Exam Extras

Question 1

Unit trust fund taxation - tax on gains and income from options or futures

• corp tax
• dividends
• foreign divs
• distribute interest over divs

Answer 1

• do not pay tax on capital gains or income derived from options or futures
• interest and rental income subject to corporation tax of 20%
• dividends from franked investments (equities) have no tax liability
• foreign dividends may be subject to withholding tax
• funds that distribute interest rather than dividends can deduct interest as expense for corporation tax so not taxed twice.

Question 2

Unit Trusts - taxation treatment of the investor;
> income tax on dividend distributions from equity UTs;
-to pay divs must hold less than what in what and self assessment

> dividend distribution paid to trustees
- if held on what trust liable for what amount of tax and what allowance doesn’t apply - divs that fall within £1k taxed at what amount

> interest distributions from non-equity trusts;

• to pay interest distributions must hold at least what in what
• is interest paid net or gross

> interest to trustee
- if held now what trust liable for what tax and if £1k?

Reinvestment of either of these still count as what and subject to what
CGT payable when

Answer 2

Income tax on dividend distributions from equity UTs;

• to pay divs must hold less than 60% in cash, gilts and corp bonds.
• taxpayers must use self assessment
• then taxed at normal dividend rates

Dividend distribution paid to trustees

• if equity funds held in discretionary trust, trustees liable for tax at 38.1% and £2k tax free does not apply.
• divs that fall within £1k only taxed at 7.5%

Interest distributions from non-equity trusts;

• to pay interest dis, must hold at least 60% in above investments
• interest paid gross
• £1k savings allowance for basic, £500 for higher and 0 fo additional

Interest to trustees
- if held in discretionary trust, liable for 45% income tax (if £1k then 20%)

Reinvestment of divs or interest still counts as income and subject to same tax treatment than if distributed.

Capital Gains Tax is payable on profits when disposing of units.

Question 3

Offshore funds - taxation treatment of investors
Reporting funds;
- main advantage (taxation), to get this must be what throughout period of ownership, dividends from what are taxed as foreign dividends and subject to what in same what as divs from what, if funds holds more than what % in what then income is taxed how, distribution of income and reporting to HMRC, physical and deemed dis and taxed even is what

Non-reporting;
- income is what and divs payable, CGT allowance rules and why, taxed at what rates even though usually, roll ups funds good for what and non uk resident and taxation

Answer 3

Reporting funds;

• main advantage is that dividends and interest treated in same way as UK based funds and only capital gain subject to CGT rules.
• to benefit from this, must be reporting throughout period of fund ownership
• dividends from funds constituted as companies are taxed as foreign dividends. Subject to income tax in same way as dividends from equities.
• when offshore fund holds more than 60% of assets in interest bearing securities, income taxed at normal bands.
• reporting fund does not have to distribute all income but must report to HMRC
• allows for physical and deemed distributions
• UK investor taxed on their share of income even is actual dis not received.

Non-reporting funds;

• usually income accumulated and no divs are paid
• CGT allowance cannot be used to mitigate tax liability as taxed as income.
• taxed at income tax rates even though usually largely dividends.
• roll-up funds used to shelter acc income allowing investor to realise gains once tax rate has dropped or non-UK resident.
• non uk resident, offshore income free of UK tax but may be taxable at home

Question 4

Exchange traded products - ET Funds;
- type of fund and traded how, variety, subject to what fees but no what and AMC less than %, what is synthetic replication (use of what to replicate what and subject to what risk), subject to what tax on divs and gains, error and ISA

ET Commodities - tracks what and may track what else in what situation

ET Notes - type fo fund and give access to what, what wrapper type issued by who and have what date but don’t pay?, returns linked to what minus what, ownership of shares and use what instead and value affected by what rating

Answer 4

Funds - index tracking funds and are traded like a single share

• covers wide variety of trackers
• subject to broker fees but no stamp duty and AMCs of <0.5%
• synthetic replication - use of swaps to replicate returns and could be subject to counterparty risk
• can be subject to tracking errors
• subject to income tax on divs and CGT on gains
• eligible for inclusion in ISAs

Commodities - tracks performance of commodity and may track an index designed to measure value of commodity if complications tracking physical commodity.

Notes - also trackers and give access to specialist market niches

• type of bond issued by the bank and have a maturity date but don’t pay interest
• returns linked to index - amc
• ETNs don’t own anything in tracker (shares) but use derivatives instead
• value is affected by credit rating of issuer
• subject to default risk

Question 5

Taxation of VCTs - income tax relief, dividends, gains, losses and relief lost

Answer 5

• income tax relief of 30% up to max £200k of new issues of o shares
• dividends received up to £200k exempt from income tax
• Gains arising from disposal of shares exempt from CGT and no min holding period.
• any losses on shares are not allowable loses for CGT purposes and cant be offset by other capital gains.
• income relief taken back if shares not held for 5 years