Hello Pg 7 of ch8 - discount rate should be 'NET REAL rate of return' for calculating tax allowance for discounting unrealized gains. Q8.3 - discount rate should be (1.10/1.03-1)* 0.8 instead of flat 10% * 0.80. Here it is not considering indexing in the discount rate. Also, the question says - it is expected to produce no income. What if the income of 200 is expected in the last year before being sold? how do we treat income here? Thanks in advance
Indexing doesn't apply to future gains so you don't index the discount rate. You accumulate the purchase price at the index rate until the end of 2017, then the chargeable unrealised gain is the difference between the current market value and the indexed purchase price. The discount rate is the net investment return, which is 8%, i.e. it is assumed 20% tax is paid on the expected investment return of 10%.
lets suppose the dates in this question were one year earlier, then discount rate should hv been indexed too, right??
Thank you Aladinsane Yes, you and the CMP are correct, the indexation has frozen so it won’t be a real rate. If you were asked to calculate expected discount rate in the past up until date of freeze then you would use a net real rate, as you would allow for indexation.
This will be treated as taxable income and taxed, charges will be made to unit fund to represent this income tax charge.
Hopefully Emma can explain this. Is this fund a unit fund? If so then do policyholder tax rules apply to the income earned? If it's not a unit fund and just a BLAGAB fund with with an asset that earns an income then would company tax rules apply? (i.e. the income is part of the 'I' component of 'I-E'?)
Hi The company would make a charge to the policyholder for tax on the income earned in the fund as the company are essentially paying this tax to HMRC, calculated as part of the I-E calc. Does that make sense? Thanks Em
