Improve the suitability and tax-efficiency of their current financial arrangements Flashcards
State the additional information that an adviser would require to advise Nick and Shirin on the suitability and tax-efficiency of their current financial arrangements
- What is the CFL?
- Objectives/Income required/timescales to achieve goals
- Interest being received on deposit savings accounts
- Asset Allocation/diversification within equity funds
- Use of allowances/ISA/Pension contributions
- Amount contributed to pensions in last 3 years?
- Are they willing to make overpayments on their mortgage?
- Performance of S&S ISAs
- Charges on ISAs
- Are they expecting any inheritances?
- Willingness to alter their portfolio in line with their ATR
- Awareness of personal savings allowance/dividend allowance/CGT allowances
- Awarness of CGT annual exempt amount which they are not using
Comment on Nick and Shirin’s Income tax position
- Both Higher rate tax payers
- Both have £500 PSA to set against deposit savings interest
- Both have £2000 div allowance which is not being used
- Income from their ISAs is tax free
- Higher rate tax relief on their pension contributions
- Could pay more into pensions for future growth and tax relief
- If they are receiving child benefit then Shirin will pay the high income child benefit tax charge
Comment on the suitability and tax efficiency of Nick and Shirin’s current savings and investments
- They have sufficient cash for emergencies
- All holdings are within the FSCS, no capital in risk of default
- May not be using their PSA in full
- Interest from joint deposits paid gross and taxed 50/50
- Both high risk investors
- UK Equity funds more in line with medium/medium to high
- Shirin’s default cautious fund is not in line with her ATR
- Should consider switch to more high risk funds, boost global exposure and potential for growth
- don’t know if they have used the ISA allowances in full
- No use of LISA which provides 25% extra from government
- ISA are tax free - efficient for HRT
- couple would benefit from APS on death
- Both have UK equity funds in their ISAs and Nick’s ISA which matches their ATR, however they are overweight in equities.
- Neither can utilise div allowance of £2,000
- Neither is using or able to use their CGT exemption
- No use of bed and breakfast
- Shirin’s employer would match her contribution of 8% if she increased hers
- Neither are using full AA
- Both missing out on tax relief at 40%
- Shirin’s pension fund does not match her ATR
- Overall their is insufficient diversification
- Increasing pension contributions would reduce high income child benefit tax charge
- Mortgage is protected by level term
- may be paying for cover you don’t need
- may be cheap and provide extra so keep
- can make penalty free overpayments
- ATR is high so overpaying debt maybe not a concern
Outline the key factors that a financial planner should consider, when recommending a suitable strategy for Nick and Shirin’s existing savings and investments
- Goals/income or growth
- use of savings and investments
- Diversification/correlation/asset allocation
- Timescale
- Emergency fund
- CFL / ATR / previous investment experience
- Charges / performance
- Planned use of tax wrappers / use of allowances / their higher rate status
Describe the process that an adviser should follow before giving investment advice to Nick and Shirin
- Establish the relationship / disclosure of status
- Establish goals / objectives
- Timescales for investment
- ATR / CFL
- Emergency funds required
- Analyse their personal and financial situation
- Formulate recommendations
- Tax status - both HRT, use of ISAs / Pension contributions
- Likely future tax position / increase in income
- Asset allocation
- Implement recommendations
- Review
Comment on the suitability of Nick and Shirin continuing to hold UK equity funds within their S&S ISAs
Advantages:
- Potential for growth over long term for Nick’s retirement
- Adds diversification to their portfolio
- actively managed
- matches ATR
- No political or regulatory risk
- no restrictions on access
- APS applies as married
- Should be able to switch funds easily
- use of ISA rather than pension funds reduces value of estate
Disadvantages:
- Too much reliance on UK equities / no diversification
- Vulnerable to UK economy
- Tax free in an ISA / outside wrapper would be taxed as savings income and could use PSA
- little there diversification
identify and explain to Nick and Shirin the key investment risks of holding equities
- Pricing: price depends on supply and demand
- Volatility: Dividends can fluctuate
- Liquidity risk: Some Shares can be difficult to sell
- Regulatory risk: Mark manipulation / info can be misleading
- Diversification: Essential to spread the risks associated with equities
Explain how diversification may be used to manage and reduce risk
Diversification reduces risk by increasing the number of asset classes
Some asset classes are not strongly correlated - a loss in one might not mean a loss in another
Geographical diversification spreads the risk across a number of different economies / currencies / markets
Sector diversification reduces the risk associated with specific areas of the economy or firms
Explain in detail how Nick and Shirin could use an EIS to potentially mitigate their income tax liabilities and state the long term benefits of using such a scheme
- 30% income tax relief on contributions
- Limited to total income tax paid in tax year
- Can carry back to previous tax year too
- Must be held for 3 years, otherwise tax relief clawed back
- Losses on encashment can also be set against income tax
- CGT deferral available via reinvestment relief
- For gains made in previous 3 tax years / following tax year
- EIS CGT free if held for 3 years
- Any deferred gain payable on encashment
- Business relief if held for 2 years and on death
- High risk investment suits ATR
- couple may have sufficient CFL
- Diversification / growth potential
- Higher investment limits when compared to SIA/pensions annual allowance
Explain in detail how Nick and Shirin could use a Seed EIS to potentially mitigate their income tax liabilities and state the long term benefits of using such a scheme
- 50% income tax relief on contributions
- Limited to total income tax paid in tax year
- Can carry back to previous tax year too
- Must be held for 3 years
- Otherwise tax relief clawed back
- losses on encashment can also be set against income tax
- Can defer CGT liability: 50% reinvested gain is exempt from CGT, 50% deferred
- For gains made in previous 3 tax years / following tax year
- SEIS CGT free if held for 3 years
- Deferred gain payable on encashment
- BR if held for 2 years and on death
- high risk ATR suits couple
Outline the process to follow to review the performance of existing stocks and shares ISAs
- LOA to obtain plan details
- Confirm date of purchase
- Base cost / any further withdrawals
- Identify reinvested income
- Calculate performance history
- Assess asset allocation
- Identify suitable benchmark and compare against
- Review charges
- Comparison with risk-free return
- Review volatility / risk rating of fund
- Assess funds against ATR / CFL
Identify the key reasons why a range of collective investment funds might be suitable for Nick and Shirin
- Improves diversification
- Reduces volatility
- Professional management
- No CGT on internal fund charges in OEIC
- Funds can match ATR
- Wider choice of active/passive funds
- Can choose monthly/quarterly withdrawals
- Simple tax reporting
- Less admin / can be held on platform
- Pound cost averaging for monthly contributions
- Benefit from volatility
- Can use dividend allowances that are currently not used
- Flexible contributions
- Suitable for long term investments
Identify the key reasons why a global equity-based investment strategy may be appropriate for Nick and Shirin
- Potential for growth
- Equities tend to out perform other assets
- Long term timeframe
- Pound cost averaging with regular contributions
- Reduces risk
- Geographical/currency diversification
- Matches ATR
Nick and Shirin are considering making overpayments to their mortgage. State the key benefits and drawbacks for them making such overpayments.
Benefits:
- Reduces interest charges
- Increases equity in home
- Can make overpayments of 10% penalty free
- Peace of mind
- Could repay mortgage earlier
- No investment risk
- Could improve credit rating
Drawbacks
- Interest rate is low
- Do they have sufficient surplus income to make overpayments
- Potential for higher growth if invested with ATR elsewhere
- Retaining debt increases flexibility
Explain to Shirin to Shirin why she might be liable to the high income child benefit chare and how she can avoid paying this
- Her income is currently over £50k
- If either receive child benefit the charge applies to her as she is the higher earner
- her adjusted net income is > £50,000
- CB reduced by 1% for each £100 of income over £50,000
- never pay more in tax than the full amount of child benefit
- Shirin can make pension contributions to reduce net income to under £50,000
State the advantages and disadvantages or turning their mortgage into an interest only
Advantages:
- potential growth on investments
- reduced outgoings / more disposable income
- may repay early
- can access investments if needed/flexible
- tax efficient and matches ATR
Disadvantages:
- investment risk / risk of interest rate rise
- Shortfall risk
- temptation to withdraw funds
- needs advice /monitoring / fees and charges
- may be harder to arrange a re-mortgage if use of salary sacrifice
Recommend and justify the actions you would take in relation to improving the suitability and tax efficiency of Nick and Shirin’s current arrangements
ISAs:
- both need to make use of their ISA allowances each year
- maximising the funds held in tax free environment
- That can then be used to supplement their retirement income
- no restrictions on access which may suit retirement age
Funds:
- review fund choices across their pension and investment portfolios
- ensure align to ATR and diversified
- review pension investments
EIS/SEIS:
- consider small amounts of EIS investments
- benefit from income tax relief at 30%
- may be boost long term savings
- outside of estate after 2 years
- reduce IHT payable in long term
- 50% CGT relief
IHT:
- monitor size of estate
- make provision for IHT liability should one arise
Pensions:
- maximise pension contributions
- benefit 40% tax relief
- Maximise potential growth which will be free of income and CGT
- larger income for couple at retirement
- pensions free from IHT
- see if company allows SS which reduces NI payments
- see if company allows additional contributions
- may reduce child benefit charge
- ensure expression of wish up to date
Home:
- ensure mortgage protection is in line with mortgage including sum assured
- mortgage covered on death and serious illness
