Case Study 1 (25-01)

Question 1

State the additional information that a financial adviser would require to enable them to identify a suitable level of ongoing income for Kathy, following the death of Alan.
(15)

Answer 1

• Current monthly expenditure.
• Capital needs/lump sum needs/ Emergency fund requirement/ any debts/liabilities.
• Any future care costs? /Longevity/ family health history.
• Any inherited State Pension claimed from Alan?
• Escalation of Defined Benefit (DB) scheme.
• Use of allowances (ISA/CGT).
• Has she registered Additional Permitted Subscription (APS) for Alan’s ISAs?
• Base cost on OEICs/ capital losses.
• Interest rate on deposit account/yield on OEICS/ ISAs
• Asset allocation.
• Income options available on Personal Pension (FAD/UFPLS).
• Is she willing to erode her capital? /Give up access to capital/Priority of objectives (income vs. inheritance for children).
• Any inheritances expected?
• Charges.
• Capacity For Loss (CFL)

Question 2

Outline the benefits for Kathy of using the services of a financial adviser on an ongoing basis to monitor her financial arrangements.
(10)

Answer 2

• Expertise/professional management/research/ receive recommendations.
• Less admin for Kathy/ peace of mind.
• Her tax position / tax efficiency/ use of allowances (ISA/CGT/gift allowances).
• Charges review.
• Can benchmark portfolio against appropriate indices/monitor performance/income yield.
• Likely to result in improved returns/ identify shortfalls/swift action to remedy.
• Attitude to risk/capacity for loss.
• Diversification/rebalancing.
• Cash flow modelling/ budgeting.
• New funds/new investment opportunities/new products/change in legislation/tax regulations.
• Regulated advice/ Consumer Duty/ identify vulnerabilities.

Question 3

Explain to Kathy how she could use her uncrystallised pension plan to provide her with further guaranteed sustainable income in retirement.
(10)

Answer 3

• Annuity purchase.
• Take 25% Pension Commencement Lump Sum (PCLS) (tax-free).
• Can use PCLS to buy Purchased Life Annuity (PLA).
• PLA offers tax-free return of capital element.
• No investment risk.
• Escalation.
• Capital protection/guarantees.
• Income taxable to Income Tax at 20% (she is Basic Rate Taxpayer).
• Taxed at source/paid net.
• No admin/no ongoing costs/no need for further advice.

Question 4

Recommend and justify the actions that Kathy could take to generate a tax-efficient income in retirement from the ISA and OEIC portfolios.
(14)

Answer 4

• Use ISA/Bed & ISA.
• Tax-free income and growth.
• Use Capital Gains Tax exemption of £3,000.
• Register capital losses.
• Switch OEIC (UK mid cap) to dividend-paying equities.
• UK mid cap stocks often pay lower dividends.
• Can use Dividend Allowance of £500.
• Dividend Tax of 8.75%.
• Use Additional Permitted Subscription (APS) to transfer Alan’s ISAs.
• APS protects tax-free wrapper/ retains £420k tax free.
• Take income from fixed-interest (OEIC/Alan’s ISA).
• Can use Personal Savings Allowance (PSA) of £1,000 on OEIC interest.
• Excess interest charged at 20%.
• Diversify income streams to maximise allowances.

Question 5

Identify the key reasons why an equity release arrangement may not be appropriate for Kathy in meeting her long-term objectives.
(8)

Answer 5

• She has sufficient assets at present/ no need to do this.
• May be taking on debt.
• Interest may need to be paid.
• Interest may be rolled up.
• Interest could be high.
• May reduce estate value for children (lower property value).
• House may need to be sold on her death to repay debt/ pay for long term care/ she wishes to pass it to her children.
• Set up charges/ Need for advice/complex arrangement.

Question 6

Explain to Kathy the conditions that must be met for regular gifts to be effective for IHT purposes using the normal expenditure out of income exemption.
(9)

Answer 6

• Gifts must be from excess income.
• Cannot be funded from capital/ cannot use current ISA withdrawals.
• Immediately IHT exempt/no 7-year rule.
• In addition to annual gifting exemptions (£3K).
• Must not impact standard of living/can vary each year.
• Accurate records must be kept/ Must be a pattern.
• Can be challenged by HMRC post death/not guaranteed.
• Gift must be outright/no retained value.
• Could be treated as Potentially Exempt Transfer (PET) if gift fails.

Question 7

Explain to Kathy how she can use the Additional Permitted Subscription to preserve the favourable tax status of Alan’s ISA portfolio and the benefits for her of doing this.
(10)

Answer 7

• ISA is a continuing account.
• Obtain value of ISA at date of death/Probate value/date of transfer.
• Claim/apply/register the Additional Permitted Subscription (APS).
• APS protects the tax-free ISA wrapper/remains tax free/cannot add to Alan’s ISA.
• APS available as married to Alan/living together on date of death.
• Can still use her own ISA allowance each year.
• APS can be used up to 3 years from date of death/to date of estate wind-up/date of closure of continuing account.
• She can transfer existing holdings in specie/retain existing investments/can switch to cash ISA.
• Can invest in line with her Attitude to Risk (ATR).
• She can transfer personal cash to the ISA.