Our Post-Exam Review of the September 2022 CII AF5 Exam
Last updated on August 3rd, 2023 at 7:32 am
Here, we look at the exam guide for the September sitting of CII’s AF5 exam, so we can see how we did in our pre-exam analysis.
If you haven’t already seen the exam guide for September, you can access it here.
This time, the fact-find, released two weeks prior to the exam, concerned Sam and Beth, a married couple in their mid to late 50s with one child Theo.
The objectives, given on exam day, were as follows:
- Set up appropriate protection for Beth’s company
- Assess the options that might be available to Beth in respect of her future remuneration following the sale of the company
- Review the options available to Sam and Beth to assist Theo with the purchase of his first property.
- Improve the tax efficiency of their financial arrangements
- Protect their assets from the impact of inflation as far as possible
- Enable them to maintain their current standard of living when they retire.
(a) Identify the additional information that you would require in order to advise Sam and Beth on the suitability and tax efficiency of their current financial arrangements. (14)
(b) Outline the key factors that you would take into consideration when establishing if Sam and Beth can achieve a sustainable income in retirement. (14)
In each analysis, we include fact-finding questions and so part (a) of question 1 was covered. We had included similar analysis for ensuring they had a sustainable income in retirement which could have easily been adapted to outline the key factors they would need to consider in part (b).
(a) Explain to Beth how the sale of her business is likely to be treated for tax purposes when she completes the sale next year. (10)
(b) Explain to Beth how her taxable income and use of allowances will change, once she is no longer an owner of the business. (10)
Within our analysis, we include self-test questions and in this sitting, we had included a question that asked for an explanation of how the shares in Beth’s limited company would be treated on disposal which provided the information to answer part (a).
Although we hadn’t specifically included the question in (b), there was information throughout the analysis regarding their individual tax status which a well-prepared candidate could have used to formulate an answer.
(a) Beth and her employees are considering setting up an appropriate protection policy for each individual over the next three years. Each policy should provide sufficient funds for the company to pay for replacement staff in the event of the death or serious illness of either Beth or the two existing employees.
Recommend and justify a suitable protection policy for each individual to meet this need and explain how these would be set up. (12)
(b) Explain to Beth why it may be beneficial to her if she were to negotiate a higher employer pension contribution in exchange for a lower salary after the sale of the company. (8)
Within our analysis, we had covered the protection scenario for Beth and her employees which included how to set up a key person policy.
We had also included analysis on salary sacrifice, albeit for Sam, but this information could have been applied to Beth as well.
Sam and Beth have asked for your advice in respect of the various options available to them to assist Theo in purchasing his first property.
(a) Explain the key drawbacks if Sam and Beth make a loan to Theo, rather than making a gift. (8)
(b) Identify the key reasons why Sam and Beth should not agree to act as guarantors against Theo’s mortgage. (7)
Within our analysis, we had included a table that gave the options available to Sam and Beth to help Theo buy his first home which included making a loan to him. We had also included the pros and the cons of each option. Further analysis on this aim included the key issues that should be considered if they make a loan to Theo as well as the IHT situation and the pros and cons of their acting as guarantors. Anyone using our analysis would have scored the majority of the marks on offer for this question.
(a) Explain in detail to Sam and Beth why the open-ended investment company (OEIC) holding in the UK Mixed Bond fund may not be suitable to meet their long-term objectives. (12)
(b) Outline why some of Sam and Beth’s current savings and investments are likely to be at risk from future inflation. (6)
Our analysis covered in full the question in part (a) and for part (b) we had commented on the inflation position throughout the whole analysis when considering any of their investment products, particularly in regards to the deposit account, their index-linked gilt funds, the mixed bond fund and the Premium Bonds.
(a) Recommend and justify the actions that Sam and Beth could take to reduce Sam’s tax liability, following his recent promotion. (14)
(b) Explain to Sam and Beth how the Death in Service payment might have an impact on Sam’s Lifetime Allowance in the event of his death before retirement. (10)
We had included analysis on Enterprise Investment Schemes as well as recommending Sam increase his pension contributions in order to reduce his adjusted net income and that assets should be transferred into Beth’s name to make maximum use of allowances.
Within a review question on pensions, we had stated that Sam should monitor his fund and contribution levels to ensure he stays within the lifetime allowance; we then gave the potential charges if he exceeded this. Although this would have contributed to some of the marks in (b) candidates would have needed to use their own knowledge and experience to gain maximum marks.
(a) Identify the key reasons why Sam’s existing AIM shares may be suitable as part of his overall portfolio to meet his long-term objectives. (10)
(b) Explain to Sam the potential benefits of investing in a Venture Capital Trust. (10)
We had included analysis on the AIM shares which included the business relief and the taxation and within our generic section, we had the information necessary to answer the question on the benefits of investing in a VCT.
(a) Explain to Sam and Beth why they should review their personal tax positions on a regular basis. (8)
(b) Identify seven key issues that you would discuss with Sam and Beth in respect of the future sale of her company at your next review meeting in March 2023. (7)
We had included various model questions and answers on the personal tax position of Beth and Sam as well as the sale of Beth’s business; the information within these could have been used to answer both parts of this final question.
Overall this paper seemed quite tough with questions being asked in a different way than perhaps students are used to.
Candidates would have needed to think carefully about the preparation they had done on Sam and Beth’s circumstances and used that information to answer the questions asked.
It is another reminder that as many exam guides should be used as possible in preparation for the AF5 exam so candidates are prepared for the various questions that the CII use to test the prepared content.
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