Topic 9: Tax Wrappers Flashcards
What is a Tax Wrapper?
A tax wrapper is simply a tax shelter around an underlying investment that changes the way the investment is taxed. The most familiar of these is the individual savings account (ISA) in its various forms. Pensions are a form of tax wrapper too,
What is an ISA?
Individual savings accounts (ISA) were introduced in 1999. Their stated objectives were to develop the population’s savings habit and to ensure that tax relief on savings is fairly distributed.
Whats a Stocks and Shares ISA?
A stocks and shares ISA can include:
— shares and corporate bonds issued by companies listed on a recognised stock exchange anywhere in the world, including Alternative Investment Market (AIM) shares;
— gilt‐edged securities and similar stocks issued by governments of countries in the EEA;
— UK‐authorised unit trusts and OEICs;
— UK‐listed investment trusts;
— life assurance policies on the sole life of the ISA investor;
— units in a stakeholder medium‐term investment product;
— shares acquired in the previous 90 days from an all‐employee savings‐related share option scheme (SAYE).
What is a Cash ISA?
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;
— stakeholder cash deposit products
What is an Innovative Finance ISA?
An innovative finance ISA involves investing via a peer‐to‐peer (P2P) lender
What is a Help to Buy ISA?
A Help‐to‐Buy ISA (now closed for new applications) was to help those saving for their first UK home by adding a bonus to any savings they make.
Account holders could make an initial deposit of up to £1,200. Monthly savings of between £1 and £200 can be made until 30 November 2029. Each £200 paid in attracts a bonus payment of £50, subject to the ISA being worth at least £1,600 when funds are withdrawn for home purchase. The minimum bonus size is £400 and the maximum £3,000. The bonus is available on purchases of up to £450,000 in London and £250,000 elsewhere in the UK and is paid when the home purchase is completed.
What is a Lifetime ISA?
A Lifetime ISA can be used to buy a first home (replacing the Help‐to‐Buy ISA) or save for later life (see section 9.1.6)
What are the three eligibility rules for ISAs?
- The minimum age for investing in a stocks and shares ISA, innovative finance ISA or Lifetime ISA is 18 years (Lifetime ISAs also have a maximum age of 40); a cash ISA can be opened by anyone aged 16 or over.
- An ISA investor must be generally resident in the UK for tax purposes.
- An ISA can only be held in a single name, ie joint accounts are not permitted.
What are the tax relief with ISAs?
Investors are exempt from income tax and CGT on their ISA investments.
As a comparison, an investment held in a unit trust is potentially liable to CGT on encashment. If the unit trust is held within an ISA there is no liability to CGT.
What are the main rules of lifetime ISAs?
A Lifetime ISA was introduced from 6 April 2017, with the aim of encouraging younger people to save for their first home in the UK, to a value of up to £450,000, and/or for their retirement. The main rules are as follows:
- A Lifetime ISA can be opened by those aged between 18 and 40.
- Savings made before the age of 50 attract a bonus of 25 per cent (paid by
the government).
- The bonus is paid monthly, which enables interest to be earned on the bonus.
- A maximum of £4,000 may be saved per tax year; there is no monthly savings limit.
- The underlying investment choices are the same as those in the cash and stocks and shares ISAs.
- Savings into a Lifetime ISA form part of the annual ISA allowance, rather than being in addition to it.
- Savings can be used to purchase a first home and/or retained to provide benefits in retirement from the age of 60.
- Savings, including the bonus, can also be withdrawn when the account holder is terminally ill.
- A 25 per cent penalty is applied if funds are withdrawn for reasons other than the purchase of a first home, the holder reaching age 60 or the holder suffering a terminal illness.
- An individual may 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 towards the purchase of a first home.
What is a Junior ISA?
Junior ISAs (JISAs) became available in November 2011 when their predecessor
the Child Trust Fund (CTF) scheme closed.
Children cannot have both a JISA and a CTF, but CTFs can be transferred into JISAs on request. JISAs confer the same tax benefits as an adult ISA. Stocks and shares and cash JISAs are available, and investment can be made into one type or split between each. As with other ISAs, there is a maximum annual investment limit.
Where a child is aged under 16, a JISA can only be opened and managed by the child’s parent (or another adult with legal responsibility for the child). An eligible child aged 16 or over can open and manage a JISA on their own behalf; if a JISA has already been opened for them, they become responsible for managing it.
Funds cannot be accessed until the child reaches 18; once the child is 18, the account becomes a conventional adult ISA.
What is a Child Trust Fund?
Child Trust Funds (CTFs) are no longer available to new savers, although existing CTFs can continue to receive subscriptions up to the annual limit. Alternatively, as already mentioned, a CTF may be transferred into a Junior ISA (see section 9.2).
A CTF remains in force until the child’s 18th birthday. At this point, no further contributions can be made but the account keeps its tax‐exempt status until it is closed. A maturing CTF can be transferred into an ISA without affecting the child’s ISA subscription limit. There is no access to money in the account before the child’s 18th birthday.
There were three general types of CTF:
- deposit‐type savings accounts;
- share accounts; and
- stakeholder CTF accounts.
Stakeholder CTF accounts invest in a range of company shares, subject to certain government rules designed to reduce the risk.
The maximum annual charge permitted on a stakeholder CTF is 1.5 per cent.
What is the main difference between Venture Capital Trust and Enterprise Investment Scehemes?
The main difference between the two types of scheme is that a VCT is an investment in its own right, a collective investment, whereas the EIS is a system of tax reliefs that an individual company applies for; if a company is eligible for the EIS an investor in the company can claim the available tax reliefs.
What is a Venture Capital Trust?
A Venture Capital Trust (VCT) is a company whose shares are listed (and can therefore be traded) on the stock exchange; it is run by an investment manager. The VCT normally spreads the monies raised from investors over a range of different companies.
Investment into a VCT is normally viewed as high risk, so income tax reliefs are granted to make the proposition more attractive:
- Income tax relief at up to 30 per cent is given on an investment of up to £200,000 per tax year.
- Any dividends paid by the VCT from the £200,000 permitted maximum investment are tax free.
- Any capital gains are exempt from CGT.
- A VCT must be approved by HMRC and must meet certain conditions to gain approval.
What is a Enterprise Investment Scheme?
In a similar way to a VCT, the Enterprise Investment Scheme (EIS) is designed to encourage investment in certain smaller, high risk companies by the provision of tax relief. The main difference is that whereas a VCT is a listed company that undertakes the investment on the behalf of the investor, the EIS involves direct investment in a company that is eligible for the scheme.
As with VCTs, EIS investment is seen as high‐risk so tax reliefs are offered:
- Income tax relief at up to 30 per cent is given on an investment of up to £1,000,000 (£2,000,000 if the amount invested in excess of £1,000,000 is made in knowledge‐intensive companies) per tax year.
- The CGT on any capital gains that are reinvested is deferred.
- Capital gains from investment in the EIS are exempt from CGT, provided
that the EIS shares have been held for at least three years.
As with the VCT, there are a number of conditions that must be met for the tax reliefs to be granted.
There is also the Seed Enterprise Investment Scheme (SEIS), which offers even higher tax reliefs than the EIS, as it is targeted at raising funds for small start‐up companies.
