1
Q
What are 3 general features of unit trusts and OEICs?
A
- investors pool their money in exchange for ownership of units or shares.
- the underlying assets in the pool are held by someone else.
- trustees for unit trusts
- depositary for the OEIC
- the day to day buying and selling of the pooled assets is done by a fund manager.
2
Q
What are the elements of investor protection for unit trusts and OEICs?
A
Unit trust: investors are protected by the trust deed and the trustees acting on their behalf.
OEICs: investors are protected by the independent depositary and company law.
Both are protected by the regulator.
Both are protected by the FSCS for 100% capped at £85,000.
3
Q
What does it mean that unit trusts and OEICs are open ended?
A
The fund manager does not have to wait until one of his unit holders wants to sell before he can free up units to sell to new investors.
Units and shares can be created or issues when any investment is made and cancelled when they are cashed in.
They are unlimited.
4
Q
Who determines the sectors that unit trusts and OEICs fall into?
A
Investment association.
5
Q
What are index tracking funds?
A
These aim to align their performance as closely as possible to the performance of a selected index. They aim to mirror as closely as possible what the index is doing.
6
Q
What are the pros and cons of index tracker funds?
A
+ costs are low compared to active managed funds
+ few fund managers actually beat the index in developed markets
+ where fund managers do beat the index, it is often by taking higher risks
+ performance is easy to follow
- you follow the market which can be a rollercoaster at times
- you can never beat the index as you are only tracking it
- you will always underperform the market we the fund will inevitably have some charges attached
- mergers can distort the index
7
Q
What are the different types of screening that ethical funds differentiate themselves through?
A
1) negative screening = funds will avoid certain unethical practices
2) positive screening = tolerance to unethical practice but the fund will actively seek out firms that make an effort to be ethical
3) neutral approach = involves choosing firms that are considered socially responsible
8
Q
What is ESG and what does it stand for?
A
- Environmental - safeguarding the natural world. Approach to pollution. Policies relating to crime. How it avoids risks to the Environment.
- Social - relationships with employees, suppliers, customers and communities. Attitudes to social diversity. Human rights policies.
- governance - leadership, executive pay, audits. Shareholder rights. Openness and transparency.
9
Q
What are the main rules for diversification of Undertaking for collective investment in transferable securities (UCITS) funds?
A
- no more than 10% of the fund in any one share.
- only 4 companies can have the maximum 10% holding.
- any other shares holding must not exceed 5%.
- in effect this means a minimum of 16 holdings.
10
Q
What are the 3 types of FCA authorised funds?
A
UCITS Schemes
Non-UCITS retail schemes
Qualified Investor Schemes (QIS)
11
Q
What is the maximum investment and borrowing of a UCITS?
A
- maximum 10% investment in alternative investments.
- maximum bowling is limited to 10% of fund value
12
Q
What is the maximum investment and borrowing of a Non-UCITS?
A
- maximum investment of 20% in alternative investments.
- maximum borrowing is limited to 10% of fund value.
13
Q
What is the maximum investment and borrowing of a QIS?
A
- few restrictions on exposure to alternative investments
- no limit on maximum borrowing.
14
Q
What is the difference between a UCITS and a UCIS?
A
UCITS = satisfies the EU UCITS directive. Once approved, the fund can market itself across the EU to retailers. Lower risk of loss. Protected by the FSCS for 100% capped at £85,000.
UCIS = an unregulated scheme. It cannot market itself in the UK or to retail clients. Greater risk of loss. Not protected by the FSCS.
15
Q
What is a unit trust?
A
It is a collective investment set up under trust rules.
A fund manager buys bonds or shares in companies on behalf of the fund. The fund is split into units and this is what investors buy.
A unit trust can only be constituted by the signing of a trust deed. And the trustee legally holds all the assets. The manager is responsible for day to day running. The trustee must be regulated by the FCA and the manager authorised by the FCA.
16
Q
What are the responsibilities and obligations of a trustee?
A
Act within the rules. They are the legal owners of the trust assets. Report any issues to the regulator if they are not satisfied with how it is being managed.
Audit the fund and issuing information to unit holders who must be registered. Arrange meetings of unit holders. Distribute the income of the trust to unit holders.
17
Q
What are the duties and actions of a unit trust manager?
A
Must be an approved person. Manager the trust in accordance with its rules and regulations.
Supply information to the trustee. Maintain records of transactions. Notify the trustee and or FCA if it has breached any rules within the trust. Responsible for the promotion of the trust.
18
Q
What must a unit trust hold and what does it contain?
A
A register of unit holders.
Contains names and addresses, unit holding and the date of registration.
19
Q
What is the maximum time the register of unit holders can be closed for maintenance?
A
30 days per year.
20
Q
How are unit holders protected?
A
By the trustees, the FSMA 2000 and the FOS.
21
Q
What is the taxation on authorised unit trusts?
A
- do not pay tax on gains within the fund.
- subject to corporation tax.
- do not pay income tax on gains from derivatives.
22
Q
What is the key consideration that determines whether a fund is deemed to be an equity fund or not?
A
How much of its assets are held in interest bearing securities.
An equity fund is one that has less than 60% of its assets in interest bearing securities.
If a fund has 60% or more of its assets in interest bearing securities; it is deemed a non equity fund.
23
Q
What is the taxation of an equity fund?
A
- corporation tax at 20% on income received.
- foreign dividends are subject to 20% corporation tax but this is often offset by double taxation rules.
24
Q
What is the taxation of a non equity fund?
A
- from April 2017, a fund with more than 60% of assets in interest bearing securities will pay distributions gross to investors.
- the fund can suffer corporation tax at 20%.
25
What is the tax treatment on interest distributions of non equity unit trusts?
- distributions are paid gross
- any savings income within the £5,000 starting rate will not be taxed.
- income earned above the PSAs is taxed as follows
- basic rate = 20%
- higher rate = 40%
- additional rate = 45%
26
What are the personal savings allowance bands?
- starting rate = £5,000
- basic rate = £1,000
- higher rate = £500
- additional rate = £0
27
What is the equalisation payment?
A partial refund of the original capital invested so that it is not subject to CGT.
However it will be deducted from the purchase price of units when identifying any gains liable to CGT in the future. A
28
What is the CGT surcharge levied on gains from residential property?
8%
29
What is the tax due on gains up to basic rate and above basic rate?
Up to = 10%
Above = 20%
30
What are the minimum investment amounts for unit trusts?
- £500 to £1,000 for lump sums
- £50 to £100 per month for regular savings
31
What must be provided for all purchases within a unit trust?
A key features document (KFD) or key investor information document (KIID)
32
When an investor sells units within a unit trust, how soon must payment be made?
4 days after receipt of signed documentation.
33
How are unit trusts priced and valued?
- dual price - different price to buy and sell. The difference often represents an initial charge. Buys units at the higher offer price and sells at the lower bid price.
- single price - uses mid market rates. Charges are declared separately.
34
What is an open ended investment company? (OEIC)
A collective investment set up as a limited company.
The authorised corporate director (fund manager) buys bonds or shares in companies on the stock market on behalf of the fund. The fund is split into shares and this is what investors buy.
Is is operated by a board of directors.
35
What are the differences between an OEIC and a unit trust?
OEIC
- Assets are protected by independent depositary
- fund managed by the authorised corporate director
- often single priced
- structure well recognised throughout the EU
- limited company. Issues shares.
Unit Trusts
- assets protected by trustees
- fund managed by fund manager
- often dual priced
- most commonly found in the UK
- trust structure. Issues units.
36
What is the authorised corporate director responsible for?
- day to day management such as valuations, pricing and dealing
- compliance with FCA requirements
- preparing accounts
- managing the investment
37
What is the depositary responsible for?
- the collection of income and distributions
- ensuring the ACD complies with the rules
- the safe keeping of assets.
38
What is the scheme operator responsible for?
Issuing reports twice yearly and dealing with most administrative tasks.
39
What are the advantages of investing in an OEIC?
- more EU friendly - unit trusts have the added complication of trust law
- OEICs have a more flexible charging structure
- they are easier to run under an umbrella structure which gives more choice and freedom to create new funds.
40
What are the 2 forms of fund of funds?
- fettered - uses only funds of the host provider.
- unfettered - uses funds from other companies
41
For taxation, which 2 categories does offshore funds fall into?
- reporting - income reported to HMRC and dividends and interest taxed as in the UK. Normal CGT rules apply. Income must be declared.
- non reporting - no income is distributed and no dividends are paid. Gains are chargeable to income tax rates. Investors cannot use CGT exemption to offset gains from non reporting funds.
42
What are the differences between onshore and offshore funds?
Onshore
- made up of unit trusts or OEICs
- equity or non equity based
- investors who receive equity based can use the £1,000 dividend allowance
- investors who have non equity funds can use the PSA.
- income distributions paid gross
- income above PSA is taxable through self assessment
- CGT treatment is the same
Offshore
- structure of unit trusts or OEICs with two categories of funds:
- reporting
- must report income to HMRC
- income taxed according to asset mix
- equity or non equity income taxation applied
- no tax taken at source
- investors pays full liability if extra to pay
- nothing to reclaim as nothing paid
- gains taxed in line with standard CGT rules
- non reporting
- no income paid
- gains potential but taxed under income tax rules
- full income tax liability down to the investor
43
What are the two main types of investment trust?
Conventional
Split capital
44
What are the 8 different investment trust share classes?
1) ordinary - entitled to all income and capital growth
2) preference - pay a fixed dividend. Higher claim than ordinary shareholders in liquidation scenarios
3) split capital - two share classes, income shares are entitled to all trust income, capital shares are entitled to no income
4) zero dividend preference - fixed redemption dates of no longer than 10 years. No income entitlement. Preferential rights over capital distribution. Taxed under CGT rules.
5) income - right to income with fixed redemption value.
6) capital - shareholder entitled to remaining capital on trust wind up. No income or predetermined capital rights.
7) packaged - packages of capital, income and zero dividend preference shares. Creates the equivalent of an ordinary share of a conventional trust.
8) warrants - right to buy further investment trust shares as a set price at a predetermined date. No income produced. Taxed under CGT rules.
45
How do you calculate gearing?
(Total gross assets / net assets) x 100
46
What are the 3 types of with profits bonus?
1) annual/reversionary - based on year by year performance and declared annually
2) terminal - one off bonus added to sweep up any missed bonuses.
3) special - awarded on an ad hoc basis if the fund has had good returns in any one year.
47
What are the 3 with profit policy types?
1) traditional - annual bonuses are added to the Sum assured on a simple or compound basis
2) low cost with profit - introduced to keep premium costs down.
3) low start, low cost - premiums start lower and increase gradually over a 5 year period.
48
What is pound cost averaging?
The idea that if you buy lots of something whilst the price is low, then when you come to sell it again at the end, you get back more than you paid if prices eventually rise.
49
How does pound cost averaging work against an investor?
If prices keep increasing whilst the units are being purchased, then the investor would have been better off investing a lump sum when the units were cheaper.
50
What are the rules for a qualifying life assurance based investment?
- 10 year minimum term
- regular premiums must be paid at least annually for 10 years or 3 quarters of the term (whichever is shorter) - surrendering within this time will make it non qualifying
- policy must include a level of life assurance equal to at least 75% of the premiums paid.
- contributions are maximum of £3,600 per annum
51
What are the chargeable events for a non qualifying life assurance based investment?
DAMPS
D - Death
A - Assignment
M - Maturity
P - Part surrender
S - Surrender
52
What is the rule for bond withdrawals?
An investor can take 5% per policy year of their original investment. The 5% is not taxed initially.
It is cumulative.
The 5% rule can be utilised for 20 years (100%).
Any withdrawals over the 5% are added to the investors income and taxed at the marginal rate.
53
What is a guaranteed income bond?
In return for a single premium, the bond provides a guaranteed income each year for a specified term
The Income is paid at the end of each year.
At the end of the term, the original premium is guaranteed to be returned to the investor.
54
How do you calculate top slicing relief?
(5 steps)
1 - add the gain to the investors other income in the tax year
2 - calculate the tax due on the gain in each band and deduct basic rate tax. The result is the liability without too slicing relief
3 - divide the gain by the number of full policy years. The result is the annual equivalent gain.
4 - calculate tax due on the annual equivalent and deduct basic rate tax. Multiply by the number of full policy years. The result is the tax that is actually due. (Relieved liability)
5 - deduct the individuals relieved liability from the total liability.
55
What is a high income bond?
They satisfy investors prepared to accept an element of risk to their capital in exchange for higher returns.
56
What is a guaranteed growth bond?
No income is paid out. They are often set up for short terms. The income is added to the capital at maturity and distributed in full.
57
What is a unit linked bond?
They are typically open ended and can be structured in a way to match investor risk profiles. There are no guarantee dates and are written as whole of life policies.
58
What are distribution bonds?
They split the income received and distribute this separately, leaving the capital in tact.
59
What is a guaranteed equity and protected bond?
They typically offer a guaranteed return of your total at the end of the term. The guarantee is generally 100% for guaranteed equity and 90% for protected bonds.
60
What is the difference of onshore bonds and offshore bonds?
The tax treatment
61
What is the tax on a seller of a traded endowment policy?
Qualifying:
- no income tax payable
Non Qualifying:
- taxed according to circumstances
CGT:
- no CGT payable on sale
62
What is the tax on a buyer of a traded endowment policy?
Qualifying:
- not chargeable
Non Qualifying:
- maturity or surrender value directly before death minus total premiums paid
CGT:
- potential CGT on final sale or death
- can use unused CGT allowance
- the same gain will not suffer both income tax and CGT
63
What are the main features of a friendly society?
They can invest where they like. To be tax exempt, they must have annual premiums of £270 or monthly premiums of £25. No age restrictions. FSCS protected. No internal taxation.
64
What is a tracking error?
Experienced by trackers. The distortion between the fund performance and the index, caused in part by the changes in the fund.
65
What are the two elements of a real estate investment trust?
Ring fenced - property letting element. Must be the main element with most of its income coming from rents. Exempt from corporation tax except from certain property sales. Paid net of 20% income tax. Unable to use PSA
Non ring fences - all other activities such as property management. Subject to corporation tax. Treated like Dividend payments. Paid gross.
66
What are enterprise investment schemes (EIS) and seed enterprise investment schemes (SEIS)?
An efficient way to buy shares in a single company, often one which you will have an active part in once you have invested.
67
What is a VCT?
The collective investment of private equity.
You will not necessarily know who you are investing into and many companies will benefit from the investment.
Lower risk that EIS and SEIS.
68
What is a knowledge intensive company?
One that meets certain criteria:
By the time the share issue takes place they must meet
- operating expense / costs condition (company spent at least 15% of their operating costs on innovation, research and development in at least 1 of the 3 preceding years) plus either
- invention condition
- or Skilful employee condition (at least 20% of employees hold a higher education and get involved in company’s research and development)
69
Who are tax breaks given to?
Qualifying individuals who subscribe for eligible shares in a qualifying company carrying out a qualifying business activity.
Qualifying individuals:
- someone not connected with company when subscribing for shares.
- a UK resident or non UK resident who pays UK income tax
Eligible shares:
- new ordinary shares that are not redeemable for at least 3 years
Qualifying company:
- an unlisted company with no current arrangements in place to apply for a listing.
- fewer than 250 employees
- gross assets of less than £15 million before share issue and £16 million after
- not raised vct investment of more than £5 million in last 12 months
- lifetime limit of £12 million for most companies and £20 million for knowledge intensive companies
Qualifying business activity:
- established in the UK
- carrying on a qualifying trade
- can include companies whose shares are traded on the AIM market
- without pre arranged exit plans
70
What are tax incentives of an EIS?
- Income tax relief at 30% to investors with qualifying investments
- relief given on investments up to a maximum of £1 million and £2 million in knowledge intensive companies providing a maximum tax relief of £300,000 and £600,000 respectively
- relief given by way of a tax reducer ie. You must have a tax bill equal to that is the relief to gain fully in the scheme
- an investor may carry back income tax relief to the previous year
71
What are the taxation benefits on SEISs?
- income tax relief given at 50% on the cost of shares with a maximum annual investment of £200,000
- reinvestment relief for CGT is more generous. 50% of any gain becomes CGT exempt when the shares are acquired. The other 50% is payable immediately.
72
What are the qualifying company rules for a SEIS?
- maximum employees is 25
- business must be less than 3 years old
- gross assets of less than £350,000
- no banks or property development companies allowed
73
What are the taxation benefits of a VCT?
- income tax relief as a tax reduced is at 30% up to a maximum investment of £200,000
- dividends received are tax exempt as long as the original investment was within the permitted maximum of £200,000 per year
- tax relief is withdrawn if shares are not held for 5 years
- no CGT deferral relief is given
- you get immediate CGT exemptions on any growth
74
What are the qualifying criteria for a VCT?
- must be approved by HMRC
- listed on London stock exchange
- all money raised must be used within 2 years
- cannot retain more than 15% of the income generated
- at least 80% of investments must be in qualifying holdings
- no more than 15% of the total investment must be in one company
- at least 10% of total investment in any one company must be in ordinary shares
- 250 or fewer employees
- maximum £5 million raised in last 12 months (£10 million for knowledge intensive companies)
75
What are the annual investment limits of EIS, SEIS and VCTs?
EIS - £1 million or £2 million for knowledge intensive companies
SEIS - £200,000
VCT - £200,000
76
What is the income tax relief on EIS, SEIS and VCTs?
EIS - 30% - claw back if held less than 3 years
SEIS - 50% - claw back if held less than 3 years
VCTs - claw back if held less than 5 years
77
What is the rule on UCITS investments associated with ISAs?
All UCITS are qualifying investments for ISAs however, not all UCITS funds can be held in a stocks and shares ISA.
78
What investments are eligible for inclusion in Stocks and Shares ISAs?
- cash
- authorised collective fund
- shares listed on recognised stock exchanges around the world
- corporate bonds listed on recognised stock exchanges around the world
- gilts
- individually owned life assurance investments
- units in a stakeholder medium term product
79
What is the maximum annual limit on LISAs? (lifetime ISAs)
£4,000 per annum.
80
What is the maximum monthly limit on HTB ISAs? (Help to buy ISAs)
£200 per month
81
What are purchased life annuities?
Paid for from any lump sum at any point in the annuitants life
The income that they provide is split into capital and interest elements
Essentially the capital element is deemed to be a part return of the original capital. The interest element is paid in addition.
82
What are the tax implications of a purchased life annuity?
Capital element is paid tax free
The interest element of each payment is taxed as savings income
The annuitant can use their personal savings allowance to eliminate or reduce tax liability
83
What is a derivative?
Financial contracts whose value is derived from the value of an underlying asset.
84
What are futures?
Agreements signed to supply x amount of goods in y number of weeks time for z price.
Price is agreed when the contract is made.
Contract imposes an open ended obligation on both parties
85
What are options?
Gives the buyer an option but not an obligation to buy or sell an asset before a certain date.
The price is fixed when the contract is made.
The price is called the strike price.
86
What do the buyer and seller of futures hope for?
Buyer hopes that the market price will rise (long view)
Seller hopes that the market price will fall (short view)
87
What is the difference between a call option and a put option?
Call - gives the buyer of the option the right to buy the underlying asset. The seller must sell the underlying asset.
Put - gives the buyer of the option the right to sell the underlying assets. The seller must purchase the underlying assets.
88
What are the 4 main strategies adopted by hedge funds?
1 - long/short funds - combining equities in a neutral approach. Holding long positions in come holdings and short positions in others
2 - relative value funds - uses arbitrage to try to identify market price anomalies
3 - event driven funds - use corporate events to make their growth
4 - tactical trading funds - trade in currencies, bonds, equities and commodities
R02 CS
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