The CII AF1 February 2021 Exam in Review

The CII has released their papers from the exam sittings that happened in February.  In this article, we look at what was tested this time round in AF1: the Personal Tax and Trust Planning paper.

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

Question 1

Question 1 introduced us to Jonah, aged 57, UK domiciled with two minor children, engaged to Sophia, who had an Italian domicile.

As is the case with Question 1, it tested various areas from the syllabus.

Firstly, candidates had to calculate the IHT that would be due if Jonah had died in February, also stating who would pay the IHT and in what proportion (there was an interest in possession trust) and finally describe some of the actions he could have taken to reduce his liability during his lifetime.  In total Question (a) was for 18 marks.

Question (b) tested a familiar topic and that was what would happen with his will if he had amended it to include Sophia prior to their wedding.  This should not have caused problems for candidates as it’s a subject that is often tested.  The question also asked for the IHT differences assuming they had married and all his estate was left to her.  And finally, part (iii) asked for an explanation of how Sophia could elect to be treated as domiciled in the UK for IHT purposes – this was for 10 marks, with the total question being worth 20  marks. The examiner’s comments were that in the main part (i) was well answered but in part (iii) candidates did not spot in the case study that Jonah did not want to give up any capital so gave options that would not have been appropriate.

Still, on the IHT subject, Question (c) asked for the extent to which the estate would qualify for business relief – this was for 7 marks.  The comments regarding this question are that candidates did not go far enough with their answers to gain the full marks available.

Question (d) asked candidates to state how the trust established by Jonah’s mother would be categorised by HMRC and describe how tax would be applied. This caused some problems as IPDIs are not tested often but do regularly appear in client’s wills so is a key area for financial planners.

Part (ii) asked for an explanation of how the tax treatment of the trust would change following Jonah’s death and Question (e) asked firstly for an outline of the conditions that need to be met for Jonah’s estate to qualify for the RNRB and an explanation of the implications on the qualification for the RNRB if Jonah created a trust in his will.

Finally, Question (f) asked candidates to describe how a chargeable gain would be calculated on full surrender of a bond and for a further 9 marks explain how any tax payable on full surrender would be calculated.  This is a further test of the updated HRMC process for top slicing which the exam guide noted that ‘more candidates are showing a better understanding of’.

Question 2

Onto Question 2, and this concerned Atique, a sole director of a building company, and two other minority shareholders.

The first question asked for an explanation of the extent to which the shareholders of the company would qualify for Business Asset Disposal Relief on disposal of their shares. This was for 9 marks and was well answered.

Question (b) asked candidates to explain how the gain would be treated and taxed when Atique sells the company shares. Again, this was well answered; although to gain the last two marks, candidates had to link their answer back to the case study, which not all candidates did.

Question (c) was a calculation of the CGT liability for Atique on the sale of his investments – this was for 12 marks and has appeared in previous exams, so candidates should have been aware of the process.

Question (d) asked how Atique could report any CGT he owes to HMRC and explain the penalties that could be imposed if CGT is not paid on time. The question gave a total of 8 marks.  Most candidates could answer via self-assessment with fewer recognising that the ‘real-time service’ is the other way of submitting a CGT return.

Finally, Question (e) asked for an explanation of how the gain realised from selling his home will be treated for CGT purposes. The question was for six marks, and the case study clearly stated that Atique had a lodger, which now impacts the availability of lettings relief which candidates may not have been up to date with.

Question 3

Finally Question 3, this concerned Sadie and Lorenzo,  a married couple with two children and living with Lorenzo’s mother, Vera.

The first question was a straightforward calculation of the income tax payable by Sadie in the tax year and was answered well.

Part (ii) of (a) asked for the factors Sadie needed to consider if she decided to opt back into receiving child benefit. It was just for four marks but again candidates did not link their answers to Sadie’s circumstances and so would not have achieved maximum marks.

Question (b) was in two parts: firstly, candidates had to state the tax treatment of Lorenzo’s bond gain and the effect of the gift aid donation; and secondly, explain the difference in the tax treatment of the bond gain if Lorenzo had made a pension contribution of the same amount instead of a gift aid donation. Most candidates would have been aware of the pension contribution impact but less well known is the impact of a charitable donation on a bond gain.

Question (c) was a description of the personal tax treatment of any interest and dividends if Lorenzo invested in equity and non-equity Unit Trusts and it is good to see that this was well answered.

And Question (d) was on the benefits of an LPA for Vera and was also well answered.

The final question was for six marks and asked for an outline of the circumstances in which Oscar, the son, would be treated as automatically non-resident in the UK if he moved to France – and it appears that this was not answered well.

All in all, it was a fair paper with all the normal subjects being tested.  Candidates must go into this exam having studied amongst other things, LPAs, the residence and domicile rules as well as having practised thoroughly how to set out income tax, National Insurance, CGT, and IHT calculations.  In this exam guide, the senior examiner commented that ‘candidates often avoid or do not revise particularly well the rules around residency’ so future candidates should ensure they do as this subject is more than likely to appear in most exam sittings.

Candidates must also remember to link their answers to the case study – this is imperative in an AF exam to have the best chance of achieving maximum marks.

Comparison with the October 2020 paper

Let’s look at what was examined in October:

• Income tax and NICs calculation
• Payments on account
• SEIS qualifying criteria
• CGT implications of the sale of shares
• Maximum tax relievable pension contribution
• Buy-to-let properties taxation
• Child Benefit
• Debt relief order
• Advantages of an IVA as an alternative to bankruptcy
• Nominating a home as a main residence and the factors to consider
• The remittance basis
• Taxation of reporting and non-reporting offshore funds
• Income tax treatment of income in a trust and taxation of beneficiaries
• Trust expenses
• CGT calculation
• Legal implications of trustees appointing capital to a non-beneficiary
• General powers of attorney

Past papers are an invaluable way of revising as over time the same subjects are being tested.  In addition, using past guides helps candidates practise setting out their answers in bullet point style and in the formatting of calculations.

Grab the resources you need!

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