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The CII AF1 October 2020 Exam in Review

The CII AF1 October 2020 Exam in Review

The CII has released their papers from the exam sittings that happened in October.  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 is for 80 marks and can test a variety of areas from the syllabus.  The case study introduced us to Ralph and Nicky, their daughter Bethany, and her son Lucas.  Ralph was self-employed and, as in the July paper, the first questions were calculations on income tax and National Insurance contributions (NICs).  The NICs calculation should have been straightforward as the information needed is included in the tax table.  The income tax calculation involves making sure everything is included, which is mentioned in the case study; in this one, candidates should have included self-employed profits and the allowable expenditure as well as his personal pension contributions, interest from a corporate bond, and cash as well as dividend income.  Ralph had also invested in a SEIS where tax relief is given as a tax reducer.  All in all, these questions should have been a good start for the well-prepared candidate.  What followed may have caused more difficulty as it tested when payments on account are made and what they are based on and why Ralph should contact HMRC regarding his payments.  Self-employed tax is often tested in AF1 and can cause difficulties to candidates; the marks for these two questions totalled 13, but we hope most candidates would have got the 3 dates correct and that they understood they are based on the previous tax year’s bill.

Question (b) tested the criteria a qualifying company must meet to be a suitable investment for a SEIS, as well as the CGT implications of the sale of the shares, the disposal proceeds of which were used to invest in the SEIS.  This may have caused some difficulty as candidates may have confused EISs and SEISs, which are treated differently.

Question (c) focused on Nicky; candidates were asked to explain the maximum tax relievable pension contribution she could make in this tax year and the total profit she would have received from her buy-to-let property, which would have meant remembering mortgage interest only receives tax relief at basic rate now.

The final parts of Question 1 involved the daughter Bethany.  Firstly, candidates had to describe the impact of her living with Hugo on the Child Benefit payments she receives; this question tested this topic from a different angle than before, particularly as Hugo was not the father of Lucas which some candidates may not have realised would not change the fact he would have been subject to a High-Income Child Benefit charge as the higher earner.

Finally question (e); a two-part question on a debt relief order for 7 marks and the advantages of Bethany’s entering into an IVA as an alternative to bankruptcy.

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Question 2

Question 2 introduced us to Astrid and Ian and the part of the exam where residency and domicile are tested.   There were only three questions but on first reading, they seemed perhaps more of a challenge than the topics tested in Question 1.  Candidates had to answer questions on a married couple nominating one of their homes as a main residence, the facts that they should take into account when selecting which one to nominate, the conditions that must be met for the nomination to be successful, and finally, identify the factors HMRC would take into account if the couple did not make the nomination.  Factors questions are appearing regularly in AF exams and in this question, there were two of them!

Question (b) asked for an explanation of why Astrid could no longer claim the remittance basis of tax and what the impact of this would have on her ongoing tax affairs, and finally, for 11 marks, candidates had to describe the tax treatment of reporting and non-reporting offshore funds.  Offshore funds are not tested very often, so this may have been a challenging end to Question 2.

Question 3

Finally Question 3, and this was the trust question; we were introduced to Sasha as one of the trustees of a discretionary trust set up for her two nieces.

The first question tested the income tax treatment of the income received by the trustees; candidates should not really have had problems with this as it should be expected that trust taxation might appear in an AF1 exam.  Question (a) continued with a question on how trust expenses will be accounted for, and finally, candidates had to describe how the two nieces will be treated for income tax purposes if the trustees distribute income of £10,000 net to them both.

Question (b) seemed a straightforward calculation of capital gains tax assuming a rental property was sold by the trustees and Question (c) asked for the legal implications of the trustees appointing capital to Elsa, the mother of one of the nieces but not a beneficiary herself.

Finally, a question on powers of attorney, and in this exam, it was the turn of a general power of attorney to be examined: firstly, the benefits of giving someone a general power of attorney and finally, the limitations for Sasha of taking this course of action.  Powers of attorney are another topic that should be expected in this exam, and we hope it didn’t cause too many issues for candidates.

All in all, it seemed like a fair AF1 paper, particularly Question 1 and 3 with perhaps Question 2 being the most challenging for candidates.

Comparison with the July 2020 paper

If we compare this to what was tested in the summer sitting, we can see the following topics were tested then:

  • Income tax calculation
  • National Insurance liability and maximum limits
  • Rent-a-room conditions and furnished holiday lets
  • Charitable gifts treatment in lifetime and on death
  • Wills and divorce
  • CGT during the administration period
  • Bankruptcy
  • Deed of variations and disclaimers
  • Responsibilities of executors
  • How trustees can be replaced
  • Exit charge and periodic charges
  • Taxation of a discretionary trust
  • Tax treatment of income paid to a beneficiary of an interest in possession trust

As you can see, these two papers tested a variety of areas from the syllabus with some overlap with income tax and National Insurance contributions. It goes with saying that these calculations must be practised, as well as CGT and IHT to ensure these valuable calculation marks are attained.  Using old exam guides is essential to see the variations on topics and the level of detail required in the model answers.  As mentioned, factor questions are appearing regularly, so ensure you are comfortable with answering these too.

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