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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.
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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.