Danby Bloch: Test yourself on your investment tax planning knowledge

By Danby Bloch

Go to the profile of Money Marketing
May 22, 2019

Not being up to date with the rules could leave you vulnerable to accusations of poor advice from the clients you should value most

General investment account funds usually require tax planning each year. The most valuable clients tend to have them, yet many advisers have not kept up to date with the main tax rules and how they can affect net returns.

So here are some test investment tax questions I have knocked together to help you check your understanding of them. Not being up to date with the knowledge could leave you vulnerable to accusations of poor advice from the clients you should value most.

You might argue that you do not actually need to know this stuff; that the platform you use will do it all for you. But this would be wrong; you certainly do need to know the principles. The platform might not have the right answers, either because it is deficient in some way or, more likely, as it has been fed the wrong information.

You need to be able to check. You also need to be able to explain the principles to your clients.

Most importantly, though, you can’t do the tax planning unless you understand the principles. Required planning could include rebalancing asset ownership between spouses or civil partners, making pension contributions, deciding how much to withdraw and when from assets subject to capital gains tax, choosing appropriate tax wrappers, and much more besides.

1. Sheila has used up all her capital gains tax annual exempt amount of £12,000. A further £10,000 of her taxable capital gains she has realised in the current tax year falls into her basic rate tax band, and £20,000 falls into her higher rate band. What is the total CGT payable assuming no further disposals?

Answer: £10,000 x 10 per cent + £20,000 x 20 per cent = £5,000

2. What would be the impact on Sheila’s CGT liability if she made a net pension contribution of £8,000?

Answer: The gross pension contribution of £10,000 extends Sheila’s basic rate band by £10,000, cutting the rate on £10,000 that was previously in the higher rate band from 20 per cent to 10 per cent, which would therefore save tax of £1,000, plus the pension tax relief.

3. How long can an individual carry forward a capital loss to be able to use it against a future capital gain?

A) One year

B) Four years

C) Six years

D) Indefinitely

Answer: D, indefinitely

4. Sid has a £10,000 loss carried forward from 2018/19 which he wants to set against his total capital gains of £25,000 he realised in 2019/20. He has also realised losses of £5,000 from disposals in 2019/20. In which order can he set the following against his 2019/20 capital gains?

A) The annual exempt amount of £12,000

B) His 2018/19 brought-forward losses

C) His 2019/20 losses

Answer: C, A, B

5. Mandy is a higher rate income tax payer and has received an equalisation amount as part of her dividend payment on the fund she recently bought. At what rate is this taxed?

A) 40 per cent

B) 1 per cent

C) 5 per cent

D) Nil

Answer: Nil. It is treated as a partial return of the capital she originally invested.

6. Anna has invested a total of £100,000 in a fund at various times over the course of the past 10 years. The investment is now worth £300,000 and Anna would like to take a partial withdrawal of £10,000. How much of this would be a taxable gain to the nearest pound?

Answer: The proportion of the withdrawal attributable to the original capital is withdrawal x remaining original capital / current value of capital – i.e. £10,000 x £100,000 / £300,000 = £6,667. So the taxable proportion is £10,000 – £6,667 = £3,333.

Tax planning is something that clients with GIA investments need to do each year and for which they are prepared to pay – because it is worth it. So, how did you get on?

Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum

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