Workbook 5 Tax on investments

Question 1

Cash / Savings Income.
e.g.
 Bank and Building society account.
 Receipt of demutualisation shares.
 National Savings.

Answer 1

Paid Gross
0% starting rate for savings up to £5,000.
PSA can be used
if not covered by above then declare to HMRC, and tax paid at marginal rate.
No CGT.

Question 2

Bonds and Fixed Interest Assets
e.g.
Gilts.
Local Authority Bonds. Corporate Bonds. PIBS.

Answer 2

 Interest normally paid gross. Tax treatment is as cash/savings income.
 Not subject to CGT for Gilts, Qualifying Bonds or PIBS.
 Losses not available to be set against gains from other investments.

Question 3

Property income

Answer 3

 Income tax charged on income from letting property in similar way to a business. Taxed at 20%, 40% and 45% based on level of income.
 All UK property income pooled together, and overseas property pooled together.
 Deductible expenses and capital allowances reduce amount of income liable to income tax (basis changed from April 2017).

Question 4

CGT on sale of property

Answer 4

• 18% or 28% based on whether gain, when added to income, falls in basic rate band or above.
• Reliefs potentially available.
   Holdover relief.
   Rollover relief.
   Entrepreneurs’ relief (from 6 April 2020 renamed Business Asset Disposal relief).

Question 5

Rent a room

Answer 5

 Rent a room up to £7,500pa = tax free.

Question 6

Woodlands.

Answer 6

• Profits from occupation exempt
  from Income tax.
• IHT postponed until trees cut and sold if woodland owned for 5 years.
• CGT exempt.

Question 7

Shares taxation

Answer 7

 Dividends subject to income tax, on the top part of income.
- From 6th April 2018 the first £2,000 of dividends is tax free. Dividends in excess of £2,000, basic rate 7.5%.
- Higher Rate 32.5%
- Additional Rate 38.1%
 Capital Gains
- 10% or 20% in the usual way.
- Capital losses may be offset against gains in same or future tax years.
- 20% for trustees or personal representatives

Question 8

Shares stock division

Answer 8

 New shares are paid instead of a dividend payment.
 Shareholder treated as if having received an equivalent amount of income to the market value of new shares on the 1st day of trading.

Question 9

Overseas Shares

Answer 9

 Dividend paid after deduction of
withholding tax.
 Dividend taxed as for UK shares.

Question 10

Stamp duty of….

Answer 10

0.5% of the value of shares rounded to the nearest £5. (see stamp duty chapter for more info).

Question 11

Collective Investments
e.g.
 Unit trusts  OEICs
 UCITS

Fund taxation….

Answer 11

Fund
 Income taxed at 20% as savings income.
 UK dividends have no further tax liability.
 Foreign dividends net of withholding tax.
 CGT Exempt.

Question 12

Collective Investments
e.g.
 Unit trusts  OEICs
 UCITS

Investor taxation….

Answer 12

Investor
 Dividends subject to income tax as top part of income. From 6 April 2018, you don’t pay tax on the first £2,000 of dividends in the tax year. Dividends over £2k are taxed at 7.5% (basic rate band), 32.5% (higher rate band) and 38.1% (additional rate band).
 Interest from authorised unit trusts/OEICs is paid gross.
- Where the starting rate band for savings is available and/or the personal savings allowance, if total interest doesn’t exceed allowances there will be no tax payable. Where interest exceeds available allowances there will be tax payable at 20%, 40%, 45% as applicable
 CGT in the usual way at 10% or 20%.

Question 13

Offshore REPORTING FUNDS

Answer 13

 Investor enters share of income on tax return.
 Investor is assessed for income tax on income (whether or not paid out).
 Income paid gross.
 Income paid out as dividends qualifies for offset against the tax free dividend allowance in the same way as UK dividends so, if within £2k, can be received tax free. If above £2k, taxed as shown in section above for Collective Investments.
 Income paid out as interest can be offset against any available personal savings allowance, otherwise taxable at 20/40/45% as applicable.
 CGT on encashment.

Question 14

Offshore NON REPORTING FUNDS

Answer 14

 Gains on disposal (including death) charged to income tax (20/40/45%) so no CGT exemption or losses available. Gain includes accumulated income.
 Income can be accumulated in low tax environment

Question 15

Investment Companies
(also known as investment trusts)
e.g. REIT

Fund taxation…

Answer 15

 Taxed in the usual way for assets contained in the company.
 Can offset expenses.
 Not subject to CGT.

Question 16

Real Estate Investment Trusts (REIT).

Answer 16

• Dividends taxed as normal.
• Income payment from tax-exempt element classed as property income and paid net of 20% tax.
• Capital Gains tax in the usual way.

Question 17

Investment Companies
(also known as investment trusts)
e.g. REIT

Investor taxation…

Answer 17

 The first £2,000 received in dividends from investments is tax free. Above this, dividends in basic rate tax band taxed at 7.5%, higher rate tax band 32.5%, and additional rate tax band 38.1%.
 Income from tax-exempt element received net of 20% tax. Investor can reclaim or pay the balance of tax due based on their own situation.
 CGT in the usual way at 10% or 20%.

Question 18

ISAs

Fund…

Answer 18

 Dividends - no tax due.

 Can reclaim 20% on corporate bonds.

Question 19

Pension

Fund…

Answer 19

 Dividends - no tax due.
 Can reclaim 20% on corporate
bonds.
 Interest tax free.
 No CGT on fund.

Question 20

Life assurance 
e.g.
 Endowments.
 Non qualifying
investment bonds.
 Whole of life policies.

Fund…

Answer 20

 Savings, property and offshore income taxed at 20%
 Dividends - no further liability (classed as ‘franked’ income).
 Capital gains taxed at 20%.
 Indexation Allowance available up
to December 2017 only.
 Expenses can be offset against unfranked investment income.
 Friendly Societies - No Income tax or CGT on returns.

Question 21

Life assurance 
e.g.
 Endowments.
 Non qualifying
investment bonds.
 Whole of life policies.

Investor…

Answer 21

 Qualifying policy:
o Free of further taxation.
 Non Qualifying:
o If chargeable event occurs & gain arises.
o Tax at 20% or 25% if higher/additional rate taxpayer (UK policy).
o Top slicing to assess if gains exceed basic rate tax band (or higher rate band).
o For newer bonds (6/4/2013 onwards) or older bonds incremented/assigned since then, relief available for periods resident outside UK.
o Offshore bonds - Investor liable for income tax on whole gain (unless falls within personal allowance, starting rate band for savings or personal savings allowance). Top-slicing available when assessing whether higher or additional rate tax due.

Question 22

Annuities

 CPA purchased using funds from a pension scheme.
 PLA purchased using a cash lump sum.

Answer 22

Investor
 CPA – Taxed as earned income at recipient’s marginal income tax rate(s).
 PLA – Interest element of payments taxed as savings income. If available, the personal savings allowance/starting rate band can be offset against interest to achieve some or all of it tax free. Capital element of payment paid free of tax.
 No CGT on income received.

Question 23

EIS Tax relief

Answer 23

 30% relief on qualifying investment up to £2,000,000 in tax year (any investment over £1m must be made into knowledge-intensive companies).
 Can carry back investment to previous tax year if not fully invested in previous tax year. To a maximum of £2,000,000.

Question 24

EIS Disposal

Answer 24

 Disposal of qualifying shares usually CGT exempt if shares held for 3 years.
 Income tax relief withdrawn if disposed of within 3 years.
 Must not be pre-arranged exit provisions which minimise the risk.

Question 25

EIS Investors

Answer 25

 Must not be connected to company or trade at time of initial investment.

Question 26

EIS Tax status

Answer 26

 Must be liable to UK tax.

 Do not need to be UK resident.

Question 27

EIS Qualifying compnies

Answer 27

 Gross assets < £15 million before invest, 3 years.
 Trade in UK, not need to be incorporated in UK.
 Not listed when EIS shares issued.
 Fewer than 250 full time employees (500 for knowledge-intensive cos).
 Company must have raised no more than £5 million under EIS/VCT/corporate venturing scheme combined (£10m for knowledge-intensive cos) in previous 12 months.

Question 28

EIS Loss of Relief

Answer 28

 Disposal of shares < 3 years (except spouse / death).
 If receive value from the company within 1 year before and 3 years after investment.
 Company ceases to be qualifying in 1st 3 years.

Question 29

EIS Defer CGT

Answer 29

 Reinvest gain in EIS shares.
 UK resident.
 Reinvest within 1 year before and 3 years after disposal that gave gain.

Question 30

VCT Tax relief

Answer 30

 30% relief on investments up to £200,000 in tax year.

 Dividends received where qualifying investment does not exceed maximum of £200,000 per tax yr. are tax free.

Question 31

VCT Disposal

Answer 31

 Individuals CGT free on disposal.
 No minimum holding period for
CGT exemption.
 Income tax relief withdrawn if dispose of shares within 5 yrs, unless to spouse or on death.

Question 32

VCT Investors

Answer 32

 Liable to UK tax to claim relief.

Question 33

VCT Qualifying companies

Answer 33

 Not a close company.
 Trading on an EU regulated market throughout the relevant period.
 Income from shares or securities (whole or mainly).
 At least 80% value of investments in qualifying unlisted trading cos.
 At least 10% in ordinary non pref. shares.
 Not > 15% in one company or group.
 At least 70% of qualifying investments by value must be in new ordinary shares/certain pref shares.

Question 34

VCT Loss of Relief

Answer 34

 Tax relief withdrawn if shares disposed of < 5 years unless to spouse or on death.

Question 35

VCT Defer CGT

Answer 35

Cannot defer CGT by reinvestment in VCT.

Question 36

Pension penal tax

Answer 36

Investments in residential property (with a few exceptions) and in tangible movable assets – e.g. antiques, art, jewellery and fine wine – may trigger penal tax charges.