Aim 2 - To improve the ongoing suitability and tax efficiency of their savings and investments

Question 1

Comment on the suitability of Jim and Sandra’s savings and investments and identify whether the portfolio meets their risk profiles

Answer 1

• they are both medium risk investors
• too much held on deposit/eroded by inflation/not sufficient easy access for emergencies
• lack of diversification of asset classes
• they have sufficient geographical diversification within their equity investments
• no default risk with cash/deposit covered by FSCS and NS&I fully protected
• ISAs for tax efficiency
• deposit interest just over Jim’s Personal Savings Allowance
• Unit trust dividends exceed dividend allowance for both
• Excess dividends for Jim liable to higher rate tax/32.5%/Sandra only pays 7.5% on the excess
• more investments should be held in Sandra’s name
• risk profile of funds/asian equity fund may not suit ATR

Question 2

Outline the process you would follow to enable you to review the performance of Jim and Sandra’s existing stocks and shares ISAs

Answer 2

• LOA/obtain plan details
• confirm date of purchase
• base cost/any further investments /withdrawals/fund switches
• identify reinvested income
• calculate gain/performance history
• assess asset allocation
• identify suitable benchmark
• identify alpha/compare against benchmark
• review charges
• comparison with risk-free return/risk adjusted return
• review volatility/risk rating of the fund
• assess funds against attitude to risk/capacity for loss

Question 3

State the information you would require to calculate the CGT liability on the sale of the unit trust holdings

Answer 3

• base cost
• current value
• sales since original purchase/transaction costs
• any dividend income reinvested
• taxable income for the current tax year/tax status/for CGT rate
• any carried forward losses from previous tax years/registered with HMRC
• annual exempt amount availability

Question 4

Explain the CGT implications of transferring the Unit Trust held by Jim and Sandra and the improved CGT efficiency that this action will potentially provide

Answer 4

• Inter-spousal transfer rules apply
• no loss no gain basis/no CGT/Sandra receives the investment at initial base cost
• CGT is chargeable potentially at 10% not 20% (if gain keeps Sandra within the basic rate)
• £12,300 CGT annual exempt amount available
• Retain sufficient investments for Jim to use his CGT exempt amount

Question 5

Describe the actions Jim and Sandra could take to improve the tax efficiency of their savings and investments

Answer 5

• Jim is a higher rate tax payer and Sandra is a basic rate tax payer
• transfer deposit account to Sandra - most of interest will be covered by her unused PSA
• transfer some of Jim’s Unit Trust to Sandra
• transfer uses interspousal exemption
• transfer of unit trust saves dividend tax of 25%/7.5% not 32.5%
• transfer of unit trust reduces potential CGT to 10% if keeps Sandra within BRT
• use both CGT exempt amounts
• increase pension contributions for Sandra
• Pension provides tax relief/tax free growth
• pension is IHT free
• continue funding ISAs in full

Question 6

Identify benefits and drawbacks of Sandra using a UK FTSE tracker fund for long term investment

Answer 6

Benefits

• low cost
• simple to understand
• no human error/no active management
• tracks market/potential for growth

Drawbacks

• underperforms index/no ability to outperform/no Alpha
• tracking error/impact of charges
• will follow market down in downturn/market risk
• lack of diversification/may not match attitude to risk

Question 7

Other than market risk, identify and describe the potential risks associated with the Asian equity funds held in Jim’s S&S ISA

Answer 7

• non-systematic risk/underperformance of a company within the portfolio or the fund
• diversification risk/ISA is only invested in equities/no exposure to other asset classes
• legislation/taxation risk/change in legislation may affect tax benefits of ISAs
• currency risk/movements in exchange rates may affect value
• political risk/sudden change in legislation/government/practice
• regulatory risk/poor accounting standards/less regulation
• liquidity risk/may be difficult to dispose of

Question 8

Explain to Jim and Sandra why Premium Bonds may not be suitable for them over the longer term

Answer 8

• they have excess held in cash
• no interest paid
• no potential for capital growth
• unknown returns/may not win in future
• inflation risk/returns unlikely to match inflation
• not suitable for long term
• does not match their ATR