Practice Test 3 - James divorced

Question 1

Recommend and justify ways James could immediately reduce the Inheritance Tax that would be payable on his death.

Answer 1

• Expression of wish for death pension benefits/make pension contribution.
• This will ensure the proceeds will go to his intended beneficiaries/keeps benefits outside estate.
• Execute a deed of variation on mother’s estate.
• Keeps inheritance outside his estate.
• Make gift out of regular income/normal expenditure.
• Utilise annual gift allowance/£3,000.
• Small gifts/£250.
• Charitable gifts/political parties.
• This removes proceeds out of estate/exempt transfers.

Question 2

In the event of James’s death, describe the process of how his estate will be settled if he does not make a Will and identify the potential problems that could arise. A statement of the laws of intestacy is not required.

Answer 2

• Administrator’s required/personal representatives.
• Letters of administration.
• Debts need to be paid/assess value of debts.
• The estate is valued.
• IHT liability is calculated.
• Any IHT must be paid within six months.
• This must be paid before estate is distributed.
• Children’s assets held in trust/bereaved minors trust.
• It will cause delays.
• Estate may not pass to intended beneficiaries.
• Funeral arrangements not known.

Question 3

Calculate, showing all your workings, the annual allowance available to James in the current tax year. Ignore any carry forward that may be available.

Answer 3

Current earnings £180,000.
Gross pension contribution £6,000
Adjusted income £174,000
Excess above adjusted income threshold of £150,000 = £24,000/2 = £12,000 reduction in Annual Allowance
£40,000 - £12,000 = £28,000 AA for current tax year
Ignoring any carry forward

Question 4

State three benefits and three drawbacks of James continuing to contribute to his SIPP rather than to a personal pension plan.

Answer 4

Benefits:
• Has wider investment options.
• Can be used for commercial property purchase/borrowing.
• Can use Discretionary Fund Manager.

Drawbacks:
• Higher charges.
• May not use wider investment opportunities.
• Complex/greater administration.

Question 5

Describe how a deed of variation is set up and the formalities which have to be incorporated within the deed.

Answer 5

• Must be in writing/legal document.
• Signed/dated/witnessed.
• Deed states what is being varied in will/intestacy, the ‘what’.
• Must be clear who is benefitting from variation, the ‘who’.
• All beneficiaries must agree.
• All beneficiaries must be at least 18.
• All beneficiaries must be of sound mind.
• It will be treated as taking place on the donor’s death.
• Must be executed within two years of death to be effective for Inheritance Tax purposes.
• The deed should not be for consideration of money or money’s worth.
• The deed should contain a statement that ‘the variation’ is to have effect for either Capital Gains Tax, Inheritance Tax or both.
• The deed should contain an exemption certificate for variations of stock, shares or securities.

Question 6

Comment on the suitability of James’s existing investment portfolio.

Answer 6

• Range of asset classes not used/lack of diversification/underweight in equities.
• It does not match James’s attitude to risk.
• It is not tax efficient/need to use ISA allowance.
• Adequate/excessive emergency fund.
• Current account likely to be paying no/low interest.
• There is too much invested in the with-profits bond.

Question 7

Recommend and justify how the tax efficiency of his investment portfolio could be improved.

Answer 7

Maximise ISA tax allowance/NS&I products/Junior ISA to provide tax free growth/income.
• Ethical Investment Strategy/Venture Capital Trusts to be tax relief/reducer.
• Encash/dispose of unit trust/open-ended-investment companies to utilise Capital Gains Tax allowances/crystallise any loses.
• Increase pension contributions for tax relief/tax efficient saving for retirement/reinstate personal allowance.
• Take 5% withdrawals from with-profits bond with the Tax deferred.

Question 8

Describe the issues that James’s adviser should consider when formulating a recommendation to assist James in an ethical investment strategy.

Answer 8

• Strength of his beliefs/motivation/how much he wishes to invest.
• Shades of green.
• Positive/negative screening.
• Engagement.
• Best in class.
• Range of funds/restricted fund choice/less diversification.
• Fund performance/increased volatility.
• Charges.
• Reputation of fund manager/expertise.
• Attitude to risk.
• Tax wrappers/Investment wrappers.
• Ethical banking.
• Timescale/objective.

Question 9

State seven areas an adviser would address when effecting a review on a job change.

Answer 9

• Income.
• Expenditure/affordability.
• Pension provision.
• Employee benefits/Protection/Private Medical Insurance etc.
• Attitude to risk.
• Review investment portfolio.
• Change in tax status/employment status.