Explain to Khaled and Jenna the key financial issues of purchasing their new house before selling their current home.
SDLT – would need to pay an additional 5% surcharge as it will be their second property
If they own both properties at the end of the day of completion of their new property.
This can be reclaimed if their house is sold within 36 months.
Borrowing – Would need to set up a loan or mortgage to cover purchase of new property incurring interest plus set up costs.
Use of investments – Or would need to encash investments which could trigger tax issues or charge and loss of future growth and income/loss of liquidity.
Dual property costs – running costs for two properties: mortgage, bills, insurance, council tax.
Private residence relief – full relief will only be available on their existing home if they sell the property within 9 months.
If they sell after this time CGT may become payable.
Explain to Khaled and Jenna the benefits of considering a loan to purchase their new home
Security/value - they have their mortgage free home to use and the value is more than the loan needed.
Open ended - the loan can be repaid once they have sold their own property.
Retain their existing investments and emergency fund/retain liquidity.
No charges or tax issues on investments.
No concerns about market timing issues.
Affordable as both have good incomes.
Can use £150,000 inheritance to reduce debt by the end of the year.
Explain to Khaled and Jenna the drawbacks of considering a loan to purchase their new home
Interest rate on loan likely to be high.
Fees and charges of the lender.
They may not have enough time to organise the finance.
Selling their home may take a long time - so a lot of interest payable.
Loss of their income before repayment brings ongoing debt repayment issues.
Identify the factors Khaled and Jenna should take into account before using a bridging loan to purchase the new home.
Mortgage free security/value covers the loan needed.
The loan is open ended so can be repaid once they sell their house
or other assets to fund the house purchase.
Emergency fund required.
Affordability of interest.
Interest rate on loan.
Fees and charges of lender.
Is there enough time to arrange the loan?
Timescales for selling their home.
Loss of income before repayment.
Khaled and Jenna are considering the use of some of their investment portfolio to purchase their new property. Identify the factors they should take into account before deciding whether to take this action.
Saves interest – on loan or mortgage.
Amount needed – the purchase price of the house plus the buying costs/stamp duty land tax.
Which investments – which are best to encash?/none of their investments match their ATR.
Market timing – the UK Telecoms shares have been performing badly so selling now would lock in the loss/may be a good time to encash the OEIC funds that have performed well to lock in gains.
Tax – there would be CGT on any gains on the OEIC funds above their CGT AEA at the higher rate of 24% for Khaled. 18%/24% for Jenna.
Could offset losses from shares and any other registered losses they have carried forward.
Charges – there may be encashment penalties on their investments.
Liquidity – they would lose access to these liquid funds until they have sold their own house.
Future growth - loss of the potential growth on any investments encashed.
Future income – loss of income from any investments encashed.
ISA – loss of tax free growth and income from ISA wrappers if withdrawn.
Reinvestment – may be a poor time to invest again once their house is sold/costs and charges of new investments/can only invest £20,00) each pa back into ISAs.
CGT may become payable.
Explain how cashflow modelling is used and how it could help Khaled and Jenna establish a financial plan for their long-term objectives.
Provides a year-by-year summary of cash paid to and paid out/ assesses affordability from surplus income.
Builds in current assets and income from all sources, expected inheritance money and equity from downsizing.
Builds in assumptions e.g., increases in income needed, expenditure and inflation, salary from part-time work, growth rate assumptions, longevity.
Several cash flows can be run to show result of using different assumptions.
Will identify whether Khaled and Jenna can meet their financial goals in retirement, and if not
it will identify the point at which they are likely to run out of money.
Prioritises which assets to draw income from/maximise tax efficiency.
Can also assess the income affordable from available resources on first death.
Identify potential inheritance values on second death to their children.
Can also stress test market conditions.
Can build in the use of tax-efficient wrappers/pension/ISA.
Structures finances/gives a plan.
Explain to Khaled and Jenna the advantages of taking out a loan rather than use their investments to purchase the new house.
Borrowing enables their investments to remain invested and so avoid market timing issues
and any CGT issues incurred if investments encashed.
Retains access to their liquid investments/emergency fund.
They do not lose any of the potential growth and income on their investments.
Borrowing enables their ISA funds to remain tax free inside the wrapper.
Borrowing avoids any reinvestment issues – charges, timing – when they sell their house.
Explain to Khaled and Jenna the disadvantages of taking out a loan rather than use their investments to purchase the new house.
Lender’s costs and fees will be more than any charges for investment encashment.
They can encash investments that don’t meet their ATR whereas bridging does not require any encashments.
They only have 6 weeks to arrange the loan whereas investments can be accessed any time.
The rate of interest will be expensive on the loan whereas there is no extra direct cost if they use their investments.
State five benefits of Khaled using his Telecoms shares and OEICs towards the purchase of the new property.
Shares have performed badly so potentially avoiding further losses.
Dividends likely to exceed DA of £500 so less HRT on dividends/33.75%.
Reduces the investments that are a higher risk than Khaled’s moderate ATR.
Provides cash towards purchase of property means less needed from elsewhere/reduces interest payable on loan.
The loss on the shares can be offset against Khaled’s share of the OEIC gains to reduce the CGT payable.
There may be some CGT payable for Khaled at 24% and Jenna at 18%/24%/they can use their CGT AEAs to reduce gains.
No need for future monitoring of the values.
Reduces their overweight position in equities in their portfolio.
State five drawbacks of Khaled using his Telecoms shares and OEICs towards the purchase of the new property.
Dealing charges to sell.
Loss of all dividends/lose use of DAs of £500 each at 0%.
Locks in loss.
Miss potential for recovery.
Market timing risk.
Reduced liquidity.
Reinvestment risk once property sold and cash needs to be reinvested.
Would be IHT efficient if they are AIM shares.
Explain the main taxation issues if Khaled and Jenna were to use their investments and savings to purchase the new property. (Income Tax)
Using cash deposit will reduce Income Tax on interest above their PSA (£1,000 Jenna, £500 Khaled)/saves tax at 20%/40%.
Using Khaled’s shares will reduce the higher rate dividend Income Tax of 33.75% above his DA of £500.
Selling the OEIC funds will also reduce dividends for both.
If everything fully encashed, neither will have any dividends, so lose the use of their DAs of £500 each.
ISA encashments will be tax free but they will have reduced tax free income.
Explain the main taxation issues if Khaled and Jenna were to use their investments and savings to purchase the new property. (CGT)
Selling the Telecoms shares will crystalise the loss for CGT in Khaled’s name.
He can use this loss against any gains on the OEIC funds.
If he has a net loss, he should register this with HMRC within 4 tax years.
If he has a net gain, he can use his AEA of £3,000 to reduce the CGT.
Any taxable gain on Jenna’s half of the OEICs can be reduced by her AEA of £3,000.
Any CGT paid will be at 24% for Khaled and 18%/24% for Jenna.
Explain the main taxation issues if Khaled and Jenna were to use their investments and savings to purchase the new property. (IHT)
The value from the investments will still be in their estate for IHT as they will have purchased the new property.
The property may be held as joint tenancy, so they would have 50% in each of their estates on death for IHT, but as everything is going to the spouse this is covered by spouse exemption.
Could qualify for 100% business relief (50% from 6 April 2026) if they are AIM shares (50% business relief).
Explain the factors you would consider when assessing the suitability of their current pension arrangements.
Income needs at 67 – income amount.
Vesting plans – whether flexible income or annuity is required.
PCLS – whether the projected 25% of the fund will be enough capital to meet their capital needs in retirement.
Inflation – whether the funds will enable enough inflation proofing on retirement income.
Longevity – whether the funds will last through to death.
Tax position – income drawn will be taxable.
Other income – income available from other investments and State Pension.
Current level of provision – whether sufficient.
State Pension – what is their entitlement/guaranteed and inflation proofed from 67.
Options – whether the schemes offer all flexible options at 67.
Funds – which funds are available, switching options, performance and charges.
ATR – the fund selection against ATRs
Explain the benefits of Khaled and Jenna making additional contributions to their pension schemes. (MONEY IN)
Possible employer matching.
Income Tax relief on contributions -40%/20%.
Easy administration as employer deals with it.
Extra contributions currently out of estate for Inheritance Tax.
Explain the benefits of Khaled and Jenna making additional contributions to their pension schemes. (MONEY INSIDE)
Larger fund passes quickly to survivor if nomination completed.
Extra funds on death Income Tax free to survivor/currently IHT free (until April 2027).
Tax free growth on fund.
Pound cost averaging.
Can match investment fund to ATR.
Explain the benefits of Khaled and Jenna making additional contributions to their pension schemes. (MONEY OUT)
Larger PCLS/25%.
Larger retirement income available.
Retirement funds will last longer.
Explain to Jenna how the target date fund works and any associated risks.
This is an actively managed fund
so investments can be changed to deal with varying market conditions.
The manager gradually moves funds from cautious growth investments
into safer investments to reduce volatility as retirement nears.
Jenna can alter her retirement age and take on a new target date if desired.
The cautious risk profile means potential returns will be lower than could be achieved with a moderate risk fund
and the fund will remain in low return funds even if Jenna leaves them invested into retirement.
Her fund will be less than it could have been in retirement so less income or death benefits available.
Identify the factors that Khaled and Jenna should take into account before making any fund switches in their pensions.
ATR match.
Market conditions.
Performance of the funds/benchmark performance against suitable index.
Any costs for Jenna moving out of her target date fund.
Style of fund management desired – active, tracker.
Funds available in the schemes.
Cost and charges.
Liquidity of the funds they are in.
Three year timescale to retirement/vesting plans.
State and explain to Jenna the risks of investment in Emerging Market Funds.
Liquidity – may be difficult to sell.
Non-systematic/specific risk – underperformance of a company within the fund.
Systematic risk – market falls due to inflation/interest rate changes/exchange rates.
Currency risk – movements in exchange rates may affect value of the investment.
Political risk – risk of corruption/sudden change in legislation/government practice.
Geographical risk – some of the regions are prone to natural disasters - can affect share values.
Regulatory risk – poor accounting standards/less regulation.
Event risk – value may be affected by specific event/technical risk with infrastructure projects.
Explain to Khaled and Jenna why it is important to review their pension arrangements in advance of retirement.
Update nominations.
Check State Pension entitlement – may need to buy extra years.
Can make higher contributions whilst have earnings to support them.
Tax relief on contributions being claimed/maximised.
ATR can change near retirement.
Charges reviewed.
Estimate retirement benefits available/FAD or annuity/PCLS available.
Performance of funds and see if new funds available.
Identify the further information needed from Khaled and Jenna in order to assess the suitability of their current pension arrangements.
State Pension entitlement/BR19s.
Willingness to transfer capital between them.
Income on investments/interest rate on deposit /likely income from Jenna’s part time work.
Performance of funds/shares.
Expenditure.
Debt – Views on taking out a short-term loan v using assets for property purchase.
Financial Protection – Any LPAs in place?
Use of allowances – pension contributions history/use of carry forward /employer matching?
Nominations – views on adding children.
Detail of existing policies – single company shares date purchased/original price paid for single company shares – are they AIM shares/business relief – base cost of OEICs/any losses carried forward.
Inheritances – views on how to invest £150,000.
Need for income in retirement – how much?/capital needs/views on guaranteed vs flexible income.
Gifts – any planned, timescales, previous gifts made.
Charges.
Risk – CFL.
Emergency Fund requirements now and in retirement.
Priority of retirement provision over IHT issues and other objectives.
Timescales – for part-time work.
Recommend and justify actions that Jenna and Khaled should take to improve the suitability of their pension schemes.
Increase personal contributions.
Each gets tax relief at their marginal rate/20%40%.
Money removed from their estate for IHT currently (until 2027).
Possible extra employer matching.
Higher retirement benefits at 67/larger PCLS.
Tax-free growth.
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Encash some of their existing non-ISA investments each year to fund extra contributions.
Adjust risk on portfolio as currently not aligned to their moderate ATR.
Make use of CGT AEAs to produce tax free encashments.
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Review funds.
To ensure fund are in line with ATR and vesting plans and review performance.
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Nominate their children as additional beneficiaries.
They then have an option for an income rather than only cash.
Can retain tax-efficient wrapper.
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Monitor/review regularly
To check performance of funds.
Ensure correct funds selected near retirement to align to annuity purchase or drawdown/if tax free cash to be taken.
Explain to Khaled and Jenna how investing some of their portfolio into a loan trust would help meet their retirement objectives whilst providing growth to protect their estate.
The loan is interest free and repayable on demand
so they have access to the original capital that has not been repaid at any time.
Growth on the loan is outside of their estate for IHT
so less IHT will be paid and more of the estate paid on to her children.
Funds within the investment can be selected that match their ATR
so providing the opportunity for capital growth in future.
They can receive an ‘income’ each year of up to 5% of the amount loaned for up to 20 years
which will have no immediate tax/tax deferred.
They can decide to reduce or stop the ‘income’ if it’s not needed (and take it in later years)
giving them some flexibility on income.
On second death the trustees will have the option of assigning bond segments to their children
who can cash them in tax efficiently when desired.
