Taxation, Investment Wrappers and Trusts

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Taxation, Investment Wrappers and Trusts

5 questions

Chapter 9

Further informationThis chapter looks at taxation, tax-free products and trusts. We will look at the main forms of personal taxation: income; capital gains and inheritance. We then move on to transactions taxes: stamp duty; SDRT and VAT. Next is tax efficient investment wrappers: ISAs; child trust funds; investment bonds and junior ISAs. We conclude with pensions and trusts.

This chapter has five questions in the exam.

Answer to question on previous slideB: All members of the Institute are obliged to follow it.

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Residency and domicile

• Domicile – your long term home for tax purposes, it relates typically in inheritance- Of origin – where you are born- Choice – where you intend living long term- Dependency – children

• Residency – where you physically are for tax purposes- Applies to income tax and capital gains tax

• UK Resident- Pays UK tax on worldwide income and gains

• UK resident test – during the tax year- You spent 183 or more days in the UK, or- Your only home was in the UK – available for at least 91 days in total and you spent at

least 30 days there

2. Taxation

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Income tax – chargeable persons

• Individuals assessed per ‘fiscal year’.

• 6 April to 5 April the following year.

Income tax allowances

• Personal allowance – all taxpayers receive this tax-free amount. It raises every year and is announced in the budget. If it is not used in a fiscal year, it cannot be carried forward.

Income tax rates

• Above the personal allowance income is subject to tax at various bands depending on income amount (bands are not examinable).

2. Taxation

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Taxable income rates (after the personal allowance):

• Basic rate tax payers – First £1000 of interest tax free 20% taxed above this

• Higher rate tax payers – First £500 of interest tax free 40% taxed above this

• Additional higher rate tax payers no tax free allowance taxed at 45%

2. Taxation

Non-savings income% Savings income % Dividends

(£2000 tax free) %

Basic rate 20 20 7.5

Higher rate 40 40 32.5

Additional rate 45 45 38.1

Further informationPersonal savings allowanceSee main slidePersonal dividend allowanceFor dividend income only, there is an additional allowance of £2,000 irrespective of tax band.

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National Insurance Contributions (NICs)

• Give entitlement to certain UK social security benefits and the state pension.

• Paid by employers, employees and self employed.

Tax Credits

• Redistribute income to people on lower wages.

• Purpose to help families on lower pay- Child tax credits, paid to families with children- Working tax credits, paid to people in work and on lower incomes

2. Taxation

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Capital Gains Tax – persons chargeable

• Individuals assessed per ‘fiscal year’

• Sell an asset at a profit

• Rates 10% (basic rate) and 20% (higher rate)

• Residential property rates 18% (basic rate) and 28% (higher rate)

Allowances

• Annual exemption

• Losses may be carried forward indefinitely

2. TaxationFurther informationCapital losses can be used to reduce the profits on capital gains. If after netting gains and losses, an overall loss is produced, this can be carried forward to future years to offset future profits. There is no time limit on the carry forward.

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Tax-free gains

2. Taxation

Taxable or exemptPrincipal home ExemptGilts ExemptCars ExemptCorporate bonds ExemptInvestment Funds (OEICs, Unit Trusts) TaxableDerivatives (futures, options) TaxableEquities TaxableHoliday home Taxable

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Inheritance tax – persons chargeable• Charged on gifts of assets at death and in the seven years prior to death

• Above a set allowance, the estate is taxed at 40%- If the allowance is not used, it can be transferred to a surviving spouse/civil partner

• Residence nil-rate band (RNRB) - Added to the nil-rate band if their home, or a share of it, is passed to children or

grandchildren

Inheritance tax – exemptions• Totally exempt:

- Gifts between spouses/civil partners

- Gifts to political parties

- Gifts to charities

• Certain exempts in respect of lifetime transfers

2. TaxationFurther informationIn the exam lifetime exemptions will not be tested. For information only purposes, the life allowances are:• An annual gift of £3,000• Small gifts of £250 per year• Wedding gifts of £5,000 from parents to children, £2,500 from grandparents

to grandchildren and £1,000 from any other person

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Stamp Duty Reserve Tax

• Stamp duty reserve tax (SDRT) – Securities held within CREST- SDRT: 0.5% (rounded-up to the nearest penny)

• Stamp duty land tax (SDLT) – UK land and property- SDLT: Progressive tax and determined by the value of the property

• 3% added to SDLT rates is the purchase is a second residential property

2. TaxationFurther informationStamp duties in the UK are payable on the purchase of tax on land, property and certain securities. Other countries have in recent years abolished transaction tax, but India recently introduced it and the USA may introduce it in the future.

Keeping on targetWhich of the following is subject to capital gains tax?A. Your main homeB. A giltC. Your motor carD. Equities

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Individual Savings Accounts (ISAs) – overview

• Eligibility - UK resident or non-UK resident crown employee- Cash ISA: Age 16+- Stock and shares, innovative finance, lifetime ISA: Age 18+

• Max subscription £20,000

• Free of income and capital gains tax

3. Investment Wrappers

Answer to question on previous slideA – Equities are subject to CGT.

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HintsYou cannot have a Help to Buy ISA and regular cash ISA in the same year.


Lifetime ISA• Can be opened by adults under 40

- Contributions made to the age of 50• Maximum contribution of £4000pa • Government adds 25% bonus at the end of the year

• Money used - Deposit on a first home- Retirement planning

• Withdrawals made before 60 lose the Government bonus and pay 5% surcharge

Innovative Finance ISA• Peer-to-peer lending (P2P) (Chapter 1) • Tax free

3. Investment Wrappers

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Junior ISA (JISA)

• Parent/guardian may open a JISA on behalf of the child- UK resident children under the age of 18- No withdrawal of funds- At 16, the child can assume management of the funds- At 18, the fund will be automatically rolled in to a ISA

• Funds could be withdrawn

• Cash and/or a stocks and shares component available

• Investment amount is only £9,000 in total, each year

3. Investment WrappersFurther informationJISAs replaced Child Trust Funds (CTF). The JISA subscription rises each year in line with the CPI.

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State pensions

• Basic pension- Paid to everyone of a pensionable age (65 for men and women from 2018)- The pension age will then rise to 68 in later years

• State second pension (S2P)- Earnings-related pension providing most help to those on lower earnings- Now replaced by a higher basic pension

4. PensionsFurther information From 2018 the retirement age for both men and women was equalised to 65. This will rise in future years to 68.

Keeping on targetAn ISA is exempt from which tax?A. IncomeB. SDRTC. InheritanceD. VAT

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Occupational pension schemes

• Defined benefit (‘final salary’) - E.g. receive 1/60 of final salary for every year employed

• Defined contribution (‘money purchase’)- At retirement the beneficiary can:

• Buy annuity with the pot, guaranteeing an income until death; or/and• Take income drawdown from the pension pot or/and• Take the cash

Personal pensions

• Available to employed, self-employed or unemployed

• Defined Contributions, its value is based on the fund performance

• Can be Self-Invested Personal Pensions (SIPPS)- For investors who want to make own investment decisions- Investment types more flexible than other pensions

4. Pensions

Answer to question on the previous slideAnswer A.

Further information From April 2015, on retirement the pensioner can do what they like with their defined contribution pension pot. There will be no longer a requirement to purchase an annuity by a specified age.

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Jargon• Trustee

• Beneficiary

• Settlor

Types of trust• Discretionary trust

- Absolute discretion for trustee to distribute income to beneficiaries

• Interest in possession (life interest trust)- Life tenant – income from the trust

- Remainderman – receives capital when life interest ends

• Bare trusts- Obeys instructions of beneficiaries

- Trustee is a nominee only

5. TrustsFurther informationTypical uses of trusts include:• Ensuring the financial needs of the settlor’s family are provided after death• Minimising tax burdens on the settlor’s estate following death• Making gifts to people too young or not sensible enough to handle them• Making gifts of income to one person, whilst reserving capital for another

person after the income beneficiary’s death• Qualifying for charitable taxation treatment

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Documents

Taxation, Investment Wrappers and Trusts