Advice & Investment Flashcards
Identify the factors you would take into account before offering any advice
• Objectives – income/growth/both • Willingness to get involved with the management of their capital • Term of the investment • Health and life expectancy/need for care • Emergency fund • Attitude to risk • Capacity for loss - can this increase ATR? • Suitability of existing invest. to meet objectives • Taxation (wrappers and allowances) • Ethical requirements • Next Generation, BR & Trusts? • Investment Experience • Corridors 70 to 79 65-80% 80 to 84 50-75% 85 to 89 35-60% 90+ 20-40%
Types of Investment Risk
Systematic risk Unsystematic risk Liquidity Inflation Interest Rate Gearing (Inv. Trusts) Currency Credit Political Event Regulatory
Factors to consider for encashing and re-investing
Selling Loss/Gain made? Other gains/losses in 18/19 Charges comparison Performance against bench. Income produced
Re-investment Cap. for loss Portfolio in line with ATR? Any SJP plans held already - happy with IMA Income paid lower? CYC - 1% Advice Costs
Why Recommend the four main asset classes
Cash
Allows for withdrawals without suffering market volatility.
Fixed interest
Interest from fixed interest assets can be used to provide a known income stream.
Equities
Negatively correlated to fixed interest.
Property
Rental income helps cover income needs.
Not directly correlated to equities.
General
To provide a diversified portfolio.
Equities / property provide the potential for growth/ produce growth needed.
Matches ATR / helps manage risk level in portfolio.
Outline the factors that you would take into account before recommending any changes to the existing investment mix.
- Attitude to risk and capacity for loss
- Any ethical preferences
- She has over £300k held in equity ISAs/she has experience of investing
- Ad hoc lump sums needed
- Income pattern required
- Ensure sufficient is held in cash to cover short term income requirements
- She would like the children to inherit on her death and so a longer investment term can be used
- A proportion of the funds should be invested for growth
- She has a large percentage of her assets already held in property
- Investment outlook/Brexit
Recommend and justify the actions she can take to achieve these objectives. Client’s husband died
APS
1. Wife should make an APS for £*** using funds held in UTs and cash.
ISAs
2 .She should then take the income she needs from the ISAs as this income is tax-free and this will also reduce the estate for IHT purposes.
3. Continue maximum funding her ISAs in future years where funds allow.
Pensions
- Take no income from the pensions for as long as possible as outside the estate for IHT purposes.
- Designate husband’s FAD to be a dependant’s FAD before June 2020/within 2-year window.
- When income is taken from the pension funds the dependant’s FAD should be used before her pension funds as the income will be income tax-free as he died before age 75.
Misc
Gift holiday property to sons to reduce estate for IHT purposes.
Outline seven events that if they were to occur would mean that an interim, unplanned review would need to take place.
- Death/serious illness of clients or family.
- Change of marital status/new family members grandchildren etc.
- Lifetime gifts/give money to a child/give money to grandchild.
- Market crash/severe downturn in investment returns/major political event.
- New capital loss or gain.
- Inheritance/windfall/downsize.
- Significant change in expenditure.
- Significant change in legislation/tax rules.
Explain the factors that you would take into account prior to making a recommendation as to which of the three options available to her should be used:
- Use Deposit A/C + Borrow
- UFPLS + Borrow
- FAD + Borrow
Savings plus B2L mortgage
1. Emergency funds will be significantly reduced.
UFPLS to cover purchase price
- HRT payer may lose PA if UFPLS taken and part may subject to IT at 45%.
- MPAA will be triggered - may subject to an AA tax charge.
- Significant amount of capital will be tied up in a single investment.
PCLS of £100k plus B2L mortgage
4. MPAA will not be triggered – no income taken.
General points – using the pension
- Pension funds used now form part of her estate for IHT purposes.
- Pension funds used now form part of her estate for LTC assessment.
- Reduces level of income/flexibility available from the pension funds in retirement.
General points – using a B2L mortgage
- If PCLS/deposit used along with B2L mortgage, then no Income Tax charge will arise.
- Gearing which will magnify gains/losses.
- Tax relief on mortgage interest is being reduced to basic rate relief only.
- Interest rate chargeable/interest rates are likely to increase in the future/charges for B2L mortgage.
General points
12. Charges incurred by taking UFPLS/accessing PCLS/accessing bank account funds/CGT or penalties on encashment of UT.
Explain, giving your reasons, why the existing investment strategy is unsuitable (Lifestyling when client will use flexible option)
- The lifestyle fund assumes client will take 25% PCLS and use the balance of the funds to purchase a lifetime annuity at selected pension age of 65.
- Client plans to access her pension flexibly.
- Client only ** years away from SRA most the funds are currently invested in cash and fixed interest, which is unsuitable for ATR.
- Longer investment horizon as the funds will need to stay invested in equities to maximise the possibility that her funds will provide her with an income for the remainder of her lifetime/otherwise the fund is likely to be depleted too quickly.
Pension
Outline the additional information you would require in order to be able to recommend a suitable investment strategy
- The level of involvement in inv. decisions.
- Ethical preferences/religious beliefs.
- Future contributions - how long continue.
- Health/longevity.
- Will the pension be used to purchase the B2L?
- Need for PCLS/capital in retirement.
- Level of income required in retirement.
- Capacity for loss.
- Income available from other investments.
- When will they start to receive their State pensions?
- Funds passed children on death/help IHT planning use non-pension assets first?
- Prepared to transfer the PPP to SJP?
- What inv. strategy is being used for non-pension inv.?
Tracker vs Active
Outline five potential benefits and five potential drawbacks of retaining the Tracker Unit Trust compared to re-investing in an actively managed fund.
Benefits of tracker
- lower charges
- simple to understand
- reduced volatility
- may match ATR
- may outperform active managed fund
- less admin
- diversification is possible by tracking a number of indices
- most possible don’t produce an income so good for capital preservation
Drawbacks of a tracker
- Indices can be very concentrated e.g. FTSE 100 dominated by a small number of large businesses - lack diversification.
- Doesn’t produce a dividend so not good if want income
- Always underperforms index due to charges
- No ability for fund manager to concentrate on favoured investments.
- Fund manager cannot make a defensive stance when markets are expected to fall.
- Manager must invest in line with index
- Less growth potential than active funds
Treatment of ISAs on death + options to spouse
- if died after 6th April 18
- the investment has remained as an ISA / not become a unit trust
- it will continue to benefit from ISA tax advantages until the earlier of - probate or 3 years after death
Spouse Options
- whole amount (including any growth) by can be invested into ISA
- In addition to the current annual allowance
- Spouse can chose Inv. which match their ATR
- doesn’t need to be held in S&S ISA, can be held in cash ISA
- you can switch providers
EIS vs CGT
EIS – Income Tax
• Tax relief is as a tax reducer at a rate of 30% of the investment in the tax year concerned.
• The relief cannot exceed the IT paid in that tax year.
• Has the IT liability been reduced because of pension contribution?
• Investment can be carried back to previous tax year to increase IT relief. Therefore, if they had an IT liability in the previous tax year, part of the investment should be carried back.
• Income produced (if any) taxable but could use Divi. Allow. to reduce IT payable (to 0% if income within DAs)
• IT relief will be lost if he disinvests within 3 yrs.
EIS – IHT
• Investment is funded from the sale of business which qualifies for BR.
• Can therefore receive reinvestment relief so 100% BR is retained and available immediately within the EIS provided the investment is made within 3 years of the business being sold.
• Spouse isn’t a shareholder, so no reinvestment relief is available on an investment in their name.
• Investment in spouse name takes 2 years before 100% BR will apply & Spouse ATR match?
VCT - Income Tax
• The amount of IT relief available is as per the EIS (1-5)
• Can’t carry back an inv. into VCT to previous tax year.
• The income paid from a VCT is tax free and doesn’t use their DAs.
• IT relief will be lost if they disinvest within 5 yrs.
VCT – IHT
• VCTs don’t qualify for IHT BR relief so investments into a VCT will be within his estate for IHT purposes.
CGT
• VCTs are exempt from CGT whereas an EIS will take 3 years for this to happen
• If invests funds into EIS within 3 years of making the sale - be able to defer the CGT payable until subsequent disposal of the EIS and still maintain ER.
• Investing in a VCT this tax year will mean a CGT bill on the business sale, on 31st January, following the end of the current tax year.
