for every 2 to a minimum of £4k
• Can contribute up to age 75

Question 7

What are the 3 ways to receive tax relief on pension contributions?

Answer 7

1. through the PAYE system
2. Relief at source: Divide contribution by .80: contribute £1,600 = 2k pension contribution. Higher tax payer rate, will have to apply further relief at self assessment.
3. Claim all at self assessment. Made a qualified contribution but no relief available at source.

Question 8

What benefit is it to defer State pension?

Answer 8

New pension(after 2016) increases 1% for every 9 weeks = 5.8% annualized after reaching state pension age.

Pre 2016- Increase 1% for every 5 weeks = 10.4% annually. Can receive additional benefit as a lump sum or increased payments.

Question 9

What is AIM?

Answer 9

Alternative Investment Market: Launched in 1995: help smaller/growing companies raise capital.
Listed on AIM at the London Stock exchange.

Question 10

What is a Venture Capital Trust?

Answer 10

VCT: Run by fund managers. To be a company on VCT, have to be trading for less than 12 yrs.

• 30% tax relief(on tax owed, no credit) up to £200k on new shares(not bought on secondary market)
• hold 5 years to prevent claw back
• Tax free dividends (even if bought on secondary market) up to 200k investment each year.
• Gains exempt from CGT

-No Carry back contribution

Question 11

What is an Enterprise Investment Scheme?

Answer 11

• Aim is invest in unquoted companies for minimum of 5 years.
• 30% tax relief(on tax liability) up to £1M, and £2M on knowledge intensive companies
  -Relief may be carried back to previous year.
  -Clawback if sold in 1st 3 years. CGT also exempt if sold after 3 yrs.
• Losses can be set against other income.
  -Qualify for IHT business relief if held at least 2yrs.

Question 12

What is a Seed Enterprise Investment Scheme?

Answer 12

Invests into companies with assets less than £200k.
-50% tax relief up to £100k limit

• Carry back prior year up to £100k.
• 50% CGT exempt on reinvested gains: 50k reinvested = tax on 25k.

Question 13

Chargeable event for an onshore investment bond?

Answer 13

1. Full surrender of policy
2. assignment for money
3. exceeding the 5% cumulative withdrawals
4. death of life assured resulting in death benefit
   -gain is added to tax liability for current year marginal rate.
   - Top Slice: enable to use multiple saving allowance, spread gains through prior years to prevent going into higher tax bracket.

Question 14

Tax position on off shore bonds?

Answer 14

• no 20% tax being deducted in the fund
• gains/excess withdrawals are taxed at 20%/40% or 45% – no 20% tax ‘credit’

Question 15

How to use Spousal/Civil partner’s allowance?

Answer 15

• non-tax payer and basic tax payer can transfer 10% of their personal allowance to their partner

Question 16

How to claim relief on Charitable donations through Gift Aid?

Answer 16

1. Gift Aid: Charity increases value of donation by basic tax level(20%) relief. Ex. give £160 = £200 contribution
   Higher tax rate payer claim through self assessment. Non taxpayer should not use.
   - For an additional-rate taxpayer, it is achieved by extending the basic- and higher-rate tax thresholds by the donation.

• Ex:makes a net donation of £800= gross donation of £1,000. The individual’s basic-rate tax band will now be £38,700 (£37,700 + £1,000), assuming a basic-rate tax band threshold of £37,700 and additional-rate tax will be payable on adjusted net income above £151,000 (£150,000 + £1,000, assuming a higher-rate tax band threshold of £150,000).

Question 17

What are the steps in calculating income?

Answer 17

1. Deduct any contributions to occupational pension schemes from earnings
2. Work out the personal allowance if it is different from standard
3. Deal with personal pension contributions and Gift Aid donations. These extend the basic-rate band by the gross amount to ensure that higher- and additional-rate taxpayers receive the additional 20/25% tax relief. Show the new basic- and higher-rate bands.
4. Calculate the tax, observing the HMRC priority of income:

non-savings (ie earnings, pensions, rental);
savings;
dividends; and
capital gains.

Question 18

What tax rates apply?

Answer 18

1. Determine any applicable personal allowance (allowance is reduced above limit)
   2The starting rate of 0% will apply to savings income only if non-savings income is less than the personal allowance the £5,000 starting-rate band
2. The personal savings allowance (PSA) applies to the next £1,000 of savings income providing there is no income of any kind in the higher-rate tax threshold (if there is, this falls to £500). If there is any income in the additional-rate band, the PSA falls to £0.

Question 19

What is the Dividend Allowance?

Answer 19

The first £2,000 of dividend income is tax free for all taxpayers, dividends above £2,000 but below the basic-rate threshold are then taxed (the rate depends on whether the individual is a basic-, higher- or additional-rate taxpayer).

Question 20

How is tax relief given to pension payments from a higher tax payer?

Answer 20

Basic-rate tax relief is given at source by paying contributions net of basic-rate tax. Higher-rate tax relief is given via self-assessment, by increasing the individual’s higher-rate starting threshold by the amount of the gross contribution