Case Study 1 (24-10)

Question 1

State the additional information that a financial adviser would require in order to advise Cameron and Nancy on the suitability of their current arrangements to meet their financial objectives.
(13)

Answer 1

• Expenditure/surplus income/budget/affordability/emergency fund.
• Amount of planned gifts/loans to grandchildren/when do they intend to gift monies/previous gifts made/Annual Gifting Allowances.
• Family health/longevity/plans for long-term care.
• Interest rate on saving account.
• Base cost of Unit Trusts/gains on Unit Trusts.
• Use of CGT exemption/any losses carried forward.
• Downsizing/equity release.
• Any inheritances expected.
• Willing to transfer to Nancy for tax efficiency.
• Charges.
• Asset allocation/diversification.
• Priority of objectives (inheritance for children vs. retirement income)/willing to use Trusts/lose access to capital.
• Capacity for Loss.

Question 2

Identify the key reasons why it might be appropriate to include Cameron and Nancy’s children in future meetings with their financial adviser.
(7)

Answer 2

• Vulnerability.
• They will assist/support Cameron and Nancy/new process for Cameron and Nancy (no financial advice before).
• Consumer Duty.
• IHT planning will impact children/intergenerational planning/can make potential use of children’s allowances (e.g. ISA/pension).
• Aids understanding for children/better planning.
• Children may be Attorneys/they are beneficiaries/may be executors.
• Can aid Trust planning/they may be Trustees/make use of Trusts.

Question 3

Outline the issues that Cameron and Nancy should consider when deciding whether they should loan monies to their grandchildren, rather than gifting monies for them to purchase their first properties.
(10)

Answer 3

• Amount of loan/gift?
• Affordability issues for Cameron and Nancy/concerned about income sustainability/loss of capital.
• Loan will be repaid/can grandchildren afford to repay?/Loan can be ‘forgiven’ at later date.
• Interest could be charged.
• Loan remains in estate for IHT.
• Loan protects monies if grandchildren divorce/buy property with partner/ bankruptcy.
• Can place charge on property to protect loan/need for formal agreement?
• Gift will be outside the estate after 7 years/gift is a Potentially Exempt Transfer (PET).
• Gifts can use £3K Annual Gifting Allowance (AGA).
• Loan affects borrowing affordability for grandchildren.

Question 4

Recommend and justify a range of actions that Cameron and Nancy can take to mitigate their potential Inheritance Tax liability.
(12)

Answer 4

• Use £3K Annual Gifting Allowance/£6K/small gifts exemption (£250)/use gifts out of income (if they have surplus income).
• Can make Potentially Exempt Transfers/Chargeable Lifetime Transfers.
• IHT reduces over 7 years.
• Loan Trust.
• Loan Trust growth outside estate/can withdraw capital if needed.
• Use Discounted Gift Trust (DGT).
• Immediate discount on IHT (based on age/income chosen)/ Full gift to DGT is exempt after 7 years.
• DGT provides regular income stream.
• Whole of Life Joint Life Last Survivor policy in Trust.
• Pays lump sum to meet IHT.
• Invest in AIM shares.
• Outside estate after 2 years.

Question 5

Explain to Cameron and Nancy how a whole of life assurance policy could be used to assist them with their Inheritance Tax planning objective.
(12)

Answer 5

• Joint Life last survivor basis/second death.
• In Trust for children/executors.
• No need for Probate.
• Sum assured to match IHT liability.
• Guaranteed premiums/reviewable premiums.
• To ensure affordability/to keep costs low.
• Indexation.
• To keep pace with growth of estate.
• Estate can be distributed in full to beneficiaries.
• Premium can be paid by children.
• Policy can be cancelled if no longer needed/policy cannot be cancelled by insurer.
• Allows time for other measures to be put in place (gifting).

Question 6

Explain to Cameron and Nancy why their existing portfolio of unit trusts may not be suitable for their longer-term objectives.
(10)

Answer 6

• Not tax-efficient/not held in ISA/liable to IHT.
• Held in joint names so higher tax paid/transfer more to Nancy.
• Dividend exceeds £500 Dividend Allowance.
• Dividends taxable at 33.75% for Cameron/8.75% for Nancy.
• CGT on any gains of 10%/20%.
• CGT exemption of £3K/£6k.
• All equity-based/lack of diversification (no other asset classes).
• Income stream not guaranteed.
• Currency risk on Global funds.
• May not match Attitude to risk (ATR)/volatile investment.

Question 7

Identify a range of actions that Cameron and Nancy could take to improve the sustainability of their retirement income.
(10)
Total marks

Answer 7

• Use ISA/Bed & ISA.
• Tax-free income and growth.
• Reduce cash holdings/excess cash/identify emergency fund needs/reduce Premium Bond holdings.
• Cash not keeping pace with inflation.
• Use annual CGT exemption of £3k.
• Invest in Purchased Life Annuity (PLA).
• Guaranteed income for life/can include indexation/portion will be tax-free (return of capital).
• Transfer more Unit Trusts to Nancy.
• Reduces dividend tax to 8.75%/saves 25%/CGT to 10%.
• Transfer more cash funds to Nancy.
• He exceeds Personal Savings Allowance (PSA)/he pays 40% tax/she pays 20% tax.