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Chapter 3 Flashcards

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1
Q

How does the law treat a sole trader?

A

The law and tax system do not distinguish between the individual and the business.

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2
Q

How do self-employed individuals (sole traders) pay taxes?

A

They pay tax twice a year and are liable for either Class 2 or Class 4 National Insurance Contributions (NIC) depending on their profits.

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3
Q

When are Class 2 and Class 4 NIC paid by sole traders?

A

Class 4 have to be paid when profits are over £12,570. Class 2 is considered paid when profits are over £6,725. Sole traders can pay voluntary class 2 below this

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4
Q

How do employees of sole traders pay tax?

A

Class 1 NIC through income tax with PAYE

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5
Q

How are partnerships taxed?

A

Partners are treated as individuals for tax and legal purposes, and pay income pay based on their share of profit

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6
Q

How are individuals in a partnership liable for debts?

A

A partner is liable for the partnerships debts, but not the other partners taxes

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7
Q

What is an LLP?

A

An Limited Liability Partnership is a separate legal person where partners are not individually liable for the LLP’s debts but follow the same tax rules as partnerships.

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8
Q

What is an LTD?

A

A Limited Company is a business with a separate legal identity from its owners. The company, not the owners, pays tax, including corporation tax on profits and capital gains.

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9
Q

What must a Limited Company do to operate legally?

A

Register with the Registrar of Companies and provide specific information, including yearly accounts.

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10
Q

How are owners of a Limited Company taxed?

A

As “office holders,” they are taxed like employees with NIC Class 1 liabilities on an annual cumulative basis.

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11
Q

What distinguishes a Public Limited Company (PLC) from an Ltd?

A

PLCs can trade shares on the stock exchange and have additional requirements like shareholder meetings and stricter disclosure rules.

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12
Q

What are the minimum requirements for a PLC?

A

At least 2 directors,
2 shareholders,
Company secretary.
Name must end in PLC.
Certification from the Registrar of Companies Shares worth at least £50,000
At least 25% of nominal value plus any premium received.

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13
Q

What are the qualifications for a PLC secretary?

A

The secretary must be a member of a professional body or otherwise qualified.

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14
Q

What are the reporting and disclosure requirements for PLCs?

A
  1. Annual Shareholder Meetings 2. Accounts and Reports Shared Annually 3. Accounts filed within 6 months of the end of the accounting period 4. Disclosure of shareholdings and any information that might affect share price
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15
Q

What is an ordinary power of attorney?

A

It grants power to the attorney only while the donor is mentally capable.

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16
Q

When is power of attorney revoked? (4)

A

Death, Bankruptcy, Expiry of Specific Time, Donor Cancellation

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17
Q

What was introduced by the Enduring Power of Attorney Act 1985?

A

The ability for attorney powers to continue after the donor loses mental capacity.

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18
Q

When must an EPA be registered with the Office of the Public Guardian (OPG)?

A

When the attorney believes the donor has lost, or is beginning to lose, mental capacity.

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19
Q

What is the difference between an Enduring Power of Attorney and a Lasting Power of Attorney?

A

EPA only makes decisions on property and financial matters. An LPA, introduced in 2007, also covers health and welfare decisions. Gifts can be made by an LPA if the gift is of a reasonable value on birthdays or christmas, or the gift is to a charity

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20
Q

What happens if no valid EPA or LPA exists for a person who lacks capacity?

A

The Court of Protection (COP) can appoint a duty of care.

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21
Q

What are the 3 basic requirements for a contract to be binding?

A
  1. Offer and acceptance. 2. Intention to create a legally binding contract. 3. Consideration (both parties exchange something of value).
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22
Q

What 2 additional requirements are there for life assurance contracts to be binding?

A

Goof faith and Insurable interest

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23
Q

What are the 3 types of contract for minors?

A
  1. Binding (employment) 2. Binding unless repudiated (leases) 3. Non-binding (binding for the other party but not the minor)
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24
Q

How are people with mental health conditions, and those under the unfluence of drugs and alcohol restricted in their capacity to contract? (2)

A
  1. They can make contracts, but it is invaild if the other party knew they were unable to understand the agreement. 2. They can ratify a previously unbinding contract if they recover from their condition
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25
In life assurance, what is the process of offer and acceptance?
1. Client submits a form (offer) 2. Life office issues a letter of acceptance 3. Client officially accepts when the first premium is paid, or DD is set up
26
How long is the cooling off period for life assurance policies
30 days
27
What is the definition of agency?
Agency is a contract where one party (the agent) agrees to act on behalf of another party (the principal).
28
What is an example of agency in financial services, and what are the responsibilities in this case?
A client using an Independent Financial Advisor (IFA) to find insurance. The IFA is the agent and has a duty of care to the client. However the client is responsible for the acts of the IFA
29
What happens if an IFA fails to disclose important information to an insurer?
There is a non-disclosure, and the insurance contract is not valid.
30
What is the role of a representative of an insurance company?
They are an agent of the insurer and are responsible for omissions (Contract remains valid)
31
What are the two main types of property ownership?
Freehold: Owner owns building and land Leasehold: The land is not owner by the owner, just the building
32
What is the minimum lease length typically required for mortgage purposes?
Mortgage companies generally require at least 25 years remaining on the lease when the mortgage expires.
33
What change did the Common Leasehold Reform Act 2002 bring to leasehold properties?
The Act reduced the number of leaseholders needed to force a sale from 66% to 50%.
34
What are the two types of joint ownership?
Joimt Tenacy: Equal share, best for spouses. Tenants in common: Better for friends, shares can be unequal and goes to estate upon death
35
What are the 3 types of Governemnt Schemes for property ownership:
Shared Ownership: Purchasers buy a share (usually 25, 50, 75%) and pay rent on the unowned share. First Home Scheme: Discounted homes available for household incomes not exceeding 80k (90k in London). Mortgage must fund at least 50%, and price cap is 250k (450k in London). Mortgage Gaurentee Scheme: Increases the amount of 91-95% mortgages available, as government gaurentees the mortgage over 80%. 690k max price, available until end of 2025
36
What is the difference between bankruptcy and insolvency?
Bankruptcy is for individuals, while insolvency is for companies.
37
When can bankruptcy be initiated for an individual?
Bankruptcy can be initiated when a creditor is owed at least £5k or a share of debts totaling £5k.
38
What must be proved for bankruptcy to be initiated?
The debtor's inability to pay or an unenforced court order (e.g., bailiffs) must be proven.
39
How can an individual become bankrupt?
An individual can apply to make themselves bankrupt, or they can go bankrupt if they break an Individual Voluntary Arrangement (IVA).
40
Who takes control of the debtor’s property in bankruptcy?
An Official Receiver (OR) takes control of the debtor’s property and may appoint an insolvency practitioner as a Trustee in Bankruptcy (TIB).
41
In what order are funds distributed by the Trustee in Bankruptcy (TIB)?
1. Admin Costs 2. Preferential Debts (Holiday pay, employee wages, pension contributions) 3. Secondary Debts (VAT, Income Tax, NIC) 4. Floating Charges 5. Unsecured and Other Debts
42
What happens if funds are insufficient to pay a specific category of creditors in bankruptcy?
Funds are split equally among all creditors in that category.
43
How long does bankruptcy last?
Bankruptcy lasts for 12 months, unless the conditions of bankruptcy are broken.
44
What is an Individual Voluntary Arrangement (IVA)?
An IVA is an alternative to bankruptcy, where creditors must pass a vote of 75% or more to agree.
45
What is the result of an IVA for the debtor’s ability to get a mortgage?
Debtors cannot get a mortgage while the IVA is in place. They are removed from the registrar 3 months after the IVA ends but remain on the credit report for at least 6 years.
46
What are the fees associated with an IVA?
Fees are payable as part of the original monthly payments, with additional setup and handling fees paid to the Insolvency Practitioner (IP).
47
How does bankruptcy affect an individual’s property and assets?
The Trustee in Bankruptcy (TIB) will release and distribute the debtor's estate to creditors according to priority.
48
What happens during corporate insolvency?
Corporate insolvency begins with winding-up petitions when a company cannot pay its debts. An Official Receiver (OR) or Insolvency Practitioner (IP) takes control of assets and distributes debt payments.
49
What are the 2 alternatives to Corporate Insolvency?
Administration or Voluntary Arrangements
50
What governs the disposal of a person's estate after death if they don’t have a will?
The law of intestacy governs the disposal of an estate
51
What should a will state?
A will should state how assets will be distributed and also state the executor of the will.
52
What are the three formalities for a will to be valid?
1. The will must be in writing. 2. It must be signed by the testator. 3. It must be witness by 2 independant people (attestation)
53
How does the law of intestacy distribute assets if the deceased has 1. A spouse 2. A Spouse and Children. 3. Children and no Spouse. 4. No living relatives
1. Spouse is sole beneficiary 2. Spouse takes personal chattels plus £322k and half of remaining balance. Issues get the rest. 3. Everything goes to issues, then parents, then siblings, then grandparents, then aunts and uncles. 4. The Crown
54
What is the role of Legal Personal Representatives (LPRs)?
LPRs are responsible for handling the estate, paying debts, and taxes.
55
What must LPRs do to administer an estate?
LPRs must get a Grant of Representation from the Probate Registry: Grant of Probate for executors, and Grant of Letters of Administration for administrators.
56
What is a trust?
A trust is a means of arranging property to benefit other people without giving them full control, often used for passing on property to minors.
57
Who are the parties involved in a trust?
The SETTLER gives assets to the BENEFICIARIES, but they are controlled by TRUSTEES until a specified time or event.
58
What is the role of trustees in a trust?
Trustees have legal ownership of the assets but must act according to the terms of the trust.
59
What is an express trust?
An express trust is created intentionally.
60
What is an implied trust?
An implied trust is implied from the actions of all parties, such as when a partnership buys a property but only puts one person’s name on the contract.
61
What is a presumptive trust?
A presumptive trust is when one person buys a property in the name of another person.
62
What is a successive trust?
A successive trust holds property for a succession of interests, such as for a wife, but upon her death, the property passes to her children.
63
What is a constructive trust?
A constructive trust is imposed by law in the presence of bad actors in the trust, such as a trustee selling an asset cheaply to a family member for personal profit.
64
What is a resulting trust?
A resulting trust occurs when a trust fails, such as when a wife murders her husband who set up life assurance.
65
What is a bare or absolute trust?
In a bare or absolute trust, the trustee's sole duty is to transfer the trust property to the beneficiary.
66
What is a power of appointment trust?
In a power of appointment trust, the trustees have the power to change beneficiaries based on family circumstances, making it very flexible.
67
What is a discretionary trust?
A discretionary trust is a power of appointment trust where no one currently has an interest in possession.
68
What is an interest in possession trust?
An interest in possession trust allows the beneficiary to have the right to income from the trust property, but not necessarily the capital.
69
What is a statutory trust?
A statutory trust is created by law, such as in life assurances or pension schemes.
70
What type is a pension scheme trust?
Pension schemes, specifically occupational pensions, must be set up under an irrevocable trust, usually created by a trust deed.
71
What are the main uses of trusts? (3)
The main uses of trusts are in life assurance, pension schemes, and for personal individuals for inheritance.
72
What are the ‘3 Certainties in Creating a Deed’?
1. Words must unmistakenly show a trust is intended. 2. The property must be certain. 3. The beneficiaries must be certain
73
What are trustees' duties?
Be familiar with the terms of the trust, register their names on the property, and administer the trust and instructed
74
Can trustees provide capital for a beneficiary?
Yes, trustees can provide capital for a beneficiary's advancement, but the payment will be deducted from their share when they become entitled.
75
How does Power of Attornery change with regards to Mental Health Decline?
Before 2007 you could be an Eduring Power of Attorney, but this has been revoked The Mental Capacity Act 2005 (2007 effective) brought in Lasting Powers of Attorney. One for health and one for wealth. Mental health is assumed untill otherwise or: Cannot recall info Understand info Retain Communicate
76
What makes doing IHT planning tough for LPA?
They are forbidden from making gifts (outside of customary occasions)
77
When is LPA revoked?
Bankruptcy of Attorney or Donor, Death of Donor, Marriage breakdown, Attorney's Capacity (all assuming they are the sole attorney)
78
What does the Consumer Disclosure Act 2012 insist on?
The retial consumer should take reasonable care not to make misrepresentations
79
How is an estate divided up if there is no will?
Spouse only? Gets it all Spouse and kids? Spouse gets £322k and the rest is divided between the spouse and the kids. Only Kids: They split evenly, if one is dead their share passes to their descendants No relatives: To the Crown.
80
Under the Enterprise Act 2002, how long does bankruptcy normally last?
Usually 12 months, after which the person is discharged (unless their conduct was culpable, in which case it can be extended).
81
What are the main disqualifications during bankruptcy?
While undischarged, a bankrupt: ❌ Cannot act as a company director ❌ Cannot obtain credit over £500 without disclosing their bankruptcy ❌ Faces professional bans in sectors such as accountancy, financial services, and banking
82
When can a leaseholder buy or extend the freehold and what act allows this?
Commonhold and Leasehold Reform Act 2002 2 years and 21 years left on lease
83
According to the case of Speight v. Gaunt [1883], what is the duty that the trustees owe to the beneficiaries?
The trustees must act bona fide, with the diligence that a prudent businessman would use in managing his own affairs.
84
When is a trustee liable for loss?
If they do not act with utmost deligence
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