Chapter 3

Question 1

What is a sole trader and what taxation applies?

Answer 1

Individual who solely controls their own business therefore liable

Profits subject to income tax
Subject to capital gains tax
Class 2 NI as self employed and Class 4 for profits

Question 2

What is a partnership and what taxation applies?

Answer 2

Sum of the partners so jointly and severally liable

Income tax, NICs and capital gains tax based upon their part of the business profits

Class 2 and 4 NICs

Question 3

What are LLPs?

Answer 3

Limited Liability Partnerships - own legal entity so not liable on partners

However all other traditional partnership features apply

Question 4

What are limited companies and what taxations apply?

Answer 4

Have their own separate entity and registered on companies houses

Company is only liable to extent of assets so shareholders not liable

Requires a director

Pay corporation tax on benefits including gains plus NIC of Class 1 - employee and employer

Question 5

What is Business Relief?

Answer 5

100% relief from IHT if owned by deceased for at least 2 years

Question 6

How does a company become a public limited company and what are the requirements?

Answer 6

25% places on stock exchange

2 directors and 2 shareholders
AGM required
Accounts filed within 6 months

Question 7

Difference between Bankruptcy and Insolvency?

Answer 7

Bankruptcy is individuals
Insolvency is Companies

Question 8

What is the Debt Procedure?

Answer 8

1 - Petition to Court
Owed at least £5,000 and not paid in 3 weeks

2 - Official Receiver
Takes control of debtors property and gathers details of assets and liabilities in report to determine whether trustee in bankruptcy is required

3 - Trustee in Bankruptcy
All assets owed including pensions pass to trustee except tools of trade, business vehicle, clothing etc.
Reviewed annuals

Question 9

What order are creditors paid?

Answer 9

1 - Bankruptcy Costs
2 - Preferential Creditors
3 - Unsecured Creditors

Question 10

What credit consequences does bankruptcy cause?

Answer 10

Unable to act as director and cannot obtain more than £500 of credit

Question 11

What options are their with Corporate Insolvency?

Answer 11

Company Voluntary Arrangements - same as IVA

Administration - administrator brought in to run company as going concern

Wound Up

Question 12

What are the stages of a company being wound up?

Answer 12

1 - Appoint a Liquidator
May need professional insolvency practitioner if lots of assets

2 - Identify Creditors
Contact all creditors within 12 weeks who send proof of debt

3 - Approve Claims
Sell available assets
Assess claims and provide to creditors who have 21 days to execute

4 - Pay Claims in Priority Order
Secured Creditors
Liquidators and associated costs
Preferential Creditors
Unsecured Creditors
Interest on all loans

Question 13

What are the main conditions for a contract to be legally binding?

Answer 13

1 - Offer
2 - Acceptance
3 - Intention

Question 14

What is consideration and examples?

Answer 14

Exchange of items to make contract valid

Payment of policy premiums or payment of benefits

Question 15

Who does not have capacity to contract?

Answer 15

Minors - can repudiate until age 18

Those without mental capacity

Drunk or not in control at time of entering contract

Question 16

What is the law of agency and provide examples?

Answer 16

Agent carries out certain acts on behalf of another party

IFA is agent of client

Multi-Tied or Tied are agents of firm

Question 17

What are the types of property ownership?

Answer 17

1 - Freehold
Own the building and land in perpetuity

2 - Leasehold
Own the building
Pay rent to Freeholder
Leaseholder gets property and land at end of lease however long terms

3 - Commonhold
Own property freehold in perpetuity
Association owns the lands (city centre flats)

Question 18

How can a leaseholder purchase the freehold?

Answer 18

50% of leaseholders must agree to purchase the land

Must live in property for 2 years with at least 21 years left on lease

Question 19

Types of joint ownership?

Answer 19

Joint Tenancy - equal share

Tenants in common - separate share and passes into deceases estates

Question 20

What is a power of attorney and give examples?

Answer 20

Legal document where donor grants power to attorney

GPA - transact as donor
EPA - replaced by LPA
LPA - Widened scope to cover personal health and welfare as well as property and financial affairs

Question 21

What cancels a GPA and what does an EPA & LPA do?

Answer 21

Donor’s bankruptcy, death, mental incapacity or end of term

They allow power of attorney to continue when mental incapacity occurs

Question 22

What revokes an LPA?

Answer 22

Donor’s death, dissolution of marriage or revokes them self

All of the above but also bankruptcy for property and finance LPA

Question 23

What is the process when an individual dies testate?

Answer 23

1 - Prove the Will
2 - Complete HMRC accounts - pay tax
3 - Receive probate
4 - Distribute the estate

Question 24

What actions revoke a will?

Answer 24

1 - Writing a new will
2 - Destroying a will
3 - Marriage

Question 25

What is the order of inheritance when dying intestate?

Answer 25

Spouse inherits everything if no children
Spouse inherits first £270,000 and 50% of the rest with children inheriting other 50% - might be in trust

If no spouse then children, grandchildren, parents etc.

Or to crown if no relatives

Question 26

What is a trust?

Answer 26

Means of arranging property for the benefit of other persons without giving them full control

Question 27

What are the 3 parties of a trust?

Answer 27

Settlor - original owner of asset - can be trustee

Trustees - legal owners of asset in trust
Must be 18, sound minded and not bankrupt

Beneficiaries - long-term intended recipients

Question 28

What are the type of trusts?

Answer 28

Refer to pages 145-146

Question 29

What can trusts be used for?

Answer 29

1 - Keeping outside estate for IHT purposes
2 - Ensure swift payment to beneficiaries
3 - Keep separate from trading accounts - in case of insolvency
4 - Protect pension from misuse

Question 30

What is a bare trust and when does it become an absolute trust?

Answer 30

Fixed and unchangeable beneficiary who will get property at age 18

Becomes absolute when beneficiary reaches 18