Every mock section 6

Approved securities

Investments that are permitted for certain tax advantages

Must be

• Regulated

• Operating regularly

• Recognised

• Open to publicly

90% of securities in a fund must be approved

Investment Trust Narrowing and Widening Discounts

Discount is Share Price > NAV

Narrowing:

• If the discount gets smaller

Example:

• Start NAV = 100p, Start SP = 86p

• End NAV = 150p, End SP = 141p

NAV increased by 150 - 100 / 100 = 50%

SP increased by 141 - 86 / 86 = 64%

SP return is higher than NAV return because:

• Investments has become more valuable

• Therefore a narrowing discount boosts shareholder return

And vice versa for widening

Investment Trusts 3 main types

Conventional trusts

• Can exist for decades

• 1 class of ordinary shares that give shareholders all income and capital gains

Limited Life Trusts

• Fixed lifespan

• At the end shareholders decide to wind it up or continue

Split Capital trusts

• More than 1 class of shares - Income shares, Ordinary Shares, Capital Shares, ZDP shares

• This trusts allows investors to choose if they want income, capital growth or lower risk

Hurdle Rates

Indicates annual growth needed each year in future if they are going to be sufficient

Collective Investments

• Pooled money

• Professional management

• Diversification

• Access to specialist objectives

• Reduced risk

Examples are OEICS AND UNITS TRUSTS

Property Authorised Investment Fund & Real Estate Investment Trusts

PAIF:

• Minimum of 60% of funds must be held in property

• Open ended

REIT:

• Minimum of 75% to be held in real estate

• Closed ended

PAIF

An OEIC can’t be a Unit Trusts

• No tax on Rental Income paid to the PAIF but when that is distributed via PID it is taxed as seen in bullet point 2

• 20% Corp Tax on other income

3 types of income:

1. PID:

• Comes from rental income

• When paid 20% taken off each tax band (HRT=20% etc)

2. Interest Distribution:

• Taxed as savings income (income tax)

3. Dividend Distribution

• Taxed as Dividend income

REIT

Same structure as a PAIF

Differences are:

• Investments REIT you buy shares in a listed company but PAIF you buy units in a collective investment fund

• So a PAIF is an OEIC and REIT is a property company

EIS CGT Deferral Relief

When you have CGT due if you invest it into an EIS the gain is deferred until a later date

SEIS

Designed for investing in very small, newest company’s (EIS is for larger companies)

• Income Tax Relief - 50%

• CGT Reinvestment Relief - if you need to pay CGT you invest that gain into a SEIS

• To qualify for SEIS must be less than 3 years old

50% of CGT is exempt if reinvested into a SEIS

Dividends are taxed as normal

Typical structured product

A zero-coupon bond

• Which provides capital protection

And a call option

• Which provides the return

Scrip Dividends

Profit distributions by companies in the form of company stock as opposed to cash payments

Taxed in same way as normal dividends

• 8.75%

• 33.75%

• 39.35%

Difference between American and European style options

American option can be exercised at any time

European option can only be exercised on exercise date

Diluted NAV example

Ordinary shares - 12m

Assets - £24m

Warrants - £8m

Diluted NAV:

• £24m + £8m / £12m + £8m = £1.60

Undiluted NAV:

• £24m / £12m = £2.00

Stakeholder max charges

Stakeholder ISA and pension:

• first 10 years = 1.5%

• After 10 years = 1%

Tax on surrender of onshore bond question.

MVR - 1.5%

HRT

Invested - £40,000

Now worth - £52,000

£52,000 × 1.5% (MVR) = £51,220

20% tax has been suffered inside bond as its onshore

• 40% - 20% = 20% income tax on the gain alone

• £51,220 - £40,000 = £11,220 × 20% = £2,244 tax owed

• Net Return = 51,220 - £2,244 = £48,976

Friendly societies contributions

If paid as lump sum £270 a year

If paid monthly £25 a month

Can be any age to contribute

Purchased Life Annuity

One that’s been purchased with your own money (Money not from a pension)

As this moneys already been taxed HMRC doesn’t tax the whole thing

Receive 2 payments:

• Annuity payment (Tax-free)

• Interest (taxable as income)

Easy way to calculate accumulation of ISA

Investment - £10,000

Initial charge - 3.5%

Return each year 4.2% for 5 years

£10,000 × 3.5% = £350, £10,000 - £350 = £9650

£9650 × 1.042^5 = £11,854

Put and call premiums

The buyer always pays the options premium

The buyer always has the right to exercise the option

CGT charges

Allowance = £3,000

BRT - 18%

HRT - 24%

ART - 24%

ETC & ETN

Exchange traded commodity (ETC):

• Tracks a commodity

• Real time priced

Exchange traded Note (ETN):

• A debt security issued by a bank or financial institution

• This creates counterparty risk

No stamp duty on these they only apply to shares

Undiluted NAV per share and diluted NAV

Assets - liabilities / No. Of Shares

Diluted NAV includes the extra assets and shares when warrants are exercised

• You add it to the assets

• Use same formula

Assets + exercised proceed - liabilities / current shares + New Shares

What is the tax due for a BRT who got £600 dividends and £800 distribution

£600 - £500 (Div All) = £100 × 8.75% = £8.75

£800 - £1000 (Pers Sav All) = £0.00

Distribution is the fixed security version of dividends

EIS and VCT

EIS:

• Max investment = £1million

• 30% Tax relief

• More risky and less liquid

• No CGT after 3 years

• Carry back available

VCT:

• Max investment £200k

• 30% Tax relief (must hold for 5 years to keep this)

• Tax-free dividends

• Can only receive the 30% tax relief if it’s below your income tax paid that year

• No CGT

VCT facts

• 30% Tax relief

• No CGT

• Max investment = £200,000

• Must hold for 5 years to get TR

• Income tax paid that year must be more than TR received back

Income tax - £20,000

VCT investment - £50,000 × 30% = £15,000

= Would receive whole TR

Income tax - £8,000

VCT Investment - £30,000 × 30% = £9,000

= Would receive back £8,000 not the full amount

Depositary

Acts as an independent custodian

Responsibilities:

• Safeguard assets

• Protects investors

• Oversees fund manager actions

Every OEIC has one

Equalisation Payment

Happens when:

• You buy units shortly before a distribution

• Part of the distribution is actually your own capital being returned

Therefore it isn’t all taxable income

• A return of capital which is the equalisation payment

Fettered and unfettered funds of fund

Fettered:

• Only invest in funds run by same company

• E.g only buying aviva funds

Unfettered:

• Doesn’t have to only invest in internal funds can select from any

Fund of funds and manager of managers funds

Fund of Funds:

• Invest directly into funds managed by other managers

• Fund of funds can be fettered or unfettered

Manager of managers funds:

• They appoint specialist investment managers to look after different parts of the portfolio

Non property income distribution payment

It’s a dividend payment from the part of trust that doesn’t benefit from corp tax exemption

Would therefore apply dividend allowance (£500) and times by dividend tax rate

Investment trust Performance fee questions

Invested - £20,000

Return - 9%

PF Threshold - 4%

PF return on excess - 6%

The fee only applies to the return above the threshold

£20,000 × 1.09 = £21,800

Excess Return:

• 9% - 4% = 5%

• £20,000 × 5% = £1,000

Performance fee:

• 6% of excess

• £1,000 × 6% = £60

Value after fee:

• £21,800 - £60 = £21,740

Questions to find which NAV is trading closest to its price

Share Price - NAV / NAV x 100

Then find the one closest to 0%

Pound cost averaging

To be PCA:

• Needs to be a regular contribution (not a lump sum)

• Needs to invest in fund that moves in line with market

Reporting and Non reporting

Reporting = Pay CGT

Non-Reporting = Pay income tax

Units Trusts & OEICS

Shares created and cancelled as investors join and leave

• Open ended means the number of shares aren’t fixed

• Price is based off the NAV of the underlying assets

They are collective investment schemes

Single pricing

Main differences between OEICS and Unit Trusts

Unit Trusts:

• Own units

• Assets held by trustees

• Can be dual priced

OEICS:

• Own Shares

• Assets held by depositary

• Usually single priced

Single pricing

Single:

• Used by OEICS

• One price for buying and selling (Based on the midmarket price)

• Charges are separate

Investment Trusts

Close ended (fixed number of shares)

• Can trade at a discount (Share Price lower than NAV per share) and vice versa

• Listed on stock exchange so is indepdent of its NAV

• Gearing allowed

• No CGT

Shariah compliant investment fund

• Interest (RIBA) is not allowed

• Less funds to invest in

• Shariah board need to approve funds

Sukuk (Islamic Bond)

• Cna produce savings income

Call option

Gives you the right to buy at the strike price

A call is in the money if: Current Price > Strike price

Put option

The right to sell at the strike price

A put is in the money if: Current price < strike price