R02 Unit trusts and OEICs: free practice questions

1. Question 1 of 5

   Which of the following are reasons collective investment schemes are popular with private investors? 1. Small sums can be pooled into a much larger fund 2. Professional managers make the investment decisions 3. A wide spread of holdings reduces the investor's risk 4. Investors own the underlying shares directly

   Option A: 1, 2 and 3 onlyOption B: 2, 3 and 4 onlyOption C: 1 and 2 onlyOption D: 1, 2, 3 and 4

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   The answer is A: 1, 2 and 3 only

   Pooling lets small sums buy a wide spread of investments cheaply, run by professional managers, reducing risk. Investors buy units or shares in the scheme, not the underlying investments.

   Why the other options are wrong

   B

   Investors own units or shares in the scheme, not the underlying shares.

   C

   The wide spread of holdings reducing risk is also a key reason.

   D

   Statement 4 is wrong: investors don't own the underlying investments.

2. Question 2 of 5

   Under the UK UCITS rules, a retail fund can hold up to 10% in any one company, but no more than four holdings above 5%. What is the minimum number of holdings it must have?

   Option A: 16Option B: 10Option C: 12Option D: 20

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   The answer is A: 16

   Four holdings at 10% make 40%. The remaining 60% must be in holdings of no more than 5% each, so at least 12 more: 16 in total. Most funds hold 50 to 100.

   Why the other options are wrong

   B

   That assumes every holding could be 10%.

   C

   That counts only the 5% holdings, not the four 10% holdings.

   D

   That assumes every holding is limited to 5%.

3. Question 3 of 5

   What is the status of a unit trust's register of unitholders?

   Option A: It must be closed for six months a yearOption B: It's only a record for the manager's marketingOption C: It's conclusive evidence of title to the unitsOption D: It's kept by the FCA

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   The answer is C: It's conclusive evidence of title to the units

   The register is conclusive evidence of title and records names, addresses, units held and registration dates. It must be available for free inspection, though it can be closed for up to 30 days a year.

   Why the other options are wrong

   A

   It can be closed for up to 30 days a year.

   B

   It has legal significance for ownership.

   D

   The trustee is responsible for it.

4. Question 4 of 5

   Which of these switches is a disposal for CGT purposes for the investor?

   Option A: A fund of funds manager switching its underlying fundsOption B: An OEIC manager rebalancing the portfolioOption C: Switching between sub-funds of an umbrella OEICOption D: A unit trust manager selling shares inside the fund

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   The answer is C: Switching between sub-funds of an umbrella OEIC

   A switch from one sub-fund of an umbrella OEIC to another is a disposal for CGT. A fund of funds is exempt from CGT when it switches its underlying holdings.

   Why the other options are wrong

   A

   Switches within a fund of funds don't create a CGT liability.

   B

   Internal gains are exempt from tax.

   D

   Gains within the fund are exempt.

5. Question 5 of 5

   A client swaps a small holding of shares for unit trust units through a share exchange scheme. What is the tax position?

   Option A: It's treated as income in the year of exchangeOption B: It's free of CGT because no cash changes handsOption C: It's a disposal of the shares for CGT purposesOption D: Tax is deferred until the units are sold

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   The answer is C: It's a disposal of the shares for CGT purposes

   Share exchange can be a simpler and cheaper way to dispose of small holdings, but it's still a disposal for CGT, so tax is due if gains exceed the annual exempt amount.

   Why the other options are wrong

   A

   Gains on shares are subject to CGT, not income tax.

   B

   It's still a disposal.

   D

   The disposal happens at the exchange.

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