Chapter 2 Flashcards
- Colin and Evelyn want a life assurance policy to meet the potential inheritance tax bill on their joint estate of £1,150,000 which they own in equal shares and includes the family home. On the first death, they plan to leave their estate to each other and then on the second death to their children. If they were both to die in the current tax year, the most effective policy would be a:
A. joint life second death policy for £150,000
B. joint life first death policy for £140,000
C. joint life first death policy for £32,000
D. joint life second death policy for £60,000
D - The current nil rate band for IHT is £325,000, plus a residence NRB (RNRB) of £175,000. If on the first death, Colin and Evelyn leave the estate to each other, no IHT will be payable at that point. Their NRB and RNRB will then be available to the legal personal
representatives of the second of them to die. On the surviving spouse’s death, the total NRB and RNRB would be £1,000,000 (2 x current NRB of £325,000 + 2 x current RNRB of £175,000). As their estate is worth £1,150,000, the amount subject to IHT is £1,150,000 - £1,000,000 = £150,000. Therefore, the IHT due would be £150,000 x 40% = £60,000. A joint life second death policy is suitable, as this would pay out on the death of the surviving spouse, which is when the IHT is due.
- What is the technical definition of a mortgage?
A. Assigning security to a lender in exchange for a loan
B. A loan used to purchase a property
C. The security offered in exchange for the loan
D. Borrowing money from a lender for house purchase
C - The technical definition of a mortgage is the security offered in exchange for a loan to buy a house (although the more common usage of the term mortgage is a loan used to purchase a property).
- Which of the following statements regarding ‘structured’ and ‘unstructured’ loans is incorrect?
A. Structured loans are viewed as lower risk than unstructured
B. Unstructured loans tend to be for larger amounts
C. The interest rate applied on an unstructured loan is usually linked to a base rate
D. There is often no collateral to back up a structured loan
A - An unstructured loan is usually backed up by collateral (e.g. a house on a mortgage) and the interest rate is linked to a base rate, but a structured loan does not tend to have any collateral and is therefore considered to be a higher risk to the lender. Structured loans tend to be smaller amounts e.g. for loans on a sofa or a car.
- You’re about to recommend a family income benefit to Glenda, a single mother with two young children. Explain to Glenda how a family income benefit policy differs from a standard term assurance policy?
A. On death of the life assured a series of payments are made instead of a lump sum payment
B. The policy has multiple lives assured to cover all family members
C. The aim of the policy is to maintain the family’s lifestyle in the event of the life
assured becoming ill
D. It is a government backed policy with tax concessions
A - A family income benefit pays out a series of regular payments rather than a lump sum, but a standard term assurance policy pays out a lump sum on the death of the life assured.
- Which of the following features is the same under both an income protection policy and a personal accident and sickness insurance policy?
A. Regular benefit is paid in the event of being unable to work due to illness or
accident
B. The contract could be cancelled by the insurer on the annual review date
C. A one-off lump sum payment may be payable in the event of permanent disability
D. Underwriting is based on morbidity and the client will have to complete a lengthy series of questions regarding their health and occupation
A - Both income protection and personal accident and sickness policies pay a regular benefit in the event of the claimant’s being unable to work due to accident of illness. Neither contracts pay out on the death of the insured, but the accident and sickness policy may pay out a lump sum on diagnosis of certain permanent disabilities. A permanent health insurance policy cannot be cancelled by the insurer, but an accident and sickness policy may not be renewed at the end of the policy year.
- Your clients Cynthia and Errol are in their mid-fifties. How many qualifying years will they require to receive the full new State pension?
A. 35
B. 36
C. 38
D. 40
A - To receive the full new State Pension, an individual must have 35 qualifying years. A qualifying year is a tax year in which you have paid or been credited with sufficient national insurance contributions.
- What are the standard timeframes used when discussing investment objectives? A. The phrases short, medium and long-term with time frames specific to each client
B. Short-term = up to 5 years, medium-term = 5-15 years, long-term = 15 years +
C. Short-term = 1-2 years, medium term = 3-5 years, long-term = 5 years +
D. Time frames are attributed to each asset class; cash = short-term, fixed interest and property = medium-term and equities = long-term
B - Most investments up to 5 years are classed as short-term. Medium-term investments are between 5 and 15 years and long-term is 15 years plus. Whilst different asset classes are more suitable for different lengths of investments, this does not relate to the question here.
- Elsie has a portfolio of investments currently worth around £500,000. Which of the following would be regarded as an advantage of using a platform for Elsie?
A. Increased investment returns due to lower taxation
B. The special offers and greatly reduced charges on offer
C. The personal investment manager allocated to each investor
D. The ability to aggregate holdings from several companies on the same system
D - A platform allows a client to aggregate his or her holding from different companies on the same system. It is a convenience tool but does not provide any tax advantages or greatly reduced charges.
- Grace is considering purchasing a buy-to-let property to supplement her income in retirement. What are the risks associated with investing directly in property?
A. The time needed to buy or sell the property (liquidity)
B. Property is regarded as the most volatile asset class
C. Payment on surrender can be delayed for up to 6 months
D. Most investors are inexperienced in investing in commercial property
A - One of the main risks of investing directly in property (such as a buy-to-let) is that money is tied up and to liquidate the money will involve having to sell the property, which can take a long time. Other risks include struggling to find a tenant to pay rent, problems with tenants, costs of repairs and the risk of increased costs if interest rates rise. While
property values can go up and down, it is not considered the most volatile asset class. Answer c) is incorrect, as direct investment in property is sold not surrendered, and payment is instant.
- Tariq has heard that certain investments use derivatives to help provide capital growth. Can you explain to Tariq what a derivative is?
A. A contract stating that one or two of the parties will give the other party the
difference between the current value of an asset and its value at a later date
B. The right to buy another type of asset at a higher price within a specified time frame
C. The obligation to sell another type of asset at a higher price within a specified time frame
D. The right or obligation to buy or sell another type of asset at a specified price at a specific date and time in the future
D - A derivative is a right or obligation to buy or sell another type of asset at a specified price at a specified date and time in the future. The other answers are incorrect. The actual market price of the asset (at the specified date in the future) may be higher or lower than the specified price.
- If Harold were to die today, he would leave his beneficiaries with a significant IHT liability. Out of the following courses of actions, which would NOT normally give rise to a potential inheritance tax liability?
A. Encashment of an investment bond
B. A lifetime gift of an asset to a child
C. Transferring ownership of an OEIC
D. A lifetime gift of an asset to a trust
A - IHT is the tax on the estate on death. The encashment of an investment bond would not necessarily be as a result of the death of the client; hence, the answer is a). A lifetime gift to a child and transfer of ownership of an OEIC is a potentially exempt transfer, so may give rise to IHT if the donor dies within seven years, and the gift exceeds their available NRB. The early death of a client may give rise to IHT if their estate is valued over the IHT NRB and/or if they have made lifetime gifts in the seven years prior to their death, in excess of their available NRB.
- Sheila is considering the use of trusts to reduce the IHT potentially payable on her estate on death. How could the use of trusts help Sheila mitigate her IHT liability?
A. Trusts ensure that assets are paid in accordance with the donor’s wishes thereby avoiding IHT
B. Placing investments in trust can reduce the value of the estate
C. A regular premium life policy in trust allows clients to use their nil rate band
D. Single premium life policies placed in trust are immediately exempt from IHT
B - Placing investments in trust can reduce the value of the estate for IHT purposes, although not always immediately. Regular premiums tend to be exempt from IHT anyway, as they are usually within the gift allowances. Trusts do set out how assets should be paid out; however, this is not what enables them to mitigate IHT.
- Universal credit is usually paid:
A. weekly
B. monthly
C. every 6 weeks
D. every 8 weeks
B - Universal credit is paid monthly to allow people to budget effectively and to reflect the workplace, as one of the stated aims of moving to universal credit is to encourage people back to work.
