Topic 9 Flashcards
Tax wrappers
What are tax wrappers, and how do they affect investments?
Tax wrappers, such as ISAs, change the way an investor is taxed on income and gains from underlying investments. They allow for tax advantages by modifying the tax treatment of income and capital gains, which can be taxed during the investment’s life and when funds are drawn or income is paid out.
What types of investments can be held in a stocks and shares ISA?
A stocks and shares ISA can include shares and corporate bonds from companies listed on a recognised stock exchange, gilt-edged securities, UK-authorised unit trusts and OEICs, UK-listed investment trusts, life assurance policies, units in stakeholder medium-term investment products, and shares acquired through employee share option schemes.
What is a cash ISA, and what investments can it include?
A cash ISA can include bank and building society deposit accounts, units or shares in UK-authorised unit trusts and OEICs that are money-market schemes, and stakeholder cash deposit products.
What is an innovative finance ISA, and what investments can it include?
An innovative finance ISA can include peer-to-peer (P2P) lending or long-term asset funds, such as those made up of illiquid assets like privately owned companies or property, as well as open-ended property funds with extended notice periods.
What is the maximum subscription limit for ISAs?
The subscription limit for ISAs ensures that individuals can benefit from tax advantages without exceeding reasonable savings. The limit applies to the overall annual contribution across different types of ISAs. Investors can split their investment across various ISA types, provided the total annual limit is not exceeded.
What are the eligibility rules for investing in an ISA?
The minimum age for investing in most ISAs is 18, though a Lifetime ISA can only be opened by those under 40. The investor must be generally resident in the UK for tax purposes. Additionally, ISAs can only be held in a single name (joint accounts are not permitted).
What happens to an ISA when the investor dies?
Upon the death of an ISA holder, the account becomes a “continuing account of a deceased investor” and continues to benefit from the tax advantages. No further subscriptions can be made, but the tax benefits remain until the account is closed or for up to three years after the death.
What is an additional permitted subscription (APS) for surviving spouses or civil partners?
After the death of an ISA holder, the surviving spouse or civil partner can make an additional ISA subscription to the value of the deceased’s ISA holdings. This APS can be made within three years of the death or 180 days after the estate’s administration is complete, depending on the type of ISA.
What is the flexibility offered by some ISA providers?
Some ISA providers offer flexibility, allowing funds withdrawn from a cash or innovative finance ISA, or the cash element of a stocks and shares ISA, to be replenished during the same tax year. However, providers are not obligated to offer this flexibility.
What are the restrictions when transferring between ISAs?
Transfers can generally be made between providers and different types of ISAs without breaching ISA limits, but there are some exceptions:
Transferring from a Lifetime ISA before the age of 60 triggers a 25% withdrawal fee.
Cash can be transferred from an innovative finance ISA, but other assets may not be.
Some ISA providers may impose withdrawal restrictions and charges on transfers.
How does flexibility affect an investor’s ISA contributions?
If an ISA offers flexibility, an investor can replenish withdrawn funds up to the annual ISA limit. For example, if an investor withdraws £7,000 from a £12,000 investment, they could still invest £15,000 in the remainder of the tax year, if the ISA is flexible. Without flexibility, the investor can only contribute up to the remaining limit (£8,000 in this case).
What tax reliefs apply to ISA investments?
ISA investments are exempt from income tax and capital gains tax (CGT). This contrasts with unit trusts or OEICs, which may be liable for income tax on interest or dividends and CGT on encashment.
What is the Help-to-Buy ISA?
The Help-to-Buy ISA, available from December 2015 to November 2019, was a cash ISA aimed at helping individuals save for their first home. It provided a government bonus of 25% on savings, up to a maximum of £3,000, with a minimum savings requirement of £1,600. The bonus was paid upon completion of a home purchase, and the scheme had a deadline of 1 December 2030 for home purchases.
What are the rules for a Lifetime ISA?
A Lifetime ISA, available from 6 April 2017, can be opened by individuals aged 18 to 39 and is aimed at saving for a first home (up to £450,000) and/or retirement. The government provides a 25% bonus on savings made before the age of 50, up to £4,000 per year. The bonus is paid monthly, and savings can be used for a first home or retirement at age 60. A 25% penalty applies if funds are withdrawn for reasons other than these conditions.
Can a person contribute to both a Help-to-Buy ISA and a Lifetime ISA?
Yes, an individual can contribute to both a Help-to-Buy ISA and a Lifetime ISA, but the bonus payment from only one of these ISAs can be used for the purchase of a first home.
What is a Junior ISA (JISA)?
A Junior ISA (JISA) was introduced in November 2011 as a replacement for the Child Trust Fund (CTF). It provides the same tax benefits as an adult ISA and can be in the form of a stocks and shares or cash ISA. Investments can be made into one type or split between both, with a maximum annual investment limit.
Who can open and manage a Junior ISA (JISA)?
If the child is under 16, a JISA can only be opened and managed by the child’s parent or another adult with legal responsibility. A child aged 16 or over can open and manage their JISA independently. Once they reach 16, if a JISA has already been opened for them, they become responsible for managing it.
When can the funds in a Junior ISA (JISA) be accessed?
Funds in a Junior ISA cannot be accessed until the child turns 18. At that point, the JISA becomes a conventional adult ISA, and the child gains full control over the account.
Can a Junior ISA (JISA) be transferred from a Child Trust Fund (CTF)?
Yes, a Child Trust Fund (CTF) can be transferred into a Junior ISA on request. However, children cannot hold both a JISA and a CTF at the same time.
What are the rules for Child Trust Funds (CTFs)?
CTFs are no longer available to new savers, but existing accounts can continue to receive contributions up to the annual limit. Once the child turns 18, no further contributions can be made, but the CTF maintains its tax-exempt status until it is closed. A CTF can be transferred into an ISA without affecting the child’s ISA subscription limit.
What are the types of Child Trust Funds (CTFs)?
There were three types of Child Trust Funds (CTFs):
Deposit-type savings accounts
Share accounts
Stakeholder CTF accounts, which invest in a range of company shares with government-imposed rules to reduce risk. The maximum annual charge for a stakeholder CTF is 1.5%.
What are Venture Capital Trusts (VCTs) and how do they work?
Venture Capital Trusts (VCTs) are companies listed on the stock exchange that invest in smaller companies. They are managed by an investment manager and spread the funds raised from investors across different companies. VCT investments are high-risk, but they offer tax benefits such as up to 30% income tax relief on investments of up to £200,000 per year, tax-free dividends, and exemption from Capital Gains Tax (CGT) on capital gains.
What tax benefits are available for investors in Venture Capital Trusts (VCTs)?
Investors in VCTs are eligible for income tax relief of up to 30% on investments up to £200,000 per year. Any dividends paid by the VCT from this investment are tax-free, and any capital gains are exempt from CGT. VCTs must be HMRC-approved and meet certain conditions to grant these tax reliefs.
What is the difference between a Venture Capital Trust (VCT) and the Enterprise Investment Scheme (EIS)?
A VCT is a company listed on the stock exchange that invests in a range of smaller companies on behalf of its investors. In contrast, the Enterprise Investment Scheme (EIS) offers tax reliefs to individuals who directly invest in eligible smaller companies. While VCTs are collective investments, EIS involves direct investment in individual companies.
