R03 Training Material

Transcription

1 R03 Training Material

2 Introduction This guide is part of our support material for the R06. These guides identify the key areas that may be examined and have deliberately been kept concise to enable you to manage your time effectively remember we will provide you with a full analysis of the actual case study that you will sit, and our experts will be online to help with any of your questions. Personal Taxation The first step for the R06 is to know the options and the when they may apply, the main types of personal tax questions that could come up include: Income tax Inheritance tax Capital gains tax National Insurance Holding investments in a tax efficient manner When could it apply? Remember, this exam is for us to demonstrate our financial planning skills and the case study could cover: Employed Self employed Retired Divorced What are the possible sources? The case study will be set in different scenarios with the individuals needing advice on their: Potential IHT liability Income tax liability from employment/self employment Tax position on products ie onshore bonds and OEIC s Don t worry, our detailed solution will provide all the information you will need for your case study. These guides are part of the FinancialAdviserExam library to cover the main technical areas.

3 FinancialAdviserExam When asked to prepare an IHT computation remember: Assets Less Liabilities and don t forget about the available nil rate band. remember write it down secure a mark Remember, the R06 is a fact finding exam, you are demonstrating your fact finding skills and applying your technical knowledge to the circumstances in the case study. Before we make any recommendation, we must first make sure we understand the current position and future intentions: What fact finding questions should we be considering for R06? Inheritance Tax Is there a Will who does he wish to benefit from his estate? Enquire about current health and any family history Details of any gifts made in the last 14 years Who are the named beneficiaries from pension? Details of any trusts either as settlor or beneficiary Any money to be left to charities or political parties? Whether prepared to give assets away during his lifetime? What level of priority is this aim in relation to client s other financial needs? Possibility of downsizing main residence? Tax efficient investments Any other sources of income/investment income? Has ISA allowance been used? What are the purpose of the investments growth, income or both? Is capital gains tax annual exemption available for this tax year? Any capital losses carried forward for earlier tax years? What level of income does the client require to maintain standard of living?

4 What? Why? Who? Full Marks This is a fact finding exam - if you remember these four boxes this should help you on your way. For example: What - They should make lifetime gifts Why? To reduce their IHT exposure Who? The beneficiaries will receive more from the estate any drawbacks? They client will not be able to benefit and will lose control of the assets. Remember, within the R06 exam, you are identifying the taxation issue of the individuals in the case study. It is unlikely that you will secure a mark for knowing the rules for capital gains tax taper relief, you might, but we should focus our attention on the core areas. FinancialAdviserExam On IHT questions, quote the main reliefs - 3,000 annual exemption, normal expenditure out of income. The examiner does not know your knowledge - assume nothing and write it down on the day. remember write it down secure a mark

5 Income tax and inheritance tax often appear in the R06 exam Let s look at an example, Donald is moving from employed to self-employed. He reckons his income will increase from 34,000 to 38,400 once self employed. It's important to understand how he will be taxed differently - we have set this out below: Income tax computation for Donald Employed Employed Income 34,000 34,000 Less Personal Allowance (8,105) 25,895 25,895 x 20% 5,179 Tax due 5,179 Net disposable income after tax 28,821 Class 1 NIC = 508 x 12% = 61 per week Total Class 1 NIC 3,172 per year (3,172) Net income after income tax and NIC 25,649 Notice that for an employed individual, Class 1 NIC is due.

6 Income tax computation for Donald Self Employed Self Employed Income 38,400 38,400 Less Personal Allowance (8,105) 30,295 x 20% 6,059 30,295 Tax due 6,059 Net disposable income after tax 32,341 Class 2 NIC (Self Employed) 2.65 x Class 4 NIC 38,400-7,605 = 30,795 x 9% 2,772 Total NIC liability (2+4) 2,910 per year (2,910) Net income after income tax and NIC 29,431 This time as Donald is self employed, he is liable to pay Class 2 and Class 4 NIC.

7 How ready are you for the RO6? Here is a question focusing on inheritance tax. The marks allocated are similar to what you could see on the day. Background Gordon and Margaret live in a house worth 1,100,000 which has no mortgage. They have an unsecured personal loan of 13,000 and the following assets: Asset Current Value Car 17,000 Bank deposit 25,000 Stock & Shares ISA 41,000 Contents 85,000 Question (i) Calculate, showing all your workings, their Inheritance Tax liability should Tom and Lisa both die now. (5) (ii) Recommend and justify suitable actions for Tom and Lisa to take to mitigate Inheritance Tax. (12) If a question of this style was to come up in the exam you are looking to collect all 17 marks. Have a think how you would answer and then see the next page for what the CII expect.

8 Answer (i) Assets House 1,100,000 Other assets 168,000 Total 1,268,000 Minus debts 13,000 Total 1,255,000 Less IHT band 650,000 Total 605,000 x 40% = 242,000 (ii) Review/set up Wills; to avoid intestacy. Make annual gift allowances/exemptions. Make potentially exempt transfers. Investment bond in trust; reduces estate. Take out whole of life; Joint Life Second death. In trust. This will pay Inheritance Tax liability. Effect appropriate protection policy to cover potentially exempt transfers; to preserve the value of the nil rate band. How did you do? Remember, our solution will pick up the likely angles and provide the answers for the case study that you will sit.