CTFA Exam: Tax Considerations for Portfolio Investments

Tax Considerations for Portfolio Investments

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Question

Pauline, a basic-rate taxpayer, has a portfolio which comprises of various equity and fixed-interest unit trusts and OEICs. She should be aware that:

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Explanations

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A. B. C. D. E.

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Pauline, as a basic-rate taxpayer, has a portfolio that includes various equity and fixed-interest unit trusts and OEICs. Each of these investments has different tax implications, and Pauline should be aware of these implications to manage her portfolio efficiently.

Here are the explanations for each answer:

A. Any losses from this portfolio are allowable for Capital Gains Tax calculations. Capital gains tax (CGT) is a tax on the profit you make when you sell an asset that has increased in value. If you sell an investment for more than you paid for it, you will be taxed on the profit you made. However, if you sell an investment for less than you paid for it, you will make a loss, and this loss can be used to offset any gains you made elsewhere. Therefore, any losses from Pauline's portfolio can be offset against any gains she makes in the future for CGT purposes.

B. Her entire portfolio will be subject to a 10% tax credit. This statement is incorrect. There is no blanket tax credit for investments in the UK. Some investments, such as ISAs, have tax benefits, but equity and fixed-interest unit trusts and OEICs do not have a standard tax credit. However, Pauline may be entitled to receive a tax credit on the dividends paid on her investments. The tax credit will be equal to 10% of the dividend paid, and this tax credit can be used to offset any income tax she owes on the dividends received.

C. Only the proceeds of sale from the OEICs could be subject to Capital Gains Tax. This statement is incorrect. Any proceeds of sale from equity and fixed-interest unit trusts and OEICs are subject to Capital Gains Tax. If Pauline sells an investment for more than she paid for it, she will be taxed on the profit she made.

D. The taxation of dividends on the OEICs held will be treated the same way as the unit trusts. This statement is correct. The taxation of dividends on OEICs is treated the same way as unit trusts. The dividends paid on both investments are subject to income tax, but Pauline may be entitled to receive a tax credit on the dividends paid. The tax credit will be equal to 10% of the dividend paid, and this tax credit can be used to offset any income tax she owes on the dividends received.

E. She can never reclaim any tax deducted at source. This statement is incorrect. Pauline may be able to reclaim tax deducted at source on her investments. For example, if she is a non-taxpayer or a basic-rate taxpayer and tax is deducted from her interest or dividends, she may be able to claim back some or all of the tax paid. Additionally, if she is a higher-rate taxpayer, she may be required to pay additional tax on her investment income. In this case, she may need to declare the income on her tax return and pay any additional tax owed.