Recommend and justify Flashcards
Recommend and justify the recommendation you would make to help Dan and Tara create a sustainable income from their business / increase their disposable income.
As directors, Dan and Tara are employed and receive a salary
Salary should be between LEL and PCT
Saving NICs for both employer and employee / increasing net income
To ensure entitlement to State benefits
And use personal allowance
For maximum income tax efficiency
Balance required to plug income shortfall drawn as dividends
Saving NICs for both employer and employee / increasing net income
Enabling full use of dividend allowance for both Dan and Tara
Reducing tax payable / increasing net income
Tara to claim child benefit if not doing so already
Recommend and justify the recommendation you would make to help Dan and Tara provide financial security for each other and their children in the event of death / sickness.
Business to provide life cover benefits for Dan and Tara for benefit of children / survivor
Relevant life policy / group life / death in service under trust for tax efficiency
Dan and Tara should take out further individual cover if the company cannot provide sufficient
Also written under trust for tax efficiency
Increasing term to maintain pace with inflation
Family income if affordability is an issue
Key person cover put in place for Dan and Tara to provide funds to buy in expertise / allow company to continue trading on death / incapacity /
CIC
PMI policy family cover
To enable Dan and Tara to obtain treatment quickly and return to work sooner in the event of an acute condition
Executive income protection for Dan and Tara
To provide an income in the event of long term illness
Deferred period
based on affordability
Increasing cover
to allow for inflation
Make wills and include guardianship clauses for the twins
To give financial security to survivor and twins
Recommend and justify how the company can set up a suitable individual life policies for Dan and Tara, which maximise tax-efficiency to provide benefits for
the surviving partner and twins in the event of death before retirement.
Relevant life policy
Company as the policyholder paying the premium
Dan / Tara the life assured
Premium would be a business expense so deductible against corporation tax
Not classed as a benefit in kind for Dan / Tara
As written under DIS rules
Policy should be written under a discretionary trust with survivor and twins as potential beneficiaries
Meaning the benefit will be outside the estate for IHT purposes
Survivor can access the funds after 1st death without them falling into 2nd estate
Only life cover can be provided
The level of cover can be determined by Dan / Tara’s needs
Indexation can be added on to account for inflation
The term should be until Dan / Tara’s anticipated retirement date
Recommend and justify a suitable protection policy to provide business protection cover for the company in the event of Dan or Tara dying or suffering a critical illness.
Combined term with critical illness cover
To replace loss of profits
Company is policyholder with Dan / Tara life assured
Written to their normal retirement date / renewable if unclear
Sum assured based either on multiple of salary or profits
Indexed to account for inflation
Select own occupation for TPD
To give widest scope for a claim
Premiums paid by company, not a benefit in kind
Recommend and justify a suitable insurance policy to provide a regular income
to protect the couple’s lifestyle in the event of Dan or Tara suffering a longterm illness and being unable to continue to work.
Individual income protection policies / director policy
Provides a regular income to protect the couple’s lifestyle in the event of either being unable to work due to incapacity
No tax relief on premiums / deductible expense if director policy
Income is tax free / taxable under PAYE if director policy
Maximum benefit 50 – 75% of earnings
Term in line with anticipated retirement
Own occupation to provide widest cover (maximise chance of pay out)
Deferred period to match employer’s sick pay (if any), together with any existing savings they’d be prepared to use to fund during the deferred period
Guaranteed premiums for known cost
Indexed to keep pace with inflation
Proportionate / rehabilitation benefit would enable return to work parttime if recover sufficiently
Permanent policy – insurer cannot cancel regardless of how many claims made
Recommend and justify the recommendation you would make to help Dan and Tara provide for the private education of their twins. (You can also recommend an investment bond if you prefer and you can justify it – or some ISA, some investment bond).
Maximise ISA savings
For tax-free returns
Place some of large cash holding into UT/OEIC
In funds appropriate to timescales and ATR for this objective
Overtime encash and drip feed into ISAs
To use CGT annual exempt amount
And maximise use of ISA allowances
Boosting income and growth
Any shortfall to be met by regular savings
To benefit from pound cost averaging
In funds appropriate to timescales and ATR for this objective
Financial protection to be put in place (income protection, CIC, life cover) to enable school fee costs to be met in the event of death or illness
Detail and justify the recommendation you would make in respect of Dan and Tara’s financial objective of having an adequate income in retirement.
Arrange for the company to contribute to the pension scheme on behalf of Dan and Tara
No employee or employer NIC on company contribution
Contribution not taxable for employee or employer
Employer contribution trading expense so receive corporation tax relief
Providing payments commensurate and wholly and exclusively for the purpose of the business employer contributions are unlimited
Both maximise their pension contributions using carry forward if necessary / available
Receive tax relief
Boosting potential for fund growth
Dan and Tara to use 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 if they retire early
Ensure salaries are above LEL
to give entitlement to New State Pension
Both obtain State pension forecasts
To ascertain how much they will both receive and from when
Any gaps to be plugged with Class 3 NICs
To maximise the amount of State pension that can be received
Both to both review their fund choices across both their pension and investment portfolios
To align with high ATR and term to retirement
Review the performance of their investment and pension funds
To ensure they are competitive and performing well
Detail and justify the recommendation you would make in respect of Dan and
Tara’s financial objective of mitigating the IHT liability on their estate whilst
maximising their estate for the benefit of their children.
Write a will
To ensure their respective estates go to where they want them to go to
on 1st death
Both to decide and put in writing what should happen to their share of
the company on death
Set up two SL WOL policies to cover the IHT liability on their estate
SA to match liability
May wish to index sum assured
So it keeps pace with inflation of the estate over time
Should be set up under trust
So that the policy is not included in the estate
Beneficiaries should be the executors
So that they can obtain the proceeds quickly and pay off the bill so the
estate can be distributed
Premiums gifts out of income so exempt from IHT
Consider a programme of regular gifting if affordability allows
If firm provides life cover, place it under discretionary trust with survivor
and twins as potential beneficiaries
To keep out of estate of both 1st and 2nd to die
Write letter of wishes explaining what they would want to happen
This will ensure that there is no delay in the funds being paid out on
death
And that they go to the intended beneficiary
And reduce IHT payable on 2nd death
Survivor could take capital or income outright
Or could take a loan which would be repayable on death
The loan would reduce estate on death
Both to invest in EIS/SEIS
The EIS/SEIS will be outside of estate after 2 years, reducing its value
for IHT purposes by the amount invested
(Plus immediate income tax savings)
Consider writing will trusts into wills
Discretionary NRB to use NRB of first to die
Assets remain accessible during lifetime of surviving partner
While remaining outside their estate on death
If split main residence into tenants in common can leave share to twins under IPDI trust
Surviving spouse can continue to live there as life tenant
RNRB will be used on 1st death as this is permitted
No exit/periodic charges so efficient for IHT
Recommend and justify why Dan and Tara should each set up a suitable life
assurance policy to cover their current and future IHT liability.
IHT liability falls on 1st death for both Dan and Tara’s estates
Because they are unmarried there is no spousal exemption on first
death
SL WOL policy therefore required
The sum assured should be the amount of IHT payable
Indexed to keep pace with inflation
The policies should be written under trust
With surviving partner as trustee if they are named executors under the
wills
This will enable the policy to be paid out before probate
Meaning no assets will need to be sold to pay the IHT due
Premiums could be a gift under normal expenditure exemption
Premiums can be guaranteed for ongoing affordability or reviewable for
low initial cost
Explain to Dan and Tara the potential drawbacks of the above
recommendation.
Cover may be insufficient
Estate may increase faster than inflation / tax rates may change
Cover may be too much (over insurance)
IHT liability is still payable (no mitigation has taken place)
Reduces disposable income
If select reviewable premiums may become unaffordable in long term
Detail and justify the recommendation you would make in respect of Dan and
Tara’s financial objective of improving the suitability and tax efficiency of the
couple’s investment portfolio and pension plans.
They should utilise their ISA allowances for the 2020/21 tax year
This would mean that the income and gains on the wrapped funds
would be tax free
Given their 90% cash holding, they should prioritise S&S ISAs
They might consider drip feeding further cash lump sums over the
years ISAs
Future income and gains tax free
Maximising performance
And if moved from collective wrapper
Uses up CGT annual exempt amount
Saving further tax
Invest some of the cash into EIS/SEIS
Income tax saving of 30%/50% of investment
Gain on the EIS/SEIS itself will be free from CGT after 3 years
In line with ATR
They are also in good health and relatively young, hence IHT is unlikely
to be an immediate concern
They should consider making additional pension contributions wherever
possible
This is because they will receive tax relief
Or corporation tax relief at in the case of company contributions
Both could consider a lump sum payment given their level of cash
savings and the availability of carry forward
However, this will be limited to relevant earnings (£12,500 each in
current year unless they increase their salary)
Income within the fund free of income tax
Capital gains will also be tax free
They will be able to take 25% of this amount including future growth tax
free
Pension assets are also free of IHT
The pension funds would be subject to a lifetime allowance test
However, based on current funding levels, this would not present a
problem for either of them
They also have scope to make further contributions based on the
annual allowance test
In the event of their death prior to the age of 75, the funds could be
passed free of any tax liability to the other, or possibly to the children
They could consider investing further into the business or leaving funds
in the business if in line with other objectives
This is because a holding in a business is subject to business relief
It may therefore be free of IHT subject to conditions.
Review all fund choices to ensure in line with ATR and any ethical
preferences
