CISI IAD Tax-Efficient Investing 2 — Questions and Answers
Question 1: What is 'Venture Capital Trust' (VCT) and what tax advantages does it offer?
- A tax relief scheme for investments in large quoted companies with venture capital divisions
- A listed investment company investing in qualifying small companies, offering 30% income tax relief on new shares (up to £200,000 per year), tax-free dividends, and CGT exemption on disposal of VCT shares (Correct answer)
- A pension product for venture capitalists offering enhanced annual allowance
- A government scheme offering guaranteed returns on investments in start-up technology companies
Correct answer: A listed investment company investing in qualifying small companies, offering 30% income tax relief on new shares (up to £200,000 per year), tax-free dividends, and CGT exemption on disposal of VCT shares
VCTs are listed investment companies investing in portfolios of small qualifying companies. The tax advantages include: 30% income tax relief on new shares (minimum 5-year hold), tax-free dividends, and no CGT on disposal of VCT shares. They are higher risk due to the nature of underlying investments.
Question 2: What is a 'Self-Invested Personal Pension' (SIPP) and how does it differ from a standard personal pension?
- A SIPP is a group pension scheme for self-employed individuals; it differs by being employer-funded
- A SIPP is a personal pension giving the member control over investment decisions, with a wider range of permitted investments (including commercial property) compared to standard insured personal pensions (Correct answer)
- A SIPP is a government-backed pension paying a guaranteed income; standard pensions are market-linked
- A SIPP is only available to high earners; standard personal pensions have no income restrictions
Correct answer: A SIPP is a personal pension giving the member control over investment decisions, with a wider range of permitted investments (including commercial property) compared to standard insured personal pensions
A SIPP gives the member control over how their pension fund is invested, allowing a wider range of investments including direct equities, funds, bonds, commercial property, and alternatives. Standard insured pensions typically restrict investment to the insurer's approved fund range.
Question 3: What is the 'tapered annual allowance' and who does it affect?
- A reduction in the ISA allowance for high earners
- A reduction in the pension annual allowance for high earners (adjusted income above £260,000 in 2025/26), reducing the allowance by £1 for every £2 of income above the threshold to a minimum of £10,000 (Correct answer)
- A reduction in EIS tax relief for investors making very large contributions
- A charge applied when pension contributions exceed the lifetime allowance
Correct answer: A reduction in the pension annual allowance for high earners (adjusted income above £260,000 in 2025/26), reducing the allowance by £1 for every £2 of income above the threshold to a minimum of £10,000
The tapered annual allowance reduces the pension annual allowance for those with adjusted income above £260,000 (2025/26). For every £2 above the threshold, the allowance reduces by £1, to a minimum tapered allowance of £10,000. This limits pension tax relief for the highest earners.
Question 4: What is the CGT annual exempt amount (AEA) for individuals in 2025/26?
- £12,300
- £3,000 (Correct answer)
- £6,000
- £10,000
Correct answer: £3,000
The CGT annual exempt amount for individuals was significantly reduced: it was £12,300 until April 2023, then £6,000 (2023/24), then £3,000 from April 2024 onwards. For 2025/26 it remains at £3,000, meaning only gains above this level are subject to CGT.
Question 5: What CGT rates apply to gains on residential property (above the AEA) for a higher-rate taxpayer in 2025/26?
- 10% for basic rate, 20% for higher rate
- 18% for basic rate, 24% for higher rate (reduced from 28% in 2024 Budget) (Correct answer)
- 28% for basic rate and higher rate
- 18% for all taxpayers regardless of income
Correct answer: 18% for basic rate, 24% for higher rate (reduced from 28% in 2024 Budget)
Following changes in the October 2024 Budget, CGT on residential property gains is 18% for basic-rate taxpayers and 24% for higher and additional-rate taxpayers (reduced from the previous 28% higher rate). Non-residential assets are subject to 10%/20% rates.
Question 6: What is an 'onshore bond' and what is its tax treatment?
- A UK government gilt; fully exempt from income tax for UK investors
- A life assurance investment bond issued by a UK-based insurer, subject to corporation tax within the fund; the 5% per annum cumulative tax-deferred withdrawal facility allows deferral of any income tax liability for the investor (Correct answer)
- A bond traded on the London Stock Exchange; subject to stamp duty at 0.5% on purchase
- A UK corporate bond; subject to income tax on interest and CGT on gains
Correct answer: A life assurance investment bond issued by a UK-based insurer, subject to corporation tax within the fund; the 5% per annum cumulative tax-deferred withdrawal facility allows deferral of any income tax liability for the investor
An onshore bond is a life assurance wrapper. The fund pays corporation tax internally (treated as satisfying basic-rate liability). The '5% rule' allows investors to withdraw up to 5% of the original investment annually without immediate tax liability, with tax deferred until full surrender or specified events.
CISI IAD Tax-Efficient Investing 2
What is 'Venture Capital Trust' (VCT) and what tax advantages does it offer?