welcome []€¦ · cemap 1, 2 & 3 making sense of money –a guide. introduction whilst in...

Welcome

Certificate in Mortgage Advice & Practice

CeMAP 1, 2 & 3

Making Sense of Money – A guide

Introduction

Whilst in class, the tutor will ask questions, naturally this can’t happen with HomeStudy, so in order to firm up what you’ve just studied we’ve introduced some questions. Unlike the LIBF exams you will not be given the answers and will have to provide the answers yourself.

Introduction

You will find Exam Tips in the slides. These make the important but tricky areas easy to remember. Remembering these will then “lead you” to the right answers in the exam.

Lesson 1 CeMAP 1 - Agenda

Money, an understanding

Financial Intermediation

Banking

Income Tax

Capital Gains Tax

Inheritance Tax

VAT

Insurance Premium Tax


Stamp Duty

Corporation Tax

National Insurance

Social Security Benefits

Testacy & Intestacy

Basic Legal Concepts

Insolvency


Preparing Financial Advice

Advising Young People

Advising Workers / Families

Individual Protections

Business Protections


Pensions

General Insurance

Gilts

Local Authority Stock

PIBS

Corporate Bonds

Equities

Collective Investments


FCA

Rules & Process of Advice

Mortgage Regulation

Money Laundering

Complaints & Compensation

Consumer Protection Legislation

EU Directives

Exam Technique


Law of Contract

FCA Regulation

Ownership & Tenure

Land Registry

Lenders Perspective

Supply of Mortgage Finance


House Buying Process

Role of the Advisor

Insurances

Conveyance


Mortgage Products

Mortgage Repayment Vehicles


Arrears and Repossessions


Case studies

Exam technique

Handouts

For this lesson there are handouts on:

Welfare & benefits

When reviewing these slides do refer to the handouts at the back of your HomeStudy book.

Exam Weightings for CeMAP 1

✓ Tax & Social Security Benefits 20%

✓ Legal Concepts 15%

✓ Financial Life Cycle 10%

✓ Process of Advice 10%

✓ Structure of the Industry 10%

✓ Investments 10%

✓ Life, Pensions & Endowments 10%

✓ Mortgages 10%

✓ Inflation & Interest Rates 5%

Naturally these are only indicative but they do give a pretty fair analysis of where questions will be centered.

Money

Many people believe that money is something magical. Infact it’s a commodity and just like other commodities it isbought and sold, hence why we have banks.

Money is a common denominator in that it can be used tovalue all goods and services. Everyone knows that £1 canpurchase 3 newspapers, 4 packets of crisps or acheeseburger from McDonald’s.

Money

Prior to money we used a system of bartering. Although this still works between friends, it can not possibly work ina complex society.

Imagine you are a market gardener growing carrots andyou wish to purchase a new car. Firstly you need the carmanufacturer to want your carrots and then, how manycarrots will be needed to buy a new Jaguar?

Money

Money is a commodity as it is bought and sold and one of the main areas that we see this happening is through foreign exchange, forex. As we saw in the previous slide, everyone in the UK knows that a pound can buy a cheeseburger; a few years ago there were 2,000,000 Turkish Lira to the pound, so if you wanted to buy a cheeseburger in Turkey you would need 2,000,000 Lira and in essence all the forex markets are trying to do is equalise the value of money across countries.

Insurance

Insurances covers a very wide area but they all can be summarised very easily as being a means of risk management. In fact, technically, an insurance is described as a risk transfer mechanism. The client pays a premium and the insurer pays out in the event of a claim; the risk has been transferred from the client to the insurer.

Inflation

Inflation is a measure of how prices have gone up over a given period, usually a rolling 12 months. There are manydifferent indexes but inflation is now measured via Consumer Price Index, CPI. The Government have set a target for CPI at 2%pa, plus or minus 1%. You may feelthat it is the Government’s job to bring inflation in at thislevel, but it is the responsibility of the Bank of England toachieve this.

Inflation

The Monetary Policy Committee meet 8 timesa year to set interest rates. If they believe thatinflation is rising they will raise interest rates, thismakes borrowing more expensive, less people willbe inclined to borrow to make a purchase andmanufacturers and retailers will be forced to lowerprices leading to a lowering of inflation.

Every quarter the Bank of England publish anInflation Report which gives an analysis of the

UK economy and bank thinking.

Inflation

If prices are still rising but at a slower ratethan previously this is now known asdisinflation.

Last year inflation was 8%, this year it is6%. Prices are still rising but at a lower orslower rate than before, this is disinflation.

Financial Institutions

Proprietary – is a company owned by its shareholders, a limited company or a public limited company, plc.

Votes at an AGM are dependent on the number of shares owned, ie 40,000 shares = 40,000 votes. The “rules” allowing a company to borrow etc are set out in it’s Memorandum & Articles of Association.

Government & Taxation

The Government’s finances can be viewed like a family, ideally

they are seeking to balance what monies are coming in with

expenditure, when this happens it is called a balanced budget.

When there is more money coming in then is being spent then this is a budget surplus. If this happensthen the Government could cut taxes.

Government & Taxation

When there is more money being spent then coming inthen this is called a budget deficit. At present we have alarge deficit and the Government is borrowing moremoney (through gilts) and are experiencing highertaxation and spending cuts

Question Time

1. What is disinflation?

2. Name the 4 parts of financial intermediation

3. If a credit union wants to pay interest to its members, how much in reserves must they hold?

4. Who is responsible for the level of inflation?

5. How is the Government’s economic policy made up?

Question Time Answers

1. Inflation is still rising but at a lower rate than previously

2. Geographic location, aggregation, maturity transformation & risk transformation

3. £500,000 or 5% of total assets

4. Monetary Policy Committee

5. Monetary and fiscal policy together make up economic policy

Tax Tables

At the back of your HomeStudy book is a tax table. It is in

exactly the same format as the one you will find at your

exam. It is an extremely useful aid saving you the effort of

having to commit to memory much information.

It provides rates, allowances and notes on Income Tax,

Capital Gains Tax, Inheritance Tax and Stamp Duty on land

Whenever, you get a question on

these subjects, refer to the

tax tables before answering.

Tax Tables 2018/ 2019 2019/2020

INCOME TAX RATE £ £

Basic rate 20.00% 0 to 34,500 0 to 37,500

Higher rate 40.00% 34,501 to 150,000

37,501 to 150,000

Additional rate 50.00% 150, 001 + 150, 001 +

PERSONAL ALLOWANCES

AGE £ £

Personal Born after 1938 11,850 12,500

Married couples allowance

75 8,695 8,915

Income limit for personal allowance

100, 000 100, 000

Income Tax can be found on page 1. It covers rates and allowances for this tax year, 2019 / 2020 and the previous year, 2018 / 19. You will only ever be asked questions relating to this tax year.

Not shown here on this slide but on the tables itself (see the back of your book) are notes referring to additional points. It is highly unlikely that you will be asked questions concerning these points

Tax Tables INHERITANCE TAX £

Annual exemption 3, 000

Small gifts exemption 250

Gross transfer Rate

First £325, 000 Nil

Excess 40.00%

Chargeable lifetime transfer

20.00%

Gifts in consideration of marriage:

From parents (parent) 5, 000

From grandparents (grandparent)

2, 500

From others (per person) 1, 000

Also on page 1 of the tax table are the rates and allowance for Inheritance Tax. Here you can clearly see the “personal allowance” of £325,000 which is referred to under GROSS TRANSFER FIRST £325,000 NIL.

Also, the annual exemptions and gifts in consideration of marriage are here

Tax Tables

Reduction of tax charge gifts within 7 years of death

Years between gift and death

% of death rate tax payable

0 – 3 100.00%

3 – 4 80.00%

4 – 5 60.00%

5 – 6 40.00%

6 – 7 20.00%

Staying on page 1 are the “tapering reliefs” for both Potential Exempt Transfers & Chargeable Lifetime Transfers.

Remember, when calculating liability, the % of death rate tax payable, is not the amount of tax paid, rather, it is the percentage of the value of the gift made coming back to the estate to be potentially taxed.

Tax Tables The rest of the contents of the tax tables are fairly straightforward. Capital Gains Tax rates (page 2) of 10%and 20% are totally dependent on the rate of Income Taxpaid by the client ie. Non tax payers and basic rate payerspay Capital Gains Tax at 10% and higher and additional taxpayers pay Capital Gains tax at 18%.

Stamp Duty on page 2 refers to land only. You will still needto remember the rates for shares (0.5%) and bearerinstruments (1.5%). You will not need the Scottish rates

Page 3, looking at pension allowances, are for financialadvisers. At this level of exam, you will not be askedquestions about them.

Income Tax

Everyone who has Residence / Ordinary Residence, those who spend more than 183 days living in the UK,are subject to Income Tax on all of their earningsthroughout the world.

Income includes, wages, self employment, pensions,interest, dividends, income from gilts, tips, rental incomeand benefits in kind such as company cars (this isassessed on the car’s carbon emissions)

Income Tax

A simple way of remembering what is liable to Income Tax is to look if it’s a regular occurrence, if money comes in to your pocket “regularly” then it’s likely to be liable to Income Tax.

If it’s a “one off”, then you could pay another tax such as CGT when you sell something but you cannot be liable for Income Tax.

Income Tax

John Doe, aged 58, has a pension income of £58,000. He

has no other income. What is his Income Tax liability?

Income Tax

Income Rate Tax Due on “Slice”

58,000

12,500 0% 0

45,500

37,500 20% 7,500

8,000 40% 3,200

TOTAL TAX DUE £10,700

Income Tax

One way to calculate tax is to think of your income in a bucket.

First open the tap and then allow the basic rate to trickle out of the bucket. The water that has fallen out is the personal allowance (£12,500), close the tap. Next open the tap again and allow the next chunk of water out (up to £37,500), this is what you can earn at basic rate tax, close the tap. Now that you've allowed all of the personal allowance and all of the basic rate tax to be used up, whatever is left in the bucket can only be taxed as higher rate. This is also the way to look at Stamp Duty when buying a house.

Income Tax

Income

Open the tap let the personal allowance out, then the basic rate etc

Income Tax Allowances

To summarise:

✓ Personal Allowance – everyone has one

✓ Marriage Allowance – transfer up to 10% if couple are

non & basic rate payers

✓ Married Couples Allowance – Born <1935

✓ Blind Person’s Allowance – Can be transferred to spouse

✓ Personal Savings Allowance – For interest, first £1,000 /

£500 tax free

✓ Dividend Allowance – First £2,000 free

ALL ALLOWANCES ARE ON THE TAX TABLES

Inheritance Tax

Example:

George has died and his estate has

been valued at £425,000. He has left

£200,000 of this to his wife and the

remainder to his son. How much

Inheritance Tax is due?

Inheritance Tax

Estate £425,000

Less to his wife £200,000

Balance £225,000

As this is below his nil rate band (personal

allowance) there is no Inheritance Tax due and his

wife can also claim £100,000 (£325,000-£225,000)

to be added to her nil rate band.

Remember, interspousal transfers are always

exempt from IHT & CGT.

Inheritance Tax

Example:

Mary has died and left an estate of £1,000,000 to her son, including her house valued at £300,000. Her husband Philip pre deceased her in 2015 and had not used any of his allowable exemptions.

How much Inheritance Tax is due?

Inheritance Tax

Answer:

Estate 1,000,000

Less “threshold” x 2 650,000

Less Residence Nil Rate Band x 2 300,000

Taxable estate 50,000

@40% = £20,000

Exam Tip

Remember that if you get money in your pocket on a

regular basis then you will pay Income Tax. If the

money you receive is a “one off” then you may pay

other taxes such as CGT & IHT but you won’t pay

Income Tax.

Capital Gains Tax is when you’ve bought something

and sold it at a profit

Inheritance Tax, with the exception of Chargeable

Lifetime Transfers is only paid on death.

Question Time

1. The term resident refers to which two personal taxes?

2. How much of a personal allowance can be transferred over from a non tax paying spouse to a tax paying one?

3. For CGT, what 3 reliefs are only applicable to business assets?

4. How many years does someone have to live in the UK for them to be deemed domiciled?

5. Can you claim the Residence Nil rate band when leaving your home to your partner’s son?

Question Time Answers

1. Income and Capital Gains Tax

2. £12,500 10% of the personal allowance provided that the recipient is a BRT and the spouse is a non tax payer

3. Roll over, hold over and entrepreneurs

4. 15 out of 20 years

5. No, it has to be your main residence and left to a linear descendant to claim the relief

Tax Rates

The good news is that you don't have to remember tax

rates and allowance for Income Tax, Capital Gains Tax,

Inheritance Tax, Stamp Duty (Land) as these are all

provided in the exam within your Tax Tables. Rates of

National Insurance used to be included in the tax tables

provided. This year they haven’t been and you will not be

asked for rates.

The bad news is that you do have to remember VAT, Corporation Tax & Stamp Duty on shares and bearer instruments!


Social security benefits can broadly be placed into 3

categories:

Support for sick & disabled – Statutory Sick Pay, Employment & Support Allowance, Attendance Allowance, Personal Independence Payments, Carer’s Allowance.

Support for people on low income – Working Tax Credit, Income Support, Job Seekers Allowance

Support for raising children – Statutory Maternity Pay, Maternity Allowance, Child Benefit, Child Tax Credit

An aide memoir for these benefits can be found at the back

of your book and full details on pages 77-84 of the LIBF

manual.


Some things to remember:

Employment & Support Allowance has replaced

Incapacity Benefit. It can either be contribution based

(now referred to as “new style) or income based.

Effectively this can be viewed as long term sick pay for

the employed or sick pay for the self employed. If

income based then it is a means tested benefit, if

contribution based then it is not.


People on low incomes

Means-tested Means-tested Dependent on Taxable

Income Savings NI contributions

Working Tax Credit Yes Yes No No

Income support Yes Yes No No

Jobseekers' Allowance:

Contribution based No No Yes Yes

Income-based Yes Yes No No

Child Tax Credit Yes Yes No No

Testacy

When you have made a will, you are said to be testate.A will gives you the opportunity of speaking “beyond thegrave”. Instructions on how you wish to be buried, sentimental bequests and even instructions on who willlook after the children.You (the testator) must be over 18, signed and witnessedby at least 2 attestators (witnesses) who can not be beneficiaries (neither can the spouses of the attestatorsbenefit).

Once this has happened then the will is said to have beenproperly executed.

Laws of Intestacy Example

Married with spouse, estate of £850,000

➢ Spouse receives £250,000 plus

➢ 50% of the remaining £600,000 ie £300,000

➢ Spouse gets in total £550,000

➢ Children inherit £300,000 split equally between them

Question Time

1. Who would make Class 3 National Insurance contributions?

2. Regarding means tested benefits, what is the amount of savings an individual can have before they lose all entitlement?

3. If a man dies intestate, how much will his spouse inherit if there are no children?

4. What is a settlor?5. Post October 2015, what is the minimum

amount of debt that someone could be declared bankrupt for?

Question Time

1. Someone who is not entitled to a full state pension

2. £16,0003. 100% of his estate4. The person who sets up a trust by placing

something in it5. £5,000

Next Step

Now that you have completed the first

lesson, go to the End of Lesson 1 questions

to check your understanding

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