The CII AF1 October 2018 Exam in Review

As the CII have now released their exam papers from October, 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.

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

Question 1

Question 1 is for 80 marks in total and usually involves two or sometimes three generations of a family.  In this paper, we were introduced to Brian and Clare: an older couple with two grown-up children.

The exam kicked off with questions on the Marriage Allowance, which might have been new territory for the AF1 exam; 11 marks were available in total for firstly, stating the criteria to qualify for the allowance and secondly, explaining how it is claimed and received.  The question finished with a 10-mark income tax calculation.  The marriage allowance is where 10% of the personal allowance can be transferred to a spouse and so would have been included in part (iii)’s answer too.

Next up was a CGT calculation on pooled shares. This has been tested before, so anyone using past papers to revise would have seen something similar.

We had been told that Brian was in poor health, so the next question on a discounted gift trust would have expected, in the answer, an inclusion of this fact and how it might have impacted on the discount.  In total, 15 marks were available for DGT knowledge.

The daughter had buy-to-let properties, and the changing legislation around being able to claim mortgage interest relief was tested next, as well as a question on the advantages of those properties being treated as furnished holiday lets; this latter area has certainly been tested in the past.

The son had recently become self-employed, so next up were questions on how he would register with HMRC, as well as how he would have been taxed in the first 3 years, including a calculation and theory question on his NI liability.

Question 1 is often challenging, and this exam paper had a fair mix of new rules, as well as some well-tested areas which should not have been too hard for a well-prepared candidate.

Question 2

This question involved a married couple with two non-dependent children.  The husband was a sole trader and had been unable to work for 12 months.

The questions started with the factors that are used by HMRC to determine whether someone is employed or self-employed.  Then there was a question on bankruptcy and specifically how a bankruptcy order would affect their home, investments and a SIPP.   The other questions for Question 2 included exempt property in a bankruptcy order, what would have happened if he had set up as a limited company rather than as a sole trader and finally an explanation of how State pension would be calculated.  Overall, this question seemed fair and didn’t cover any areas that hadn’t been covered before in an AF1 exam.

Question 3

Question 3 involved a single older client; she had one son who had settled in Australia and married his long-term partner.  The client had set up a discretionary trust within 7 years of her death in 2018, had made a charitable gift and also a marriage gift to her son.  She also had an EIS, and her will included another charitable gift.  The first question was an IHT question, so a few things needed to be thought about here: the EIS would have been exempt as she had held it for more than 2 years, and candidates would also have had to work out the net estate to see if the 36% IHT rate could have been used rather than the standard 40%.  This perhaps was the toughest calculation in the paper.

This question also included a question on domicile and deemed domicile, a general power of attorney, tax avoidance schemes and finally the steps that the client should follow to set up and register a charitable trust.

This question seemed to be the most challenging, as areas covered here we don’t believe have been tested before.

Comparison with the April 2018 Exam Paper

Let’s compare this with last April’s exam, which can be found here.

There was an IHT question in April’s paper, but overall it tested different areas than those we saw in October’s paper.

In Question 1, we had IHT, as mentioned, and also questions on the residence nil rate band, stamp duty implications for a flat being bought by trustees, the implications of divorce on a will, the tax treatment of an investment bond being encashed and the income tax and capital gains tax position of a discretionary trust.

Question 2 included income tax, the child benefit tax charge and bankruptcy, and Question 3 therefore had the residency question, entrepreneurs’ relief for CGT, CGT when selling a rental property, the pros and cons of buying a buy-to-let property either directly or through a limited company and finally a question on the relevant factors that would need to be considered when advising on whether an EIS is an appropriate investment.

The AF1 exam can cover some quite diverse areas within the syllabus but also some areas that have been tested time and time again; for this reason, it is important to look at past exam papers and study carefully the examiner’s comments.  Also remember that AF1 is about application of technical knowledge and so answers should be related as much as possible to the actual case study.

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