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The CII AF1 October 2019 Exam in Review

The CII AF1 October 2019 Exam in Review

The CII have released their exam papers from the October sitting, so 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 and, as is usually the case, tested a few different areas involving various people. We had Andrew and his two adult children, Hayley and Lance, plus two grandchildren; we also had his mother, Peggy, her deceased aunt and deceased husband, Frank.

The first question tested IHT, and delegates had to calculate the IHT due as a result of Peggy’s death in March 2019.  The date of death could have been the first thing to catch delegates out, as this occurred in the last tax year, meaning the residence nil rate band would have been different.  As Peggy had inherited her aunt’s estate 3 years previously, candidates also needed to calculate quick succession relief.

We had been told in the case study that Frank had set up a discretionary trust four years before his death, and so question (b) tested the tax position of when the trust was set up and why it was paid again when he died.  The final part of the question asked for the duties of a trustee, which for 12 marks should have been an easy list for delegates.

Powers of attorney always appear in the exam, and the next question was on this topic, albeit from the angle of the process that would need to be followed if Andrew lost mental capacity without an LPA being in place. Part (ii) of the question asked for an explanation of the drawbacks to Andrew and his family of this scenario.

Question (d) was a mixture of easy and quite hard. The first part asked for the exemptions and allowances available for IHT purposes (this was a very easy 7 marks for an AF1 candidate). The question continued with why it would be more tax-efficient for Andrew to set up an absolute trust for Lance’s children instead of Lance, and finally, candidates had to describe the ongoing income, capital gains and IHT treatment that would apply to a trust for Hayley’s benefit if she qualifies as a vulnerable beneficiary.  Part (iii) in particular may have been a challenge for some students.

The final question was an explanation of the method used to calculate the tax paid on the surrender of a life policy.  No calculation was required, so this was testing the new process for top-slicing, which candidates should have been prepared for.

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Question 2

Onto Question 2, which amongst other things included the learning outcome on the impact of residence and domicile.  We were introduced to Kim and Robert, both of whom were aged 65 and had spent the last few years travelling across Europe.  We were also told that Robert owned a flat prior to meeting Kim, which he lived in but Kim never had.

The first question was therefore on the CGT liability as a result of the sale of the flat, and the second part of the question was how the rented flat would have been subject to tax had Robert transferred ownership into their joint names before he disposed of it.  This question was testing various aspects of CGT, i.e. letting relief, principal residence relief, the higher rates of CGT – all of which has been tested before.

The second part may have proved more challenging, however.  Question (b) was an explanation of how Kim would account for any tax due on the sale of her unit trust, which she sold in 2018 whilst she was not a UK resident.

The rest of the paper tested deferral of State pension, stamp duty land tax when buying a holiday home and the personal tax treatment if Kim were to invest in an EIS and a VCT.

Question 3

The last question was about a sole shareholder who paid herself a small salary and the bulk of her income in dividends.  She was a divorcee but had recently got engaged.  She had various assets including OEICs, fixed-interest unit trusts and an offshore life bond.

The first question was a calculation – 12 marks for calculating her income tax liability.

The second part was explaining the benefits to her of structuring her salary and dividends in this way.

Question (b) asked for an explanation of the tax considerations and limitations of making a personal pension contribution and a company pension contribution.

Finally, the exam finished with the implications of her dying without making a new will: in respect of her existing will; for the distribution of the estate; and if one of her children was to divorce after her death.

Overall, this exam paper felt as if it wasn’t as challenging as previous papers, with some of the application areas missing.

Comparison with the April 2019 Paper

If we compare the areas tested this time to the areas tested last time, in April we had the following:

  • Income tax calculation
  • Entitlement to State pension
  • Impact of sacrificing an annual bonus for a pension contribution
  • Income tax treatment of interest-free employer loans
  • Disclaimers and deeds of variation
  • Offshore funds and onshore bonds
  • Process and advantages of using an IVA compared with being made bankrupt
  • CGT calculation
  • How HMRC would treat a failure to report accurately a capital gain
  • Ordinary powers of attorney as well as both types of LPA
  • The circumstances in which an attorney can be removed
  • How investments are taxed if non-UK domiciled/elects to be UK domicile
  • CGT implications of transferring unit trusts into a discretionary trust
  • Investment duties of a trustee
  • Periodic charge and exit charge calculations
  • Factors that could cause a review of the investment policy of a trust

As you can see, there is some overlap; however, what is most important is the studying of old exam guides. These will give an excellent flavour as to how the questions are worded, what the examiner was looking for and what hasn’t been tested for a while.   It is also essential to keep up to date with any changes (as in bond taxation this time round), as these often appear in the next available exam sitting.

Grab the resources you need!

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