15) THE MAIN ADVICE AREAS

Question 1

What is the impact of death of a wage earner in a family?

Answer 1

Reduction in family’s standard of living, may not be poss for surviving family to inc income, pressure on funding.
Not able to keep up with payments - loan, mtg, consequently prop may be sold, rehoused in less suitable circumstances. Hard to meet aspirations of family, such as further edu.

Question 2

What three approaches can a busi make against death of a busi partner?

Answer 2

1. Automatic accrual method - agreement by all partners wh if death of one, all other partners share in previously agreed proportions, the deceased’s portion of business. Decsd family compensated by life insu policy written in trust. 100% busi relief for inheritance tax wrt decsd’s share of bus
2. Buy-and-sell method - Partners enter into agrmt wh, if death of a partner, decd’s legal reps are obliged to sell partner’s share to other partners and the other partners are obliged to buy it. Each partner takes out a life policy in their own name in trust for the other partners. Other partners deemed to receive cash and not busi assets, so no relief from busi relief from inher tax
3. Cross-option method - Same as above except that decd’s estate have OPTION to sell to other partners and partners have OPTION to buy it, but no legal obligation to do so. If they do , deemed to receive busi assets and relief from inher tax may be avai

Question 3

Five approaches to categorising sav and invst pdts - to identify what best suits a client

Answer 3

Sav and invst normally to 1) provide inc or 2) provide capital sum
5 approaches -
1. Reg savings or lump sum
Small, reg amts saved from disposable inc to build up sav. Need to invest arises with lump sum recd/windfall, or to move from one form of invstmt to ano
2. Level of risk - deposit accounts etc in cash .. no risk.
Innvestments carry more risk to capital but accepted in hope of higher returns
3. Accessibility - Many depo acc have instant access or at least req short notice. Some invst have fixed maturity date. Some gilts can be sold prior to redemption w.out guarantee of price returned.
Some gilt-edged stocks, shares and other invstms are irredeemable i.e. no maturity/redemption date
4. Taxation - Main IT and CGT. Some invst carry tax on both inc recd and capital gained. (shares and UT)
Some taxed on inc but exempt from CGT eg gilt-edged secu. Consider both tax regime and tax posn of investor eg ISA for non tax payer not beneficial
5. Effect of inflation - Invs tgr must be in line w inflation or else purchasing power of money will fall, no gr in real terms.

Question 4

explain two approaches to inheritance tax IHT liability

Answer 4

1. try to avoid paying it (by reducing value of estate to below nil-rate thresholds (use exemptions, gifts during lifetime, place in trust etc)
2. to make provision for paying it when it is due by eg life insurance written in trust to provide for IHT liability, using unused nil-rate band on second death, using residence NRB to mitigate IHT

Question 5

Why shd an adviser be aware of tax treatment of diff products even if they are not tax specialists?

Answer 5

Improve tax situa by
* maximise tax-free oppor - eg invst in ISA, pensions, e
* non-tax payers can consider investing funds such as off-shore bonds - free from UK tax
* If exceeding CGT exempt limit, can consider CGT free investments such as gilts
Some investments are taxed always such as endowment policy, UK investment bonds are taxed at 20% and cannot be reclaimed, finl adviser to be aware of these when making suggestions

Question 6

What is key person insurance?

Answer 6

1. Sickness of employee - reduced profits if key employee cannot work, company needs funds to recruit/replace/train. Critical illness cover can be used
2. Sickness of a busi partner - sick partner may continue to draw income from company, no contribution, drains funds…income protection cover
   If partner unable to return, other partners may take oversick partner’s share of business - critical illness cover can generate lump sum
3. sickness of self employed sole trader -involved in all aspects of business, instant loss of income, customers lost to competitors, collapse of busi……income protection cover to continue income