Objective Based Questions :Tom and Sally’s investment portfolio and improve overall tax efficiency

Question 1

Comment on Tom’s current income tax and capital gains tax

position.(12)

Answer 1

Tom is currently a higher rate taxpayer and Sally is a non-taxpayer
 He currently takes a salary of £60,000 and dividends of £25,000 – he pays 40% on his
salary over the basic rate threshold and personal allowance and 32.5% on dividends
above the dividend allowance - he should consider adjusting his salary and dividends
to reduce his overall income tax liability
 Any interest on the deposit account held jointly by Tom and Sally will be paid gross,
and divided equally between them and added to their respective taxable incomes for
the year
 As a higher rate taxpayer, Tom is entitled to a £500 personal savings allowance (PSA),
which means he can receive up to £500 a year interest with no tax liability. Interest
in excess of this taxed at 40%
 As a non-taxpayer for now, Sally has a PSA of £1,000
 The interest earned in their various accounts is unlikely to exceed their respective
PSAs at present
 Tom is using both his PSA and his dividend allowance (DA) of £2,000
 Sally is not using her personal allowance currently (if she became a
director/employee of Tom’s company she could be paid a salary to utilise her tax
free personal allowance)
 Sally is not using her dividend allowance, it is being wasted as she does not receive
any taxable dividend income (if she became a director/employee of Tom’s company
she could receive dividend income and utilise her dividend allowance)
 Tom will pay CGT on any gains from his unit trusts at 20% after any exempt amounts
have been used. CGT is at 10% for Sally but as they are not married any transfer to
her would be a disposal for CGT
 They have not utilised their ISA allowances for the current tax year
 And we don’t know whether they have used their annual CGT exempt amounts or
have any losses they could carry forward

Question 2

Comment on Sally’s current income tax and capital gains tax

position. (7)

Answer 2

 Any interest on the deposit account held jointly by Tom and Sally will be paid gross,
and divided equally between them and added to their respective taxable incomes for
the year

 As a non-taxpayer for now, Sally has a PSA of £1,000

 Sally is not using her personal allowance currently (if she became a
director/employee of Tom’s company she could be paid a salary to utilise her tax
free personal allowance)
 Sally is not using her dividend allowance, it is being wasted as she does not receive
any taxable dividend income (if she became a director/employee of Tom’s company
she could receive dividend income and utilise her dividend allowance)
- CGT is at 10% for Sally but as they are not married any transfer to her would be a disposal for CGT
 They have not utilised their ISA allowances for the current tax year
 And we don’t know whether they have used their annual CGT exempt amounts or
have any losses they could carry forward

Question 3

Comment on the suitability of Tom and Sally’s current fund choices (12)

Answer 3

Tom’s unit trusts invested in Sterling corporate bond funds:
 Not totally incompatible with his attitude to risk, but depends on the quality of the
bonds
 Potential for growth
 but insufficiently diversified
 Should consider diversifying in respect of geographical location, asset class and
sector
 Taxed as interest, not dividends,
 So, 40% higher rate tax for Tom

Tom and Sally’s ISAs invested in global equity funds
 Some diversification in that their ISAs investments not just UK based,
 but insufficiently diversified in respect of asset class
 Not incompatible with attitude to risk
 Income and growth tax-free

Question 4

Tom and Sally have asked you to undertake a review of their non-pension
investments and savings.
(a) Identify the factors you would take into account when reviewing
their holdings to ensure the diversification and asset allocation is
suitable for their income needs and risk profiles. (13)

Answer 4

a) Factors to ensure diversification and asset allocation is suitable for income needs and risk
profiles:
 Ensure that all asset classes are used
 Ensure that uncorrelated/ negatively correlated assets are included within the
portfolio
 Take account of current market conditions and ensure a suitable geographical
spread
 Take account of currency risk
 Ensure sufficient liquidity of assets to cover emergencies and large capital outlays,
such as the potential house purchase
 Take account of income needs/ pattern of income required
 and hold sufficient income units
 Performance of existing holdings
 Consider the charges associated with the investments
 Level of involvement the clients wish to have
 That they both have and adventurous attitude to risk
 The likely timescale of the income/ longevity expectations

Question 5

Outline the benefits to Tom and Sally of using a platform to hold
Tom’s unit trust funds and their ISAs. (8)

Answer 5

Benefits of holding unit trust and ISAs on a platform:
 Wide choice of funds and managers
 Access to model portfolios/ DFM/ specialist funds
 Automatic rebalancing available.
 Low charges.
 Access to platform research.
 Easy to use CGT/ ISA allowances.
 Ease of administration/ online access

Question 6

Identify six potential benefits of using a discretionary fund manager
(DFM) to manage the couple’s investments.(6)

Answer 6

Six benefits of a DFM:
 Provides the expertise that the couple lack.
 Will invest based on their ATR and objectives.
 Will provide access to funds not available to a private investor.
 Will make use of their annual ISA and CGT exempt amounts.
 Potential for outperformance.
 Will provide regular updates/ reporting/ tax statements.

Question 7

Detail and justify any recommendations you would make relating to ensuring
Tom and Sally’s investments are suitable for them and are held tax
efficiently. (9)

Answer 7

After agreeing a suitable cash reserve/emergency fund/funds required for deposit
and costs of buying the buy-to-let property,
 Reduce the amount held in cash and redistribute between them to make maximum
use of their respective PSAs
 This will save 40% income tax on the interest earned
 Invest the balance in asset backed investments using their ISA allowances each, per
tax year
 Tom to crystallise sufficient gains in his unit trust to utilise his CGT exempt amount
and reinvest in ISAs
 In funds compatible with his ATR
 or he could encash more and invest in an EIS or SEIS, which allows him to eliminate
his income tax liability due in January 2020,
 and defer any CGT payable on gains
 Use any excess income to make maximum tax relieved pension contributions