The CII AF1 April 2018 Exam in Review

As the CII have now released their exam papers from April, it’s time for us to see what was tested this time round; we kick off with the AF1 exam: Personal Tax and Trust Planning. This will be invaluable reading as you prepare for your CII AF1 exam.

If you haven’t seen it yet, then the paper can be found here:

http://www.cii.co.uk/media/9223962/af1_april_2018_qp.pdf

Question 1

Question 1 is the big 80-point question, and this time, we were introduced to James, a divorced 58-year-old with a 16-year-old son, Miles.  James had a sister, Julia, a future wife called Lucy and an ex-wife called Ellen.

The exam kicked off with a 15-mark question on IHT, where candidates had to assume that James had died in April.  Candidates would have noticed that a discretionary trust had been set up in 2010, which was within 7 years of the PET being made to Julia in 2013. This meant that the nil rate band had been used up by the CLT, with nothing left to set against the PET. The CLT itself would not have been subject to IHT. The rest of the estate also comprised some interesting items, for example:

• the collection of 19^th century art work by ‘pre-eminent British artists’ worth £800,000,
• an EIS, which although IHT-free, would have had an impact on the tapering of the residence nil rate band.

There was a lot in the first question so part (ii) of the question would have provided some welcome relief as candidates had to simply state who pays the IHT and by what date.  The third part of the question was explaining how any IHT could be met if there were insufficient liquid assets; six marks were available and we suspect this is where the art work may have had some relevance, as it could be used to actually pay the bill.  We suspect this is not in the R03 or J02 manual anywhere but does widen out the learning and understanding.

The rest of Question 1 was made up of the rules for the residence nil rate band, stamp duty implications for a flat being bought by trustees for Miles, a well-worn question on the implications on James’ will of divorce, if he dies intestate and when he marries Lucy.  This has been tested a lot in the past, and so candidates should be familiar with the rules here.

One question on the tax treatment of an investment bond being encashed may have caught some out, as this was testing the rules when the settlor is still alive which some may have missed.  The rest of the question tested the income tax and capital gains tax position of a discretionary trust, which has also been tested time and time again and should not have caused candidates problems at this level.

Question 2

Question 2 involved a married couple with two children.  The first question was an income tax calculation, and for 14 marks, also presented some challenges. There was a bond encashment involving a top slicing calculation, which would also have impacted on Anna’s personal allowance. Again, this was followed by questions where marks were easily made up if they were lacking in (a): child benefit tax charge and what Anna could do to reduce her income tax liability.

The bankruptcy question showed up in this question as well, where candidates had to outline the circumstances under which an employee could petition a business owner for bankruptcy and then 8 marks for remembering the order of priority the trustee in bankruptcy would have to follow.

Question 3

Question 3 therefore had to include the question on residency, and it was indeed the first question, made up of two parts. Candidates had to explain the circumstances where someone would be treated as automatically non-resident in the UK and then four factors that would be considered when using the sufficient ties test.  These are not the easiest of rules to remember, but anyone studying for AF1 really should take the time, as this is a key part of the syllabus, and something will always be in the exam on residency or domicile.

Question 3 also covered entrepreneurs’ relief for CGT, a 12-mark question on the CGT when selling a rental property, which would have included lettings relief and a PPR calculation, which again are technical areas but useful to test.

We then had a question on the pros and cons of buying a buy-to-let property either directly or through a limited company, which again seems quite topical and finally a question on the relevant factors that would need to be considered when advising on whether an EIS is an appropriate investment. This type of question has featured a couple of times in AF1 recently, and future candidates should therefore ensure they relate their answers to the facts being given in the case study, otherwise they may miss out on some valuable marks.

Comparison with the October 2017 Exam Paper

Let’s compare this with last October’s exam, which can be found here:

http://www.cii.co.uk/media/7774723/af1_october_2017_qp.pdf

There might always be some overlap between past papers, and in this one, there was a reduction in the personal allowance that had to be calculated, but in the main, the areas being tested were quite different; the calculations included income tax with gift aid, PMI, corporate bond unit trusts and deposit interest; adjusted income, an annual allowance charge and an allowable loss on an EIS.

Also appearing in October’s exam was spousal bypass trusts and the tax treatment of pension funds that go into the trust, another question on the consideration factors which was again on an EIS but on whether the client should sell or retain the shares held.

Again, bankruptcy appeared; residency rules; capital gains tax and pooled shares; stamp duty on second properties; furnished holiday lets and inheritance tax.

The AF1 exam can present some challenging questions with a lot of detail particularly in the calculation questions.  Studying past exam papers is crucial to firstly seeing what hasn’t been tested in a while but also to see the model answers and the level of detail needed to maximise marks.  As mentioned before, AF1 is about application of technical knowledge and so answers should be related as much as possible to the actual case study.

Grab the resources you need!

If you’re studying for your CII AF1 exam, and you’re wanting to feel confident on exam day, you’ll need to prepare as much as possible. Grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the AF1 calculation workbook taster now!