Advanced Diploma in Financial Planning Practice Test 3 · 2018. 9. 25. · AF5 . Advanced Diploma in Financial Planning . Practice Test 3 . Unit AF5 – Financial planning process

AF5 Advanced Diploma in Financial Planning Practice Test 3 Unit AF5 – Financial planning process 2018-2019 Revision Aid Based on April 2015 examination

SPECIAL NOTICES

These revision questions have been put together by an experienced trainer to provide a prompt for exam practice. However, please ensure that you bear in mind any changes to law, tax and

practice that may have taken place since publication or update.

Practice in answering the questions is highly desirable and should be considered a critical part of a properly planned programme of examination preparation.

AF5 Practice Test 3 2018-2019 Revision Aid

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AF5 – Financial planning process Contents Fact Find 3

Question paper 14

Model answers 19

Tax tables 27

Published September 2018 Telephone: 020 8989 8464 Fax: 020 8530 3052 Email: [email protected] Copyright © 2018 The Chartered Insurance Institute. All rights reserved.

mailto:[email protected]


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You are a financial adviser authorised under the Financial Services and Markets (FSMA) Act 2000. You completed the following fact-find when you met Mr and Mrs Jones recently.

PART 1: BASIC DETAILS

Client 1 Client 2 Surname Jones Jones First name(s) Peter Sue Address 15 Skelton Drive, Southampton 15 Skelton Drive, Southampton Date of birth 11.11.1962 14.12.1963 Domicile UK UK Residence UK UK Place of birth UK UK Marital status Married Married State of health Good Good Family health Good Good Smoker No No Hobbies/Interests Golf Cycling

Notes:

PART 2: FAMILY DETAILS Children and other dependants

Name Relationship Age D.O.B Health Occupation Financially dependent? Sally Daughter 17 16.08.1997 Good N/A Yes Amy Daughter 16 23.07.1998 Good N/A Yes

Notes: Sally plans to go to university this year and Amy intends to go to university in two years’ time. Peter’s mother, aged 71, has recently moved into a residential care home following a diagnosis of dementia. She is in relatively poor health. Peter has taken over management of her financial affairs via a registered Lasting Power of Attorney. She is not entitled to any state assistance with her care fees as she has capital of £400,000 following the sale of her house. Peter’s mother has an annual income shortfall of £15,000 to pay for the care fees. Peter is looking into various options for funding care fees as he wants to guarantee that the fees can be paid for his mother’s lifetime.

AF5 - FINANCIAL PLANNING PROCESS

FACT-FIND – Practice Test 3


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PART 3: EMPLOYMENT DETAILS

Client 1 Client 2 Employment Occupation Engineer Teacher Job title Managing Director Teacher Business name PSJ Components Ltd Hawthorns School Business address Unit 12, ABC Industrial Estate,

Southampton Beech Avenue, Southampton

Year business started 2005 Remuneration Salary £67,000 £27,000 Dividends £27,778 Nil State Pensions Nil Nil Overtime Nil Nil Benefits Benefits-in-kind £2,000 p.a. No Pension scheme (see Part 11) Yes Yes Life cover Yes Yes Private Medical Insurance Yes No Permanent Health Insurance No No Self Employment Net relevant earnings N/A N/A Accounting date N/A N/A Partnership/Sole trader N/A N/A Other Earned Income Notes:

Peter has 100% shareholding in PSJ Components Ltd which has 15 full-time employees. Peter’s company offers all employees membership of a defined contribution group personal pension scheme. His company has a staging date for auto-enrolment of May 2016. The company also provides a group private medical insurance for employees and their families. Peter is planning to retire at age 60 after his daughters have left university. Client 1 Client 2 Previous Employment Previous employer RT Utilities Ltd Job title Engineer Length of service 18 years Pension benefits (see Part 11) Group Personal Pension Notes:


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PART 4: OTHER PROFESSIONAL ADVISERS

Client 1 Client 2

Accountant Fawsley & Co Fawsley & Co Bank Armitage Bank Armitage Bank Building Society Doctor Dr Newton Dr Newton Estate Agent Financial Adviser Insurance Agent Solicitor Lewis LLP Lewis LLP Stockbroker Other Notes: PART 5: INCOME AND EXPENDITURE Income

Client 1 Client 2 Joint Monthly

£ Annually

£ Monthly

£ Annually

£ Monthly

£ Annually

£ State Pensions Private Pensions Salary 67,000 27,000 Benefits-in-kind 2,000 Investment income (gross) 7,850 4,300 Rental (gross) Dividend

27,778

Notes:

The investment income is derived from Peter and Sue’s investment portfolio and Peter’s Easy Access savings account. The dividend income is from Peter’s shareholding in PSJ Components Ltd.

Client 1 Client 2

Income Tax £ £ Personal allowances Taxable income Tax National Insurance Net Income

Notes:


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Expenditure

Monthly £ Annually £ Household Expenditure Client 1 Client 2 Joint Client 1 Client 2 Joint Mortgage/Rent 600 Council tax 140 Buildings and contents insurance 600 Gas, water and electricity 2,000 Telephone 800 TV licence and satellite 60 Property maintenance 3,000 Regular Outgoings Life assurance (see Part 8) 25 130 Health insurance (see Part 9) Savings Plans (see Part 10) 1,000 Car tax, insurance and maintenance 980 750 Petrol and fares 300 150 Loans Hire purchase School fees Childcare Further education Subscriptions Food, drink, general housekeeping 1,000 Pension contributions (see Part 11) 223 (net) 149 (net) Other Expenditure Magazines and newspapers 30 Entertainment 250 Clubs and sport 1,500 Spending money 5,000 Clothes 2,500 Maintenance Other (Holidays) 10,000 Total Monthly Expenditure 1,548 299 2,210 Total Annual Expenditure 18,576 3,588 26,520 2,480 750 23,900 Total Outgoings 75,814 Notes:

Do you foresee any major/lump sum expenditure in the next two years? Notes: Peter and Sue would like to fund the university costs for both Sally and Amy but would consider using a student loan to fund a portion of the university costs.


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PART 6: ASSETS

Asset Client 1 £ Client 2

£ Joint

£

Income (Gross)

£ 1. Main residence 500,000 2. Contents/car 80,000 3. Current account – Armitage Bank 10,000 3,000 15,000 Nil 4. Easy Access Savings Account – Armitage

Bank 35,000 350

5. Stocks & Shares ISAs – UK Growth funds 16,500 16,500 Nil 6. Unit Trusts/OEICs – emerging market

Equity funds 125,000 2,400

7. Unit Trusts/OEICs – UK fixed-interest Security funds

86,000 86,000 8,600

8. Unit Trusts/OEICs – UK Equity Income funds

20,000 800

9. Shares in PSJ Components Ltd 500,000 27,778

Notes: The main residence is held as joint tenants. Peter and Sue’s Unit Trust portfolios are held in a range of emerging market Equity funds and fixed-interest Security funds which they purchased a number of years ago on the advice of a friend. Peter and Sue’s holdings in the fixed-interest Security funds are identical and the gross income is £4,300 per annum each. Peter and Sue do not monitor these portfolios and the values are an estimate based on the last annual statements. They believe these holdings have increased significantly in value since they were originally purchased. Peter’s holding in the UK Equity Income funds is a regular savings plan for Sally and Amy’s university fees. Peter and Sue’s Stocks & Shares ISAs are invested in UK Growth funds (accumulation units).

Peter’s accountant has recently valued PSJ Components Ltd and believes that his shares are worth approximately £500,000.


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PART 7: LIABILITIES

Mortgage Details Client 1 Client 2 Joint Lender Armitage Bank Type of mortgage Interest only Amount outstanding £240,000 Start date September 2008 Term/maturity 14 years Monthly payment £600 Interest rate Tracker Life policies (see Part 8)

Notes: The mortgage rate tracks the Bank of England base rate plus 2.5% for the term of the mortgage. Peter and Sue intend to repay the mortgage from the proceeds of the endowment and the eventual sale of Peter’s business.

Other Loans Client 1 Client 2 Joint Lender Type of loan Amount outstanding Start date Term/maturity Monthly payment Interest rate Payment protection

Notes:

Peter and Sue do not have any loans.

Other Liabilities (e.g. tax)

Notes: Peter has to pay additional Income Tax on his dividend income via self-assessment. He puts this money aside in his Easy Access savings account each year.


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PART 8: LIFE ASSURANCE POLICIES

Life/Lives

assured Ownership Sum assured

£ Premium

£ Term Start date In

trust?

Surrender Values

£ 1. Joint Joint 120,000 130 p.m. 25 years 1994 No 65,000 2. Peter Peter 100,000 25 p.m. 14 years 2005 No N/A Notes:

Peter and Sue took out an endowment policy when they bought their first home. This is a conventional low-cost with-profits endowment and they have retained this policy when they moved house to take advantage of the life cover element. Peter and Sue have recently been contacted by their insurance company notifying them of a projected shortfall at maturity. Peter took out an additional life policy to cover a start-up loan for his business. The loan has been fully re-paid but Peter has retained the policy to provide additional cover for the family. PART 9: HEALTH INSURANCE POLICIES

Type Life Covered Current Sum

Assured £ Start Date Term/Review Deferred

Period Premium

£ Private Medical

Insurance

Peter, Sue, Sally and

Amy

2005 Age 65

Notes:

The Private Medical Insurance cover is provided by Peter’s company. It provides cover for the whole family although this cover will cease for Sally and Amy when they reach age 18.

PART 10: REGULAR SAVINGS

Type Company Ownership Fund Amount Saved

£

Sum Assured

Maturity Date

Current Value

£ Unit Trust Peter UK Equity

Income 1,000 p.m. N/A N/A £20,000

Notes:

Peter has set up a regular savings plan to help fund the university fees for his two daughters. This is held in his sole name and is invested into an actively-managed UK Equity Income fund. Peter intends to fund this plan until Amy graduates in six years.


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PART 11: PENSION DETAILS Occupational pension scheme

Client 1 Client 2 Member of employer’s scheme Yes Type of scheme Final salary occupational scheme Date joined 1990 Retirement age 60 Pension benefits Defined Benefit Death benefits 3 x average salary Dependant’s benefits Yes Contracted-in/out Contracted-out Contribution Level (employee) 8.3% Contribution Level (employer) Fund type Fund value

Notes: Sue is a member of the Teachers’ pension scheme which provides benefits of 3/80ths lump sum and 1/80th pension for each year of pensionable service.

Additional Voluntary Contributions (including free standing additional voluntary contributions).

Client 1 Client 2 Type Company Fund Contribution Retirement date Current value Date started

Notes: Peter and Sue do not have any additional voluntary contribution schemes.


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Personal Pensions

Client 1 Client 2 Member of employer’s Group Personal Pension (GPP) scheme

Yes No

Type of scheme Defined contribution GPP Date joined 2005 Retirement age 65 Pension benefits Defined contribution Death benefits Return of fund Dependant’s benefits None Contracted-in/out Contracted-in Contribution level (employee) £223 per month (net) Contribution level (employer) £279 per month Fund type Cautious lifestyle fund Fund value £95,000 Notes: Peter’s GPP is invested in the default option for the scheme. Peter does not monitor the performance of the pension fund.

As Sue has a guaranteed pension from her employment, Peter is considering the options in respect of the pre-retirement death benefits on his pension. Peter has not yet completed a nomination on this pension.

Previous pension arrangements Client 1 Client 2

Type Personal Pension Company RT Utilities Ltd Fund With-profit Contributions £105,000 Retirement date 65 Current value £118,000 Date started 1989

Notes: Peter’s personal pension is a preserved defined contribution scheme from his previous employment with RT Utilities Ltd. Peter has received a recent statement from the pension provider indicating that there is no longer an exit penalty on transfer from this policy. With-profits is the only fund available under this policy.


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State Pension

Client 1 Client 2 State pension SERPS/S2P Graduated pension Total

Notes Peter and Sue have not checked their entitlement to State Pension benefits.

PART 12: INHERITANCES

Wills Client 1 Client 2

Do you have a current Will? Yes Yes Notes:

Peter and Sue have recently updated their Wills. These are mirror Wills leaving everything to the surviving spouse on first death and to their children in equal shares on second death.

Trusts Client 1 Client 2

Are you a beneficiary under a trust? No No If yes, give details. Are you a trustee? No No If yes, give details.

Notes:

Gifts Client 1 Client 2 Give details of gifts made and received. None None

Notes:

Inheritances Client 1 Client 2 Give details of any inheritances received or expected £400,000

Notes:

Peter is expecting an inheritance of up to £400,000 from his mother who is now living in a care home. Peter’s father died several years ago and left his full estate to Peter’s mother. The final value of the inheritance will depend on the care home costs. Peter is the sole beneficiary of his mother’s Will which was set up a number of years ago. Sue’s parents died several years ago. Peter and Sue are not expecting any inheritances from any other sources.


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PART 13: ATTITUDE TO RISK What level of risk are you prepared to take to achieve your financial objectives?

Notes: Peter has a medium attitude to risk. Sue has a low to medium attitude to risk.

PART 14: BUSINESS RECORDS

Compliance Date fact-find completed 01.04.2015 Client agreement issued 01.04.2015 Data Protection Act 01.04.2015 Money laundering 01.04.2015 Consultations Dates of meetings 01.04.2015 Marketing Client source Referrals Documents Client documents held Date returned Letters of authority requested 03.04.2015 Notes:

PART 15: OTHER INFORMATION


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AF5

Advanced Diploma in Financial Planning Practice Test 3 Unit AF5 – Financial planning process

SPECIAL NOTICES

All questions in this paper are based on English law and practice applicable in the tax year 2018/2019, unless stated otherwise and should be answered accordingly. It should be assumed that all individuals are domiciled and resident in the UK unless otherwise stated.


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Unit AF5 – Financial planning process Instructions to candidates Read the instructions below before answering any questions • Three hours are allowed for this paper which carries a total of 160 marks.

• You are strongly advised to attempt all tasks to gain maximum possible marks. The number

of marks allocated to each task is given next to the task and you should spend your time in accordance with that allocation.

• In this examination you should use the fresh copy of the fact-find provided. You are not

allowed to bring into the examination the pre-released copy of the fact-find.

• Client objectives are provided overleaf and you should read them carefully before attempting the tasks.

• Read carefully all tasks and information provided before starting to answer.

• You may find it helpful in some places to make rough notes in the answer booklet. If you do

this, you should cross through these notes before you hand in the booklet.

• It is important to show all steps in a calculation, even if you have used a calculator.

• If you use a calculator, it must be a silent, battery or solar-powered, non-programmable calculator. The use of electronic equipment capable of being programmed to hold alphabetic or numerical data and/or formulae is prohibited. You may use a financial or scientific calculator, provided it meets these requirements.

• Tax tables are permitted to be used for this paper and all questions are based on the current

tax year 2018/2019.

• Answer each task on a new page and leave six lines blank after each task.

Subject to providing sufficient detail you are advised to be as brief and concise as possible,

using note format and short sentences on separate lines wherever possible.


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CLIENTS’ FINANCIAL OBJECTIVES You have now been able to determine from the information in the fact-find that your clients have the following financial objectives: Immediate objectives • To fund Sally and Amy’s future university costs. • To provide financial security for the family in the event of Peter being unable to work due to

long-term illness. • To ensure long-term care fees can be paid for Peter’s mother for her lifetime. Longer-term objectives • To provide adequate income in retirement. • To mitigate future Inheritance Tax liabilities. • To improve the ongoing tax efficiency of Peter and Sue’s current investment holdings.


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Attempt ALL tasks

Time: 3 hours

1. Identify the additional information you would need to discuss with Peter and Sue in

order to advise them on how to meet their:

(a) immediate financial objectives; (15) (b) longer-term financial objectives. (15) 2. Peter and Sue have told you that they have different attitudes to risk (ATR). (a) Outline the steps an adviser should follow when using a risk profiling tool to

ascertain Peter and Sue’s ATR.

(6) (b) State five benefits and five drawbacks of using a risk-profiling tool to assess

Peter and Sue’s ATR.

(10) 3. Peter and Sue have asked you to review their existing pension and investment

portfolio.

Candidates will be rewarded for supporting their recommendations with relevant

evidence and demonstrating how their recommendations work holistically to meet their clients’ objectives.

(a) Explain in detail to Peter why the investment funds held within both

of his existing pension plans may not be suitable to meet his retirement objectives.

(12) (b) Recommend and justify any actions that Peter and Sue could take, in

respect of their existing savings and investment portfolio, in order to meet their longer-term objective of improving the ongoing tax efficiency of their portfolio. Ignore Inheritance Tax planning in your answer.

(15) 4. Explain to Peter his administrative responsibilities as an employer in respect of the

eligible jobholders under the new auto-enrolment regulations.

(9)


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5. Peter’s mother has recently moved into a residential care home. (a) Justify why an immediate needs annuity could be used to meet the income

shortfall in the payment of the long-term care fees for Peter’s mother.

(10) (b) Explain to Peter the obligations that he must fulfil whilst acting as Power of

Attorney for his mother.

(7) 6. Peter’s daughter, Sally, is due to start university this autumn and Peter wishes to

fund Sally’s university costs in full.

(a) Comment on the weaknesses in Peter’s regular savings plan for university

fees.

(8) (b) Explain to Peter the benefits of Sally using a student loan to fund her

university costs, with the loan being repaid from Peter’s regular savings plan at a future date.

(9) 7. Peter and Sue would like to review their current protection arrangements. Candidates will be rewarded for supporting their recommendations with relevant

evidence and demonstrating how their recommendations work holistically to meet their clients’ objectives.

(a) Outline any weaknesses in Peter and Sue’s current protection arrangements. (12) (b) Recommend and justify a suitable protection policy to provide a regular

income if Peter suffers a long-term illness and is unable to work.

(15) (c) Recommend and justify what action Peter could take to ensure that if

he dies before taking benefits, his pension fund will ultimately pass to Sally and Amy in an inheritance tax-efficient manner, whilst providing Sue with access during her lifetime.

(10) 8. Identify seven events, other than the annual review, that would trigger an

immediate review of Peter and Sue’s financial affairs.

(7)


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NOTE ON MODEL ANSWERS

The model answers given are those which would achieve maximum marks. However, there are alternative answers to some question parts which would also gain high marks. For the sake of clarity and brevity not all of these alternative answers are shown. An oblique (/) indicates an

equally acceptable alternative answer.

Model answer for Task 1 (a) Candidates would have gained full marks for any fifteen of the following: To fund Sally and Amy’s future university costs: • Cost of university fees and duration/length of course. • Willing to invest in Sue or daughters names/ownership/use of trusts. • Use of scholarships/student loans/bursaries/funding from other family members/

children plan to work? • Use of tax-efficient wrappers/ISA/JISA/child trust fund. • Protection cover for fees. • Capacity for loss. To provide financial security for the family in the event of Peter being unable to work due

to long-term illness: • Income/capital required and term/dependency period. • Family health history. • Can company continue to pay Peter salary/dividends/profitability? • Willingness to use other assets/downsize/entitlement to State benefits/clarify Peter's

Private Medical Insurance. To ensure long-term care fees can be paid for Peter’s mother for her lifetime. • Care fee inflation/projected future costs. • Life expectancy/specific health details for mother. • Eligibility for registered nursing care contribution/attendance allowance. • Any care fees arrangements already in place/would Peter contribute? • Does Peter hold sole Power of Attorney? • Affordability/budget.


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(b) Candidates would have gained full marks for any fifteen of the following: To provide adequate income in retirement: • Level of income/pension commencement lump sum required in retirement and Sue’s

planned retirement date. • Details of Peter’s existing pension policies e.g. charges/ performance/exit penalties/

latest benefits statement etc. • Willingness to use other assets/downsize/increase pension contributions/use carried

forward allowance/use of company profits. • When does he plan to sell the company/sell shares/exit strategy for business? • State Pension entitlement/BR19. To mitigate future Inheritance Tax liabilities: • Does Peter’s business qualify for business relief? • Use of exemptions/gifting/PET/chargeable lifetime transfers/place life policies in trust. • Consider deed of variation on mother's Will/skip a generation. • Willing to set up life insurance policies/Joint Life Last Survivor Whole of Life policy. • Willing to complete nomination on pension/spousal by pass trust. To improve the ongoing tax efficiency of Peter and Sue’s current investment holdings: • Original purchase price of investment holdings. • ISA allowances used this year/pension contributions/tax-efficient products? • Capital Gains Tax exemption used this year/carried forward losses/uncrystallised losses? • Willingness to transfer assets to Sue/ownership. • Affordability/budget. • Capacity for loss. Model answer for Task 2 (a) • Explain the purpose of the risk profiling tool. • Complete a risk questionnaire/series of questions. • Use computer software/manually/to produce a risk-rating/score/results. • Risk rating suggests a suitable asset allocation/an efficient frontier model. • Adviser would discuss the results with both clients. • Agree a final rating with Peter and Sue.


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(b) Benefits: • Simple/understandable/consistent/repeatable process/objective. • Helps the client to understand/consider risk. • Separate risk profile for each client/objective established/attitude to risk can change

over time. • Assists with appropriate asset allocation. • Identifies the maximum loss tolerance/risk and reward. Drawbacks: Candidates would have gained full marks for any five of the following: • Client may not understand the terminology/questions. • Adviser may misinterpret the results/different tools give different results. • May not establish capacity for loss. • Different objectives/clients may have different attitude to risk/may not consider

timeframe. • May not take into consideration their investment experience/behavioural finance/

emotion. • Cannot be used in isolation/further discussion needed. Model answer for Task 3 (a) With-profits Personal Pension fund (RT utilities): • High charges/not transparent/opaque investment. • With-Profit plan has performed poorly. • Unlikely to improve/provide better returns/no guarantee of future bonus/may also levy

exit penalties in future, market value adjuster (MVA). • No other fund choice. Lifestyle fund (Group Personal Pension ): • Cautious Lifestyle has set retirement date (age 65). • Cautious Lifestyle is inflexible/automatically switches. • Switches take no account of market conditions/timing. • Fund will be fully invested in cash/fixed-interest at normal retirement date. • Assumes annuity purchase so may be unsuitable/drawdown more likely option. Generic: • He may wish to retire before normal retirement date. • Peter has no control of asset allocation. • Neither/either fund matches Peter’s attitude to risk.


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(b) Candidates would have gained full marks for any 15 of the following: • Use ISA allowances every year/use tax-efficient products. • Sell existing holdings and repurchase within an ISA. • Set up JISA for Amy/Sally for university fees/£4,000 per annum. • To reduce Income Tax liability/improve tax-efficiency. • Use Capital Gains Tax exemptions/register/crystallise Capital Gains Tax losses. • To take tax-free growth/rebase/offset against future gains. • Switch Peter's UK equity income unit trust to Sue/daughters/ trust. • Transfer other unit trusts/cash/PSJ Components Ltd shares to Sue. • Using spousal exemption/nil gain, nil loss. • Saving 20% income tax on interest. • Saving 25% income tax on dividends. • Saving 10% Capital Gains Tax/use both Capital Gains Tax exemptions. • Enables use of both Dividend Allowances/£2,000 each. • Invest in pensions. • For tax-relief/pension commencement lump sum/tax privileged. • Reinstating Peter’s personal allowance. Model answer for Task 4 • All jobholders must be enrolled in qualifying pension/scheme by staging date/May 2016. • Communicate information to employees. • Contribution levels must comply with auto-enrolment limits/meet minimum levels. • Contributions must be deducted from salary/payroll. • Must offer/process opt-out requests. • Must refund contributions (if any employee opts-out). • Must keep accurate records/must submit returns (Pensions Regulator). • Must offer a default fund. • If staff opt-out, employer must re-enrol them every three years. Model answer for Task 5 (a) • She is eligible; • as over age 60; • lives in a care home and has mental impairment/dementia. • Is in poor health so higher annuity rates/preserves capital. • Guaranteed income/will not run out of money. • Paid tax-free if paid direct to care home. • Can be inflation-proofed to protect against growth in care fees. • Can offer Capital Guarantee if required. • Simple product/no ongoing reviews. • She has capital/£400,000 to purchase annuity/Peter can use his Power of Attorney.


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(b) Candidates would have gained full marks for any seven of the following: • Must exercise a duty of care/must act in her best interests/good faith. • Must carry out instructions in lasting power of attorney/Court of Protection. • Must not benefit himself. • Must avoid conflicts of interest. • Must keep her affairs confidential. • Must not delegate powers under Lasting Power of Attorney (LPA), unless stated in the

LPA. • Must keep records/accounts/dealings/tax returns/make reports. • Must not make gifts (unless in line with the Mental Capacity Act)/small gifts/normal

pattern of gifts. Model answer for Task 6 (a) • Income is taxable to Higher Rate Tax/32.5%. • Not in ISA/JISA/Capital Gains Tax may apply/28% Capital Gains Tax. • Peter could use his annual exemption for Capital Gains Tax but cannot use it elsewhere. • Not using Sue/daughters' allowances. • Volatility/fund could fall in value when fees are needed/fund unsuitable for short-term

investment. • Lack of diversification. • Funding/growth may be insufficient to meet the fees. • No protection is included. (b) Candidates would have gained full marks for any nine of the following: • Retains investment holdings/no immediate capital need. • Avoids poor market timing. • Can manage Capital Gains Tax liability/annual Capital Gains Tax exemptions. • Longer investment timeframe/time for funds to grow. • Investment returns may be sufficient to repay loan. • Loan not repaid until earnings threshold met. • Earnings threshold £25,000. • Could make early repayments without penalty. • If repay loan early no/reduced interest is paid. • Loan is written off after 30 years.


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Model answer for Task 7 (a) Candidates would have gained full marks for any twelve of the following: • Insufficient life cover in event of either death to maintain family standard of living/meet

future objectives/cover university fees/mortgage not fully covered. • Term of life policies do not match term of mortgage. • Potential shortfall on endowment at maturity. • Life policies not in trust/would fall into estate/delays/probate. • Family reliant on Peter’s income/Peter is main breadwinner. • Any State benefit entitlement is minimal. • No income protection for Peter. • No critical illness cover. • Private Medical Insurance does not cover daughters over age 18. • No business cover/Keyperson cover (for PSJ Components Ltd). • Company may not survive/affects profits/no guarantee of dividends/salary. • Nominations/spousal by pass not completed on pensions/Death-in-service. • Could use savings but this would impact on other objectives. (b) Candidates would have gained full marks for any fifteen of the following: • Income protection policy/Permanent Health Insurance. • Could be set up by employer/personal. • Family would be unable to maintain lifestyle if his salary were lost/he is main

breadwinner. • Maximum permitted benefit/50-75% of income. • Policy must cover dividend income. • As this is a significant portion of his income. • Policy should cover phased return to work/proportionate benefit. • Own occupation to offer widest possible cover. • Tax-free benefit if personal policy/tax deductible for employer. • Term to normal retirement date/60 for Peter to cover income until retirement. • Indexation to maintain real value of benefit/inflation-proofing. • Deferred period for minimum 3 months. • Sufficient savings to maintain lifestyle for 3 months/lower premiums. • Guaranteed premiums for known cost/ongoing affordability. • Policy will allow multiple claims/cannot be cancelled by insurer. • Critical illness cover – invest lump sum to provide income.


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(c) • Set up spousal bypass trust. • Discretionary trust. • Sue is a trustee. • Spousal bypass trust receives pension fund. • Sue has access if needed/is a beneficiary/can take capital or income. • Sue can take a loan. • Sue does not have to repay the loan until death. • Repayment of loan reduces her estate. • Value of Peter’s pension fund would remain outside Sue's estate on her death. • Sally and Amy receive their share of the trust/skips a generation/Sally and Amy can be

beneficiaries. Based on regulations in force for the 2018/2019 Tax Year, the following alternative answers

would have achieved marks: • Peter to nominate Sue as his beneficiary on his personal pension plans. • Sue can draw income or lump sums from Peter’s pension on his death/full access for

Sue. • On death of Peter before age 75, any withdrawals by Sue will be tax-free. • On death of Peter after age 75, any withdrawals by Sue will be taxed at her marginal rate

of tax. • Sue can nominate Sally and Amy as her successors on the pension plan. • On Sue’s death, the plan can pass to Sally and Amy. • There will be no Inheritance Tax due on the pension plan when it passes to Sally and

Amy. Model answer for Task 8 • Change in personal circumstances e.g. death/divorce/ill-health/change in objectives/

Inheritance/additional monies to invest. • Use of tax-efficient allowances/ISA/Capital Gains Tax/Pensions/year end planning. • Need/changes in income/expenditure/tax status – for family/Peter’s mother. • Sale of PSJ Components Ltd/change at PSJ Components Ltd. • Investment performance/rebalancing /change in attitude to risk. • Taxation/Legislation change. • Economic/market changes/new products.


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The Tax Tables which follow are applicable to the October 2018 and April 2019 examinations.


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INCOME TAX RATES OF TAX 2017/2018 2018/2019 Starting rate for savings* 0% 0% Basic rate 20% 20% Higher rate 40% 40% Additional rate 45% 45% Starting-rate limit £5,000* £5,000* Threshold of taxable income above which higher rate applies £33,500 £34,500 Threshold of taxable income above which additional rate applies £150,000 £150,000 Child benefit charge: 1% of benefit for every £100 of income over £50,000 £50,000 *not applicable if taxable non-savings income exceeds the starting rate band. Dividend Allowance £2,000 Dividend tax rates Basic rate 7.5% Higher rate 32.5% Additional rate 38.1% Trusts Standard rate band £1,000 Rate applicable to trusts

- dividends 38.1% - other income 45%

MAIN PERSONAL ALLOWANCES AND RELIEFS Income limit for Personal Allowance § £100,000 £100,000 Personal Allowance (basic) £11,500 £11,850 Married/civil partners (minimum) at 10% † £3,260 £3,360 Married/civil partners at 10% † £8,445 £8,695 Transferable tax allowance for married couples/civil partners £1,150 £1,190 Income limit for Married couple’s allowance† £28,000 £28,900 Rent a Room relief £7,500 £7,500 Blind Person’s Allowance £2,320 £2,390 Enterprise Investment Scheme relief limit on £1,000,000 max** 30% 30% Seed Enterprise Investment relief limit on £100,000 max 50% 50% Venture Capital Trust relief limit on £200,000 max 30% 30% § the Personal Allowance reduces by £1 for every £2 of income above the income limit irrespective of age (under the income threshold). † where at least one spouse/civil partner was born before 6 April 1935. ** maximum for ‘standard’ investment but for ‘knowledge intensive’ investment, the limit is £2,000,000. Child Tax Credit (CTC)

- Child element per child (maximum) £2,780 £2,780 - family element £545 £545

Threshold for tapered withdrawal of CTC £16,105 £16,105


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NATIONAL INSURANCE CONTRIBUTIONS Class 1 Employee Weekly Lower Earnings Limit (LEL) £116 Primary threshold £162 Upper Earnings Limit (UEL) £892 Total earnings £ per week CLASS 1 EMPLOYEE CONTRIBUTIONS Up to 162.00* Nil 162.01 – 892.00 12% Above 892.00 2% *This is the primary threshold below which no NI contributions are payable. However, the lower earnings limit is £116 per week. This £116 to £162 band is a zero-rate band introduced in order to protect lower earners’ rights to contributory State benefits e.g. the new State Pension. Total earnings £ per week CLASS 1 EMPLOYER CONTRIBUTIONS Below 162.00** Nil 162.01 – 892 13.8% Excess over 892.00 13.8% ** Secondary earnings threshold. Class 2 (self-employed) Flat rate per week £2.95 where profits exceed £6,205 per annum. Class 3 (voluntary) Flat rate per week £14.65. Class 4 (self-employed) 9% on profits between £8,424 - £46,350.

2% on profits above £46,350.


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PENSIONS TAX YEAR LIFETIME ALLOWANCE 2006/2007 £1,500,000 2007/2008 £1,600,000 2008/2009 £1,650,000 2009/2010 £1,750,000 2010/2011 £1,800,000 2011/2012 £1,800,000 2012/2013 £1,500,000 2013/2014 £1,500,000 2014/2015 £1,250,000 2015/2016 £1,250,000 2016/2017 £1,000,000 2017/2018 £1,000,000 2018/2019 £1,030,000

LIFETIME ALLOWANCE CHARGE 55% of excess over lifetime allowance if taken as a lump sum. 25% of excess over lifetime allowance if taken in the form of income, which is subsequently taxed under PAYE. ANNUAL ALLOWANCE

TAX YEAR ANNUAL ALLOWANCE 2011/2012 £50,000 2012/2013 £50,000 2013/2014 £50,000 2014/2015 £40,000 2015/2016 £40,000~ 2016/2017 £40,000* 2017/2018 £40,000* 2018/2019 £40,000*

~ increased to £80,000 for pension input between April - 8 July 2015. If not used, can be carried forward to pension input period of 9 July 2015 - 6 April 2016, subject to a maximum of £40,000. *tapered at a rate of £1 for every £2 of adjusted income in excess of £150,000 where threshold income exceeds £110,000. MONEY PURCHASE ANNUAL ALLOWANCE 2017/2018 2018/2019 £4,000 £4,000 ANNUAL ALLOWANCE CHARGE 20% - 45% determined by the member’s taxable income and the amount of total pension input in excess of the annual allowance or money purchase annual allowance.


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CAPITAL GAINS TAX EXEMPTIONS 2017/2018 2018/2019 Individuals, estates etc £11,300 £11,700 Trusts generally £5,650 £5,850 Chattels proceeds (restricted to five thirds of proceeds exceeding limit) £6,000 £6,000

TAX RATES Individuals: Up to basic rate limit 10% 10% Above basic rate limit 20% 20% Surcharge for residential property and carried interest 8% 8% Trustees and Personal Representatives 20% 20% Entrepreneurs’ Relief* – Gains taxed at: 10% 10% Lifetime limit £10,000,000 £10,000,000 *For trading businesses and companies (minimum 5% employee or director shareholding) held for at least one year.


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INHERITANCE TAX RATES OF TAX ON TRANSFERS 2017/2018 2018/2019 Transfers made on death after 5 April 2015

- Up to £325,000 Nil Nil - Excess over £325,000 40% 40%

Transfers made after 5 April 2015

- Lifetime transfers to and from certain trusts 20% 20% A lower rate of 36% applies where at least 10% of deceased’s net estate is left to a registered charity. MAIN EXEMPTIONS Transfers to

- UK-domiciled spouse/civil partner No limit No limit - non-UK-domiciled spouse/civil partner (from UK-domiciled spouse) £325,000 £325,000 - main residence nil rate band* £100,000 £125,000 - UK-registered charities No limit No limit

*Available for estates up to £2,000,000 and then tapered at the rate of £1 for every £2 in excess until fully extinguished Lifetime transfers

- Annual exemption per donor £3,000 £3,000 - Small gifts exemption £250 £250

Wedding/civil partnership gifts by

- parent £5,000 £5,000 - grandparent/bride and/or groom £2,500 £2,500 - other person £1,000 £1,000

100% relief: businesses, unlisted/AIM companies, certain farmland/building 50% relief: certain other business assets Reduced tax charge on gifts within 7 years of death:

- Years before death 0-3 3-4 4-5 5-6 6-7 - Inheritance Tax payable 100% 80% 60% 40% 20%

Quick succession relief: - Years since IHT paid 0-1 1-2 2-3 3-4 4-5 - Inheritance Tax relief 100% 80% 60% 40% 20%


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CAR BENEFIT FOR EMPLOYEES The charge for company car benefits is based on the carbon dioxide (CO2) emissions. There is no reduction for high business mileage users. For 2018/2019: • The percentage charge is 13% of the car’s list price for CO2 emissions of 50g/km or less. • For cars with CO2 emissions of 51g/km to 75g/km the percentage is 16%. • For cars with CO2 emissions of 76g/km to 94g/km the percentage is 19%. • Cars with CO2 emissions of 95g/km have a percentage charge of 20% and thereafter the charge

increases by 1% for every complete 5g/km to a maximum of 37% (emissions of 190g/km and above).

There is an additional 4% supplement for diesel cars not meeting Euro IV emission standards. However, the maximum charge remains 37% of the car’s list price. Car fuel The benefit is calculated as the CO2 emissions % relevant to the car and that % applied

to a set figure (£23,400 for 2018/2019) e.g. car emission 90g/km = 19% on car benefit scale. 19% of £23,400 = £4,446.

1. Accessories are, in most cases, included in the list price on which the benefit is calculated. 2. List price is reduced for capital contributions made by the employee up to £5,000. 3. Car benefit is reduced by the amount of employee’s contributions towards running costs. 4. Fuel scale is reduced only if the employee makes good all the fuel used for private journeys. 5. All car and fuel benefits are subject to employers National Insurance contribution’s

(Class 1A) of 13.8%.

PRIVATE VEHICLES USED FOR WORK 2017/2018 Rates 2018/2019 Rates Cars On the first 10,000 business miles in tax year 45p per mile 45p per mile Each business mile above 10,000 business miles 25p per mile 25p per mile Motor Cycles 24p per mile 24p per mile Bicycles 20p per mile 20p per mile


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MAIN CAPITAL AND OTHER ALLOWANCES 2017/2018 2018/2019 Plant & machinery (excluding cars) 100% annual investment allowance (first year)

£200,000

£200,000

Plant & machinery (reducing balance) per annum 18% 18% Patent rights & know-how (reducing balance) per annum 25% 25% Certain long-life assets, integral features of buildings (reducing balance) per annum

8%

8%

Energy & water-efficient equipment 100% 100% Zero emission goods vehicles (new) 100% 100% Qualifying flat conversions, business premises & renovations 100% 100% Motor cars: Expenditure on or after 01 April 2016 (Corporation Tax) or 06 April 2016 (Income Tax) CO2 emissions of g/km: 50 or less* 51-110 111 or more Capital allowance: 100% 18% 8% first year reducing balance reducing balance *If new


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MAIN SOCIAL SECURITY BENEFITS 2017/2018 2018/2019 £ £ Child Benefit First child 20.70 20.70 Subsequent children 13.70 13.70 Guardian’s allowance 16.70 17.20 Employment and Support Allowance

Assessment Phase

Age 16 – 24 Up to 57.90 Up to 57.90 Aged 25 or over Up to 73.10 Up to 73.10 Main Phase Work Related Activity Group Up to 102.15 Up to 102.15 Support Group Up to 109.65 Up to 110.75 Attendance Allowance Lower rate 55.65 57.30 Higher rate 83.10 85.60 basic State Pension Single 122.30 125.95 Married 195.60 201.45 new State Pension Single 159.55 164.35 Pension Credit Single person standard minimum

guarantee

159.35

163.00 Married couple standard minimum

guarantee

243.25

248.80 Maximum savings ignored in

calculating income

10,000.00

10,000.00 Bereavement Payment* 2,000.00 2,000.00 Bereavement Support Payment**

Higher rate - First payment 3,500.00 3,500.00 Higher rate - monthly payment 350.00 350.00

Lower rate – First payment 2,500.00 2,500.00 Lower rate – monthly payment 100.00 100.00 Jobseekers Allowance Age 18 - 24 57.90 57.90 Age 25 or over 73.10 73.10 Statutory Maternity, Paternity and Adoption Pay

140.98

145.18

*Only applicable where spouse or civil partner died before 6 April 2017. ** Only applicable where spouse or civil partner died on or after 6 April 2017.


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CORPORATION TAX 2017/2018 2018/2019 Standard rate 19% 19%

VALUE ADDED TAX 2017/2018 2018/2019 Standard rate 20% 20% Annual registration threshold £85,000 £85,000 Deregistration threshold £83,000 £83,000

STAMP DUTY LAND TAX Residential Value up to £125,000 0% £125,001 - £250,000 2% £250,001 and £925,000 5% £925,001 and £1,500,000 10% £1,500,001 and over 12% Stamp Duty Land Tax (SDLT) is payable in England and Northern Ireland only. Land Transaction Tax (LTT) is payable in Wales and Land and Buildings Transaction Tax (LBTT) is payable in Scotland. The rates for LTT and LBTT are different to the rates shown above. Additional SDLT of 3% may apply to the purchase of additional residential properties purchased for £40,000 or greater. SDLT is charged at 15% on interests in residential dwellings costing more than £500,000 purchased by certain corporate bodies or non-natural persons. First-time buyers benefit from SDLT relief on purchases up to £500,000 when purchasing their main residence. On purchases up to £300,000, no SDLT is payable. On purchases between £300,000 and £500,000, a flat rate of 5% is charged on the balance above £300,000.