The CII AF2 April 2019 Exam in Review

Here, we look at the CII AF2 (Business Financial Planning) exam paper from April to see what was tested from the syllabus this time. This is useful reading for those preparing for the October sitting of the AF2 exam.

If you haven’t seen it yet, you can find the question paper here.

Question 1

This is the main question and gives a total of 80 marks.  This time round we were introduced to a limited company owned 50/50 and established by two friends.  The company had 12 employees and were planning to introduce the sales manager as shareholder.  They had in place a buy and sell agreement.

The exam started gently with a question on the tax implications if the new shareholder were to take a loan to buy the shares.  It continued with questions on the limits, implications and restrictions of her buying the shares using her SIPP or the company’s SSAS if she were to transfer her SIPP funds to it.  Using a SSAS to invest in the employer has been tested many times, so this part should not have caused too many problems.

We then had a question on the implications for the existing key person cover when Chloe becomes a shareholder.  This may have been more challenging as a number of points were required, but well-prepared candidates should have realised the majority of them.

We were also told in the case study, of an existing relevant life policy, and the next questions were on the drawbacks if this were used for shareholder protection for the new shareholder’s beneficiaries, the company and the two original shareholders. The next question continued with the subject of shareholder protection, and candidates were asked to explain how the existing shareholder protection arrangement would be affected by the new shareholder, and the second part requested an explanation of how a cross option agreement could be used for all three of them.   The second part should have caused no problems, as in an AF2 paper candidates must expect that this might be tested.  The first part may have been more challenging.

The penultimate question came in three parts; the first part asked for the disadvantages for the three shareholders of using a life of another policy to provide funds for the shareholder protection arrangement; the second part asked for a recommendation of a suitable alternative arrangement to writing life of another policies, and the third part asked for an explanation of the tax treatment of the premiums payable if paid personally or via the business on the policies recommended in part two.  These questions shouldn’t have caused too many problems for the well prepared candidate.

Finally, we had two calculations: the amount needed to buy the additional building via the SSAS, which was to include stamp duty and the funding shortfall; and extra contributions needed to allow the SSAs to buy the building.  The third part asked for an explanation of the tax implications of making the contribution identified in answer two, and again these are areas covered in previous exams.

Question 2

Onto the second question, and this tested knowledge of limited liability partnerships that had three members.  The first question was a calculation of the profit attributable to each member.  The second question asked for an explanation of the tax treatment of the profits that one of the members intends reallocating to a private limited company admitted as a fourth LLP member.

The third question was around the bankruptcy of one of the members; the first part of the question asked for the position when considering selling an asset, and the second part asked for the consequences for the LLP.

Next, candidates were asked to explain the options to remove the bankrupt as a member of the LLP. The penultimate question was on the statutory tests used to determine employment or self-employment, and finally candidates had to explain the implications for the LLP if one of the members resigns.

Parts of this second question should have been relatively straightforward for an AF2 candidate, but others would have been more challenging.

Question 3

The final question was on a sole trader, and again questions on bankruptcy appeared. This time, candidates were asked to explain IVAs, including the process and structure. The second part asked for the advantages of an IVA rather than being made bankrupt. We then had the effects of bankruptcy on their main residence and a personal pension.  Finally, candidates had to explain the order of priority when paying creditors.  This question was the most straightforward out of the three, with many of these areas having been tested in the past – not just in AF2 but also appearing in other papers such as AF1 and the diploma level J03.

Comparing with October 2018’s AF2 Exam Paper

If we compare this question to the October paper, which can be found here, the following areas were tested:

• Suitability of a limited company structure
• Corporation tax and self-assessment
• Pros and cons of drawing profits as salary and dividends
• Calculations on after tax figures if profit share paid as a dividend/bonus
• Rules governing a SSAS loan to the business
• Calculation of pension contribution needed to buy a property with maximum borrowing and the tax treatment of the contribution
• Auto-enrolment obligations of employers
• Advantages of invoice factoring
• Key person protection
• Shareholder protection
• Entrepreneurs’ relief and other CGT considerations
• EIS investment
• Buying assets of a business as opposed to shares

Using past papers is a crucial part of the revision process as overlap can appear.  Candidates should prepare a study plan incorporating all the key areas covered in the syllabus for maximum chances of success. We also can’t stress enough that AF papers are all about the application of technical knowledge not just a repetition of facts, and answers should, where possible, be related to the case study.

Grab the resources you need!

If you’re studying for your CII AF2 exam, and you’re wanting to feel prepared on exam day, you’ll need to practise applying the knowledge. Grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the AF2 calculation workbook taster now!