Topic 7 Flashcards
Gilt
Coupon?
Par value?
Rdm date?
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
Fixed interest investments are…
Fixed int securities:
Gov securities and corp bonds- collectively referred to as bonds
Eg gilts
Gilt interest is paid…
Gross
Ewill have to pay 20, 40 or 50%
Or 10% for savings income below 2710
Most corp bonds paid interet….
Net of 20% tax
And pay higher than gilts to rep higher risk
How does market value of bonds change with int rates and why?
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
Gilts and corp bonds- CGT?
Exempt
Although loses cannot be offset against other gains
Share divs - how is tax paid?
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
Real estate inv trusts allow…
And tax benefits?
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
Collective inv product are more suitable for average inv because….
Risk is spread due to pooled nature
Economies of scale- dealing cost reduced
Prof inv mgmt
Unit trusts are..
And why trusts
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
Unit trust trustee does what?
Holds the assets on behalf of invs and runs inline with deed
Unit trust manager does what?
Manages the investment, value units and buys sell on demand.
Usually actively managed so researches market to achieve fund objective
3 broad cats of unit trusts and OEICs
Income funds
Growth funds
Specialist funds
Bid offer spread?
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
Taxation of divs from unit trusts?
And CGT?
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
Taxation of share based unit trusts
And cash and fixed int trusts
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%
Open ended inv co- OEIC
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
OEIC are single priced, meaning…
Unlike unit trusts the initial charge is taken from the capital before purchase rather than adjusting share price
Both subject to annual mngmt charge
Advantages of unit trusts or OEIC
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
Disad of unit trust and OEIC
No guarantee that fund will be suff to meet tartget inv may have
No security of capital
Investments trusts
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
2 important values for inv trust invester
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’
Pricing and charges for inv trusts
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
Taxation of inv trusts
Same tax regime as for shareholders
Advantages of inv trust
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
Disad of inv trust
No guarantee of hitting targets
Gearing can exaggerate losses
Higher risk than oeic ut
Wrap is a
Internet based platform
All invs inv within one framework
Life assurance products take 2 forms- in the context of investmnt
Investments bonds
Endowments
What are the qualifying rules for life assurance products offering inv returns?
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
What if its a non qualifying life ass product?
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
Top slicing?
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
Investmt bonds are…
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
Unit linked inv bond
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
With profits inv bond…
Inv inc wehn reversionary bonus added
Terminal bonus
Charges hidden
Ealry surr, may applied market value adjuster MVA is market unfav
Adv of inv bonds?
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
Taxation of inv bonds
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
Endows
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
Wth profits endow…
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
Unit linked endow
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
Taxation of endows
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
What are derivatives?
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
Options?
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..
Futures…
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
Enterprise inv schemes
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
EIS taxation
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
Seed enterprise inv scheme are…
Sim to EIS
50% tax relief for inv up to £100k in new start up bus
Gains made in 2012/13 free of CGT
Venture cap trusts are?
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
Taxation of VCT
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,
Structure products are
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
Depositary
Oeic
Similar role to unit trusts trustee
Shares and cgt
Sale of shares treated and disposal and taxed
Inv life ass products and cgt
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)
Ns&i tax treatmt
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
