Practice Test 12 - Russel & Laura

Question 1

In respect of Laura’s pension benefits:
Calculate, showing all your workings, the value of these benefits as of April 2016 for the purposes of the lifetime allowance.

Answer 1

• 20 x £27,000;
• Plus £50,000 tax free cash;
• Plus £210,000 CIMP;
• £800,000.

Question 2

Recommend to Laura how she can protect her pension benefits from an excess lifetime allowance charge and explain briefly how the protection applies.

Answer 2

• Fixed Protection 2016.
• Receive up to £1.25m lifetime allowance.
• No minimum pension value to apply/fund is less than £1m.
• Contributions to all defined contribution schemes must have ceased;
• by 5th April 2016.
• No further accrual allowed within defined benefit schemes.
• If Fixed Protection is lost, member must inform Her Majesty’s Revenue and Customs within 90 days.
• Not available if she already has Primary/Enhanced/previous Fixed Protection.

Question 3

Identify the factors relating to Russell and Laura’s circumstances that would typically influence their attitude to investment risk.

Answer 3

• Laura retires next month/ timescale.
• Health/ age.
• They have disposable income/ existing assets/adequate emergency fund/amount available for investment.
• Guaranteed pension income for Russell/State Pension entitlement.
• Investment experience/knowledge.
• Objectives/ priorities/need for capital/income/growth.
• Economic environment/market conditions.
• Tolerance for loss/Capacity for loss.

Question 4

Comment on the Income Tax efficiency of Russell and Laura’s current savings
and investments.

Answer 4

• Laura is a higher rate taxpayer and Russell is a basic rate taxpayer.
• Utilising ISA’s is tax efficient.
• Bank accounts should not all be in Laura’s name/should be in Russell’s name.
• Saves 20% income tax.
• Laura has a Personal Savings Allowance (PSA) of £500.
• Russell has a Personal Savings Allowance (PSA) of £1,000.
• Open-ended investment companies (OEICs) should not all be in Laura’s name/more tax efficient in Russell’s name.
• First £5,000 of dividends/dividend allowance tax free.
• Russell has unused dividend allowance.
• Dividends taxed at 7.5% for Russell/32.5% for Laura.

Question 5

Explain the Capital Gains Tax implications of transferring the OEICs held by
Laura to Russell.

Answer 5

• Inter-spousal transfer rules apply.
• No gain no loss basis/no Capital Gains Tax/spouse received the investment at initial base cost.
• Capital Gains Tax is chargeable on disposal/sale.
• Capital Gains Tax charged at 10% not 20%/saving 10%.
• Capital Gains Tax annual exemption available.
• Retain sufficient for Laura to use her Capital Gains Tax allowance.

Question 6

Explain the factors that Russell and Laura should be made aware of if they were to
lend £50,000 to William for his house deposit.

Answer 6

• Loss of capital/liquidity.
• Loss of potential growth.
• They need a written loan agreement in place.
• Term of loan/level of repayments/interest rates.
• Impact of William’s death.
• Secured against property?
• William may not be able to afford to repay the loan.
• Interest charged is taxable on Russell/Laura.
• Who is making the loan/source of loan monies?
• On death, loan is a debt to the estate/part of the estate.

Question 7

State four benefits and four drawbacks of Russell and Laura appointing a discretionary fund manager to look after their investments.

Answer 7

Benefits
• Professional/active management/wider investment options.
• Potential for higher returns.
• Regular reviews/tax reporting.
• Will target objectives/bespoke service/will match attitude to risk.
• No requirement for ongoing involvement/saves time.

Drawbacks
• Higher charges.
• No guarantee of performance.
• May invest in unacceptable sectors/lack of control.
• Tax efficiency not always considered.
• May not provide regular service.

Question 8

In respect of Russell and Laura’s financial objective to pass on as much of their estate to their children as possible:
Recommend and justify how Russell and Laura should set up a suitable life assurance policy to cover their current and future Inheritance Tax liability.

Answer 8

• Whole of Life plan Joint Life 2nd Death in trust.
• Inheritance Tax liability falls due on second death.
• Benefit outside of the estate/no probate/paid quickly.
• Sum assured to meet current Inheritance Tax liability.
• Indexation.
• Guaranteed insurability options;
• to keep pace with rising value of assets/estate/inflation.
• Premiums out of normal expenditure/premiums could be paid by children.
• Guaranteed premiums.
• Ongoing affordability.

Question 9

In respect of Russell and Laura’s financial objective to pass on as much of their estate to their children as possible:
Recommend and justify how Russell and Laura should set up a suitable life assurance policy to cover their current and future Inheritance Tax liability.
Explain briefly six potential drawbacks of the recommendations made in your answer to part above.

Answer 9

• Cover may be insufficient/value of estate may increase.
• Premiums may not qualify for normal expenditure exemption.
• Tax rates may change/legislation may change.
• Estate may decrease/overinsured.
• High premiums/reduces disposable income in retirement/they have to pay for it.
• Premiums reviewable/may increase.

Question 10

State the factors a financial adviser should take into account when reviewing Russell
and Laura’s Inheritance Tax planning at their next annual review.

Answer 10

• Health.
• Current value of savings/investments/pensions/home/estate/any inheritances received.
• Change in objectives.
• Change of beneficiary/wills updated.
• Affordability.
• Any gifts made/willingness to make gifts.
• Change in legislation/taxation/new products available/rebroking and impact of Whole of Life plan reviews.
• Attitude to risk.