Objective 5 Suitability & Tax Efficency Flashcards
Identify the additional information that you would require in order to advise Alex on the suitability and tax-efficiency of the unit trust he is due to receive from Tanya’s estate.
- Risk profile of fund
- Credit rating of companies
- Current & future yields
- Reasons for fund choice
- Probate value
- CGT used now and future
- Any losses registered
- Projected income and capital requirement
- Projected tax status
- investment experience/ use of advisor services
- what other funds are available
- ISA switching available
- Personal view/ emotional attachment
Identify the additional information that you would require in order to advise Alex on the suitability of his current savings and investment holdings.
EF
income required
Any spending plans
School/university fees/ house deposit
Disposable income after return to work
What £76k in cash
Historic performance of isa
ISA contribution history
Increase in value of UT when transferred
Asset allocation ISA
Inv risk profile/ credit rating of companies/ switching
Investment experience/ use of advisory services
Divs reinvested?
CGT exemptions
Any losses registered
Reason for fund choices
Reason for UT
Use pension
Past use of gifts
Use trusts
Pass funds to children?
State the key factors that should be taken into consideration before advising Alex on the suitability of his current savings and investment holdings.
EF
Income require now and in future
Planned expenditure (bucket list)
Gifts
Capital available
Single tier pension entitlement
Project workplace pension
Tax status after any change to employment
Current and future uses of allowance - PSA/DA/CGT/ISA
Inflation assumptions
Asset allocation within the funds
Growth expectations
Performance and projections
Current and ongoing charges
Fund switching?
Erode capital?
Stay in current property? Move?
Market conditions
Current yields / outlook for future
State of health no and in future
ATR/C$L
Use of tax wrappers
DIS - view on use
Tanya pension funds - views
Outline what Alex needs to do in order to use the Additional Permitted Subscription rules to maintain the tax efficiency of the Global Equity ISA fund following Tanya’s death.
Alex is beneficiary - inherit it all
He is able to apply for ApS as spouse
If approved will retain TF status
3 years from date of death or
180 days from completion of administration of estate
If in-specie no later than 180s after distribution
Need to obtain value on death and probate - use higher val
Current value is £87k
Need to complete APS application
App should include;
T’s name and address
NI
DOB and DOD
Date of marriage
Declaration to say he is surviving spouse
Declaration to say they were living together on DOD
Can transfer holdings into isa or invest his own cash
Choose own funds in line with his ATR
APS treated as previous years subs
Will still have £20k allowance
Identify the main factors you should discuss with Alex in order to establish and agree his risk profile.
C4L vs objectives
Sole breadwinner
Income/capital/timescales when available
Back 2 work
Income capital need ST and LT
Timescales? Access required?
Risk? Emotional restraints
How much to invest/ how much secure
Ring fence funds for kids
Understanding of risk characteristics
Feature of different asset classes
Impact of inflation
Other risks? FSCS limits
Level of risk required to achieve objectives
Previous investment knowledge/involvement
Describe the process of using a risk profiling tool, and outline four drawbacks to using this method of assessing risk.
Explain process
Complete ATRQ
Focus on timescales for objectives
Priorities - growth, income, both
How he would react in certain events - pandemic drops
Answers inputted to software
Produce risk score
Produce recommended aesthetic allocation
Efficient frontier for inv
Discuss results
Agree ratings between client/adviser
Recommended asset model produced to maximise returns
Drawbacks
Taxation/charges not considered
Diff results for diff systems
Historic data only
Relevant for that moment only
Might nor understand terminology
Misinterpret results
Timeframe not considered
Inv exp not considered
Vulnerability - skew answers/ inaccurate result
Over confidence - lots of money
Not in isolation - further discussion required
Identify the generic factors that would typically influence an individual’s attitude to investment risk.
Timeframe dependent children
Timeframe desired retirement
State of health
Age
Level of disposable income/impact of reduced salary
EF required
% of total assets being invested
Availability of other income/ employment security
Increased expenditure - childcare
Income guaranteed / inflation proofed
Investment exp/ knowledge
Need growth
Risk to achieve goals
Economic environment/ market conditions
Tolerance of risk / capacity for loss
Explain how four client-specific factors could influence Alex’s current and future attitude to investment risk.
Just had traumatic life event
He is now sole breadwinner
Mortgage gone but higher childcare costs
Increased wealth due to dis in Tanya pensions etc
Job security - reduced hours impact work
Drop in disposable income
Needs may change over time
Uncertainty
Emotion feelings towards Tanya’s inv
Income may be long term - high inflation risk
Alex was nominated to receive Tanya’s DC workplace pension scheme.
As Tanya has died prior to retirement under age 75, explain the options that Alex has in relation to these funds, including their taxation treatment.
DC pension options
Pension available to Alex
Doesn’t count towards LTA or AA
Take as lump sum - nominate to FAD so can access at later date or lifetime annuity
Select option within 2 years of administrator being notified otherwise wont be tax free
Lump sum
Paid tax free
IHT free but classed as BCE and result in LTA test
LTA limits now withdrawn
Only 1 pension under LTA
No income tax charge as no LTA excess
The value of estate will be over iht threshold with dis & pp
More cash might not be a good idea
Flexibility to spend however or invest
FAD
Provide income via FAD
Withdrawals tax free
Remaining funds will be invested so able to grow
Nominate children to receive after death
Remain in pension environment so ihT free
Income wont be guaranteed and could erode acc
As inherited will not trigger MPAA
Could withdraw income for childcare costs
Could nominate to children and leave invested to grow
Annuity
Dc fund could be used to provide a annuity
Income provided would be tax free
Provide secure guaranteed income
Once set up can’t be altered
No death benefits can be included
Annuity rate likely to be low due to his age
Payments not spent will build up in estate subject to iht
No inv growth potential
No longevity risk
Comment on the suitability of Alex’s current savings and investments.
Assume all of Tanya’s investments have now been transferred to Alex, and the DIS payout will shortly be paid into his bank account.
State (cash)
£101k in deposit funds
£76k fixed rate deposit
£26k due from dis soon
Analyse
Makes up 31% of non property holdings
DIS will increase this to 62%
Evaluate
High cash levels vs medium risk ATR
Low possibility for capital gain - inflation risk
Liquid funds - good thing
State - £76k
Analyse
Relatively accessible in emergency
Notice period or interest penalty
Evaluate
Interest £500 TF and rest 40%
Currently paying 4%
high inflation - net yield negative
State - DIS soon to be paid
Analyse
Increase estate and assets by 80%
Evaluate
FSCS. 100% protect temp high balance rules £1m
Increase of holdings not in line with ATR
Full access might spend more
Needs to review how it will support him and children income
State - £152k in acc units in ISA total
Analyse
Not producing a income
Income tax free / not disclosed on tax return
Evaluate
Little diversification
Outside his ATR of medium
Potential for growth
Lack of income wont help with childcare issues
State - Inherited UT funded by her parent was £40k now £70k
Inherit at probate value currently no CGT
Analyse -
Appears to be inline with ATR
Income still taxable even if not taken
Personal reps pay the tax during administration
Evaluate
Uses his £1k DA
Over this taxed at 33.75%
State - own dc pension £138k and Tanya’s £115k
Analyse
Need to nominate within 2 years so stay tax free
Grows free of income tax and CGt and outside IHT
Tanya’s fund immediately available
His own PP can’t access till 57
Evaluate
Modest pension savings bu that’s time to pay in more
Might get matched employer contributions
Reduced hours May affect his ability to in to pension
With Alex being concerned about meeting the family’s needs with only his income, he is concerned about how inflation may affect his plans.
Outline how each of Alex’s current assets are affected by long-term inflation. (Assume he has now had Tanya’s ISA and unit trust transferred to his name. Ignore pension funds for the purpose of this question.
Main residence
Property is traditionally a good hedge against inflation
Steep rise in inflations cause interest rates to increase so pushes prices down
Current account
Cash asset - minimal interest paid will be eroded
Keep balances low for day to day only
Deposit account
4% interest base
Base rate above this so not competitive
Could secure a higher rate
Unlikely interest rates would be above inflation
Isa’s
Solely equity based
Inv traditionally provide a level of protection against inflation
Global focus will aid the funds resilience as not all countries have the same issues
UT
Equity based
Inv traditionally provide a level of protection against inflation
As a fund only in Uk it will be strongly affected by the condominium condition in the Uk
Explain to Alex why the investments currently in his name may be unsuitable for his objectives.
Deposit savings acc - fixed rate
Not in line with his medium ATR
Not liquid
No capital growth
Rate is fixed at 4 % when base rate is 5.25%
Only has £500 PSA so the rest taxed at 40%
Not clear how long its fixed for
S&S isa
One asset class - too high risk
Maybe fund management charges
Acc will not distribute income
ISA funds cannot use DA or CGT
Not currently being used so wasted
Workplace pension - UK equity funds
Limited diversification - Uk only
Fund not available to at least 57
Value of fund is low
Both Tanya’s unit trust and her workplace pension scheme use tracker funds. Explain to Alex the difference between active and passive fund management.
Active
Objective to get returns above the market
Fund manager makes buying and selling decisions
They choose timing of transactions
Constant changes made to the portfolio can increase costs
High levels of information are needed to guide selections
Analysis of the information - complex systems & calcs
running costs of fund are higher than passive
Extra costs do not guarantee above market returns
Different management styles/methods
Passive
Does not seek to outperform market
Some funds invest in a selection of assets - produce avg returns - with funds periodically rebalanced
With single asset funds like Tanya less rebalancing other the geographically
No in-depth analysis - potentially increased gains
No active intervention - charges are lower
Diversification due to tracking equities rather than specific equities
Less chance of human error
Difficult to outperform tracker funds following established efficient markets
Simplicity of investment, making it easier to understand and monitor
Funds often slightly under perform the average return, due to tracking errors because of attention fund charges and trading delays
Identify the key factors that Alex should take into account when deciding whether to retain or dispose of his inherited unit trust from Tanya.
Base cost £70k
CGT purposes add sale costs along with total value of reinvested income since transfer
Any gains up to T’s death are wiped
If disposed within short timescale likely no CGt
If retained could have a large uplift so large capital gain
Current CGt allowance £6k, due to reduce to £3k
No losses to register (may have in the past)
CGT 20% for higher rate tax payer
Current dividend allowance £1k dropping to £500
Work out dividend tax liability at 33.75%
Until transfer the div income is taxed at 8.75 - no allowance
No spouse available to share ownership with for CGT efficiency
Still could bed and isa
Doesn’t match his ATR
Value would form part of his estate for iht
Ongoing charges
Relatively liquid as a collective inv
Behavioural aspects - inherited might want to retain it
Explain to Alex how any capital gains tax (CGT) liability will be calculated should he wish to encash Tanya’s unit trust fund once the solicitor has transferred it over to him.
Assume this is based on Alex’s disposing of the entire holding in the current tax year.
probate value £70k
Can add any costs of the sale
Along with total value of all reinvested income since transfer
Tanya’s gain wiped out
Tanya’s registered losses are also wiped out
The DOD balance vs Probate balance to work out gain
Unlikely to be a large uplift in short timescales
Can you £6k exemption
Can deduct Alex’s losses if any
Gains over the allowance taxed at 20%
Alex is a higher rate tax payer
CGT will be payable latest 31st January 2025
If he delays the sale he will only have a £3k allowance next yr
