Topic 22: Other repayment vehicles for interest-only mortgages Flashcards
Tell me about ISA mortgages
How do they differ to endowment mortgages (IE where an endowment is the chosen repayment vehicle)
An ISA mortgage is simply just where an ISA is used to save money to repay an interest only mortgage
Like an endowment mortgage, only the interest due on the loan is paid to the lender during the term – the entire capital remains outstanding throughout
the term
Unlike endowments where life cover is included, separate life cover is needed to repay the loan should the borrower die before the end of the term.
What are innovative finance ISAs?
A type of investment ISA that involves investment in peer‑to‑peer lending platforms
What underlying investments are allowed for stocks and share ISA’s?
Equities
Corporate Bonds
Gilts
Life Assurance
Investment Trusts
Unit Trusts
Open Ended Investment Companies (OEIC’s)
What does it mean if your ISA is flexible?
The ISA holder can withdraw cash held in the account and then re‑invest it back into the same account in the same tax year without the re‑investment counting as part of that tax year’s ISA contribution allowance.
How long do those with help to buy ISAs have to use the scheme to purchase a property?
Holders then have until November 2030 to buy a property and claim the bonus
They were discontinued in 30 November
2019
For lifetime ISAs at what earliest point in the property buying process can the funds be used?
What if the sale falls through?
How does this differ to help to buy ISA’s?
The funds can be released to provide a deposit at exchange of contracts.
If the sale falls through, the money can be repaid to the account without affecting the year’s
contribution limit
For help to buy ISA’s the government bonus is paid to the buyer’s conveyancer ready for completion, subject to a deadline of 1 December 2030. This contrasts with the Lifetime ISA, where the bonus can be paid at
exchange of contracts to form part of the deposit
What happens if the lifetime ISA holder dies?
If the investor dies before withdrawing the fund,
the ISA wrapper is removed and the fund becomes part of their estate.
No withdrawal penalty would be applied (ie, they receive the government bonus) , and a surviving spouse could claim the additional permitted subscription (
What is a ‘Continuing ISA’?
This refers to what happens upon death of an ISA holder.
Upon death ISA funds continue to retain tax advantages until the earlier of:
-Completion of administration of the deceased’s estate
-Closure of the ISA
-Three years from the date of death
During this period, the ISA is referred to as a ‘continuing account of a deceased investor’, often abbreviated to a ‘continuing ISA’
The surviving spouse or civil partner of an ISA holder can claim an ‘additional permitted subscription’ (APS)
Tell me about this
This allows their own ISA allowance to be increased by the higher of the value of the deceased’s ISA fund at the time of their death or its value when the allowance is claimed.
The APS allowance must be claimed by the surviving spouse:
Before 3 years after the date of death OR 180 days after administration of the estate is complete
As a result of a successful claim, their
own ISA allowance for the relevant tax year will be increased by the APS.
IMPORTANT: This additional allowance applies
only to a spouse or civil partner
Who is eligible for Additional Permitted Subscription (APS) ?
The SURVIVING spouse or civil partner only
It is possible to use unit trusts and open‑ended investment companies (OEICs)
as mortgage repayment vehicles
True or false?
True
However, since both these vehicles can be
held within an ISA, it is more tax efficient, and more common, for them to be used as part of an ISA repayment ‘package’ as a stocks and shares ISA
permitted investment
What are unit trusts?
Unit trusts are pooled (or collective) investments created under trust deed, with investments made via regular payments or single lump sums.
They are open‑ended, which means that there is no limit on the number of units or shares that can be issued.
Unit trust funds are managed by a fund
manager
Unit trust subject to charges, the principal of these being the initial charge and the annual management charge
Taxation of unit trusts depends on the nature of the underlying investments (ie, is it an equity trust where income is treated as dividends, or a fixed income trust where income is treated as savings
It is classed as fixed interest if 60% or more of the underlying assets are fixed interest securities. Classed as an equity trust if less than 60%.
The fund itself is exempt from capital gains tax, but the investor’s gains on disposal are subject to capital gains tax
Must be authorised by the FCA
What are Open Ended Investment Companies?
OEICs are pooled (or collective) investments, with investments made via regular payments or single lump sums.
OEIC’s are limited companies
It is open‑ended, which means that there is no limit on the number of shares that can be issued.
OEIC fund is managed by the authorised corporate director (ACD). The ACD can create shares to meet demand and must buy back shares from investors who want to cash in their investment
Taxation of OEICs depends on the nature of the underlying investments in the exact same way as unit trusts
OEICs are subject to charges, the principal of these being the initial charge and the annual management charge as well as a dilution levy in applicable cases
Must be authorised by the FCA. The OEIC is Overseen by a depository (a bank) who is also authorised by the FCA
What is a defined benefit pension scheme also known as?
A final salary scheme
What is the most an individual can contribute to their pension fund in a given tax year whilst still receiving tax reliefs?
The most that an individual can contribute to pensions in a tax year and receive tax relief on the full amount is £3,600 or their earned income if higher
An individual’s employer can pay into an employee’s pension and receive tax relief
How do they do this?
By claiming it as a business expense
Contributions to an occupational pension scheme are paid through the ‘net pay’ arrangement
Tell me about this
Contributions are deducted from gross pay before tax
A tapered annual allowance applies to someone who has both threshold income exceeding a certain limit AND adjusted income exceeding a certain limit
What is threshold and adjusted income?
What does the tapering cause?
threshold income is total
income less personal gross contributions to registered pension schemes
adjusted income is total
income plus any employer contributions to a registered pension scheme
If you have exceeded both limits above you receive a tapered annual allowance:
This causes the following:
The taper reduces the annual allowance by £1 for every £2 of adjustable income above the threshold income limit, subject to a specified minimum
annual allowance
What is the Money purchase annual allowance?
Once a pension plan holder starts to take benefits using flexi‑access drawdown or uncrystallised pension fund lump sum arrangements (see section 22.3.2), the money purchase annual allowance applies
This means that a much smaller annual amount contributed into a defined‑contribution (eg personal pension) scheme each year will lead to a tax charge . OBVS NOT GOOD SO PEOPLE SHOULD SPEAK TO ADVISORS BEFORE DOING THIS
WHAT IS THE LIFETIME ALLOWANCE?
The lifetime allowance (LTA) is the maximum amount that can be held in pension funds by an individual at the point when they take benefits
If the fund exceeds the LTA on taking the benefits, there is a 55% tax charge ON THE EXCESS if taken as a lump sum, or 25 per cent if it is taken as income
There are three options for those wishing to take their pension benefits?
What are they?
- uncrystallised funds pension lump sum;
- flexi‑access drawdown;
- annuity
Tell me about the uncrystallised funds pension lump sum
It is one of the options to withdraw your pension benefits
The planholder can take the entire fund as a single lump sum or a series of smaller lump sums. 25% of each lump sum is tax‑free, with the remainder added to the planholder’s income for that tax year and subject to income tax depending on what bracket the pension benefit causes them to fall into
For example, if they receive salary at the basic rate and the pension benefits make them fall into higher rate, those benefits will be taxed at a higher rate
This means it is not an efficient way to pay off a mortgage
Tell me about the Flexi-access drawdown
The planholder can take 25 per cent of the fund as a tax‑free lump sum (PCLS) and then take an income (known as ‘drawdown’) from the balance of the fund.
The income is taxable in the same way as earned income. The income can be stopped and started as required and there is no minimum or maximum
amount required. This is good because you can change the amount of income you receive each year which can improve tax treatment (remember it is FLEXIBLE = ‘FLEXI ACCESS’)
The income is taken directly from the fund, which remains Invested (making it a more risky option)
It is also possible to take the full 25 per cent tax‑free cash at the start and delay taking the income until a later date.
In terms of mortgage repayment, this is likely to be the most efficient method of providing the required lump sum
Tell me about Annuity
The planholder can take the tax‑free cash and then use the balance of the fund to purchase an annuity.
The annuity will provide an income for life, and can be:
fixed; or
escalating by a set percentage each year or with inflation; or
investment‑linked (with‑profits and unit‑linked).
It is also possible to arrange an annuity that provides a reducing income (designed for those who need extra income earlier in retirement), or one that
runs for a defined term rather than for life.
