Topic 7

Question 0

Gilt
Coupon?
Par value?
Rdm date?

Answer 0

Fixed int rater offered
Value of the gilt paid on rdm- generally £100
Date gov will pay the par value, usually 5-30 yrs, but recently 50 yr gilts issued

Question 1

Fixed interest investments are…

Answer 1

Fixed int securities:
Gov securities and corp bonds- collectively referred to as bonds
Eg gilts

Question 2

Gilt interest is paid…

Answer 2

Gross
Ewill have to pay 20, 40 or 50%
Or 10% for savings income below 2710

Question 3

Most corp bonds paid interet….

Answer 3

Net of 20% tax

And pay higher than gilts to rep higher risk

Question 4

How does market value of bonds change with int rates and why?

Answer 4

Value rises when int rates go down and vice versa
The price of bonds moves to keep the premium constant
The premium being the amount expected for taking some risk
The more over parr value you pay the more this eats into the coupon

Question 5

Gilts and corp bonds- CGT?

Answer 5

Exempt

Although loses cannot be offset against other gains

Question 6

Share divs - how is tax paid?

Answer 6

Paid with 10% tax credit for basic rate
Higher-22.5% add 32.5
To calc divide by 0.9 to get gross div
X the rate
Deduct the 10% tax credit
Eg 120/0.9= 133.33 x 32.5 = 43.33 minus 13.33 = £30

Question 7

Real estate inv trusts allow…

And tax benefits?

Answer 7

Small inv exposure to diversified property inv
If firm changes status to REIT and then split bus, the rental bus is ring fenced. Must pau 90% of rental income to investors
And therefore is exempt from corp tax s tax not paid twice.
This distribution to inv is paid net of 20% tax, further 20 or 30% for higher
Cap gains are subject to CGT

Question 8

Collective inv product are more suitable for average inv because….

Answer 8

Risk is spread due to pooled nature
Economies of scale- dealing cost reduced
Prof inv mgmt

Question 9

Unit trusts are..

And why trusts

Answer 9

Pooled (or collective) inv created under trust deed
Means assets are seperate from company. Deed specified types of inv, broad principles and whether it pays incme or aim is growth- known as mandate

Question 10

Unit trust trustee does what?

Answer 10

Holds the assets on behalf of invs and runs inline with deed

Question 11

Unit trust manager does what?

Answer 11

Manages the investment, value units and buys sell on demand.

Usually actively managed so researches market to achieve fund objective

Question 12

3 broad cats of unit trusts and OEICs

Answer 12

Income funds
Growth funds
Specialist funds

Question 13

Bid offer spread?

Answer 13

Bought of offer price, then initial charge taken and valued at bid price- which is also the price they can be sold back to manager
Spread is diff between

Question 14

Taxation of divs from unit trusts?

And CGT?

Answer 14

Taxable as non- savings incme- depends on source of income ie shares or cash backed
Funds itself exempt but investers gains on disposal subject to CGT

Question 15

Taxation of share based unit trusts

And cash and fixed int trusts

Answer 15

Divs Paid with 10 tax credit, 22.5/32.5……
Non taxpayers nable to to claim 10%

60% of fund in cash or fixed int- 20% tax at source, non and low can claim back- higher + 20/30%

Question 16

Open ended inv co- OEIC

Answer 16

Are similar to unit trusts.
Howver legal status diff, ltd co so inv actually buy and sell the shares
Both are open ended as manager obliged to buy/ sell
Tax treated the same

Question 17

OEIC are single priced, meaning…

Answer 17

Unlike unit trusts the initial charge is taken from the capital before purchase rather than adjusting share price
Both subject to annual mngmt charge

Question 18

Advantages of unit trusts or OEIC

Answer 18

Flexible- no term, contributions can be varied, no penaties for settlemnt
Wide choice of inv types
Pooled inv
Charges gen lower than ins based inv like endow and inv bonds

Question 19

Disad of unit trust and OEIC

Answer 19

No guarantee that fund will be suff to meet tartget inv may have
No security of capital

Question 20

Investments trusts

Answer 20

Diff type of pooled inv
Features many advan of unit trust and OEIC, but slightly more risky
Public ltd cos on stock exchange and invest share cap in stocks, shares and smetime prop
Investors buy and sell share in inv trust on stock exchge
Closed-ended inv- no obligation to buy back or sell more shares
So shares set by market rather than true value
Can borrow to inv- gearing

Question 21

2 important values for inv trust invester

Answer 21

Net asset value NAV- eg is co had assets of 50m, liabilities of 10m and 10m shares, shares would have NAV of £4
Market value- or share price, value of share on the stock exchange. Usually lower than Nav ‘discount’ if higher ‘premium’

Question 22

Pricing and charges for inv trusts

Answer 22

Single prices like all shares, however market makers will get a spread to make a profit
Annual mgmt charge
May be dealing costs- stamp duty

Question 23

Taxation of inv trusts

Answer 23

Same tax regime as for shareholders

Question 24

Advantages of inv trust

Answer 24

Flexibility- no term Inv managers have more flex than oeic, ut Gearing can lead to enhanced performance Charges lower than endows and often lower than oeic ut

Question 25

Disad of inv trust

Answer 25

No guarantee of hitting targets Gearing can exaggerate losses Higher risk than oeic ut

Question 26

Wrap is a

Answer 26

Internet based platform | All invs inv within one framework

Question 27

Life assurance products take 2 forms- in the context of investmnt

Answer 27

Investments bonds | Endowments

Question 28

What are the qualifying rules for life assurance products offering inv returns?

Answer 28

Fund manager pays equiv of 20% tax on gains and incme- counts as basic rate so policy holder will never had liability No CGT unless buys policy from original owner and sell on for profit Death or maturity value free of tax Premium regular Min term 10 yrs Sum ass +75% of total premiums Prems in 1 yr cant be twice that of any other yr or more than an eigth of total prems Prems max 3600 pypp from april 13

Question 29

What if its a non qualifying life ass product?

Answer 29

Gains added to holders income, top slicing is applied basic payer have no further tax But if you become higher or are higher you pay20% of gain 30 for additional

Question 30

Top slicing?

Answer 30

Allows for fact that gains made over no. Of years Div gain by no of yrs= slice Prop of gain sub to tax is same prop that falls into higher rate bracket Ie if 25% slice falls into higher, then 25% of total gain sub to 20% tax- ie Deemed to have paid 20% tax alread

Question 31

Investmt bonds are...

Answer 31

Single prem, non-qual, WOL ass polcies No mat date Taxed under life ass regime, policy is geared towards inv so life ass nominal, ie 101%- treat as life for tax but keeps costs down Deemed to have paid 20% tax

Question 32

Unit linked inv bond

Answer 32

``` Similar to unit trust or OEIC but ltd to funds offered by the ins co Similar risk to above Charges tend to be higher Initial chrg like unit trust Earlt surr chrge Small prem eg 99% to unit, large prem eg 105% to units ```

Question 33

With profits inv bond...

Answer 33

Inv inc wehn reversionary bonus added Terminal bonus Charges hidden Ealry surr, may applied market value adjuster MVA is market unfav

Question 34

Adv of inv bonds?

Answer 34

Chosen mostly due to tax treatment Bond allows withdraw of money to provide tax efficient incme Usually arranged in 'mini' bonds- know as segmenting, allowing flex to cash in part of inv and minimise tax Can switch bet funds No maturity date

Question 35

Taxation of inv bonds

Answer 35

No qual pol Fund mnger responsible for corp tax so holders deemed to have paid 20%, non cant claim back Gains made not subject to CGT, so cant use allowance to mitigate tax payable If higher or made higher then , top slicing 5% or orig inv can be w/d each policy yr w/o tax lia- can be carried fwd- max 20 w/ds equal to orig inv

Question 36

Endows

Answer 36

Reg prem, quali life ass pols with set term Can be single or joint and are 1st death basis Bulk of prems for Inv, some for LA min sum ass must be at least 75% of total prems payable

Question 37

Wth profits endow...

Answer 37

Ie no inv choice- one fund, the with profits fund GSA on mat or early death Likely to inc with rev/ termnal bonuses 'Smoothed' profits held back in good yrs Fees hidden apart from monthly policy fee No specific ESC unlikely to pay true value on ES

Question 38

Unit linked endow

Answer 38

Similar to with profit end but investment choice from no of unit linked funds, as with inv bond. No GSA no smoothing More flex as prem and SA can be varied Switch bet funds ES - charges often apply in ealry yrs but get full plan value Charges more transparent May not allocate any prems to units for 1st 6 mths

Question 39

Taxation of endows

Answer 39

Designed to meet LA qual rules Benefits on mat or death not sub to fther tax, but fund pays 20% tax - so not tax free If ES b4 earlier of 10 yrs or 75% or orig term, becomes non qual- top slicing

Question 40

What are derivatives?

Answer 40

Allows inv exposure to inc or dec in the value of underlying assets without actually owning them Speculate w/o risking significant capital Futures and options

Question 41

Options?

Answer 41

Given the RIGHT to buy or sell asset(usually shares) at fixed price, know as strike price, on a fixed date or before expiry date. Call option gives right to buy at fixed price - strike Put option right to sell..

Question 42

Futures...

Answer 42

Exchange traded future contracts Right to buy or sell must be excercised, as entered into future contract Therefore have intrinsic value and are traded on futures exhange

Question 43

Enterprise inv schemes

Answer 43

Encourage inve in smaikl unquoated companies Inv higher risk Co unlisted or listed on AIM or PLUS stock markets Inv made through ord shares in co Gen buying shares in co rather than pooled

Question 44

EIS taxation

Answer 44

Inv receive 30% tax relief up to 1m The relief cannot exceed the amount of income tax the person was due to pay in that tax year- can only wipe out tax liability If shares sold within 3 yrs, releif must be paid back Gains not sub to CGT if held 3 yrs Divs as normal 100% bus prop releif if held 2 yrs b4 death- no IHT

Question 45

Seed enterprise inv scheme are...

Answer 45

Sim to EIS 50% tax relief for inv up to £100k in new start up bus Gains made in 2012/13 free of CGT

Question 46

Venture cap trusts are?

Answer 46

Listed on a EU stock market, inv buy shares in VCT Set upmin 1995 to enc inv in unquoted trading comanies, now in AIM listed Offer a form of pooled inv Higher risk but can spread risk over diff companies

Question 47

Taxation of VCT

Answer 47

Tax relief of 30% up to max inv of 200k pa, reduce lia like EIS Share held for 5yrs to avoid clawback Tax releif not av on pur of 2nd hand shares Gain exempt from CGT,

Question 48

Structure products are

Answer 48

Offer an element of protection of cap inv- sometimes up to 100% While also enabling use of high performing high risk assets-shares Risks are opaque Diff for consumers to understand Little in the way of identifying approriate target market- fsa consider important

Question 49

Depositary

Answer 49

Oeic | Similar role to unit trusts trustee

Question 50

Shares and cgt

Answer 50

Sale of shares treated and disposal and taxed

Question 51

Inv life ass products and cgt

Answer 51

Gains not subject to cgt But top slice if non qual or over 5% for inv bonds 20% of slice that is in higher bracket (Income tax not cgt)

Question 52

Ns&i tax treatmt

Answer 52

``` Inv acc- liable but gross Premium bonds- tax free Income bonds- liable but gross Savings certs- tax free Childrens bonus bond- tax free Others paid net ```