1. AF1:Taxation of Investments
2019/20
7/7/2019
Audley Financial Training

2. Taxation of Investments
ISA
Unit Trusts/OEICS
Taxation of Investments
EIS/SEIS
VCT
Insurance Policies
Property
Furnished Holiday Lets
Real Estate Investment Trust
Rent a Room
7/7/2019
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3. Audley Financial Training
What we will cover
Assume there are no issues with the taxation of unit trusts and OEICs
Investment Bonds will be covered on the second day
On ISA we will cover new rules on what happens on death, HTB ISA and Lifetime ISA
REITs and Furnished Holiday Lettings
EIS, SEIS & VCT
7/7/2019
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4. ISA: What happens on death
If death occurred after April it can be classed as a continuing ISA.
This means its tax privileged status is retained whilst in the estate.
The deceased’s executors usually apply to the provider(s) for this status.
The status will last until the earlier of
3 years from date of death
The ISA is closed
The administration of the estate is completed
7/7/2019
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5. Additional Personal Subscription (APS)
If death occurred after 3/12/14 a surviving spouse or CP gets an APS.
They inherit the deceased’s wrapper even if they don’t inherit the underlying assets.
If death occurs before April , the APS is the value of the deceased’s ISA at date of death.
If death occurred on or after 6 April 2018 the APS is the greater of the value at date of death or the value of the assets when they cease to be a continuing ISA
The APS is available on the day after the spouse’s death
7/7/2019
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6. Audley Financial Training
Using the APS
It can be either an in specie or cash contribution
In specie contribution must be made to the same manager used by the deceased and must be made within 180 days of becoming the owner.
Cash contributions can be made by either the spouse using their own assets or selling the deceased’s ISA and reinvesting the proceeds.
Can be made to any provider or type of ISA but must keep to one provider for the whole of the APS
The APS entitlement expires 3 years after the death of the spouse
7/7/2019
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7. Audley Financial Training
Think about this
Harry dies on 1/5/19 with ISA value £90,000 at date of death
The executors designate it as a continuing ISA
His wife has not made an ISA subscription for 19/20
She makes a £20,000 subscription on 31/7/19
Should this be set against her annual subscription or her APS
What would be the consequence if she were to make a £40K subscription on that date?
7/7/2019
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8. Audley Financial Training
Help to Buy ISA
Must be over 16 and UK resident
Be a first time buyer & own no property anywhere in the world
Cannot have contributed to a cash ISA in the same tax year as HTB ISA
Open account with a max of £1,200
Save up to £200 a month
Get a 25% Government bonus. Minimum savings £1,600, Maximum £12,000
Will close to new applications on 30 November 2019
7/7/2019
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9. Audley Financial Training
Lifetime ISA
Available to individuals aged 18 to 40 but contributions can continue until 50
Maximum contribution £4,000 per tax year, comes out of standard ISA allowance of £20,000
Government bonus of 25% on each contribution made up to age 50.
BUT penalty of 25% on withdrawals unless
Used for first time house purchase
Taken after age 60
7/7/2019
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10. Audley Financial Training
Insurance Policies
2019/2020
7/7/2019
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11. Audley Financial Training
Key Points
The difference between non-qualifying and qualifying policies
The taxation of Investment Bonds
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12. Audley Financial Training
Insurance Policies
The assets held in an insurance policy belong to the insurance company.
Therefore the company is liable to pay corporation tax on any income and gains.
Taxation of the investor will depend whether the policy is qualifying or non qualifying
Qualifying free of personal taxation
Non qualifying there may be additional income tax liability on the gain
7/7/2019
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13. Qualifying and non-qualifying
Qualifying policies are regular payment policies with a term of at least 10 years.
A non-qualifying policy can never become qualifying but a qualifying policy can become non-qualifying
If the policy is surrendered within ¾ of the term or 10 years if less.
7/7/2019
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14. Audley Financial Training
Investment Bonds
A whole of life non-qualifying policy.
Lump sum investment
Whole of Life means it has no fixed term
Ends on the death of the life assured
If joint life it is on a second death basis
Can have a young person, say a grandchild as life assured
Company offers a range of unitised funds
7/7/2019
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15. Audley Financial Training
Taxation principles
Tax will only be due if there is a chargeable event and a gain has been made
The gain will be liable to income tax and taxed after non-savings, savings and dividends.
The rate will be 20%, 40% and 45% but a credit of 20% is given for tax already paid within the fund
Non tax payers cannot reclaim the tax paid within the fund
All funds in the Bond are taxed in the same way
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16. Audley Financial Training
Chargeable events
Tax is due if there is a chargeable event.
These are :
Death of the policy holder
Full Surrender
Withdrawals in excess of the 5% limit
Assignment where the donor receives payment
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17. Events that are non-chargeable
Assignments given as a gift
Switching of funds
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18. Olivia is a higher rate tax payer.
She fully surrendered an Investment Bond making a gain of £30,000
Provided that this gain does not take her into the additional tax rate band she will have to pay 20% giving a liability of £6,000
7/7/2019
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19. Karl invested £50,000 in an Investment Bond on 1/5/08
He fully encashed this on 1/11/18 for £80,000 giving a gain of £30,000
Before adding this on to his other income he is a basic rate tax payer but the £30,000 puts him into higher rate.
There are two possibilities.
It does not take him into higher rate tax so he has no liability.
If it does then this is what you do
He uses top slicing.
£30,000 is divided by the complete number of years, in this case 10
This gives £3,000 and added to his other income
7/7/2019
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20. Let’s assume that £1,200 falls into the higher rate band
Multiply £1,200 by number of years used to top slice.
This gives £12,000
This is then charged at 20% giving a liability of £2,400
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21. Audley Financial Training
Top slicing
Divide chargeable gain by number of complete years bond has been held.
Add to other income
If still in basic rate no further tax
If part in higher rate multiply amount in higher rate by number of years bond held
Charge this at 20%
7/7/2019
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22. Income from Investment Bonds
Investment Bonds do not produce income to the investor, all income is reinvested in the fund
Up to 5% of the original investment can be withdrawn each plan year on a tax deferred basis
This is cumulative so if not used one year it can be carried forward.
Any withdrawals above the 5% amount is a chargeable event
On final encashment all the “5% withdrawals” are added to the final gain.
7/7/2019
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23. Tom invested £50,000 in an IB on 1/6/11.
On 1/7/18 he wants to make a partial withdrawal
The plan is in its 8th year so he could withdraw 40% of £50,000 or £20,000
If only £5,000 was withdrawn then £15,000 remains available
7/7/2019
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24. Audley Financial Training
Julie invested £40,000 in an IB.
Ten years later she surrenders the IB and receives £44,000.
She also withdrew £12,000 during the life of the plan using the 5% rule.
The gain is £4,000 + £12,000 = £16,000.
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25. Audley Financial Training
Bond segmentation
To give more flexibility most bonds are split into segments or mini policies
To take out part of the holding the planholder can either surrender whole segments or use the 5% withdrawal facility.
The resulting tax liability can be quite different
7/7/2019
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26. £20,000 £24,000 1/7/13 1/10/18 1000 segments @ £20 1000 segments @ £24
Using the 5% rule £6,000 would be tax deferred and £2,400 chargeable at 20%
£8.40 withdrawn from each segment so each one is now worth £15.60
A higher rate tax payer wants to withdraw £8,400.
What is the most tax efficient option?
£8,400/£24 = 350
350 x £24 = £8,400
Gain on each plan is £4
350 x £4 = £1,400
7/7/2019
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27. Audley Financial Training
The exception
There is one time when CGT is payable on the gain made on a life policy.
This is when someone buys an existing with profit policy on the “secondhand” market.
When the policy matures the gain is the maturity value less purchase price and premiums paid
The gain is subject to CGT
7/7/2019
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28. Audley Financial Training
The key points
Insurance policies are either qualifying or non-qualifying
There is no personal tax liability on qualifying policies
Non qualifying policies are subject to the chargeable event regime
Gains on chargeable events are subject to income tax at 20%, 40% or 45%
A 20% tax credit is given to represent the tax paid by the insurance company.
IB do not pay an income but 5% of the original investment can be withdrawn each plan year on a tax deferred basis
7/7/2019
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29. Investing in property through collectives
Open ended – Unit trusts/OEIC/Insurance Funds
Liquidity and valuation issues
Property Authorised Investment Fund (PAIF)
Property Company shares
No liquidity issues
Company pays tax on rents it receives
Investors receive dividends from the overall profits of the business
7/7/2019
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30. Real Estate Investment Trust (REIT)
Close ended property company, listed on recognised Stock Exchange
Can be placed in an ISA
Unique tax treatment
To qualify:
75% of its profits must come from property rental income
75% of its assets must be involved in property rental
90% of rental received must be distributed to investors
7/7/2019
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31. Taxation of a REIT REIT Investors Rent exempt from tax
Property Investment Distribution
Investors
REIT
Rent exempt from tax
Dividend (Non PID)
Rent exempt from tax
7/7/2019
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32. Audley Financial Training
Rent a Room Relief
Allows a householder to rent out rooms with the first £7,500 being tax free
It must be in their main residence and in the UK
It must not be a self contained flat
It must be furnished
It must not be used for business purposes
7/7/2019
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33. Audley Financial Training
Property exemption
If property income is less than £1,000, no tax is due and it doesn’t need to be declared
Or if more than £1,000 the first £1,000 can be treated as tax free but no expenses can be claimed.
If property is jointly owned each owner can claim the £1,000 exemption
Can’t use it with rent a room
7/7/2019
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34. Furnished Holiday Lettings
If it qualifies for FHL, the income is taxed as trading income.
This means:
Income counts as NRE for pension contributions
Capital Allowance can be used
Mortgage interest can be offset against income
Qualifies for Entrepreneur relief
Business holdover relief can be used
Trading losses can be offset against income
BPR may be available
Doesn’t need to be in a holiday resort!
7/7/2019
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35. 210 105 31 To qualify Must be furnished and in the EEA
Number of days it must be available to rent
105
Number of days it must be let 31
Maximum rental period to count towards 105 days
7/7/2019
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36. The tax efficient but risky trio
Enterprise Investment Scheme (EIS)
Small Enterprise Investment Scheme (SEIS)
Venture Capital Trust (VCT)
All are designed to encourage investment in small start up businesses
All give substantial tax breaks
EIS and SEIS are shares in unlisted companies
VCT are listed but invest in unlisted companies
7/7/2019
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37. Contributions EIS SEIS VCT Contribution £1,000,000 £100,000 £200,000
£2,000,000 if it is knowledge intensive
EIS
SEIS
VCT
Contribution
£1,000,000
£100,000
£200,000
Tax relief
30%
50%
Claw back
3 years
5 years
Back dating
One year No
7/7/2019
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38. Audley Financial Training
Tax Reducer
Ben invests £100,000 into a VCT so is eligible for tax relief of £30,000
His income tax liability is £28,000 so it is reduced to £0 but there is no refund
7/7/2019
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39. Clawback Jan invests £30,000 in an EIS and gets £9,000 in tax relief
Two years later the company is bought by a Private Equity firm and she receives £60,000
Jan must repay the tax relief of £9,000 so her gain is £30,000
If the business had collapsed and the shares were valueless she would still have to repay £9,000 and her loss would be £21,000
7/7/2019
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40. Clawback (2)
Two years later the shares have fallen in value to £35,000 and she decides to sell
Sue invested £60,000 in an EIS receiving £18,000 in tax relief
Her net loss is £60,000 less £35,000 less £7,500 = £17,500
Her gross loss is £25,000 but she must repay tax relief on this loss
£25,000 x 30% = £7,500
7/7/2019
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41. Audley Financial Training
CGT
EIS
SEIS
VCT
Contribution
£1,000,000
£100,000
£200,000
Tax relief
30%
50%
Claw back
3 years
5 years
Back dating
One year No
CGT deferral on reinvested gains
Yes
Yes and will wipe out 50% of invested gain
CGT on gains
Exempt after 3 years
Free immediately
Loss relief (income tax)
7/7/2019
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42. CGT deferral (EIS only)
If the £200,000 gain is invested in an EIS the gain is deferred
Jane is a higher rate tax payer and has a chargeable Capital Gain of £200,000 with a liability of £40,000
But when the EIS is realised the £200,000 gain becomes taxable at that year’s rate
7/7/2019
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43. CGT Reinvestment (SEIS)
She invests the maximum £100,000 in a SEIS and wipes out £50,000 of her gain saving her £10,000
Jane is an additional rate tax payer and has a chargeable Capital Gain of £200,000 with a liability of £40,000
As she could also have claimed £50,000 as a tax reducer, it would have cost her £40,000 to invest £100,000
If she lost all the money in the SEIS, she could offset £50,000 under loss relief saving her £22,500
Her maximum possible loss is £17,500
7/7/2019
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44. Audley Financial Training
Dividends and IHT
EIS
SEIS
VCT
Contribution
£1,000,000
£100,000
£200,000
Tax relief
30%
50%
Claw back
3 years
5 years
Back dating
One year No
CGT deferral on reinvested gains
Yes
Yes and will wipe out 50% of invested gain
CGT on gains
Exempt after 3 years
Free immediately
Dividends
Taxable
Tax free
BPR
7/7/2019
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45. Overall course objective
By the end of the course you will have: increased your chances of passing the exam by covering the technical points that are likely to be tested
7/7/2019
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46. Audley Financial Training
Day 1 objectives
By the end of this session, delegates will be able to:
Calculate accurately a liability to income, capital gains and inheritance tax and national insurance for individuals whose situation is typical of those tested in previous AF1 papers.
Understand the main pension input and benefit rules as applied to typical AF1 questions
Explain accurately the tax treatment of the main pooled investments both on and offshore and apply these rules to practical situations faced by the average investor
7/7/2019
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