AF5 Last minute study areas

Question 1

Place bond in DGT…..Benefits

Answer 1

• no IHT payable on Trust establishment as value below nil rate band
• discount provides immediate reduction in IHT liability and as both young and good health the discount may be high
• growth in bond is outside their estate for IHT purposes and the gift will be completely IHT free after 7 years
• immediately reduces the value of estate for purpose of RNRB
• meets objective of mitigating IHT on second death
• take 5% of original capital as tax deferred income withdrawals and set these to start when Jane is 60
• bond is non income producing so reduces tha admin for the trustees / means there is no requirement for a tax return
• children can be names as beneficiaries ensuring the couples wishes that the children receive the estate in second death

Question 2

Drawbacks of placing the bond in DGT

Answer 2

• lose access to the capital and decision cannot be reversed
• nicks discount is likely to be reduced due to smoker status and family health history
• 5% income is based on original investment of £130k rather than todays value and the income amount cannot be changed
• unspent income will form part of estate
• they are young and may live past 20 years / income may be taxable within the trust
• cost / admin of the trust

Question 3

Principle duties and obligations of a trustee

Answer 3

• act in accordance with the trust document and general law
• act fairly towards all beneficiaries
• take reasonable care in making investments
  Obtain professional advice when making investment decisions
• invest cash held asap unless it will be used to make payment out of the Trust
• Not to profit from the trust
• Protect trust assets
• keep accounts
• declare and account for any tax arising on trust assets
• act as the registered owner of the trust property

Question 4

Benefit of Nick using cash funds to invest in VCT

Answer 4

• will receive 30% tax relief on the amount invested not exceeding the level of IT paid in the year of share issue
• this will reduce the level of IT he pays provided shares are held for 5 years
• income received is Tax free and does not use his divi allowance so allowance can be used for unit trust gains
• No CGT payable on any gain in value of the VCT on disposal and no minimum holding period to benefit from CGT exemption
• suits his Adv ATR

Question 5

Recco and Justify actions to reduce IT payable from non pension assets

Answer 5

• Utilise both ISA allowance each year using cash holdings / bed and ISA Nicks UT to increase level of tax-free income available
• from 19/20 change ownership of deposit funds so that Jane’s share of interest does not exceed her £500 PSA and balance held in Nicks name to use his £1000 OSA with balane taxed at 20%
• switch some of UT into Janes name to utilise her divi allowance as well as Nicks and so save 32.5 IT on divis received in 18/19 and 7.5% in 19/20
• switch will be tax free as spousal exemption applies
• use funds held on deposit to make pension contributions for Jane using carry forward achieving 40% tax relief
• Nick to invest in VCT to produce tax free income and gain 30% tax relief

Question 6

Impact of DB scheme entering the PPF before Nick is 65

Answer 6

• he will receive 90% of his projected income and this is below the cap
• all benefits accrued prior to 6.4.97 will be paid level with no increase
• any gmp benefits will be treated as pre 6/4/97 benefits and will lose indexation of CPI capped at 3% that would be otherwise payable on post 88 GMP
• post 97 benefits will increase in line with CPI capped at 2.5%
• spouse pension will be 50% of nicks entitlement