Practice Test 2 - John & Margaret

Question 1

State four benefits and four drawbacks of flexi-access drawdown that John should consider when drawing his retirement benefits.

Answer 1

Benefits
• Can take lump sum.
• Flexible income/tax efficient.
• Potential for investment growth.
• Can delay decisions e.g. spouse’s pension.
• Any remaining fund on death can be passed to Margaret;
• And then to their children on Margaret’s death.

Drawbacks
• Will need to undertake regular reviews/costs on ongoing advice.
• Fund may deplete/investment risk/income not guaranteed.
• Will trigger the Money Purchase Annual Allowance/pension contributions restricted to £4,000 per annum.
• Legislation may change.
• Complex/difficult to understand.

Question 2

In the event that both John and Margaret were to die now, calculate, showing all your workings, the amount of the estate and the total Inheritance Tax that would be charged on second death.

Answer 2

BLT £1,400,000
Cash and Investments £450,000
Home £1,200,000
Holiday Let £300,000
Chattels £40,000
Total £3,390,000
(exempt due to availability of Business Property Relief (BPR) (£1,400,000)
(exempt as BPR) (£300,000)
Gross chargeable estate £1,690,000
Minus (two nil rate bands) (£650,000)
Taxable estate £1,040,000
Taxed at 40% £416,000

(RNRB not available as size of gross estate will result in taper eliminating this)

Question 3

Margaret has asked you to explain how her furnished holiday let will be taxed.

Explain the requirements that must be satisfied in the tax year 2017/2018 for her business to qualify as a furnished holiday let.

Answer 3

• Property must be held in either UK or EEA/EU.
• Must be available as a commercial let/commercial basis/market basis; available to the public; for at least 210 days in any one tax year.
• It must be physically let for at least 105 days.
• Lets of more than 31 days/long term lets must not exceed 155 days in a tax year.
• Lettings of more than 31 days do not count towards the 105 days.

Question 4

If Margaret were to sell the furnished holiday let now, calculate, showing all your workings, the Capital Gains Tax she would incur and state when this would need to be paid. Assume that the costs of sale would be £5,000 and she has not made any other disposals in the current tax year.

Answer 4

Sale price             £300,000
Acquisition cost   (£120,000)
Cost of sales           (£5,000)
Gross gain              £175,000
Less CGT 
Exemption               (£11,300)
Total                        £163,700
Chargeable at 10% on entrepreneur’s relief
Tax due                    £16,370

Tax due 31 January 2019

Question 5

Explain the main requirements that a Will must satisfy in order to be valid.

Answer 5

• Must be in writing.
• Signed by the testator/testatrix/person.
• Must be dated.
• Two or more witnesses required who must have no interest in the Will or are not potential beneficiaries.
• Must have capacity/sound mind.
• Made by someone over 18/unless a privileged Will.
• Clear intention to dispose of property/make a Will.

Question 6

State with reasons to John who may be appropriate to appoint as his attorney under a Lasting Power of Attorney for property and financial affairs.

Answer 6

• Margaret, as she is his spouse/closest relation, would be most appropriate to act as John’s attorney as she is most likely to know his wishes.
• Their children; as family members/trusted/understand his wishes.
• They are potential future beneficiaries and are likely to outlive John or both of their parents.
• Other trusted individuals, such as wider family or friends.
• There is a separation from family or it may reduce potential for conflict of interest.
• A professional attorney or solicitor for either continuity, competence or the ability to act.

Question 7

Recommend and justify the changes which can be made now to John and Margaret’s assets to maximise tax efficiency for them.

Answer 7

• Move cash to Margaret’s name, as will be taxed at a lower marginal rate or they can save 20% tax.
• Either transfer a proportion of shares in BLT Ltd to Margaret or transfer the holiday home to John therefore utilising the remainder of either her basic rate tax band or Capital Gains Tax exemption.
• Tax efficient products/ISA contributions.
• Tax-free growth/income.
• Pension contribution.
• Tax relief at source.

Question 8

State the additional information an adviser would require to advise John and Margaret on Inheritance Tax planning.

Answer 8

• Death benefit/pension commencement lump sum.
• Assign bond to Margaret.
• Taxation at lower rate on encashment.
• Invest in Enterprise Investment Scheme/Venture Capital Trusts; for tax relief/reduction.
• Use of Inheritance Tax (IHT) allowances/gifts/potentially exempt transfers/use of trusts in order to mitigate IHT liability.

Question 9

Recommend and justify ways in which John and Margaret can begin to reduce their potential Inheritance Tax liability.

Answer 9

• Affordability/willingness to lose control of assets.
• Attitude to risk.
• Previous gifts made.
• Any inherited Nil Rate Band.
• Any expected inheritances.
• Preserved pension benefits.
• Allowances/exemptions used.
• Details of the Will/intended beneficiaries.
• State of health/smoker status.
• How big a priority is IHT planning.
• Sale of businesses.