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CeMap > Unit 1 Topic 9 - Tax warppers > Flashcards

Unit 1 Topic 9 - Tax warppers Flashcards

1
Q

What is a tax wrapper?

A

Tax on investments are usually charged at two stages of an investment’s live:

  • while the funds are invested
  • when the funds are drawn or income is paid out

Using a tax wrapper such, such as an ISA, changes the way an investor is taxed on the underlying investment.

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2
Q

List out the types of ISAs.

A

Stocks and shares ISA

Cash ISA

Innovative finance ISA

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3
Q

What can a stocks and shares ISA include?

A
  • shares and corporate bonds issued by companies listed on a recognised stock exchange anywhere in the world.
  • 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).
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4
Q

What can a cash ISA include?

A
  • 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
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5
Q

What are the eligibility rules for ISAs?

A
  • Minimum age for stocks and shares or innovative finance ISA is 18 years; 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
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6
Q

What is the ISA subscription limit for 2019/20?

A

£20,000

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7
Q

What happens to the ISA holdings of a deceased investor?

A

Holdings are designed as a ‘continuing account of a designated investor’ and remain so until the earlier of:

  • administration of the estate;
  • closure of the account; or
  • third anniversary of death.
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8
Q

What is an additional permitted subscription (APS)?

A
  • Applies when an individual’s spouse or civil partner dies.
  • It allows the surviving spouse/civil partner to make an additional ISA subscription to the value of the deceased’s ISA holdings.
  • Right to make cash APS applied for 3 years from the date that the person died, or 180 days after administration of the estate is complete.
  • Stocks and shares as above (only 180 days).
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9
Q

How are ISAs taxed on income or capital gains?

A

Investors are exempt from income tax and capital gains tax on their ISA investments.

If a unit trust is held within an ISA there is no liability to CGT.

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10
Q

What is a Help-to-Buy ISA?

A

A scheme open to those aged 16 or over to help those saving for their first UK home by adding a bonus to any savings they make.

Anyone who has opened an account by 30 Nov 2019 will be able to use funds invested towards purchase of a first home by 1 December 2030.

Savings into a Help-to-Buy ISA form part of the annual ISA allowance, rather than being in addition to it.

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11
Q

What are the eligibility and payout figures of a Help-to-Buy ISA?

A
  • An initial deposit of £1,200 and monthly savings of £1 - £200.
  • Each £200 paid in will attract a bonus payment of £50, subject to the ISA being worth at least £1,600 when funds are withdrawn for home purchase.
  • Minimum bonus size of £400 and max of £3000.
  • 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.
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12
Q

What is a lifetime ISA?

A

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.

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13
Q

What ages are eligible for a lifetime ISA?

A

18-40

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14
Q

Savings made in a lifetime before a certain attracts a bonus paid by the government, what is the age and rate?

A

Savings made before the age of 50 attract a bonus of 25% (paid by the government).

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15
Q

How often is the lifetime ISA bonus paid?

A

In 2017/18, the bonus was paid annually but since 6 April 2018 it is paid monthly, which enables interest to be earned on the bonus.

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16
Q

What are the limits on lifetime ISAs?

A

A maximum of £4,000 may be saved per tax year; there is no monthly savings limit.

17
Q

What are the underlying investment choices associated with lifetime ISAs?

A

The underlying investment choices are the same as those in the cash and stocks and shares ISAs.

18
Q

What are the rules on annual ISA allowance with respect to lifetime ISAs?

A

Savings into a Lifetime ISA form part of the annual ISA allowance, rather than being in addition to it.

19
Q

What are the options with regards to redeeming a lifetime ISA?

A

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.

20
Q

Under what situation would a penalty apply when withdrawing a lifetime ISA?

A

A 25% penalty is applied if funds are withdrawn for reasons other than the purchase of a first home, the holder reaching age 60 or holder suffering terminal illness.

21
Q

What are the rules regarding investing in both a Lifetime ISA and a Help-to-Buy ISA?

A

An individual may contribute to both but the bonus payment from only one of these ISAs can be used towards the purchase of a first home.

22
Q

What is a Child Trust Fund (CTF)?

A

A tax-free savings account for children, was introduced in 2005 and was available to children born on or after 1 September 2002.

Government contributions ceased in 2011.

23
Q

What are the three types of Child Trust Funds?

A
  • Deposit-type savings accounts, which are bank and building society accounts that offer fixed or variable rates of interest;
  • Share accounts that can hold a range of investments similar to those available in a stocks and shares ISA;
  • Stakeholder CTF accounts.
24
Q

What is a Stakeholder CTF account?

A

Stakeholder CTF accounts invest in a range of company shares, subject to certain government rules designed to reduce risk.

25
Q

What is the maximum annual charge permitted on a stakeholder CTF?

A

1.5%

There is no limit on the charges on the other types of CTF.

26
Q

How are CTFs taxed on income and capital gains?

A

There is no tax on income or capital gains.

27
Q

What period does the subscription year for CTFs cover?

A

From the child’s birthday to the day preceding their next birthday.

28
Q

What is a Junior ISA?

A

JISAs are available for all children who do not have a Child Trust Fund (CTF).

JISAs confer the same tax benefits as an adult ISA.

As with adult ISAs and CTFs there is a maximum annual limit.

Where a child is under 16, a JISA can only be opened and managed by the child’s parent.

29
Q

What are two government incentives to encourage private investors to provide funds to newly established companies not listed on the stock exchange?

A
  • Venture Capital Trusts (VCTs)
  • Enterprise Invest Scheme (EIS)

The difference is that a VCT is an investment in its own right, whereas the EIS is a system of tax reliefs that an individual company applies for.

30
Q

What is a Venture Capital Trust?

A
  • A 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 difference companies.
  • Investment into a VCT is normally viewed as high risk.
31
Q

What are the tax reliefs granted to Venture Capital Trusts?

A
  • Income tax relief at up to 30% is given on an investment of up to £200,000 per tax year.
  • Any dividends paid by the VCT (from £200,000 per tax year relieved investment) are free of tax.
  • Any capital gains are exempt from capital gains tax.
  • A VCT must be approved by HMRC and must meet certain conditions to gain approval.
32
Q

What is an Enterprise Investment Scheme?

A

The EIS is designed to encourage investment in certain smaller, high risk companies by the provision of tax relief.

EIS involves direct investment in a company that is eligible for the scheme.

33
Q

What are the tax reliefs granted by the Enterprise Investment Scheme?

A
  • Income tax relief up to 30% on investment of up to £1,000,000 (£2,000,000 if the amount investedin 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 3 years.

CeMap (25 decks)

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