Advanced Diploma in Financial Planning Practice Test 1 · AF5 . Advanced Diploma in Financial Planning . Practice Test 1 . Unit AF5 – Financial planning process . 2018-2019 Revision

AF5 Advanced Diploma in Financial Planning Practice Test 1 Unit AF5 – Financial planning process 2018-2019 Revision Aid Based on April 2014 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 1 2018-2019 Revision Aid

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AF5 – Financial planning process Contents Fact Find 3

Question paper 14

Model answers 20

Tax tables 29

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 Act (FSMA) 2000. You completed the following fact-find when you met Mr Cole and Miss Bennett recently.

PART 1: BASIC DETAILS Client 1 Client 2 Surname Cole Bennett First name(s) Mark Kim Address 2 Broadway, Skegness 2 Broadway, Skegness Date of birth 21.07.1965 10.07.1972 Domicile UK UK Residence UK UK Place of birth UK UK Marital status Divorced Single State of health Good Good Family health Good Good Smoker No No Hobbies/Interests Windsurfing Horse riding Notes:

Mark and Kim have lived together for five years.

PART 2: FAMILY DETAILS Children and other dependants

Name Relationship Age D.O.B Health Occupation Financially dependent?

Noel Son 13 24.12.2000 Good N/A Yes Holly Daughter 13 24.12.2000 Good N/A Yes

Notes: Mark has twin children, Noel and Holly, from his previous marriage. They live with their mother. Mark will pay maintenance of £1,480 a month in total until they are age 18. The twins both attend their local comprehensive school. Mark would like Noel and Holly to attend university. Kim has no financial dependants.

AF5 - FINANCIAL PLANNING PROCESS

FACT-FIND – Practice Test 1


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PART 3: EMPLOYMENT DETAILS

Client 1 Client 2 Employment Occupation Director Marketing Consultant Job title Sales Director Proprietor Business name ASF Ltd KB Marketing Business address Lincoln Skegness Year business started 1988 2005 Remuneration Salary £60,000 Nil Dividends £22,222 Nil State Pensions Nil Nil Overtime N/A Nil Benefits Benefits-in-kind No No Pension Scheme (see part 11) Yes Yes Life cover No No Private medical insurance No Yes Income Protection Insurance No Yes Self Employment Net relevant earnings N/A £55,000 Accounting year N/A 1 January to 31 December Partnership/Sole trader N/A Sole Trader Other Earned Income Notes:

Mark has a 60% shareholding in his company. There are two other shareholders. He has specialist knowledge in the company who rely on him as their main sales person. In the accounting year ending 31 December 2013 Kim’s profits after expenses but before tax (net profits) amounted to £55,000.

Client 1 Client 2 Previous Employment Previous employer N/A EZRB Design Job title Marketing Assistant Length of service 10 years Pension benefits (see part 11) No Notes:


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PART 4: OTHER PROFESSIONAL ADVISERS

Client 1 Client 2

Accountant Adam Grey & Co Adam Grey & Co Bank BNM BNM Building Society Skegness Building Society Skegness Building Society Doctor Dr Foster Dr Klein Estate Agent Financial Adviser Insurance Agent Solicitor Stockbroker Patterson Mayer Other Notes: PART 5: INCOME AND EXPENDITURE Income

Client 1 Client 2 Joint Monthly

£ Annually

£ Monthly

£ Annually

£ Monthly

£ Annually

£ State Pensions Private Pensions Salary 5,000 Benefits-in-kind Investment income (gross) 520 250 Rental (gross) Dividend 22,222

Notes: The investment income is derived from Mark and Kim’s cash deposits.

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 1,088 Council tax 190 Buildings and contents insurance 600 Gas, water and electricity 140 Telephone 50 TV licence and satellite 55 Property maintenance 1,200 Regular Outgoings Life assurance (see part 8) 48 39 Health insurance (see part 9) 70 Savings Plans (see part 10) 100 Car tax, insurance and maintenance 2,100 1,700 Petrol and fares Loans Hire purchase School fees Childcare/Maintenance 1,480 Further education Subscriptions Food, drink, general housekeeping 680 Pension contributions (see part 11) 300 100 Other Expenditure Magazines and newspapers Entertainment Clubs and sport 900 1,800 Spending money 500 Clothes 480 980 Other (Holidays) 3,000 Total Monthly Expenditure 1,928 170 2,742 Total Annual Expenditure 23,136 2,040 32,904 3,480 4,480 4,800 Total Outgoings 70,840

Notes: Kim wants to increase her pension contributions and would also like to start saving a total of £250 per month to help towards Noel and Holly’s university expenses.

Do you foresee any major/lump sum expenditure in the next two years?

Notes: No.


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PART 6: ASSETS

Asset Client 1 £

Client 2 £

Joint £

Income (Gross) £

1. Main residence 480,000 2. Contents/car 25,000 10,000 3. Current account – BNM bank 1,000 1,000 2,000 4. Easy Access Savings Account – BNM bank 152,000 25,000 770 p.a. 5. Individual share portfolio 75,000 6. Stocks & Shares ISAs 56,000 38,000 7. Unit Trust 6,000 8. Shares in ASF Ltd 100,000 22,222 p.a.

Notes:

The main residence is owned as tenants-in-common. Kim holds sufficient money in her savings account to cover her Income Tax and National Insurance contribution payments. Mark sold a large part of his share portfolio in January 2014 which realised a taxable gain of £100,000. Mark’s remaining share portfolio is invested mainly in AIM shares. Mark’s and Kim’s Stocks and Shares ISAs are invested in UK Growth funds. Mark’s Unit Trust is invested in a UK Tracker fund. Mark’s accountant has advised him that his shares in ASF Ltd are worth approximately £100,000.


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PART 7: LIABILITIES

Mortgage Details Client 1 Client 2 Joint Lender Skegness Building Society Type of mortgage Repayment Amount outstanding £205,000 Start date July 2012 Term/maturity 20 years Monthly payment £1,088 Interest rate Tracker Life policies (see part 8) (see part 8)

Notes: The mortgage rate tracks the Bank of England base rate plus 2% for the term of the mortgage.

Other Loans Client 1 Client 2 Joint

Lender Type of loan Amount outstanding Start date Term/maturity Monthly payment Interest rate Payment protection

Notes: Mark and Kim do not have any loans. Other Liabilities (e.g. tax) Notes: Mark has to pay Capital Gains Tax on the gain realised from the partial sale of his share portfolio. Kim has to pay her self-employed Income Tax and National Insurance contributions.


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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 205,000 39 p.m. 20 years 2012 No N/A 2. Mark Mark 100,000 48 p.m. 13 years 2007 No N/A

Notes:

Mark and Kim took out a joint life first death decreasing term policy to cover their mortgage. Mark also has a single life plan for £100,000 life and critical illness policy payable on first event to provide cover for his twins.

PART 9: HEALTH INSURANCE POLICIES

Type Life Covered

Current Sum Assured £ Start Date Term/

Review Deferred

Period Premium

£ Income Protection Insurance

Kim 12,000 p.a. 2008 Age 60 4 weeks 40 p.m.

Private Medical Insurance

Kim 2008 30 p.m.

Notes:

Mark also has a combined life and critical illness policy (see part 8). Kim’s income protection insurance policy provides a level benefit of £1,000 per month. The policy is set up on an any occupation basis.


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PART 10: REGULAR SAVINGS

Type Company Ownership Fund Amount Saved

£

Sum Assured

Maturity Date

Current Value

£ Unit trust BNM bank Mark UK Tracker 4,800 N/A N/A 6,000 Notes:

Mark is saving £100 per month into a plan via BNM bank to save towards his children’s university costs. PART 11: PENSION DETAILS

Occupational pension scheme

Client 1 Client 2

Member of employer’s scheme Yes Type of scheme Group Personal Pension Date joined 1990 Retirement age 65 Pension benefits Defined contribution Death benefits Return of Fund Dependant’s benefits None Contracted-in/out In Contribution Level (employee) 7.5% of basic salary Contribution Level (employer) 15% of basic salary Fund type Adventurous Managed Fund value £318,000 Notes: Mark has not completed an expression of wish form. Additional Voluntary Contributions (including free standing additional voluntary contributions).

Client 1 Client 2

Type Company Fund Contribution Retirement date Current value Date started Notes:

Mark and Kim do not have any Additional Voluntary Contribution schemes.


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Personal Pensions

Client 1 Client 2 Type Personal Pension Company UN Life Fund Balanced Lifestyle Contributions £100 net p.m. Retirement age 65 Current value £11,500 Date started 2007

Notes: Kim has not completed an expression of wish form. Previous pension arrangements

Client 1 Client 2

Employer Type of scheme Date joined scheme Date left Preserved benefits

Notes: Mark and Kim do not have any previous pension agreements. State Pension

Client 1 Client 2

State pension SERPS/S2P Graduated pension Total Notes Mark and Kim do not know their entitlement to State Pensions.


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PART 12: INHERITANCES

Wills Client 1 Client 2 Do you have a current Will? No No

Notes:

Mark and Kim have not made Wills. Mark wants to ensure that Kim and his two children are financially secure in the event of his death. He would also like Kim to be able to remain in their home for her lifetime.

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

Notes: Mark and Kim have not made any gifts.

Inheritances Client 1 Client 2 Give details of any inheritances received or expected None None

Notes:

Mark and Kim have not received any inheritances and do not expect to receive any in the future.


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PART 13: ATTITUDE TO RISK

What level of risk are you prepared to take to achieve your financial objectives?

Notes: Mark has a speculative attitude to risk. Kim has a medium attitude to risk.

PART 14: BUSINESS RECORDS

Compliance Date fact-find completed 19.03.2014 Client agreement issued 19.03.2014 Data Protection Act 19.03.2014 Money laundering 19.03.2014 Consultations Dates of meetings Marketing Client source 19.03.2014 Referrals Documents Client documents held Date returned Letters of authority requested

Notes:

PART 15: OTHER INFORMATION


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AF5 Advanced Diploma in Financial Planning Practice Test 1 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 invest a sum of £100,000 from the money Mark holds in BNM bank to provide

tax-efficient growth. • For Kim to save money on a regular basis for Mark’s children to help towards their university

funding. • To provide financial security for Mark and Kim in the event of death or illness. Longer-term objectives • To provide adequate income in retirement for Kim. • To ensure that Mark’s estate passes to his intended beneficiaries. • To provide business protection cover for Mark’s company in the event of him suffering a

serious illness.


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Attempt ALL tasks

Time: 3 hours

1. State four benefits and four drawbacks to Mark and Kim if they pay adviser fees

for the initial and ongoing service:

(a) on an hourly cost basis; (8) (b) as a fund-based fee. (8) 2. Identify the additional information you would need to discuss with Mark and Kim

in order to advise them on how to meet their:

(a) immediate financial objectives; (15)

(b) longer-term financial objectives. (15)

3. Mark would like to know more about the risks associated with investments. Identify the relevant investment risks, excluding market risk, and describe how

they apply to the following:

(a) his cash deposits held within the BNM bank; (6) (b) his AIM shares. (10) 4. Mark and Kim are concerned about the impact that long-term illness or death will

have on their financial situation.

(a) Comment on Mark’s current situation and identify any weaknesses in his

existing protection arrangements if he were to die or suffer a critical illness.

(12) (b) Comment on Kim’s current situation and identify any weaknesses in her

existing income protection insurance policy if she was to suffer a long-term illness or disability.

(10)


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5. Kim is considering increasing her personal pension contributions and would like

to know more about how her existing personal pension plan works.

(a) Describe the process an adviser could use to ensure there are sufficient

funds under Kim’s existing personal pension policy to provide her required level of target benefits at her normal retirement date.

(8) (b) Identify eight drawbacks of Kim using her current balanced lifestyle fund. (8) 6. With regard to Mark and Kim’s immediate financial objectives: Candidates will be rewarded for supporting their recommendations with relevant

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

(a) Recommend and justify why an Enterprise Investment Scheme (EIS) may

be a suitable investment for Mark in respect his of current circumstances and financial objectives. (16)

(b) Recommend and justify a suitable and tax-efficient investment for the

regular savings of £250 per month that Kim would like to invest for Noel and Holly’s university education. Kim wants any new investment to be in each child’s name and not held in trust. (8)


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7. With regard to Mark and Kim’s longer-term financial objectives: Candidates will be rewarded for supporting their recommendations with relevant

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

(a) Recommend and justify the actions Mark could take to ensure that his

estate passes to his intended beneficiaries at the time of his death. Assume that no further investments or protection policies are to be taken out by Mark. (16)

(b) Recommend and justify a suitable protection policy to provide business

protection cover for Mark’s company in the event of him suffering a critical illness.

(8)

8. (a) Identify six factors that should be taken into account at future reviews for

Kim’s income protection cover.

(6) (b) Explain briefly to Mark and Kim why they should have regular review

meetings with their adviser.

(6) Total marks available: 160


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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) Benefits – Hourly cost basis • Familiar or same as other professions. • Easy to understand, compare or transparent. • Based on actual work undertaken, amount invested is irrelevant or cheaper for larger

sums. • Fee cap can apply. Drawbacks – Hourly cost basis • Perceived as inefficient or possibly ‘run up the clock’. • May put off clients making contact or asking for advice. • Paid from personal funds, net earnings or write a cheque. • Unknown total cost.

(b) Benefits – Fund-based fee • Negotiate lower fees for larger investments. • Payment via provider or not from personal funds. • Incentive to grow funds. • Attractive for lower amounts or lower fees for lower amounts. Drawbacks – Fund-based fee • Difficult to predict year to year. • May not be in line with service provided, not reflecting time spent or larger portfolios

not generally harder to administer. • Extra charges may apply for other services. • Reduces potential investment growth or taken from tax efficient investment i.e. ISA/

Personal Pension Plan.


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Model answer for Task 2 (a) Candidates would have gained full marks for any fifteen of the following: To invest a sum of £100,000 from the money Mark holds in BNM bank to provide

tax-efficient growth. • End purpose of investment or planned use of funds. • Timescale. • Need for access, amount to cover Capital Gains Tax liability or reduce mortgage. • Have current year’s ISA allowances been used? For Kim to save money on a regular basis for Mark’s children to help towards their

university funding. • Cost of fees or target amount? • Duration or timing. • Unused JISA allowance. To provide financial security for Mark and Kim in the event of death or illness. • Level of income, capital required and for how long. • Adverse underwriting, exclusions to existing cover or hobbies. • Level of State Benefits. • Value of and what happens to Mark’s shares and Kim’s business on death? • Can ASF Ltd arrange further protection benefits, continued salary from ASF Ltd or

continued earnings for Kim? • Willingness to use other assets, savings or downsize. • Willingness to make Wills, nominate beneficiaries, use trusts or get married. • Attitude to risk or capacity for loss. • Budget or affordability. • Ownership of assets.


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(b) To provide adequate income in retirement for Kim. • When Kim wants to retire and level of income required? • State Pension forecast/BR19. • Specific policy details e.g. waiver of premium (WOP), funds, charges, projection or

benefit statement for existing pension plans. • Willingness to use other assets, sale of business or downsizing. To ensure that Mark’s estate passes to his intended beneficiaries. • Who/how benefits should be split? • Willingness to set up Wills or marital plans. • Percentage split of home. • Willingness to use trusts, put existing policies under trust or complete nominations for

pensions. • Willingness to make lifetime gifts use gifting allowances. To provide business protection cover for Mark’s company in the event of him suffering a

serious illness. • Cover and term required. • Valuation basis for level of cover/multiple of earnings/multiple of profit/cost of

replacement/impact on profits. • Company liabilities/debts/business relief (BR)/Inheritance Tax (IHT) may be removed/

reduced. • Any existing cover/shareholder agreements. • Attitude to risk (ATR) or capacity for loss. • Budget/affordability. Model answer for Task 3 (a) • Inflation. • Spending power may be eroded over time or real value eroded. • Credit, default or provider risk. • If BNM bank becomes insolvent only the first £85,000 of Mark’s money is protected. • Interest rate or reinvestment. • Rates could fall or remain low.


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(b) Candidates would have gained full marks for any ten of the following: • Liquidity. • May be difficult to sell/thinly traded/lower trading volumes. • Diversification. • Invested in individual/small companies/not collectives/single asset class. • Unsystematic /specific. • Company failure/poor company performance. • Event. • Value may be affected by a specific event. • Regulatory. • Lower regulation/reporting requirements/greater risk of misrepresentation/fraud/low

level of governance. • Taxation/legislation. • Business property relief may be removed or reduced. Model answer for Task 4 (a) • Sufficient cover to repay mortgage or benefit paid to Kim. • Not covered for critical illness. • Mark’s existing life & critical illness policy is not under trust so proceeds will be paid into

his estate, possible delays or not paid to intended beneficiary. • Potential inheritance tax (IHT) liability. • Intestacy applies, children are likely to inherit Mark’s estate, and Kim not included or no

Will. • Policy term may not match children’s dependency. • ASF Ltd does not provide any cover or no business protection. • No guarantee salary/dividends will continue. • Return of fund under group personal pension. • Nomination/trust forms not completed/payable at trustee’s discretion/possible delay. • Shortfall/standard of living will be affected. • He has no income protection insurance and may have to use savings/private medical

insurance (PMI) and is reliant on NHS/delays.


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(b) Candidates would have gained full marks for any ten of the following: • Provides tax-free benefit of £1,000 per month/£12,000 per annum. • Insufficient cover/unable to maintain standard of living/her income would cease. • Written to age 60 and does not match normal retirement date/state pension age. • Level benefit/not indexed and will lose spending power/not keep up with inflation. • Deferred period of four weeks. • Has sufficient savings for longer deferred period/no need to deplete her savings. • Any occupation does not provide widest level of cover/own occupation provides better

cover. • Allows multiple claims/cannot be cancelled by insurer. • Clarify premiums e.g. reviewable or guaranteed. • May be entitled to State benefits. • She has private medical insurance enabling speedy return to work/greater choice. • She has no critical illness cover to fund lifestyle changes/repay mortgage. Model answer for Task 5 (a) • Establish income required/target benefits. • Allowing for inflation; • calculate fund required based on assumed/agreed annuity rate. • Allowing for Pension Commencement Lump Sum requirements. • Calculate existing benefits at normal retirement date (NRD) using assumed or agreed

growth rate. • Include ongoing/existing contributions/current funding. • Calculate shortfall in overall fund and increased contributions required. • Ongoing reviews required. (b) • May not retire at normal retirement date. • Market timing may not be suitable. • Loss of potential growth or may underperform as not in equities. • No equity investment at normal retirement date. • May not suit attitude to risk. • Assumes annuity purchase. • Not suitable for drawdown or phased retirement. • Inflexible switching between funds, automatically occurs or predetermined asset

allocation.


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Model answer for Task 6 (a) Candidates would have gained full marks for any sixteen of the following: Capital Gains Tax • Can defer Capital Gains Tax liability on gains arising. • In previous 3 years (or up to 1 year after investment in EIS). • Invest £100,000 to defer full Capital Gains Tax liability. • No Capital Gains Tax on any EIS gains. • If held for three years/no minimum holding period for SEIS. • No Capital Gains Tax on death. Income Tax • 30%/50% income tax relief on contributions/tax reducer. • Carry back part of the contribution to previous year. • To maximise income tax relief. • Relief is restricted to amount of tax paid. • Relief clawed back if not held for three years. • Any losses on encashment can be offset against income. IHT • 100% Inheritance Tax/business relief. • After two years. • If held at time of death. Suitability • Suits his attitude to risk. • Tax-efficient growth or use of future Capital Gains Tax exemption. (b) Candidates would have gained full marks for any eight of the following: • Junior ISA/JISA for each child. • As ineligible for Child Trust Fund/born before September 2002. • Funding within ISA limits/up to £4,260. • Amount within inheritance tax annual gift exemption. • Full ISA, accessible at the age of 18. • Income is tax free/no Capital Gains Tax/tax-free. • Parental settlement rule does not apply/Mark would have to set up JISA. • Wide investment choice/Mark and Kim control investments to age 16. • Flexibility to vary contributions/other people can contribute.


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Model answer for Task 7 (a) • Set up a Will. • Avoids intestacy/estate distributed as per his wishes/to include Kim. • Otherwise no provision for Kim/only the children benefit. • Complete nomination form for his personal pension/individual trust could be set

up/spousal bypass. • To instruct the trustees who he would like the benefits to be paid to/avoid delays. • Use split trust for existing Life and Critical Illness policy. • Benefits paid to Mark in event of Critical Illness claim and beneficiaries on death/avoids

delay of probate. • Trust is set up via Will. • Interest in possession/life interest trust/immediate post-death interest trust. • Mark’s share of the house owned by the trust. • Kim has the right to live in the house/as the life tenant/for the remainder of her life. • Mark’s children are the remaindermen. • Receive their share of the house on Kim’s subsequent death. • Consider use of Residential Nil Rate Band by leaving share of home directly to Mark’s

children/direct descendants. • Set up shareholder agreement for his ASF Ltd shares. (b) Keyperson Cover: • Critical illness policy to replace loss of profits/allows salary and dividends to continue; • company is the policy holder and Mark is life assured; • written to normal retirement date (NRD)/whole of life (WOL)/renewable term; • sum assured £100,000+/multiple of salary/profits; • indexation to account for business growth/inflation; • TPD benefit to apply on own occupation; • waiver of premium (WOP) benefit to ensure premiums continues in the event of Mark’s

incapacity; • premiums paid by company so does not affect Mark’s surplus income/it is a non-taxable

benefit/not a benefit in kind. Alternative answer: Share Purchase Cover: • Critical Illness policy to provide funds to buy shares. • Own life policy in trust. • Written to normal retirement date (NRD)/whole of life (WOL)/renewable term. • Sum assured to cover share value. • Indexation to account for business growth/inflation. • TPD benefit to apply on own occupation. • Waiver of premium (WOP) benefit to ensure premiums continues in the event of Mark’s

incapacity. • Single option agreement.


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Model answer for Task 8 (a) • Her earnings/affordability/expenditure. • Change in employment status. • Change in state benefits. • Period of incapacity before benefit would need to become payable/capital available. • Change in retirement date. • Change in personal circumstances e.g. health, marital status etc. (b) • React to changes in clients’ circumstances/priorities/attitude to risk/tax status. • React to changes in legislation/tax. • React to new products. • Ensure use of tax allowances. • Reinforce client relationship/forms part of service agreement. • Ensure plans are on track/react to market/economic changes/rebalancing/asset

allocation/performance.


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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.