Unit 1 Topic 9- Tax wrappers

Question 1

What is a tax wrapper?

Answer 1

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

Question 2

List out the types of ISAs.

Answer 2

Stocks and shares ISACash ISAInnovative finance ISA

Question 3

What can a stocks and shares ISA include?

Answer 3

• 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).

Question 4

What can a cash ISA include?

Answer 4

• 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

Question 5

What are the eligibility rules for ISAs?

Answer 5

• 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

Question 6

What is the ISA subscription limit for 2019/20?

Answer 6

£20,000

Question 7

What happens to the ISA holdings of a deceased investor?

Answer 7

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.

Question 8

What is an additional permitted subscription (APS)?

Answer 8

• 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).

Question 9

How are ISAs taxed on income or capital gains?

Answer 9

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.

Question 10

What is a Help-to-Buy ISA?

Answer 10

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.

Question 11

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

Answer 11

• 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.

Question 12

What is a lifetime ISA?

Answer 12

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.

Question 13

What ages are eligible for a lifetime ISA?

Answer 13

18-40

Question 14

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

Answer 14

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

Question 15

How often is the lifetime ISA bonus paid?

Answer 15

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.

Question 16

What are the limits on lifetime ISAs?

Answer 16

Lifetime ISA limit of £4,000

Counts towards annual ISA limit of £20,000

Question 17

What are the underlying investment choices associated with lifetime ISAs?

Answer 17

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

Question 18

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

Answer 18

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

Question 19

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

Answer 19

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.

Question 20

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

Answer 20

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.

Question 21

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

Answer 21

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.

Question 22

What is a Child Trust Fund (CTF)?

Answer 22

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.

Question 23

What are the three types of Child Trust Funds?

Answer 23

• 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.

Question 24

What is a Stakeholder CTF account?

Answer 24

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

Question 25

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

Answer 25

1.5%There is no limit on the charges on the other types of CTF.

Question 26

How are CTFs taxed on income and capital gains?

Answer 26

There is no tax on income or capital gains.

Question 27

What period does the subscription year for CTFs cover?

Answer 27

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

Question 28

What is a Junior ISA?

Answer 28

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.

Question 29

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

Answer 29

• 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.

Question 30

What is a Venture Capital Trust?

Answer 30

• 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.

Question 31

What are the tax reliefs granted to Venture Capital Trusts?

Answer 31

• 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.

Question 32

What is an Enterprise Investment Scheme?

Answer 32

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.

Question 33

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

Answer 33

• 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.