Unit 3 - Laws and Legal Concepts Relevant To Financial Advice

Question 1

What are sole traders?

Answer 1

Self employed and those personally liable for the debts of their business. No contract of employment with an employer but may provide services for others under ‘contracts for services’

Pay income tax twice yearly to HMRC and NI contributions paid under both classes 2 and 4

Question 2

What are partnerships?

Answer 2

Partners have unlimited liability for the trade debts of the partnership unless they are limited liability partnerships. Partners are self employed and pay income tax and NI contributions on their share of the profits. Do not pay corporation tax.

Question 3

What are Limited Companies?

Answer 3

Have a legally separate identity from the owners (shareholders) of the business unlike sole traders and partnerships.

The company is responsible for it’s own debts to the limit of it’s own assets.

Must be registered on the Registrar of companies and supply specified information and yearly accounts to Companies House.

Question 4

What are PLCs?

Answer 4

Similiar to limited companies but listed on the London Stock exchange

Question 5

What is a power of attorney?

Answer 5

A person can give power to another individual to act on their behalf.

Automatically revoked on the death or bankruptcy of a donor or can be revoked by them at any time.

Question 6

What must there be to form a contract?

Answer 6

Offer
Intention
Consideration

In the case of life assurance good faith

Individuals should also have contractual capacity:

Minors
People with mental health conditions
Under the influence of alcohol or drugs at time of contract

These do not have contractual capacity

Question 7

What are the different forms of ownership of property?

Answer 7

Freehold
Leasehold
Commonhold

Question 8

What is a joint tenancy?

Answer 8

Neither individual can sell a property without the others agreement. Each have an equal share of the property and when one dies the survivor inherits the share of the property without probate being needed and regardless of any will

Question 9

What is a tenancy in common?

Answer 9

Each owner holds their share separately. They can dispose of their share as they wish and when they die their share goes to their estate

Question 10

What is shared ownership?

Answer 10

Purchasers buy a share of a property and the remaining share is owned by the housing association. The purchaser pays a rent to the housing association for their share. They can buy more of the property known as stair casing up to 100%.

Question 11

What is an IVA?

Answer 11

Individual voluntary agreement. To decide if IVA is acceptable a creditors meeting is arranged, creditors representing 75% of the debts held need to vote in favour of the IVA.
Once approved, creditors cannot take any legal action

Question 12

Before a court will make a bankruptcy order:

Answer 12

The debtors inability to pay the debt must be proved by showing that a statutory demand has not been complied with within 21 days or a court order has not been enforced

Question 13

What are the effects of bankruptcy?

Answer 13

Normally continues for a 12 month period although may be longer for those who continued to trade despite being insolvent. Individuals cannot act as a company director, obtain credit above the prescribed limit of £500 without disclosing an undischarged bankruptcy and cant work in certain professions such as accounting, financial services and banking

Question 14

What is corporate insolvency?

Answer 14

Liquidation is the process by which the existence of a company is brought to an end and its property administered for the benefits of share holders and creditors.

A liquidator is appointed to take control of the company, collect its assets, pay all debts and distribute any surplus to members.

The company is then struck off from companies house and dissolved.

Alternatives to liquidation are:
Administration
Voluntary arrangements

Question 15

What are the 3 major formalities of writing a will?

Answer 15

Writing
Signature
Attestation

Question 16

What are the ways a trust can come into existence?

Answer 16

Express trusts
Implied trusts
Presumptive trusts
Successive trusts 
Constructive trusts
Resulting trusts

Question 17

What is a bare or absolute trust?

Answer 17

The trustees sole duty is to transfer the trust property to the appropriate beneficiary

Question 18

What are power of appointment trusts?

Answer 18

Gives power to vary or appoint beneficiaries, very flexible and gives trustees power to vary the beneficiaries according to family circumstances

Question 19

What are interest in possession trusts?

Answer 19

A beneficiary has a present right to income (or enjoyment of) the trust property. Beneficiary may or may not be entitled to the capital.

Question 20

What are discretionary trusts?

Answer 20

A power of appointment trust where there is no one with current interest in possession

Question 21

What is a will trust?

Answer 21

Created by a will as opposed to one created during settlors lifetime

Question 22

What are statutory trusts?

Answer 22

Specifically created by statute or law.