Unit 1 Topic 15- The main advice areas

Question 1

What is the Automatic accrual method in relation to death of a partner?

Answer 1

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.Where automatic accrual is used there is normally 100% business relief for inheritance tax in respect of the deceased partner’s share of the business.

Question 2

What is Buy-and-sell method in relation to death of a partner?

Answer 2

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.

Question 3

What is Cross-option method in relation to death of a partner?

Answer 3

This is basically the same as the buy-and-sell method, except that 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.

Question 4

What scheme could be used to protect against Sickness of an employee?

Answer 4

A critical illness cover plan can be used.

Question 5

What scheme could be used to protect against Sickness of a business partner?

Answer 5

• Income protection could be used to provide a replacement income.- Depending on the nature of the illness, critical illness cover could be used to generate the lump sum required.

Question 6

What scheme could be used to protect against Sickness of a self-employed sole trader?

Answer 6

Income protection with a short deferred period can ensure than an income continues to be received.

Question 7

What are the two main reasons for investment?

Answer 7

• To provide income (either now or in the future); or
• To provide a capital sum`

Question 8

Define Real rate of return.

Answer 8

Nominal interest/growth rate minus inflation rate.

Question 9

What main factors affect the calculation of the level of sickness cover needed by a working parent with children?

Answer 9

• The extent of any sickness benefit from an employer
• The nature and amount of available state benefits
• The number and ages of the children
• The availability of any help from family and friends with childcare and housekeeping

Question 10

What rule does HMRC apply in relation to gifts with reservation?

Answer 10

If a donor receives any benefit from a gifted asset, the asset is treated for IHT purposes as remaining in the donor’s estate.