Improve the suitability and tax-efficiency of their current financial arrangements Flashcards

1
Q

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

A
  • 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
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2
Q

Comment on Nick and Shirin’s Income tax position

A
  • 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
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3
Q

Comment on the suitability and tax efficiency of Nick and Shirin’s current savings and investments

A
  • 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
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4
Q

Outline the key factors that a financial planner should consider, when recommending a suitable strategy for Nick and Shirin’s existing savings and investments

A
  • 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
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5
Q

Describe the process that an adviser should follow before giving investment advice to Nick and Shirin

A
  • 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
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6
Q

Comment on the suitability of Nick and Shirin continuing to hold UK equity funds within their S&S ISAs

A

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

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7
Q

identify and explain to Nick and Shirin the key investment risks of holding equities

A
  • 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
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8
Q

Explain how diversification may be used to manage and reduce risk

A

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

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9
Q

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

A
  • 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
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10
Q

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

A
  • 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
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11
Q

Outline the process to follow to review the performance of existing stocks and shares ISAs

A
  • 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
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12
Q

Identify the key reasons why a range of collective investment funds might be suitable for Nick and Shirin

A
  • 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
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13
Q

Identify the key reasons why a global equity-based investment strategy may be appropriate for Nick and Shirin

A
  • 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
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14
Q

Nick and Shirin are considering making overpayments to their mortgage. State the key benefits and drawbacks for them making such overpayments.

A

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
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15
Q

Explain to Shirin to Shirin why she might be liable to the high income child benefit chare and how she can avoid paying this

A
  • 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
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16
Q

State the advantages and disadvantages or turning their mortgage into an interest only

A

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

17
Q

Recommend and justify the actions you would take in relation to improving the suitability and tax efficiency of Nick and Shirin’s current arrangements

A

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