Practice Test 11 - James & Kim

Question 1

State four benefits and four drawbacks of James deferring his State Pension.

Answer 1

Benefits
• Increased pension income.
• Triple lock guarantee.
• Uplift of 5.78% p.a./1% for every nine weeks deferred.
• No investment risk/guaranteed income.

Drawbacks
• Loss of immediate/current income.
• Takes long time to regain lost benefit/mortality risk.
• No lump sum available.
• Restriction on beneficiary entitlement.

Question 2

State four options available for James to draw benefits from his group personal pension scheme and explain the Income Tax implications for each
option identified.

Answer 2

• Take pension commencement lump sum/25% of fund value.
• pension commencement lump sum is tax free.
• Purchase annuity with residual fund.
• Income is subject to Income Tax.
• Uncrystallised funds pension lump sum (UFPLS).
• 25% tax‐free.
• Residual 75% of payment is subject to income tax.
• Flexi‐Access Drawdown.
• Can draw any amount from pension fund/up to entire fund value.
• Payments subject to Income Tax.

Question 3

Explain to James why it may be beneficial to draw an income from his ISA portfolio, rather than drawing income from his pension plan.

Answer 3

• Tax‐free withdrawals from ISA/pension income is taxable.
• Pension remains invested in tax‐efficient environment.
• More favourable death benefits on pension/Inheritance Tax planning.
• Reduces his taxable income.
• Reduced administration/no need to declare income on Tax Return.

Question 4

State the process and conditions that must be met to enable Julie to set up a valid
Lasting Power of Attorney.

Answer 4

• Julie must be of sound mind/no undue influence.
• Limited Power of Attorney documents must be completed/signed and witnessed.
• Gives authority for Health & Welfare.
• Gives authority for Property & Financial.
• Julie must appoint Attorneys.
• Attorneys must be at least 18 years old.
• Must be registered with the Office of Public Guardian.
• Fee must be paid to register Limited Power of Attorney.

Question 5

Recommend and justify the actions that James and Kim could take to immediately
reduce their potential Inheritance Tax liability.

Answer 5

• Use annual gift allowance/£3000/small gift allowances/£250.
• Make political/charitable donations.
• Gifts out of normal expenditure/income;
• removes from estate.
• Discounted gift trust.
• Immediately reduces estate/growth outside estate.
• Make pension contributions.
• fund passes IHT free.

Question 6

James and Kim wish to improve the tax‐efficiency of their savings and investments.
Comment briefly on the tax‐efficiency of their current savings and investments.

Answer 6

• ISA’s for tax‐efficiency.
• Unit Trusts are liable to higher‐rate tax.
• More investments should be held in James name.
• Savings Account is taxed at higher rate tax.
• Limited Inheritance Tax mitigation vehicles in place.
• Venture capital trusts/pension tax efficient.

Question 7

James and Kim wish to improve the tax‐efficiency of their savings and investments.
Recommend and justify the actions that James and Kim could take to improve the tax‐efficiency of their current savings and investments.

Answer 7

• James is basic rate tax and Kim is higher‐rate tax.
• Use ISA allowances/Bed & ISA/Premium Bonds for tax‐efficiency.
• Transfer Bank account to James this saves 20% tax on interest and uses James Personal Savings Allowance/£1000.
• Transfer some/all Unit Trust portfolio to James this saves tax on dividends/25% over £5,000 tax‐free allowance/ 7.5% not 32.5% and reduces Capital Gains Tax by 10% with interspousal exemption.
• Use Capital Gains Tax (CGT) exemption/£11,300.
• Make pension contributions for tax relief/tax‐free growth.
• Invest in enterprise insurance schemes /venture capital trusts for tax‐ relief/capital gains tax deferral/business property relief/tax reducer.

Question 8

Outline the tax treatment of the venture capital trust (VCT) held by Kim.

Answer 8

• venture capital trust losses cannot be off‐set against other gains.
• No Capital Gains Tax liability.
• Tax Relief clawed back if sold within five years.
• Can only claim rebate up to level of Income Tax paid.
• No Income Tax liability on dividends.

Question 9

Recommend and justify why an enterprise investment scheme may be a
more suitable vehicle for a future investment for Kim than a VCT.

Answer 9

• Inheritance tax relief/business property relief.
• If held for 2 years;
• meets their inheritance tax objective.
• Lower holding period to retain income tax relief/3 years.
• Capital Gains Tax deferral/can rollover the gains from Unit Trust
• Can offset losses against Income Tax.
• Higher investment limits/£100,000.

Question 10

State the factors an adviser should take into account when reviewing James and
Kim’s savings and investments at their next annual review.

Answer 10

• Asset allocation/rebalance.
• Investment performance.
• Change in Attitude to risk/capacity for loss.
• Legislative/Economy/market changes/changes in taxation.
• Use of tax allowances.
• Change in circumstances/income/objectives/health/tax status.
• New products on the market/charges.