3 : 4 - Developing and Communicating Financial Planning Recommendations

Question 1

In what ways can you justify how the recommendations meet the client’s specific circumstances?

Answer 1

• explanation of appropriate financial protection products
• characteristics, correlation, advantages and disadvantages of different products
• economic context of the advice and significance of main economic indicators
• comparison of the different options available
• interrelationship in estate planning between wills, trust, protection, IHT, CGT and retirement with investment planning
• how the action takes account of future needs

Question 2

How can interest rate changes affect borrowing?

Answer 2

Interest fluctuations as well as rates of inflation have a marked effect on the future value of savings and on the current or future cost of borrowings.

Large increases in the repayment amounts of borrowings can be very detrimental to a client’s financial position.

Question 3

How can recommendations be related to economic conditions?

Answer 3

Matching any investments chosen to the economic climate and explaining the rationale for this to the client also maximises the end result, and if, due to unforeseen circumstances, it doesn’t, a clear rationale for any recommendations made will allow the client to still appreciate that the recommendations were made with their interests in mind.

Question 4

In what way has RDR attempted to help build a better trusting relationship between client and IFA?

Answer 4

Suggested a move away from commission-based adviser remuneration towards a fee-based charging structure for advisers

Question 5

Do financial products need to be used for financial planning?

Answer 5

While financial planning need not involve the use of any financial products, in many cases financial products may be appropriate to meet the client’s goals and objectives.

However, in other cases, a simple rearrangement of the clients’ affairs may be sufficient to help them to achieve their goals and objectives.

(Often, a combination of financial products and rearranging the client’s financial affairs will be used.)

Question 6

How do you test whether the plan is affordable?

Answer 6

The cost of any financial products used, together with the rearrangement of the client’s assets should be affordable, based on the investible capital and surplus income figures calculated for the net worth statement and income and expenditure analysis.

Question 7

How narrow or wide should the focus be?

Answer 7

The financial plan should look at the client’s circumstances from a holistic viewpoint, rather than treating each issue, goal or objective in isolation.

This will help ensure that the recommendations remain affordable, and that you are only spending the client’s money once.

Question 8

What is an example of a potential Knock-on effect?

Answer 8

Any knock-on effects that a particular recommendation may have on other recommendations should be identified and noted in the financial plan

EG: the payment of long-term care fees from accumulated assets may have the effect of reducing the value of the estate assessable for inheritance tax purposes on the client’s eventual death.

Question 9

How can a Lifetime cash flow statement aid objective setting?

Answer 9

Recommendations made should clearly state to the client how the stated goal or objective is met and any associated risks or problems stated.

A lifetime cash flow statement may help to show how the recommendations meet the stated goals and objectives, as may post- recommendation net worth statements, income and expenditure analysis and tax calculations.

Question 10

There will inevitably come a time where the adviser is faced with a situation where a suitable product for a client’s needs simply does not exist.

What happens then?

Answer 10

Where no suitable product is available, no recommendation should be made.

Question 11

What happens when affordability is an issue?

Answer 11

Priorities must be agreed with the client and all the issues surrounding the client’s current and future needs explained so that the client can make an informed choice as to which recommendations to defer and the impact of any deferral.

This in turn will aid the client in agreeing what the next priorities are as and when the client’s earnings increase.

Question 12

What are The Rules of Intestacy?

Answer 12

When a person dies without leaving a valid will, their estate will be divided according to certain rules
(the rules of intestacy).

A person who dies without leaving a will is called an intestate person.

Question 13

Who can inherit under the rules of intestacy?

Answer 13

Only married or civil partners and some other close relatives

Question 14

Who in a family can inherit under the rules of intestacy?

Answer 14

If there are surviving children, grandchildren or great grandchildren of the deceased and the estate is
valued at more than £250,000, the partner will inherit:

• all the personal property and belongings of the person who has died
• the first £250,000 of the estate, and
• half of the remaining estate.

Question 15

What’re the 2 different ways of jointly owning a home?

Answer 15

Joint tenants

and

Tenants in common.

Question 16

If the partners are Joint tenants, at the time of the first death, the surviving partner will automatically
inherit what?

Answer 16

The other partner’s share of the property

Question 17

If the partners are Tenants in common, at the time of the first death, the surviving partner will automatically
inherit what?

Answer 17

The share devolves by will, or if there is no will, by the law of intestacy.

Question 18

If couples have joint bank or building society accounts, what happens if a partner dies?

Answer 18

If one dies, the other partner will automatically inherit the whole of the money.

Property and money that the surviving partner inherits does not count as part of the estate of the
person who has died when it is being valued for the intestacy rules.

Question 19

What do children (where there is no surviving married or civil partner) of the intestate person inherit?

Answer 19

They will inherit if there is no surviving married or civil partner.

If there is a surviving partner, they will inherit only if the estate is worth more than a certain amount.

Question 20

What do children (where there IS a surviving married or civil partner) of the intestate person inherit?

Answer 20

If there is a surviving partner, a child only inherits from the estate if the estate is valued at over £250,000.

All the children of the parent who has died intestate inherit equally from the estate. (This also applies
where a parent has children from different relationships.)

Question 21

When do children receive their inheritance?

Answer 21

Children do not receive their inheritance immediately.

They receive it when they:
• reach the age of 18, or
• marry or form a civil partnership under this age.

Until then, trustees manage the inheritance on their behalf

Question 22

Can a grandchild/great-grandchild inherit intestate?

Answer 22

A grandchild or great-grandchild cannot inherit from the estate of an intestate person unless either:

• their parent or grandparent has died before the intestate person

Question 23

Can other close relatives inherit intestate?

Answer 23

Parents, brothers and sisters and nieces and nephews of the intestate person may inherit under the rules
of intestacy. This will depend on a number of circumstances.

Question 24

Who cannot inherit intestate?

Answer 24

• unmarried partners
• same sex partners not in a civil partnership
• relations by marriage
• close friends
• carers

Question 25

Under the rules of intestacy, what happens if that are no surviving relatives?

Answer 25

The estate passes to the Crown.

This is known as bona vacantia.

The Treasury solicitor is then responsible for dealing with the estate

Question 26

When should a Will be reviewed?

Answer 26

it is important to review their will when a major life event occurs, such as a marriage, a divorce, a separation, the birth of a child, the death of a relative, etc

Question 27

What happens to a Will when a client marries?

Answer 27

Any will that they may have made previously is automatically revoked

*(unless it specifically instructs the will the remain valid in this situation)

**(In Scotland, this law does not apply)

Question 28

What happens to a will when a client divorces?

Answer 28

Their will does not become invalid, but many of its provisions would no longer be effective if they pass away before making a new will.

Question 29

When is Inheritance tax applied?

Answer 29

Inheritance tax (IHT) is charged on certain transfers of property or 'value' – it is therefore not just a death
duty.

Question 30

The individual who makes the transfer is known as?

Answer 30

The donor (or transferor)

Question 31

The individual who receives the transfer is known as?

Answer 31

The donee (or transferee)

Question 32

Why is the concept of domicile is crucial for IHT liabilities?

Answer 32

Donors who are domiciled (or deemed to be
domiciled) in the UK are subject to IHT on their worldwide property.

Donors who are non-UK-domiciled are subject to IHT on their UK property only.

Question 33

What are the 3 rates of IHT?

Answer 33

£0 - £325k : 0% (for any cumulative value of transfers)

£325k+ : 20% (chargeable lifetime transfers)

£325k+ : 40% (transfers up to 7 years prior to death subject to taper relief)

Question 34

What is the Residence Nil-Rate-Band (NRB)?

Answer 34

Individuals who have an estate worth more than the NRB can have an additional NRB when their residence is passed on to a direct descendant.

Question 35

What is currently the addition NRB?

Answer 35

£150,000 in 2019–20

Question 36

When does this band get tapered?

Answer 36

For estates worth £2,000,000 or more at the rate of £1 for every £2 in excess of this

threshold. A property which was never the residence of the individual does not qualify for this additional
band. Any unused additional threshold can be transferred to the deceased’s spouse or civil partner.

Question 37

How is any money left to charity treated?

Answer 37

It does not count towards the taxable value of the deceased’s estate.

Question 38

At what level of charitable donation is the IHT rate changed?

Answer 38

If at least 10% of the net estate is left to charity, the IHT rate on the rest of the estate is cut from 40% to 36%.

Question 39

What deductions are taken to arrive at the Net estate?

Answer 39

After deduction of liabilities, reliefs, exemptions and the nil rate band

Question 40

What are Exempt transfers?

Answer 40

These are simply transfers that are not taxed.

Question 41

What is the Monetary amount for an Exempt Transfer:

Inter-spouse (and inter-civil partner)

Answer 41

Unlimited if donee is UK-domiciled

£325,000 if donee is non-UKdomiciled

Question 42

What is the Monetary amount for an Exempt Transfer:

Gifts on marriage/civil partnership

Answer 42

£5,000 from each parent, unless from anyone else

Question 43

What is the Monetary amount for an Exempt Transfer:

Inter-spouse (and inter-civil partner)

Answer 43

Reasonable provision

Question 44

What is the Monetary amount for an Exempt Transfer:

Inter-spouse (and inter-civil partner)

Answer 44

Unlimited

Question 45

What is a potentially exempt transfer (PET)?

Answer 45

A potentially exempt transfer (PET) is a lifetime transfer by a donor to:

• another individual
• a bare trust
• a disabled trust

Question 46

How are PETs treated for tax?

Answer 46

No tax is charged at the date of the PET, and the transfer does not have to be reported to HMRC.

If the donor survives seven years, the transfer becomes fully exempt and is excluded from any IHT calculation.

Question 47

What happens should the donor die within seven years of making the transfer?

Answer 47

The tax due can be reduced based on the following table:

Years between transfer and death:

>3   -   100%
3-4  -   80%
4-5  -   60%
5-6  -   40%
6-7  -   20%
7<   -   Exempt

Question 48

What are Chargeable Lifetime Transfers (CLTs)?

Answer 48

These are transfers that are not exempt or potentially exempt.

The most common are lifetime gifts to trusts, other than to bare trusts and trusts for a disabled person (stated above to be PETs), and transfers to a company

Question 49

Tax on CLTs is payable at what %?

Answer 49

20% on the excess above the NRB at the time of the transfer

WITH a further 20% payable on death.

(There will be no further tax to pay if the donor then survives seven years)

Question 50

What happens if a client dies during the survival period?

Answer 50

Additional tax will be due, based on the higher death rate, although any tax already paid will be offset, and the same tapering table applicable to PETs can be utilised.

Question 51

How is IHT charged on the death of an individual?

Answer 51

With the tax chargeable as if the deceased had made a transfer of value equal to the value of their estate immediately before death.

Question 52

How is the taxable estate calculated?

Answer 52

The taxable estate is the individual’s assets, less their liabilities.

These assets might include the value of life policies payable on the death of the individual

Question 53

What types of assets are excluded?

Answer 53

• assets situated outside the UK (for a non-UK-domiciled individual)

• unit trust and open-ended investment company (OEIC) holdings where the beneficial owner is a
non-UK-domicile.

Question 54

How would an interest-free loan be treated for IHT?

Answer 54

A transfer of value is a reduction in the donor’s
estate. Therefore, an interest-free loan that is repayable on demand or on death is not treated as a
transfer of value.

Question 55

What is the interaction between IHT and CGT

Answer 55

There is considerable interaction between IHT and CGT.

A valuation for IHT and CGT need not be the same for:

• IHT – it is the loss to the estate that is measured
• CGT – it is the asset that is valued.

However, where an asset is valued for IHT on the death of an individual, the same value is used for CGT
purposes. This is then treated as the beneficiary’s acquisition cost.

Question 56

What happens if a disposal attracts an immediate charge to IHT (eg: setting up a discretionary trust)?

Answer 56

CGT holdover relief can generally be claimed.

Where no hold-over relief is claimed, any IHT liability paid can be deducted when calculating the gain providing the IHT was paid by the donor.

Question 57

Is CGT hold-over relief available for exempt or potentially exempt transfers

Answer 57

No

Question 58

What are Gifts with reservation?

Answer 58

They are gifts of an asset such as property where the recipient does not enjoy the possession or the donor continues to retain the benefit of the gift.

Question 59

What happens if the donor dies within seven years

of still receiving benefit of the gift?

Answer 59

Then the gift is caught for IHT purposes. Not only that, it will still be treated as being a disposal of assets for CGT purposes and therefore be taxed twice

Question 60

What are the 3 main reliefs that can apply to IHT?

Answer 60

• Quick Succession Relief (QSR)
• Business Property Relief (BPR)
• Agricultural Property Relief (APR)

Question 61

What is Quick Succession Relief (QSR)?

Answer 61

QSR is available where property in the deceased’s estate has passed to them by a chargeable transfer in the five years before their death.

The relief is given by reducing the tax payable on the deceased’s estate, by referring to the amount of tax payable on the earlier chargeable transfer, the benefit that passed to the deceased on that transfer, and the period between the transfer and the death.

Question 62

What is Business Property Relief (BPR)?

Answer 62

This is a relief for transfers of business property, designed to try to ensure family businesses (for
example) aren’t crippled by having to pay an IHT bill.

Question 63

What is the 100% BPR rate given for?

Answer 63

• interests in unincorporated businesses, such as sole traders or partnerships
• shareholdings of any size in unquoted and Alternative Investment Market (AIM) companies.

Question 64

What is the 50% BPR rate given for?

Answer 64

• controlling shareholdings in fully listed companies
• land, buildings, plant or machinery used wholly or mainly for the purpose of a business controlled by the donor (or if the donor was a partner).

Question 65

What are the assets that do not qualify for BPR?

Answer 65

• businesses that mainly deal in securities, shares, land or buildings, making or holding investments
• where the property concerned is subject to a binding contract for sale at the time of the transfer

Question 66

What is Agricultural Property Relief (APR)?

Answer 66

Agricultural Property Relief is also claimed at two rates.

The relief is 100% for:

• owner-occupied farms
• land that was let on a grazing licence

The relief is 50% for interests of landlords in most other let farmland.

(As with BPR, the relief cannot apply to property that is subject to a binding contract for sale.)

Question 67

The IHT payable on the estate of a deceased person is the liability of who?

Answer 67

The legal personal representatives.

Question 68

When is te actual IHT tax due?

Answer 68

At the end of six months after the person died.

eg: if someone dies in January, the IHT is payable by 31 July

Question 69

What is an IHT loan?

Answer 69

Historically, personal representatives may well have been forced to take out a loan in order to pay the
tax, as they could not access the deceased’s assets until the tax was paid.

Today, some banks will accept instructions from personal representatives to pay the IHT out of the deceased’s accounts. It should be noted that this facility is not universal, and so IHT loans remain relevant.

Question 70

What are the 2 ways in which the terms of the will (or intestacy) can be varied after death, that are effective for IHT purposes?

Answer 70

Disclaimers – Providing that there is no consideration in money in return for so doing, this will not be a transfer of value for IHT purposes and the property will pass to the next beneficiaries entitled under the will
(or intestacy). They have therefore passed the property down a generation without incurring an additional IHT liability.

Deeds of variation – similarly, this could be used to vary the terms of the will or intestacy for family or tax reasons. It can divert property to any person or persons nominated by the person giving away their interest in the estate. (eg: a potential inheritance from a parent could be diverted to a favourite charity of the beneficiary’s choice)

Question 71

Is a power of attorney (PoA) a trust?

Answer 71

No, however the role of an attorney is similar to that of a trustee since they act on behalf of, and for the benefit of, another.

Question 72

What were the 2 types of PoA which enable an

attorney to make gifts in limited circumstances:

Answer 72

• Enduring Powers of Attorney (EPA)

- Lasting Powers of Attorney (LPA)

Question 73

Recap:

What is the difference between Critical illness cover and Income protection?

Answer 73

Critical illness cover pays a tax-free lump sum if the client is diagnosed with one of the designated critical illness definitions covered by the plan such as heart attack, stroke or certain cancers.

This is very different from income protection, which pays a monthly income if the client is unable to work through accident or long-term illness that prevents them working including stress.

Question 74

Recap: How is Life assurance paid out?

Answer 74

Life assurance pays a lump sum on the client’s death; however, this cover may be provided as part of a retirement plan.