Test Flashcards
Samuel is a fund manager who has recently purchased a FTSE 100 call option from the fund’s assets. The risk he is taking is:
Select one:
a. limited to the premium he paid for the option.
b. limited to the transaction costs.
c. unlimited.
d. limited to the premium he paid for the option, plus transaction costs.
d. limited to the premium he paid for the option, plus transaction costs.
chapter reference 8H2A
A structured product is typically based on combining two investment instruments within the wrapper of the product. These are a:
Select one:
a. zero-coupon bond and a call option.
b. zero-dividend preference share and a put option.
c. zero-dividend preference share and a call option.
d. zero-coupon bond and a put option.
a. zero-coupon bond and a call option.
chapter reference 8K1
The main investment objective of an absolute return fund is to achieve a positive absolute return:
Select one:
a. in all market conditions.
b. when markets are rising.
c. by ensuring all fund managers adopt the same investment strategy.
d. when markets are falling.
a. in all market conditions.
chapter reference 8J
Jun Su, a higher-rate taxpayer, has made a capital gain on his venture capital trust after 4 years. If he encashes the plan now he will:
Select one:
a. potentially pay capital gains tax and must repay any income tax relief originally received.
b. pay no capital gains tax but must repay any income tax relief originally received.
c. pay income tax only on the growth over the period.
d. pay capital gains tax with no repayment of income tax relief originally received.
b. pay no capital gains tax but must repay any income tax relief originally received.
chapter reference 8D2A
Christos has 101% of the value of his investment as life cover. His product is most likely to be a[n]:
Select one:
a. structured product.
b. investment bond.
c. ISA.
d. investment trust.
b. investment bond.
chapter reference 8A15
In order to meet stakeholder standards, a stocks and shares ISA must meet which of the following conditions?
Select one:
a. There can be no more than a 2% bid/offer spread on the prices quoted.
b. No more than 70% of the fund can be invested in shares and property.
c. The minimum investment cannot be higher than £20.
d. The annual charge is limited to 1% of the fund during the first ten years, and 1.5% for the remainder of the term.
c. The minimum investment cannot be higher than £20.
chapter reference 8E9A
Why might an individual invest in a real estate investment trust [REIT]?
Select one:
a. All payments from a REIT are paid gross so there is no need for non-taxpayers to reclaim any tax deducted at source.
b. It is a more liquid way of investing directly in commercial property.
c. All income or growth generated from the investment will always be tax-exempt.
d. It provides a guaranteed rate of return.
b. It is a more liquid way of investing directly in commercial property.
chapter reference 8C4
Sanjay is a financial adviser for a trust. The trustees have approached him for advice about placing funds in an investment bond. Sanjay is UNLIKELY to advise that:
Select one:
a. investment bonds provide a wide variety of funds to meet a range of risk requirements.
b. the taxation within the underlying funds of an investment bond is more than the trust would normally be subject to.
c. this type of policy does not generate a taxable income, and so will substantially reduce the amount of administration for the trustees.
d. up to 5% of the original investment can be withdrawn by the trustees each year and paid to a beneficiary with no immediate tax liabilities for the trustees.
b. the taxation within the underlying funds of an investment bond is more than the trust would normally be subject to.
chapter reference 8A19
Kenneth has bought a European-style call option with an expiry date in 3 months’ time. The alternatives available to him at present do NOT include:
Select one:
a. exercising the option immediately.
b. letting the option expire worthless.
c. exercising the option on the expiry date.
d. selling the option.
a. exercising the option immediately.
John’s income tax liability for 2020/21 is £25,000 and for 2019/20 it was £28,000. If he invests £500,000 into an enterprise investment scheme in October 2020, the maximum income tax relief he could receive is:
Select one:
a. £25,000.
b. £150,000.
c. £53,000.
d. £28,000.
c. £53,000.
In hedging his portfolio, an investment manager has a traded call option. The characteristics of this type of investment means that:
You must select ALL the correct options to gain the mark:
a. the investment manager can sell the option before it expires.
b. the investment manager must hold the option until it expires.
c. the duration to its expiry is not relevant to its value.
d. the greater the increase in its price, the greater the intrinsic value.
e. this gives the investment manager the right to sell the underlying asset.
a. the investment manager can sell the option before it expires.
d. the greater the increase in its price, the greater the intrinsic value.
chapter reference 8H2B
Sandra is a higher-rate taxpayer earning £56,000 and her husband John is a basic-rate taxpayer earning £22,000. They have always lived in the UK and have both cashed in offshore bonds making gains of £10,000 each. Assuming they have both already utilised their respective personal savings allowances, how much is their combined income tax liability in respect of these gains?
Select one:
a. £6,000.
b. £8,000.
c. £4,000.
d. £2,000.
a. £6,000.
chapter reference 8A20
Taxation of a gain on an offshore bond
For a basic- or higher-rate taxpayer, the whole gain is charged at the basic rate of 20%. If the policy holders income is not sufficient to reach the basic rate band, any part of the gain that falls within the personal allowance would not be subject to tax.
As chargeable events are subject to the savings rate of income tax, the starting rate of 0% will apply; where the taxpayer’s non-savings income is less that the starting rate limit for savings (£5,000 in 2020/21), the income is not taxed. The personal savings allowanc (PSA) can also be used to offset tax due.
Be aware:
Taxation of UK policyholders
UK policy holders with offshore policies are liable to income tax at their highest rate on the whole of their gain, with time appointment relief for any periods spent outside the UK during the term of the policy.
Sandra, higher rate taxpayer = £10,000 taxed at 40% = £4,000 charge
John, basic-rate taxpayer = £10,000 taxed at 20% = £2,000 charge
Joseph can decide whether he exercises his right to sell an underlying asset at a certain price, at any time during a specified period. He has a[n]:
Select one:
a. European-style call option.
b. American-style call option.
c. European-style put option.
d. American-style put option.
d. American-style put option.
chapter reference 8H2B
Tony has income tax liabilities of £42,000 in the current tax year and £45,000 in the previous tax year. What amount does he need to contribute to a venture capital trust in the current tax year to reduce these tax liabilities as much as possible?
Select one:
a. £290,000.
b. £140,000.
c. £150,000.
d. £200,000.
b. £140,000.
chapter reference 8D2A
For VCTs, The income tax liability for the previous year cannot be rebated.
Tax relief is 30%.
30% * 140,000 = £42,000
42,000/0.30 = £140,000
The early surrender value of Steven’s life policy was £46,000, so he sold it on the second-hand market for £60,000 to Beryl. This means that:
Select one:
a. Beryl may have a liability to capital gains tax when the policy matures, or on prior disposal.
b. Steven will have to declare the difference between the surrender value and sale value on his tax return.
c. if the policy had run for less than 10 years when it was sold, it remains qualifying and Steven has no income tax to pay.
d. if the policy had run for more than three-quarters of its term when it was sold, it becomes non-qualifying.
a. Beryl may have a liability to capital gains tax when the policy matures, or on prior disposal.
chapter reference 8A27C
Taxation on the seller
If a qualifying policy is sold after at least ten years, or three-quarters of the term if sooner, the sale is not a chargeable event and there is no income tax.
If a qualifying policy is sold within the ten-year period, or three-quarter term, the sale is a chargeable event, and if the non-qualifying policy is sold, the sale is always a chargeable event.
If the seller is a higher- or additional-rate taxpayer, the gain is subject to higher or additional-rate income tax.
Four clients hold different investment products. Which one of them would most likely benefit from pound-cost averaging?
Select one:
a. Caitlin, who is paying £300 a month into a cash ISA.
b. Whitney, who is paying £300 a month into a 10-year traditional with-profits endowment policy.
c. Olga, who is paying £300 a month into a unit trust, invested in a specialist growth fund.
d. Imani, who is paying £300 a month into a with-profits whole of life policy.
c. Olga, who is paying £300 a month into a unit trust, invested in a specialist growth fund.
chapter reference 8A10B
SPS Limited has gross assets of £14.8 million. The maximum the company can raise from subscriptions to an enterprise investment scheme [EIS] is:
Select one:
a. £200,000.
b. £0.
c. £1,200,000.
d. £1,000,000.
c. £1,200,000.
chapter reference 8D1B
The gross assets of the company must not exceed £15m immediately before the issue or shares, nor £16m immediately afterwards.
When he surrendered his single premium unitised with-profits bond, Ross received a lower value than he expected. The most likely reason is because:
Select one:
a. explicit charges were applied because he surrendered within 5 years of taking out the policy.
b. explicit charges were applied because he surrendered within 10 years of taking out the policy.
c. a percentage of the annual bonuses were deducted from the surrender value.
d. a market value reduction was applied.
d. a market value reduction was applied.
chapter reference 8A2B
Barton Investments’ hedge fund always adopts a market-neutral strategy. This fund is referred to as a[n]:
Select one:
a. event-driven fund.
b. tactical trading fund.
c. relative value fund.
d. long/short fund.
c. relative value fund.
chapter reference 8I1D
Relative value funds are often referred to as adopting ‘market neutral’ strategies because there is no market-related element in their returns. Instead, the managers rely on arbritage to produce returns, i.e. by indentifying and exploiting pricing anomalies between similar investments or combinations of investments. Although these strategies usually have limited volatility, they can still suffer when market liquidity dries up.
Lindsey, an additional-rate taxpayer, invested £80,000 in an onshore investment bond. After six and a half years she makes her first withdrawal of £30,000. The income tax liability as a result of this withdrawal will be:
Select one:
a. £500.
b. £1,500.
c. £1,000.
d. £3,000.
a. £500.
chapter reference 8A25C
For partial withdrawals, the chargeable gain is determined at the end of each policy year, when all withdrawals for the year are added together…
Up to 5% of the original investment may be withdrawn each policy year without attracting a tax liability all the time.
For example:
- The potential liability is deferred until encashment or death.
- If the allowance is not used in any one year, it may be carried forward on a cumulative basis for future years.
- The allowance is treated as a return of the investors capital, and applies until the total of all withdrawals covered by the cumulative 5% allwance equals the original investment.
Julian, a 69 year old retired teacher, has a non-qualifying endowment policy. Examples of a chargeable event would include:
You must select ALL the correct options to gain the mark:
a. his death.
b. maturity of the plan.
c. switching of funds within the plan.
d. surrendering the plan.
e. assignment to his wife by way of a gift.
a. his death.
b. maturity of the plan.
d. surrendering the plan.
chapter reference 8A25C
Peter has just invested in a enterprise investment scheme. Assuming this is appropriate for his needs, this will be attractive to him because:
You must select ALL the correct options to gain the mark:
a. he can shelter gains from the disposal of his former business.
b. it will provide him with 30% income tax relief against his tax liability.
c. if he holds the shares for one year, they will be free of inheritance tax.
d. it may produce tax-free dividends.
e. he can reduce his income tax liability by carrying back tax relief to the previous tax year.
a. he can shelter gains from the disposal of his former business.
b. it will provide him with 30% income tax relief against his tax liability.
e. he can reduce his income tax liability by carrying back tax relief to the previous tax year.
chapter reference 8D1A
Dividends from EIS companies are paid with a 10% non-reclaimable tax credit and are potentially liable to further income tax. Consequently, most EIS companies do not pay dividends as it is more tax efficient to roll up income as tax free growth.
Edith is a client who is looking for a non-income producing investment. The options that will definitely meet her requirements include a[n]:
You must select ALL the correct options to gain the mark:
a. offshore reporting fund.
b. real estate investment trust.
c. structured product.
d. guaranteed growth bond.
e. unit trust with accumulation units.
d. guaranteed growth bond.
c. structured product.
chapter reference 8A15C/8K
Guaranteed growth bonds, while the bond it generates no income for the investor.
Structured Products, there is either a return of capital or income (rarely both), but not necessarily a 100% return of capital in all cases.
An important difference between exchange-traded funds [ETFs] and exchange-traded notes [ETNs] is that only:
Select one:
a. ETFs hold a portfolio of actual investments.
b. ETFs are sensitive to changes in interest rates.
c. ETFs track an index.
d. ETNs give access to specialist market niches.
a. ETFs hold a portfolio of actual investments.
chapter reference 8B
Property funds may only be held within an ISA if:
Select one:
a. the fund owns no properties directly, only shares in property companies.
b. all the properties owned by the fund are in the UK.
c. they do not restrict the investors’ ability to access their funds.
d. the fund is a real estate investment trust.
c. they do not restrict the investors’ ability to access their funds.
chapter reference 8C2
It is possible to hold funds that invest directly in property in an ISA, provided they do not restrict an investor’s ability to access their funds.
Gerald is an additional-rate taxpayer. If he invests £200,000 in an enterprise investment scheme [EIS], what tax benefits would he enjoy?
You must select ALL the correct options to gain the mark:
a. The EIS shares will qualify for 100% business relief if they are held for at least one year.
b. A non-UK resident is eligible to invest in an EIS, but can only claim relief against any liability to UK income tax.
c. Capital gains tax in respect of another gain can be deferred by reinvesting the gain into an EIS company.
d. He will be able to carry back the full relief to the previous tax year provided he had a tax liability of at least £60,000 in the previous tax year.
e. He can invest up to a further £800,000 in EIS investments by carrying back the investment up to three years.
b. A non-UK resident is eligible to invest in an EIS, but can only claim relief against any liability to UK income tax.
c. Capital gains tax in respect of another gain can be deferred by reinvesting the gain into an EIS company.
d. He will be able to carry back the full relief to the previous tax year provided he had a tax liability of at least £60,000 in the previous tax year.
chapter reference 8D1A
Mike died 20 months after investing into an enterprise investment scheme [EIS]. Which explanation best describes the tax treatment of his EIS shares on his death?
Select one:
a. The income tax relief given is recovered from the estate but the shares will qualify for IHT business relief.
b. The income tax relief given is recovered from the estate and the shares will not qualify for IHT business relief.
c. The income tax relief is not withdrawn but they will not qualify for IHT business relief.
d. The income tax relief is not withdrawn and they will qualify for IHT business relief.
c. The income tax relief is not withdrawn but they will not qualify for IHT business relief.
chapter reference 8D1A
Which of Maria’s clients is INELIGIBLE to invest in an ISA?
Select one:
a. Beryl, a retired British National resident in Spain.
b. Bruce, a British army officer serving overseas.
c. Karan, a retired Australian National permanently resident in the UK.
d. Alan, a 17-year old UK-resident.
a. Beryl, a retired British National resident in Spain.
chapter reference 8E2
Kate is considering investing in a with-profit bond. She should be aware that:
You must select ALL the correct options to gain the mark:
a. over the last ten years, the returns on most with-profit policies have not provided a ‘real return’.
b. bonuses can smooth out returns in times of poor investment performance.
c. she may benefit from additional profits should the life office demutualise in the future.
d. a market value adjustment [MVA] will always be applied on her death.
e. they provide investors who are relatively risk-averse with some exposure to the equity
b. bonuses can smooth out returns in times of poor investment performance.
c. she may benefit from additional profits should the life office demutualise in the future.
e. they provide investors who are relatively risk-averse with some exposure to the equity
chapter reference 8A5
Advantages of a with-profit bond:
- They provide investors who relatively risk-averse with some exposure to the equity markets
- Bonuses are not directly linked to investment performance in the same way as with unit-linked policies, because it is possible for the life office to use its reserves. This produces a ‘cushioning’ effect which irons out the sharp rises and falls that characterise unit-linked investments.
- With profit policies generally outstrip inflation.
- In some cases, they allow investors to participate in the profits of the insurance company’s trading activities.
- Ownership of a mutual life office’s with-profit policies represents ownership rights in the office itself. These should generate either additional profits or shares if the company is demutualised.
When investing in an absolute return fund, an investor should be aware that the fund:
You must select ALL the correct options to gain the mark:
a. is likely to have a similar investment strategy to other absolute return funds.
b. may invest in commodities and private equity.
c. will look to match the performance of a market index.
d. may use derivatives to protect against downside risk.
e. will always have a high proportion of equity investments.
b. may invest in commodities and private equity.
d. may use derivatives to protect against downside risk.
chapter reference 8J
A hedge fund which relies on arbitrage to produce returns is known as which type of fund?
Select one:
a. Relative value.
b. Event driven.
c. Trading strategies.
d. Long/short.
a. Relative value.
chapter reference 8I1D
Relative value funds are often referred to as adopting ‘market neutral’ stragegies because there is not market-related element in their returns. Instead, the managers rely on arbitrage to produce returns, i.e. by indentifying and exploiting pricing anomalies between similar investments or combinations of investments. Although these strategies usually have limited volatility, they can still suffer when market liquidity dries up.
Stefan pays £200 a year into his friendly society policy. Anita also has a friendly society policy into which she pays £20 per month. If Stefan and Anita continue to pay their premiums by the same frequency, how much can they increase their regular premiums by whilst retaining the tax-exempt status of their policies?
Select one:
a. Stefan is already paying the maximum but Anita can increase by £5.
b. Stefan can increase by £70 and Anita can increase by £5.
c. Neither of them can increase their premiums without losing their tax-free status.
d. Stefan can increase by £50 and Anita can increase by £10.
b. Stefan can increase by £70 and Anita can increase by £5.
chapter reference 8A24
The limit applies to the total of all friendly society policies owned by an individual. Existing policies can be increased up to the £270 limit without losing the tax-free status.
Phil is surrendering his maximum investment plan and has received the proceeds tax-free. This is because he surrendered the plan:
Select one:
a. after 6 years with an original term of 8 years.
b. after 5 years.
c. after 9 years with an original term of 12 years.
d. after 7 years with an original term of 11 years.
c. after 9 years with an original term of 12 years.
chapter reference 8A25B
A surrender within the first ten years, or three-quarters of the term if sooner, can be subject to income tax because it is a chargeable event.
Mehmet is interested in using exchange-traded funds to enhance the diversification of his portfolio. He should be aware that:
Select one:
a. some have additional risk via synthetic replication, but this type will always avoid any tracking error.
b. some have additional risk via synthetic replication and they all are likely to experience a degree of tracking error.
c. they all fully replicate the index they are tracking and this means they will avoid any tracking error.
d. they all use sampling rather than full replication and they all are likely to experience a degree of tracking error.
b. some have additional risk via synthetic replication and they all are likely to experience a degree of tracking error.
chapter reference 8B1
One of the main differences between Child Trust Funds [CTFs] and Junior ISAs is:
Select one:
a. the options for the child when they reach the age of 16 or 18.
b. that only CTFs have a stakeholder option.
c. the subscription limits.
d. the underlying investments available.
b. that only CTFs have a stakeholder option.
Chapter reference 8E14
There are three basic types of CTF account:
- Savings;
- Share accounts; and
- Stakeholder accounts.
A cereal manufacturer is about to place an order for wheat which will be delivered and priced in twelve months’ time. What action could they take to agree the price at the time of placing the order?
Select one:
a. Sell a futures contract.
b. Buy a call option.
c. Sell a call option.
d. Buy a futures contract.
d. Buy a futures contract.
chapter reference 8H1A
The holder of an option is NOT able to:
Select one:
a. sell the option prior to expiry.
b. exercise the option.
c. let the option expire worthless.
d. defer any decisions until after the strike date.
d. defer any decisions until after the strike date.
chapter reference 8H2B
What type of structured product, once issued, is listed on the London Stock Exchange?
Select one:
a. Precipice bond.
b. Investment note.
c. Warrant.
d. Exchange traded note.
b. Investment note.
chapter reference 8K2
Kevin’s life assurance policy will be deemed a qualifying policy if:
You must select ALL the correct options to gain the mark:
a. the premiums Kevin pays in any one year are not more than double those payable in any other year.
b. its term is at least ten years.
c. Kevin is a UK-resident in the year of encashment.
d. the premiums Kevin pays are at least £20 per month or £200 per annum.
e. the minimum level of life assurance cover is 100% of the total premiums payable.
a. the premiums Kevin pays in any one year are not more than double those payable in any other year.
b. its term is at least ten years.
chapter reference 8A25B
Qualifying policies
- policy term must be at least 10 years
- premiums must be payable annually or more frequently for at least 10 years (or until a claim on death or disability).
- minumum level of life assurance cover is 75% of the total premiums payable;
- premiums payable in any one year must not be more than double those payables in any other year; and
- no premium is to be more than one-eighth of the total premiums payabe over the term of the policy.
The annual limit for premiums payable under qualifying policies (that are not exempt) is £3,600.
Counterparty risk is mostly associated with:
Select one:
a. OEICs.
b. structured products.
c. unit trusts.
d. investment bonds.
b. structured products.
chapter reference 8K4
