Chapter 9 - Direct Investments Flashcards Preview

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Flashcards in Chapter 9 - Direct Investments Deck (35)
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1
Q

At what rates would savings interest on cash deposits be taxed at falling into the savings, basic, higher and additional rate bands?

A
Savings = 0%
Basic = 20%
Higher = 40%
Additional = 45%
2
Q

What are the 2 payments an individual could receive as a result of a building society demutualisation?

A

Cash bonus

Free shares

3
Q

How is a cash bonus paid as part of a building society demutualisation taxed?

A

This would be a disposal for CGT purposes, if it exceeds the annual exempt amount CGT will be due at marginal rates

4
Q

How are free shares paid as part of a building society demutualisation taxed?

A

The issue of the shares is not subject to income tax or CGT but any disposal would be subject to CGT in the normal way with an acquisition cost of £0.

5
Q

Name 4 different National Savings and Investment products?

A

Any 4 from;

National Savings and Investment bank accounts
National Savings and Investment savings certificates
National Savings and Investment income bonds
Guaranteed income and growth bonds
Children’s bonds
65+ guaranteed growth bonds
Direct ISA
Investment bond

6
Q

Briefly describe the workings and tax status of National Savings and Investment bank accounts?

A

Can be either investment account or a saver account, both taxable as savings open to aged 16 and above, higher rate on the saver account but withdrawals on this account can only be made by phone or online.

7
Q

Briefly describe the workings and tax status of National Savings and Investment savings certificates?

A

Not available since 2011 but existing issue can still be rolled over. Lump sum invested with tax free interest paid for up to 5 years

8
Q

Briefly describe the workings and tax status of National Savings and Investment income bonds?

A

Pay monthly interest at a variable rate, taxed as savings. No notice required to withdraw

9
Q

Briefly describe the workings and tax status of Guaranteed income and growth bonds?

A

Not currently available but existing ones can be rolled over. Fixed rate of interest applied which pays out for the income option or is rolled up for the growth.

10
Q

Briefly describe the workings and tax status of Children’s bonds?

A

Can be bought for anyone under the age of 16. Tax free fixed rate of interest for 5 years. Can cash in early for loss of 90 days interest max £3k per child.

11
Q

Briefly describe the workings and tax status of 65+ guaranteed growth bonds?

A

“pensioner bonds” for 1 and 3 years. The 3 year paid 4% gross, credited and taxed annually but only paid on maturity. Max £10k per person

12
Q

Briefly describe the workings and tax status of Direct ISA National Savings and Investment?

A

Meets government CAT standards, variable interest rate. Taxable as savings

13
Q

Briefly describe the workings and tax status of Investment bond National Savings and Investment?

A

Available from April 2017 rate of 2.2% fixed for 3 years max £3k can only be opened online. Taxed as savings.

14
Q

What is the difference between a gilt, a local authority bond and a corporate bond?

A

A gilt is a loan to the government

A local authority bond is a loan to a local government authority

A corporate bond is a loan to a company

15
Q

How is a government gilt taxed and how often is the interest paid?

A

Fixed rate of interest paid twice a year, paid gross and taxed as savings. Can elect to have them paid net of 20% tax. Can be held to maturity or sold on stock exchange.

16
Q

How is a local authority bond taxed?

A

Fully taxable as savings income and CGT exempt.

17
Q

How is a corporate bond taxed?

A

Subject to income tax. Paid net of 20% tax so can be reclaimed if falls in PSA, fixed interest. Losses allowable in certain circumstances like if the loan is unrecoverable. Can be traded once issued.

18
Q

What is a deeply discounted security and how does it work?

A

A security that will mature for more than it was issued for.

If the maturity value is a 15% increase or 0.5% for every year it has run then it is a DDS.

Income tax paid on the excess and to save double tax they are not subject to CGT.

19
Q

What are permanent interest bearing shares (PIBS) and when do they mature?

A

High yielding fixed interest investments issued by building societies.

Listed on stock market and are undated so may never mature.

Interest paid twice a year gross and taxable as savings

20
Q

If a building society de-mutualises what do permanent interest bearing shares (PIBS) become?

A

Perpetual Subordinated Bonds

21
Q

How do fixed interest securities work?

A

Money is loan to an institution and in return a fixed rate of interest is pad for a set period of time.

At maturity the original capital is repaid.

22
Q

How do shares work and how does an investor get a return from one?

A

A share represents part ownership of a company.

Investment returns are generated through dividends and increases in the share price.

23
Q

How are shares taxed?

A

Subject to dividend tax on any dividends distributed.

Tax payable on amount in excess of dividend allowance at rates of 7.5% basic, 32.5% higher and 38.1% additional

24
Q

What is the dividend allowance for the 17/18 tax year and can this be tapered for high earners?

A

Dividend allowance is £5,000 for all UK individuals and this cannot be reduced

25
Q

What is a stock dividend and how is it taxed?

A

New shares are issued instead of a dividend payment.

For income tax purposes the cash equivalent is deemed to be received and added to income for that year.

Acquisition cost for CGT is cash equivalent amount of the stock dividend.

26
Q

How are overseas dividends taxed in the UK?

A

Taxed same as UK dividends but usually after a withholding tax

27
Q

What is an investment trust and how is it taxed?

A

Closed ended collective investment that is traded on the exchanges.

Taxed the same as direct shares

28
Q

How is an investment in property taxed?

A

Rental income is subject to income tax and any capital gains on property investment are subject to CGT

29
Q

Can property income be classed as relevant UK earnings for the purposes of personal pension contributions?

A

No

30
Q

Name 4 allowable deductions with regards to property rental.

A

Any 4 from;

Repairs
Interest on loans
Other expenses such as legal fees, 
rent collection, 
premiums for insuring the property, 
water rates, 
gas and electric
31
Q

Are property improvements an allowable expense to be deducted?

A

No

32
Q

What is the threshold for capital allowances to benefit from 100% income tax relief?

A

£200,000

33
Q

What amount is the writing down allowance after the capital allowance threshold?

A

18%

34
Q

What is the rent a room relief threshold and how does it work?

A

Available for people who let out a part of their home.

If gross receipts are less than £7,500 no tax is charged on the rent.

If the rent is more than £7,500 then the landlord can choose between being taxed on income minus expenses OR gross receipts over £7,500 with no relief for expenses.

They can choose the most beneficial option.

35
Q

What is the main benefit of renting a property as a furnished holiday letting and what are the main conditions?

A

The main benefit is that the rental income counts as earnings for pension contributions and can benefit from CGT holdover relief.

Can be difficult to qualify as a lot of conditions such as must be in UK or EEA,
must be available to let for 210 days a year as holiday accommodation and of those days must be let in 105 of them,
continuous periods of more than 31 days cannot total more than 155 days.