R02 Offshore funds: free practice questions

1. Question 1 of 5

   What must a fund established outside the UK have before it can be promoted to UK retail investors?

   Option A: Approval from HMRC as a reporting fundOption B: A UK-resident board of directorsOption C: A listing on the London Stock ExchangeOption D: Recognition by the FCA

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   The answer is D: Recognition by the FCA

   Overseas funds must be recognised under section 272 of FSMA 2000, or be in the temporary marketing permissions regime, to be promoted to UK retail investors.

   Why the other options are wrong

   A

   Reporting status concerns tax, not marketing.

   B

   That isn't the requirement.

   C

   Listing isn't the requirement.

2. Question 2 of 5

   Why do most UK-resident investors prefer offshore reporting funds to non-reporting funds?

   Option A: Reporting funds are guaranteed in full by the FSCSOption B: Gains on disposal are subject to the usual CGT rulesOption C: Reporting funds pay no tax on any of their incomeOption D: Gains on reporting funds are tax-free

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   The answer is B: Gains on disposal are subject to the usual CGT rules

   With a reporting fund, income is taxed like a UK fund's and gains are subject to CGT, with the annual exempt amount and lower CGT rates. The fund must have kept reporting status throughout ownership.

   Why the other options are wrong

   A

   That isn't the reason.

   C

   Investors are taxed on reported income.

   D

   Gains are subject to CGT.

3. Question 3 of 5

   How is a UK resident taxed on a gain from a non-reporting offshore fund?

   Option A: Under CGT, with the annual exempt amountOption B: Tax-free, as the fund is offshoreOption C: As income, with no CGT annual exempt amountOption D: As dividends, using the dividend allowance

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   The answer is C: As income, with no CGT annual exempt amount

   The gain is calculated on CGT principles but taxed as income at 20%, 40% or 45%. The CGT exempt amount, dividend allowance, PSA and starting rate for savings can't be used.

   Why the other options are wrong

   A

   The gain is taxed as income.

   B

   UK residents are taxed on the gain.

   D

   The dividend allowance can't be used.

4. Question 4 of 5

   For a UK resident, why are offshore fixed-interest funds generally more tax-efficient than offshore equity funds?

   Option A: Equity dividends usually suffer non-reclaimable withholding taxOption B: Offshore equity funds pay UK corporation taxOption C: Bond funds can't be non-reporting fundsOption D: Bond income from offshore funds is always tax-free in the UK

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   The answer is A: Equity dividends usually suffer non-reclaimable withholding tax

   Offshore funds aren't completely tax-free: dividends usually suffer non-reclaimable withholding tax, while bond funds can hold securities paying interest gross. This also tilts offshore equity funds towards growth.

   Why the other options are wrong

   B

   That isn't the reason.

   C

   Either type can be reporting or non-reporting.

   D

   UK residents are taxed on their income.

5. Question 5 of 5

   A dollar-denominated offshore fund invests in Japanese shares and doesn't hedge currency risk. Which currency is the investor exposed to?

   Option A: Sterling onlyOption B: The yenOption C: The dollar onlyOption D: None, as the fund is offshore

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   The answer is B: The yen

   A fund's denomination may reflect its target audience. Without hedging, the investor is directly exposed to the yen. Often the only way to find a fund's approach is to ask the managers.

   Why the other options are wrong

   A

   The fund's assets are in yen.

   C

   The denomination is irrelevant when the fund doesn't hedge.

   D

   Being offshore doesn't remove currency risk.

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