U1: T15 - THE MAIN ADVICE AREAS Flashcards
What main factors affect the calculation of the level of sickness cover needed by a working parent with children?
The extent of any sickness benefit from an employer;
the nature and amount of available state benefits;
the number and ages of the children;
and the availability of any help from family and friends with childcare and housekeeping.
What is the purpose of key person insurance?
To mitigate the adverse impact on a business’s profits caused by the death or long‐term illness of an important member of staff.
Hegley Surveying Services wants to take out key person insurance on their senior surveyor, Simone. Her annual salary is £47,000. The company’s total annual salary bill is £400,000 and its latest published gross profit was £1.5m.
Calculate the appropriate sum assured, assuming the estimated time to recover from the loss of Simone would be five years.
(47,000 ÷ 400,000) × 1,500,000 × 5 = £881,250
How does the cross‐option method differ from the buy‐and‐sell method of partnership protection?
It comprises an option to purchase the deceased partner’s share rather than a binding contract; as a consequence, the deceased’s family or heirs are deemed to receive business assets rather than cash, so business relief from inheritance tax can be claimed.
For which of the following borrowers might a fixed‐rate mortgage be most suitable?
a) Ruth, who feels that interest rates will stay the same for the next few years.
b) Sean, who feels that lenders should never charge arrangement fees.
c) Aditya, who is convinced that interest rates will fall sharply in the short term.
d) Nigel, who believes that interest rates will rise significantly in the near future.
Answer is d)
Nigel – a fixed‐rate mortgage is most suitable for ensuring that, over a specific period, repayments do not increase as a result of interest‐rate rises.
Which one of the following repayment vehicles would be suitable for a client who wants an interest‐only mortgage, but insists that the product must guarantee to pay off the mortgage
at the end of the term?
a) Full with‐profits endowment.
b) Low‐cost endowment.
c) ISA.
d) Unit‐linked endowment.
Answer is A)
The sum assured on a full with‐profits endowment is set at a level equal to the mortgage debt so, as long as payments are maintained, it will guarantee to repay the mortgage at the end of the term.
If the cost of living is rising, what is likely to be the main priority of a customer making an investment?
a) To avoid incurring any further income tax liability.
b) To protect money against the effects of inflation.
c) To be able to access it immediately.
d) To invest money securely.
Answer is b)
To protect money against the effects of inflation.
If the rate of inflation is 2.5 per cent, what yield must an investor obtain on their deposit account in order to achieve a real return of 3 per cent?
a) 0.5 per cent.
b) 2.5 per cent.
c) 5.5 per cent.
5.5% (5.5 – 2.5 = 3%)
Real rate of return = nominal interest/growth rate – inflation
Nina is a basic‐rate taxpayer. She pays £162 pm by direct debit into her personal pension plan. How much is actually invested in her plan each month including tax relief?
a) £194.40.
b) £202.50.
c) £283.50.
d) £270.00.
Answer is b)
£202.50. The £162 is the ‘net’ contribution. To work out the ‘gross’ contribution, divide the net contribution by 80 and multiply by 100 (do not add 20 per cent to the net contribution).
£162 ÷ 80 × 100 = £202.50
What rule does HMRC apply in relation to gifts with reservation?
If a donor receives any benefit from a gifted asset, the asset is treated for IHT purposes as remaining in the donor’s estate.
In the context of death in business partnerships, which protection scheme is best described by the following sentence?
“all partners enter into an agreement under which, on the death of a partner, his or her share is divided among the remaining partners in agreed proportions. The deceased partner’s family is compensated by the proceeds of a life policy written in trust for their benefit.”
A) Automatic Accrual Method
B) Buy-And-Sell Method
C) Cross-Option Method
A) Automatic Accrual Method
In the context of death in business partnerships, which protection scheme is best described by the following sentence?
“all partners enter into an agreement under which, on the death of a partner, the deceased’s legal representatives are obliged to sell the partner’s share to the other partners, who are obliged to buy it. To enable them to do so, each partner takes out a life policy on their own life in trust for the other partners.”
A) Automatic Accrual Method
B) Buy-And-Sell Method
C) Cross-Option Method
B) Buy-And-Sell Method
In the context of death in business partnerships, which protection scheme is best described by the following sentence?
“the agreement specifies that the deceased partner’s estate has the option to sell their business share to the remaining partners, who have the option of buying it. “
A) Automatic Accrual Method
B) Buy-And-Sell Method
C) Cross-Option Method
C) Cross-Option Method
If business partners do not want to attract inheritance tax when purchasing a protection scheme for the case where a business partner dies. Which methods are available to them?
A) Automatic Accrual Method
B) Buy-And-Sell Method
C) Cross-Option Method
A and C)
Automatic Accrual: Where automatic accrual is used there is normally 100 per cent business relief for inheritance tax in respect of the deceased partner’s share of the business.
Cross-Option Method: There will almost always be an agreement for the deceased’s estate to sell the business share and the remaining partners to buy it but because there is no legal obligation to do so, those who inherit are deemed to receive business assets, and relief from inheritance tax may be available.
Which of the following is not a usual method of setting up a partnership agreement?
a) Automatic accrual.
b) Automatic aggregation agreement.
c) Cross-option agreement.
d) Buy-and-sell agreement.
b) Automatic aggregation agreement.
