Case Study 2 Flashcards
1
Q
Discounted Gift Trust - Some taxation points to consider 6
A
- As father died 2 years ago, the discounted value forms part of estate is subject to IHT at 40%
- However, may have some NRB and deceased wife’s NRB transferred to cover this
- In any case, the value of the CLT will be reduced by the income payments received by her father
- if they surrender the bond in the tax year their father died, then it will be taxed at his marginal rate and personal reps are responsible for paying tax to HMRC and reclaiming from the trustees
- if they surrender in a different tax year, taxed against the trustees at 45%
- trustees may assign the bond to the beneficiaries & any future gains assessed at their marginal rate and can benefit from top-slicing
2
Q
DGT - generic points - advantages 5
A
- immediate reduction in the estate
- known level of income
- income tax deferred
- growth outside of estate
- can choose investments
3
Q
DGT generic points - disadvantages
A
- only 5% withdrawals
- discount may be poor based on factors such as longevity
- irrevocable
- must survive 7 years to avoid IHT
- complex trust work
4
Q
What are Clare’s duties as trustee of the DGT (9)
A
- to hold trust property and administer for benefit of the bens
- hold title documents to trust property
- everything done must be for ben of bens
- invest cash wisely or pay it out immediately
- take account of standard investment criteria
- monitor investments
- avoid conflicts of interest
- use utmost deligence
- keep proper accounts
5
Q
Outline process a financial adviser should follow to review the performance of their ISAs (12)
A
- Obtain LOA and issue to the relevant provider to obtain policy information
- confirm date of purchase
- identify costs, withdrawals and addtional investment
- identify reinvested income
- analysis performance history
- assess asset allocation
- identify suitable benchmark
- compare performance against this benchmark
- review charges
- compare with risk-free return
- review volatility
- assess funds against ATR
6
Q
Comment on the suitability of Clare continuing to hold high yield bond funds within her S&S ISA (8)
A
- not suited to ATR
- lack of diversification
- vulnerable to changes in the economic environment
- high yield bonds can be volatile
- limited growth potential
- could provide income
- credit, capital and inflation risk
- tax free as held in ISA
7
Q
Explain why clare should consider transferring cash ISA into S&S ISA which invests in equity based funds
A
- large proportion of holdings already in cash
- equities match her ATR
- cash losing real value due to inflation risk
- interest currently low
- no growth potential on cash holdings, growth potential much higher for equities
- transfer maintains ISA wrapper and does not use this years allowance
- wide fund choice
- suitable for long term investment
- PSA will cover interest on cash therefore no need for ISA wrapper
- can increase diversification
- equities generally outperform other assets
- tax free income from dividends
- benefit from fund manager expertise
- geographical diversification
8
Q
State benefits (5) and drawbacks (6) of Clare repaying mortgage from her father’s inheritance
A
Benefits;
- Reduces interest payable over the term
- increases disposable income
- improves affordability for other objectives such as retirement
- peace of mind
- may have term assurance which no longer need when paid off
Drawbacks;
- lack of liquidity
- cannot be used for other objectives such as topping up pension
- may be poor market timing
- less efficient for IHT
- may be early repayment penalties
- does not match ATR
- growth on inheritance may exceed interest paid on mortgage
9
Q
State the factors they should be aware of when making any decisions to repay credit card and mortgage (8)
A
- loss of liquidity
- saves on interest repayments
- mortgage interest rate compared against potential returns
- increases disposable income
- improved credit score
- peace of mind
- retaining debt increases flexibility
- early repayment charges may be applicable
10
Q
What is the impact on the DGT now Clare’s father has died - 14
A
- when settlor dies, regular payments stop
- any remaining funds are available to trustees
- trustees can choose to distribute funds to trustees or continue to hold them in trust
- value of the DGT fund does not form part of the estate
- will be subject to IHT at full rate of 40% on CLT due to setting up two years ago on the discounted value
- capital payments no longer being paid so no IHT implications on this
- trustees must inform life office of death so payments stop
- any payments paid after death are refunded to trustees
- if father was sole life assured then death considered a chargeable event
- if multiple lives, bond continues
- gains on bond taxable on father if bond surrendered in same tax year as as death
- personal representatives are responsible for paying the tax if this occurs and can reclaim from trustees
- if the trustees wait until next tax year, gains are taxed at 45%
- trustees can assign the bond to the beneficiaries and any future gains will be assessed at their marginal rates with the use of top slicing
11
Q
State the additional information you would require to advise the trustees on whether to surrender or retain the investment bond held in DGT (10)
A
- amount of original investment
- date of original investment
- set up on single or multiple lives
- did a chargeable event occur on death of father
- any other capital sums invested
- where any withdrawals made
- any exit penalties
- charges
- asset allocation of underlying fund
- suitability now for the beneficiaries - do they need capital now etc?
12
Q
Recommend and justify how Clare could draw flexible benefits from her father’s personal pension plan whilst preserving the tax efficiency of the pension wrapper (9)
A
- Via FAD
- should notify trustees of her decision within 2 years of date of death
- she can draw lump sums or income
- these are tax-free due to death before age 75
- tax efficient fund and outside of estate for IHT
- potential for investment growth
- clare can nominate successors
- no limit on number of times an FAD can be passed on following death
- makes an ideal generational wealth planning tool
13
Q
What are the other options (FAD) available to Clare from her fathers Pension? (3+3)
A
Lump sum;
- under 75 when died so tax free
- as long as paid out within two year
Lifetime annuity;
- can use funds to buy this
- income tax free if bought within 2 years and under 75
- cannot include death benefits therefore income lost on death
14
Q
Describe how a cashflow model could be used to assist T&C in planning their future income needs (8)
A
- identifies objectives and targets
- quantifies capital and income required to meet objectives
- identifies required rate of return
- takes into account inflation
- shows likelihood of achieving goals
- identifies if they will run out of money/have shortfall
- aids in producing financial plan
- can show the value of using tax efficient wrappers
14
Q
List the key factors need to consider when advising on funding their retirement planning strategy (15)
A
- longevity
- current expenditure and income in retirement requirements
- expenditure in retirement
- state pension entitlement
- asset allocation of funds
- use of pension allowances
- use of ISA allowances
- charges
- any further inheritances expected
- plans to repay debt
- ATR & CFL
- market conditions
- expected rate of return
- impact of death of either of them
