Chapter 3 - Laws And Legal Concepts

Question 1

Sole Trader - what they are liable for, tax (who levied on and what taxes + NICs) & employees

Answer 1

They are self-employed and entirely liable for liabilities in their business.

Tax is levied on the individual sole trader (same for partnership) rather than the unincorporated business - profit liable to income tax and capital gains tax on any capital gains.

Pay income tax twice a year and NICs paid under class 2 and 4. Cannot separate personal liable tax from that of the business but must separate taxation of employees - must also pay secondary class 1 NIC as the employer.

Question 2

Partnerships - how tax and NICs different to sole trader and what stays the same & liabilities for each partner.

Answer 2

Largely the same as sole trader however, if taken another partner, will only pay their share of tax on the profits (50%) and NICs. Employees NICs same as sole trader.

Each partner has unlimited liability for trade debts but they are solely liable for own tax.

Question 3

Limited Liability Partnership - what are they, liability, why attractive and taxation

Answer 3

Separate legal persons and partners are not liable for LLP’s debts and is therefore attractive to firms that face large liability claims.

Tax purposes, they are treated like a partnership - partners pay income tax and NIC on their share of profits & do not pay corporate tax.

Question 4

Limited companies - what is it, debts, incorporation (meaning), shares and taxation (what do they pay and office holders) think old job here

Answer 4

Limited companies have legally separate identity from owners and company is responsible for its own debt (unless shareholders are guilty of unlawful trading).

Changing partnership to limited company = incorporation

Private limited company not able to advertise shares are for sale and would only change hands with a private agreement.

Limited companies do not pay income tax or CGT but pay corporation tax on all profits. Directors are classified as office holders for tax purposes and means instead of having deductions to monthly income they are charged accumulatively.

Question 5

Public Companies - how different to LTD & result of this & what they are required to do to be a PLC(7)

Answer 5

PLC is distinct from LTD as it may be floated on the Stock Exchange which heightens need to for PLC’s to protect investors. Therefore they are required to;

• have at least two directors or shareholders.
• must state they are public and name must end with PLC (or full version)
• Need extra certificate from Registrar of Companies before they can start trading - achieved by having shares of at least £50k and company must have at least quarter of value.
• Company secretary must be member of pro body or directors recognise as competent (through experience or other way)
• Must always lay out accounts and reports before general meeting and hold these annually.
• Must file these accounts within six months of accounting period and these may be asked to be audited or abbreviated.
• Disclosure of shareholding’s and release of info that may affect share price.

Question 6

Power of Attorney - when can it be revoked (4)

Answer 6

Power of attorney is automatically revoked on death, bankruptcy of donor and expiry of specified time plus donor can cancel at any moment in time.

Question 7

Mental Capactiy Act 2005 - enduring POA - what is it, requirements (3), registering (who & when), restricted, does not cover (2) and notice.

Answer 7

Enduring POA - power of attorney document that continues to act in the event of mental incapacity. In order to qualify, must meet the following requirements;

• established before 01/10/07
• established whilst they had full individual capacity, over 18 and not bankrupt.
• satisfied conditions of Enduring POA Act 1985.

Attorney registers EPA with Office of Public Guardian when lost or starting to lose mental capacity. If they want to maintain their affairs whilst they are mental stable then possible to restrict EPA so power does not come into effect until registered.

Powers can be restricted or general and EPAs do not cover health care provision and cannot use power to make gifts. Notice given to at least three family members.

Question 8

Lasting POA - permission to… (2), medical treatment coverage, gifts, when can it be revoked (4),

Answer 8

Introduced by Mental Capacity Act 2005 and is agreement whereby donor gives permission to make decisions regarding personal health and welfare and property and financial affairs.Two separate documents required for both. If LPA includes power to make decisions for welfare it extends to consent for medical treatment.

Must comply with regulations made under the act and registered with Office of Public Guardian asap.

Cannot be used for gifts (except reasonable e.g. birthdays) meaning IHT rarely possible. Can refer to Court of Protection to authorise gifts under LPA.

Can cancel if they have capacity or be revoked if;

• Donor goes bankrupt (not welfare tho)
• death or bankruptcy of attorney (only one)
• dissolution of marriage or civil partnership between the two.
• attorney’s incapacity (only one)

Question 9

Contract law - binding contract conditions (3) and add conditions for life policies - utmost faith (what is it, applies to…, CIDRA & Insurance Act 2015) and insurable interest (what is it)

Answer 9

For binding contract, following requirements must be fulfilled;

• offer and acceptance of terms and both parties must understand the terms of contract.
• intention to create legally binding contract and both parties must have the power to contract.
• must be consideration i.e.policyholder paying premium and firm paying out on claim.

For life assurance policies, there are additional requirements;
Utmost good faith - duty to voluntarily disclose, accurately and fully, all facts material to the risk being proposed. Applies to both parties.
- CIDRA - consumers have duty to take reasonable care not to make a misinterpretation.
- IA 2015 - Commercial clients obligation to make a fair representation of risk to the insurer that is clear and accessible.

Insurable Interest - requires person who benefits will be payable to, to have some financial interest in life assured whether it be legal or equitable.

Question 10

Contractual Capacity - Minors - minor rules for contracts (what is it), three categories + explanation

Answer 10

Minors - Special legal rules governing contracts to protect minors from their inexperience. Fall into three categories;

• Binding - contract is binding if, on the whole, it is beneficial for minor e.g work contract.
• Binding unless repudiated - e.g. lease or holding shares in company. Can cancel contract either during minority or reasonable time afterwards and therefore freed from any further liability.
• Not binding - all others and includes borrowing money. Does bind other party and minor can sue if they don’t keep up their end. Do not have to cancel contract to avoid liability.

Question 11

Contractual Capacity - under the influence of mental health conditions (when valid and when not and if get better) & alcohol and drugs

Answer 11

Mental Health Conditions - generally valid but can be void if unable to understand nature of agreement and other party aware of inability. If condition clears up they are able to ratify contract that did not previously bind them.

Alcohol & Drugs (yum lol) - similar rules to the above. Intoxicated can avoid contract only if they were totally unaware of what they were doing and other party knew this. Contract becomes binding when effects of alcohol or drugs have worn off.

Question 12

Offer and Acceptance - what is the offer, evaluation (2), acceptance letter and what does this state (2) and what is this known as and how to accept.

Answer 12

Proposal form completed by the proposer is by law the offer which is then evaluated by life office who make any enquiries or request medical evidence. If they are prepared to accept risk, they issue acceptance letter that states confirmation provided first premium is paid and state of health remains unchanged. This letter of acceptance is known as a counter offer which proposer can accept by paying the first premium.

Question 13

Law of agency - what is it, client wants insurance and IFA (3), void if and FCA compliance.

Answer 13

An agency is a contract whereby the agent agrees to do certain acts on behalf of the principal.

E.g. someone seeking insurance may use an IFA and under the law of agency;

• the IFA is the agent and has a duty of care
• IFA owes no duty to the insurer but must comply with FCA rules.
• Client is responsible for the acts of the IFA.

If IFA does not disclose material circumstance to the provider then the contract is void and vice versa if agent is acting for provider. If agent is acting for insurer then insurer is responsible for ensuring FCA compliance.

Question 14

Ownership of property - forms of ownership - Freehold, leasehold and commonhold

Answer 14

Freehold - building and land is owned until owner sells or dies at which point becomes property of their estate.

Leasehold - land is not owned outright but leased from the person who owns the freehold rights at a rent. Typically 99 years and at the end of the term the land reverts back to freeholder.

Commonhold - own their flats but commonhold association owns the land, building and the common parts. Unit-holders have a vote in the operation of the association.

Question 15

Types of ownership and lending decisions - obtaining mortgages for freehold (brief) & leasehold (lease length, safety margin and repair agreements) & help leasehold secure a mortgage through… (2) and have a right to buy or extend if… (2)

Answer 15

If freehold, should not be difficult to obtain mortgage. Harder to get a mortgage for leasehold as would need at least 25+ years left on lease to act as safety margin so it can be sold at good price is borrower defaults. May also want to see agreements regarding repair and maintenance of building - easier for flats as this can be forced in lease terms.

Leaseholder has the right to buy the freehold or extend the lease in order to help secure a mortgage. They have a right to buy or extend the lease provided they have lived in the property full time for 2 years and the lease is more than 21 years.

Question 16

Joint tenancy and tenancy in common - selling rights, shares and death

Answer 16

1. • neither can sell without the others permission. Each have equal share and when one dies, the other gets this.
2. Holds their share separately and can dispose of share when they want. When they die it goes to their estate. Don’t need to involve equal shares.

Question 17

Housing associations and Gov schemes - shared ownership (what is it and staircasing) & help to buy equity loan (what is it, who available and eligibility requirements, 3)

Answer 17

Shared ownership - buy a share of the property with remaining share being owned by housing association and purchaser pays rent to HA on their share. Can increase their shares over time (staircasing).

Help to buy: equity loan - Gov lends borrower % of the cost of property and is not charged loan fees for the first 5 years. Available for first time buyers and homeowners. Eligibility requirements;

• newly built with price tag of £600k
• Cannot be sublet or part exchange
• Must not own any other property.

Question 18

Bankruptcy and insolvency - who those to apply to
- Individual Voluntary Arrangement - alternative to…, process (5), cancelled if, fees made up of, register, credit rating and difference between this and bankruptcy.

Answer 18

Bankruptcy applies to individual whereas insolvency applies to companies.

IVA - alternative to bankruptcy and is categorised by the following;

• Creditors representing at least 75% of debts need to vote in favour for IVA to go ahead.
• Once approved, they cannot take legal action to recover debt.
• Fees payable but included in monthly repayment when proposal agreed.
• Insolvency practitioner reviews debtors finances annually and reports to creditors.
• Debtor is notified when ended.

It can be cancelled if debtor does not keep up with payments and fees are made up of - set up fee and handling fee each time payment is made.

IVA added to individual insolvency register and only taken off three years after repayment and appears on credit rating for 6 years.

Difference between IVA and bankruptcy is that debtor will not lose their home but may be asked to remortgage if equity can be used to pay off debtors.

Question 19

Bankruptcy and insolvency - Procedures - how does it begin, min amount, how demonstrated (2), how else (2), trustee, what can they retain and order of paying off debts (3)

Answer 19

Bankruptcy usually begun by petition from creditors for bankruptcy order. Will consider petition if debt is at least £5k. Before order is made, inability to pay debt must be demonstrated by showing that statutory demand has not been complied within 21 days or that court order has not been enforced (bailiffs). Can also apply online or insolvency practitioner can make you if break terms of IVA.

All property owned by the debtor at date of bankruptcy passes to trustee. Can retain tools of trade, car and essentials for themselves and family. This is then used to pay off debts in following order;
- costs of bankruptcy
- preferential debts (e.g. wages of employees)
- Ordinary unsecured creditors
These are paid equally if unable to pay debts in full.

Question 20

Effects of bankruptcy - how long and disqualifications

Corporate Insolvency - liquidator brought in to… (4), 3 words to describe process of non-existence and alternatives (2) + explanation

Answer 20

Normally continues for 12 months longer but this can be extended if continued to trade through insolvency. During this time they are disqualified from acting as company director, obtaining credit above £500 without disclosing bankruptcy and professions such as accountancy, fs and banking.

Corp insolvency - liquidator is brought in to take control of company, collect all assets, pay debtors and distribute surplus between members. Company then dissolved and struck off companies register. Liquidation, winding up and insolvency all describe process by which company ceases to exist. Alternatives are;

• Administration - administrator appointed to run company’s affairs and attempts to rescue it.
• Voluntary arrangements - insolvency is avoided by coming to an arrangement/settlement with creditors.

Question 21

Law of succession - succeeds (what is it), law recognises and three formalities when making.

Answer 21

Succeeds = whoever gets the benefits (beneficiary)

If the deceased party has made a will, law recognises their right to leave their property to whoever they wish to and law of instancy does not apply.

Three formalities when making a valid will;

• Writing - must be in writing including print and personal writing
• Signature - must be signed by testator making the will or person in presence if they cannot sign themselves.
• Attestation - signature must be witnessed by two or more people and should be independent (not related). Attestation should be witnessed by testator.

Question 22

Law of succession - Revocation of wills - revoked when (2), automatically revoked (2+explanation), advisable, civil partnership and death

Answer 22

Can revoke will by making new one or deliberately destroying it. Also automatically revoked when;

• Marriage - full, unless stated made in anticipation
• Divorce - in part, any bequests to former spouse will lapse unless clearly stated. Remainder of will carries on being valid. Appointment of spouse as executor is cancelled on divorce.

Advisable to make a new will on marriage or divorce. Civil partnership treated the same as marriage.

If person dies without making a will, they will die intestate.

Question 23

Law of succession - Intestacy - what is it, who it goes to in what situation (4, straightforward), legacy reviewal and not chattels

Answer 23

= died without a will. If dies leaving;

• spouse but no issue (kids etc) - spouse is sole beneficiary
• spouse + issue - spouse takes personal chattels, statutory legacy of £250k plus half balance outright. Issue gets other half of remaining estate.
• just issue - everything is taken by issue
• no relatives - goes to the Crown (gov)

£250k legacy amount is reviewed every 5 years and increases with CPI.
Chattels covers all property apart from money or securities, property used solely or for business purposes and property held solely as investment.

Question 24

Legal Personal Representative (LPR) and administration of estates - what are administrators, these + executors known as, liability, documents that need to be gained (2), how to obtain GoP, what they must complete and what administrators must apply for

Answer 24

Administrators - if died interstate, estate handled by next of kin. These plus executors are known as LPRs.

LPRs personally liable for the payment of all debts and taxes from the estate therefore essential to ensure enough estate left to pay for these.

If total assets are above £5k on death, it is necessary to obtain Grant of Representation - two types - Grant of probate and Letters of Administration. Executors must prove the will by showing to Probate Registry in order to obtain grant of probate. Before receiving, must complete an HMRC account which shows all assets and gifts in last seven years. If exceeds nil rate bands, then IHT may be payable and must be paid before GoP is given.

Administrators must apply for Grant of Letters of Administration. Same as above.

Question 25

Trusts - basic overview, legal ownership, interests of parties, legal action and contract

Answer 25

Trust - a means by which someone (settlor) gives away asset for eventual benefit of others (beneficiaries) and control over asset is handed over to trustee in the meantime.

Trustee possesses legal ownership of the trust property but cannot treat it as personal property and must use property for the benefit of beneficiaries. Trustees possess legal interest whilst bens possess equity interest and can enforce rights by legal action.

No requirement for contract between settlor and beneficiary.

Question 26

Types of trust - ways trust can come into existence

• Express
• Implied
• Presumptive
• Successive
• Constructive
• Resulting

Answer 26

Express trust - intentionally and expressly created. Usually done by written method.

Implied - Not created expressly but implied through actions or circumstances. E.g. partnership purchases property and conveyance on one partner only who will hold the property in trust even if no formal document. (I.e Bought under one name but used for all)

Presumptive - One person purchases a property in the name of another. Similar to above

Successive - property held in trust for succession of interests taking effect one after the other. Ensures that property stays in family despite break up.

Constructive - Imposed by law. E.g. if buying trust property of family for cheaper and know its worth more and this gets discovered, must pay back profit.

Resulting - arises when failure of trust on which property is held. As no longer can be fulfilled, ownership is reverted back to them. E.g. if wife murders husband she cannot benefit from trust.

Question 27

Types of trust

• Bare or absolute
• Power of appointment
• Interest in possession
• Discretionary
• Will
• Statutory
• Pension scheme

Answer 27

Bare or absolute - trustees sole duty to transfer property to appropriate beneficiary.

Power of appointment - powers exists to vary or appoint beneficiaries. Flexible and can cope with change in circumstances.

Interest in possession - beneficiary has present right to income or capital.

Discretionary - power of appointment where there is no one with current interest in possession. No one has right to anything until trustee decides they do.

Will - created by will and not during settlers lifetime and becomes effective when testator dies. Executors of will become trustees. Whilst alive can be changed whenever they want. E.g. gift to minor is will in trust until 18.

Statutory - created by statute or law.

Pension scheme - occ schemes must be set up with irrevocable trusts which can be created through trust deed, declaration of trust or deed poll or board resolution.

Question 28

Creating and administering trusts - how created (deed), three certainties,

Trustees -control and power + example, statutory powers, liability and record keeping

Answer 28

Created by settlor executing a deed assigning the property for the benefits of beneficiaries and this deed will set out powers of trustees and beneficiaries. Has to be signed by settlor. For trust to be valid, three certainties must be present;

• words must show and be clear that trust is intended.
• Property subject to trust must be specified.
• Beneficiaries must be certain and achieved by naming the beneficiaries.

Trustees must become familiar with terms of trust and take control of the property e.g. taking share certificates and changing name of companies register of shareholders. Trust deed will give them specific powers regarding trust property e.g. buying and selling shares to maximise benefits.

Some statutory powers for trustee such as using benefits to provide for infant beneficiaries maintenance and can apply capital for advancement of benefits.

Trustees must be diligent to avoid any losses and if they are not, they are liable for loss. Must keep accounts of trust and produced on beneficiaries request as well as any dealing and investments information.

Question 29

Appointment and removal of trustees - removed when (5)

Beneficiaries - naming, four types of beneficiary (absolute, life, reversionary and contingency), enforcing trust, administration and ending trust

Answer 29

Trustee will be removed when;

• resign or dies
• removed or automatically retired
• removed by other trustees (if permitted by trust deed)
• removed in accordance with Trustee Act 1925
• removed by relevant court.

Beneficiaries can be named or as a class- e.g. ‘all my children have equal shares’. Four types of beneficiary;

• Absolute interest - run of the mill
• Life interest - entitled to income of trust property for life but cannot touch the capital. Known as a life tenant.
• Reversionary interest - right to trust property after termination of life interest.
• Contingency - subject to contingency and therefore may not come into possession.

Enforcing the trust - trustee bound by trust wording but can use personal judgement in exercising powers and does not have to consult beneficiary.

Beneficiaries can ensure proper administration through the use of solicitors or accountants. Can also put an end to trust if all of age and no further beneficiaries and can direct trustee to hand over property.