The CII AF2 May 2021 Exam in Review
This time, we’re looking at the AF2 exam from the May 2021 sitting. This is the exam that covers business financial planning.
You can find the exam guide here.
The first case study introduced us to Stephen, Robert, and Fiona, the directors of a small private limited company founded initially by Stephen with him as the majority shareholder. They had a SSAS in place, which owned the business premises, accounting for 80% of the scheme value. We were also told that Stephen was considering selling the business.
The first question (a) (i) asked for an explanation of the tax implications of selling the assets of the business. This was for 11 marks, and candidates may have had difficulty in thinking of 11 bullet points to formulate an answer. For another 3 marks, candidates had to identify 3 non-tax benefits for the purchaser of buying the business assets rather than the shares of the company. Again, this may not have been tested in the past so could have been a challenge for some.
Question (b) asked about the SSAS: firstly, the implications for the continuation of the SSAS on the sale of the sponsoring company (for six marks) and for another three marks, the implications for the members of the SSAS should it be wound up.
Questions on the SSAS continued in (c) with a question on the implications if Stephen wished to retire and take an income from the SSAS. This was for four marks, and here candidates should have referred back to the case study to formulate an answer once noting that the main asset of the SSAS was the property.
Question (d) was made up of three parts: firstly in (i), candidates had to state the main points of a SAYE share option scheme and then in (ii), state why a SAYE scheme may be better for employees rather than an employee share option scheme and finally in (iii), explain the tax implications for 2 employees receiving an award of shares. The whole question gave a total of 16 marks, and although the details are within the course material, it could be an area that wasn’t overly focused on in revision.
Question (e) had four parts to it: firstly in (i), candidates had to state with reasons who Robert should inform if he is made bankrupt. This was for four marks, and again, candidates should have used the information in the case study to help them with their answer. In part (ii), the question was what would happen to Robert’s assets if he was made bankrupt (for six marks) and in (iii), explain what would happen to Robert’s income if he was made bankrupt (for seven marks). Finally in (iv), explain the legal implications to Robert if he is made bankrupt, including any applicable timeframes. This last part was for five marks.
Question (f) covered IVAs: firstly, the advantages of Robert’s entering into an IVA as an alternative to bankruptcy. This was for six marks and in part (ii), for nine marks, explain to Robert the process of entering into an IVA.
Bankruptcy is a key part of this syllabus. If candidates struggled with some of the earlier questions of this first case study, they really should have picked up some good marks in (e) and (f), as bankruptcy has appeared in most of the previous exams.
The second case study concerned Dominic and Louie, both self-employed furniture manufacturers. They were unsure whether to trade as a partnership or set up as a limited company.
The case study gave various factors which should have been used in some of the answers, for example, both were married with children, both had a mortgage, and would also prefer not to be liable for any business debt.
The questions that followed should not have been a surprise:
Firstly in (a)(i), candidates had to explain the benefits and drawbacks of their trading as a limited company – this was for a total of 10 marks and should have caused no issues for the well-prepared candidate.
Next, the exam asked for an explanation of the circumstances when it may be beneficial to set up as a partnership rather than a limited company. This was for four marks.
In question (c), candidates were asked how extracting profits from a limited company differs to taking profits from a partnership, and we hope that this was an easy four marks for most.
Question (d) was on business protection: firstly for 3 marks, how key person policies should be written, next, the drawbacks of using the proportion of profits formula to calculate the sum assured, and finally, the advantages and disadvantages of combining life and critical illness cover in a single unit linked contract. The whole question gave a total of 13 marks, and again, AF2 candidates should not have been surprised to see questions on this key aspect of the syllabus.
The final question in Question 2 may have caused difficulty. Firstly, candidates were asked for drawbacks of using the payback period method for calculating the investment return on a purchase of machinery, then explain the benefits of using the net present value method compared to the internal rate of return method, and finally identify the factors that should be taken into account when considering whether to buy or lease machinery. If candidates did struggle with this question, then fortunately it was only for nine marks in total.
The final case study introduced us to Amira and Lola, equal shareholders in a small architect business set up as limited company. We were told about two pension schemes: a SSAS for them as directors, and a group personal pension plan that qualified as a workplace pension scheme.
Firstly in question (a), candidates had to state the criteria to be met to ensure that a loan from the SSAS qualifies as an authorised employer loan. This was for 10 marks and has been asked so often in this exam, we are sure candidates would have done well.
In Question (b), a calculation was required of the maximum amount that Amira and Lola will have to repay at the end of each year. This was for five marks and may have been a new type of question for AF2, but candidates should have been able to have a good stab at working through the calculation.
In Question (c), candidates had to explain the amount of contribution an employer can make to a pension scheme for employees and how HMRC determine the tax relief. This should have caused no problems, and most, we hope, would have scored the available six marks.
The final question of the paper was in two parts. Both were calculations and gave a total of 11 marks: firstly in (i), candidates were asked to calculate the amount of Income Tax and NICs paid by one of the employees if they did not take up the salary sacrifice option and the net effect on his pension contribution and take-home pay – this was for eight marks, and in part (ii), candidates were asked to do the same thing, except this time assuring that he had taken up the salary sacrifice offer.
Overall, this paper was a mix of tried and tested subject areas such as bankruptcy, key person, taking loans from SSASs mixed in with some more technical aspects. This could mean that if the pass rate is low for this sitting, a lot of candidates may be re-taking it in the autumn, after which there will be no more chances to take the AF2 exam.
Future candidates should ensure they use the old exam guides to help them prepare and take heed of the examiner’s advice to always use the information given in the case studies to formulate answers. This is a key part of an advanced financial planning paper and marks will be awarded for doing this.
Comparison with the March 2021 Exam Paper
Let’s look at what was tested in March 2021’s paper. This question paper can be found here.
The topics covered were:
- Ratios: operating profit margin, current ratio, acid ratio, creditor ratio
- Company buying its own shares
- Advantages of investing in company as an equity investment or as a secured loan
- Evidence for an underwriter to justify an appropriate level of life cover
- Multiple of salary and proportion of profits formula.
- Share purchase plans
- Comparison of tax and NICs when setting up as a sole trader or as a limited company
- Partnership agreements/partnership law
- Benefits and drawbacks of the partnership converting to an LLP
- Benefits and drawbacks of a single option agreement linked to CIC for partners
- Purchase of a commercial property funded by a SSAS
- Income Tax implications of buying premises personally and the company paying rent
- CGT and IHT implications if the property bought personally is sold at a later date
- Benefits of buying a property through the SSAS rather than buying it personally
As you can see, different areas were tested in the last two exams – even more reason to use several of the past papers to get a good feel of the type of questions asked and what might appear in the final exam.
Grab the resources you need!
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