Practice Questions Flashcards

Question

Simon and Grace would like to retire when Simon reaches age 60 Outline the factors that should be taken into consideration before advising Simon on whether or not he should consolidate his deferred pension arrangements into his assured life personal pension plan

Answer 1

• A comparison of charges on the deferred and current pension schemes. 1 • Any transfer penalties. 1 • Any guarantees (1) or life cover (1) within the deferred schemes that would be lost on transfer. 2 • Comparison of fund choices between the deferred plans and Assure Life PPP. 1 • Ease of administration between the deferred and Assure Life PPP/ online access availability. 1 • Availability of flexible retirement options in deferred schemes. 1 • Whether Assure Life PPP will accept the transfers. 1 • Cost of the advice. 1 • Out of market during transfer. 1 9 max

Answer 2

• Tax-free extraction of profits from the company (1) as it is an allowable deduction against Corporation Tax (1) 2 • Not a benefit in kind (1) so no IT payable by Simon (1) and avoids NICs for Simon and the company (1) 3 • Higher amounts of carry forward can be used (1) as tax relief on employer contributions not limited by relevant earnings/ salary (1) 2 • Will provide a higher income in retirement (1) and higher PCLS (1) and so increase chance he can afford to retire at age 60 (1) 3 • Maintains the couple’s disposable income 1 • Tax free growth (1) of an asset that is outside the estate for IHT (1) and that will pay tax-free death benefits if he dies before age 75 (1) 3 • In trust so protected in the event the company becomes insolvent/ Simon is declared bankrupt. 1 14 max

Answer 3

• He will receive up to 45% tax relief on the contributions (1) as the dividend income that will fall back into his basic rate tax band will now be taxed at 7.5% rather than 32.5% (1) 2 • All growth will be free of IT and CGT. 1 • It will produce a higher income in retirement (1) and higher PCLS (1) which will increase the chances of him being able to afford to retire when he reaches age 60 (1) 3 • The funds are in trust and so protected if he becomes bankrupt. 1 • The fund is outside of his estate for IHT purposes (1) and will pay out taxfree if he dies before age 75 (1) 2 9

Answer 4

• The agreement with the company should be in writing. 1 • Simon’s gross salary would be reduced by a specified amount. 1 • The contribution will be treated as an employer contribution (1) and as a result reduces the Corporation Tax payable by the company (1) 2 • Simon’s salary will reduce (1) and so will Simon’s Income Tax (1) and Simon’s NICs (1), and also the NICs paid by the company (1) 4 • Increases the PCLS available (1) and the couple’s IHT exempt assets (1) 2 10 max

Answer 5

Ltd • Illiquid (1) as they are unquoted (1) 2 • If Simon is unable to work due to illness (1) then they are unlikely to provide any income (1) 2 • Tax benefits such as BR/ Entrepreneur’s Relief (1) may be reduced/ removed (1) 2 6

Answer 6

• Shares qualify for Entrepreneur’s Relief (1) which means the CGT rate will be 10% (1) on the gain that exceeds his annual CGT exemption (1) 3 • This is because Simon is a director of the company (1) and has held more than 5% of the shares and voting rights (1) for more than two years (1) and he is also entitled to at least 5% of the profits available for distribution/ disposal proceeds on the sale of the company (1) 4 • No CGT payable if shares held at date of death. 1 Business Relief • 100% Business Relief will be available on death (1) as the shares are held in an unlisted company (1) and Simon has held them for more than two years (1) 3 • This will reduce the IHT value to nil. 1 11 max

Answer 7

• He will be entitled to invest the whole amount into a VCT as it is less than the £200k maximum investment permitted in a tax year. 1 • He will be entitled to Income Tax relief of 30% of the amount invested (1) paid as a tax reducer (1) in the tax year in which the shares are issued (1) 3 • The IT relief is capped at the IT paid in the tax year the shares are issued (1) and it is unlikely that he will pay sufficient IT to receive the full benefit (1) and it is not possible to carry back part of the investment to the previous tax year (1) 3 • The IT relief will be lost if the shares are not held for a minimum of five years. 1 • All gains within the VCT are immediately exempt from CGT (1) and there is no minimum holding period to benefit from this (1) 2 • The income VCTs provide is free of IT (1) which is beneficial as he is a higher rate taxpayer (1) and also do not make use of his dividend allowance (1) 3 • VCTs are high risk (1) but are in line with his adventurous ATR (1) 2 • Comparison of the investment return/ yield/ growth on the shares with the expected return/ yield/ growth on the VCT. 1 • The return on the VCT is likely to be higher/ more volatile than the possible return on the premium bonds. 1 • Whether he will incur a CGT liability on the sale of the UK company shares. 1 • He will be out of the market whilst the VCT shares are being purchased. 1 • They have sufficient capacity for loss (1) and can hold the investment for a sufficient amount of time to make it suitable (1) 2 16 max

Answer 8

• The sale of the shares will give rise to a capital gain (1) and if the gain exceeds their CGT exemption of £12,000 (2019/20 (1) it will be taxed at 10% for Grace and 20% for Simon (1) 3 • They will be out of the market whilst the transaction takes place and so could lose growth. 1 • If they re-purchase shares in the OEIC they may buy fewer shares than they sold if the markets have moved against them. 1 • They can choose to invest elsewhere (rather than re-invest in the OEICs) (1) allowing Grace to invest in line with her medium ATR and ethical preferences (1) and Simon to invest in line with his adventurous ATR (1) 3 • If they invest elsewhere the returns may not be as good as the OEIC shares they sold. 1 • Future dividends will be tax-free (1) which will benefits Simon in particular as a HRT (1) and reduce their annual tax liability/ increase their annual disposable income (1) 3 • Whether Simon’s UK company shares have achieved more or less capital gain (1) and the return on these shares compared to the OEIC (1) 2 • UKL shares are certificated so would have to be sold to ISA wrap them. 1 • They could fund their ISA allowances this year by cashing out Simon’s premium bonds (1) which are out of line with their ATRs/ likely to lose value against inflation (1) thereby increasing the overall return on their investments (1) 3 • Any capital registered capital losses available to bring forward/ any capital gains incurred in 2019/20. 1 16 max

Answer 9

* Liquidity risk 1 * Value of property not guaranteed/ it is the valuer’s opinion. 1 * Any forced sale of property held in the fund reduces the fund value. 1 * Cash holdings dilute the returns within the fund. 1 * High ongoing charges/ transaction costs. 1 * Income returns not guaranteed/ rental yields can reduce/ systematic risk. 1 * No geographical diversification as UK only. 1 * Taxation risk. 1 8

Answer 10

• Complicated to understand. 1 • Reliant on fund manager’s expertise to manage the financial instruments (1) and returns may suffer if this is not done well (1) 2 • Can include performance fees/ higher charges. 1 • Doesn’t guarantee positive returns over the specified time period/ may not make a positive return over the specified time period. 1 • Performance track record likely to be relatively short/ hard to compare against other types of funds available. 1 • Funds tend to be targeted towards people in drawdown and Grace needs growth 1 • Returns unlikely to be high/ still subject to market risk (1) and better returns could be available for a similar risk level via other funds choices offered by the pension (1) 2 8 max

Answer 11

• As no tax paid within the fund, all chargeable gains will be subject to Income Tax 1 • The couple could withdraw 5% of £55,000 for each year the bond has been in existence, tax deferred. 1 • This would currently give them at least £13,750. 1 • They could assign the bond into Grace’s name as she is a BRT payer whereas Simon is a HRT payer. 1 • They will save 20% Income Tax on the proceeds (1) and top slicing relief can be used if required (1) 2 • Assign segments to Harry and Emma so they can encash them (1) and therefore the income will be assessed against their tax status (1) 2 • Proceeds likely to be tax free (1) as they have personal allowance, starting rate band and savings allowance that can be used (1) 2 • As the funds will be used to pay for living expenses at university it is likely it will be IHT exempt/ not count as a gift for IHT purposes. 1 • Assignments are not chargeable events/ will not trigger a tax charge. 1 12

Answer 12

* Greater fund choice/ choice of fund managers. 1 * Access to different asset classes. 1 * Automatic rebalancing available/ ease of fund switching 1 * Ease of administration/ everything in one place/ online access 1 * May offer reduced costs 1 * Re-registration/ no CGT/ not out of the market 1 * Easier to use CGT/ ISA allowances 1 6 max

Answer 13

• No tax on interest as falls within their savings allowances. 1 Premium bonds • Winnings would be tax-free 1 Offshore Bond • No tax paid within the fund/ gross roll-up. 1 • 5% tax deferred withdrawals not tax efficient over the longer term. 1 • Chargeable event would be taxed at 40% for Simon and 20% for Grace. 1 • Assignment to Grace will reduce tax payable/ Grace can apply top slicing relief. 1 • Assignment to children would allow tax free withdrawals. 1 Simon’s shares • Dividends use up all of Simon’s DA • The excess will be taxed at 32.5% 1 1 OEICs • In excess of DA’s so Simon paying tax at 32.5% on reinvested income and Grace paying tax at 7.5%. 1 • Placing the investment fully in Grace’s sole name would save 25% tax on half the holding (32.5% tax reduced to 7.5% tax). 1 • Can be used to fully fund both Simon and Grace’s fund ISAs for this year (1) and future years (1) 2 • Capital gains tax payable on sale (OEICs and shares) exceeding CGT exemption at 20% for Simon and 10% (within BRT band) for Grace. 1 ISAs • Tax efficient, particularly for Simon as a HRT. 1 • ISA wrapping (OEICS and Simon’s shares) will remove tax on future growth and income. 1 • Tax efficiency maintained on first death 1 14 max

Answer 14

• They can ensure their wishes are known/ avoids disputes. 1 • They can choose who will act as their attorneys (1) and can also select replacement attorneys in case an original attorney is unable to act (1) 2 • They can set up health and welfare LPAs to provide guidance on how they wish to be cared for (1) although these cannot be used until they have lost mental capacity (1) 2 • They can also set up property and financial affairs LPAs to allow an attorney to help with their finances (1) and these can be used before they lose capacity (1) if they choose to allow this (1) 3 • Having these set up saves the cost (1) and complexity (1) and lengthy amount of time that would otherwise be spent dealing with the Court of Protection (1) 3 10 max

Answer 15

• The base cost of the shares would be established. 1 • This would then be deducted from the sale value (1) plus the value of all reinvested income (1) 2 • A deduction would also be made for all costs incurred in the purchase and sale of the shares (1) and this will provide the capital gain on the shares (1) 2 • Any same year losses must be deducted (1) and then the CGT exemption can be applied (1) 2 • If there is still a gain and they have registered previous year losses then these can be applied to reduce the gain, or even eliminate it. 1 • If a gain remains, then Simon will pay tax at 20% on gains in his name as he is a HRT. 1 • Grace will pay tax at 10% on the gain that falls within her basic rate tax band 1 9 max

Answer 16

• Ensure use of ISA allowances/ CGT exemptions are maximised 1 • Review funding of pensions to ensure it is at the appropriate level 1 • Changes in tax/ pensions legislation 1 • Any additional funds to invest 1 • Any changes made to their Wills 1 • Change in income and expenditure/ increase in affordability 1 • Assess risk profile and capacity for loss and amend current investments if required 1 • Performance of investments against expectations/ benchmarks set 1 • Review of protection needs/ determine if there is a protection shortfall or excess 1 • Change in their health 1 • Change in the economy/ impact of Brexit negotiations 1 • Any new products available 1 10 max (b) Ten events that should trigger an immediate review of Simon and Grace’s finances. • A change in their risk profile or capacity for loss 1 • End of tax year with ISA limits to be used or CGT exemptions to be used 1 • Grace loses her job 1 • Simon’s business starts to struggle 1 • Change in personal circumstances/ divorce/ death of one of them 1 • They decide to change their Wills 1 • Unexpected windfall/ inheritance is received 1 • Health problems/ Simon is unable to work due to long-term sickness 1 • Changes in tax/ pensions legislation 1 • Adverse market conditions leading to a significant fall in value of their investments. 1 10

Answer 17

• The adviser can adjust the plans based on any changes in personal circumstances/ a change in their objectives. 1 • The adviser can take account of any change in their tax status/ amount Grace is earning/ any change in value to Simon’s company. 1 • The adviser can review the performance of their holdings against a suitable/ agreed benchmark and rebalance if necessary. 1 • The advice can be adjusted based on changes in legislation/ new products becoming available. 1 • Can review the costs of the children’s university education and ensure the couple have the funds required to cover these costs 1 • The adviser can ensure they are on track to be able to retire at age 60 whilst ensuring they will have sufficient income to live on. 1 • The adviser can review the protection in place to ensure it is suitable for their needs. 1 6 max

Answer 18

Any change in their target retirement date? 1 • Any change in their target retirement income? 1 • Asset allocation/ fund performance/ change in investment preferences/ changes in ATR. 1 • Has Simon increased the employer contribution to his PPP? 1 • Has Simon transferred the benefits from his old schemes to his Assure Life PPP? 1 • Any increase in expenditure/ decrease in affordability/ changes in income received? 1 • Economic/ market conditions. 1 • Changes in pensions/ tax legislation. 1 8

Answer 19

• Any change in their target retirement date? 1 • Any change in their target retirement income? 1 • Asset allocation/ fund performance/ change in investment preferences/ changes in ATR. 1 • Has Simon increased the employer contribution to his PPP? 1 • Has Simon transferred the benefits from his old schemes to his Assure Life PPP? 1 • Any increase in expenditure/ decrease in affordability/ changes in income received? 1 • Economic/ market conditions. 1 • Changes in pensions/ tax legislation. 1 8

Practice Questions Flashcards

(43 cards)