The following update has been made to your workbook edition.
Chapter 2, Section 4.8.1’s second example has been amended to read:
Example
Carly invested in an onshore SPLAB just over five years ago. On encashment today, she realised a chargeable gain of £50,000. Carly’s only other taxable income (ie, after allowances) is her £30,000 salary.
Step 1 – Carly’s total taxable income and resulting tax bill
• Salary falling in basic rate tax band – £30,000 @ 20% = £6,000
• Gain falling in personal savings allowance – £500 @ 0% = £0
• Gain falling in remaining basic rate tax band – £7,200 @ 20% = £1,440
• Gain falling in higher rate tax band – £42,300 @ 40% = £16,920
• Total income tax = £18,360
Step 2 – Tax due on Carly’s £50,000 gain
• Tax on gain – £1,440 + £16,920 = £18,360
• Less, basic rate tax deducted at source (£50,000 @ 20%) = £10,000
• Tax remaining = £8,360
Step 3 – Annual equivalent
• £50,000 / 5 (complete policy years) = £10,000
Step 4 – Tax on annual equivalent of £10,000
• Gain falling in personal savings allowance – £500 @ 0% = £0
• Gain falling in remaining basic rate tax band – £7,270 @ 20% = £1,454
• Gain falling in higher rate tax band – £2,230 @ 40% = £892
• Tax on annual equivalent – £1,454 + £892 = £2,346
• Less, basic rate tax deducted at source (£10,000 @ 20%) = £2,000
• Tax remaining = £346
• Multiply back up by 5 (complete policy years) = £1,730
Step 5 – Top-slicing relief given
• Step 2 minus Step 4
• £8,360 – £1,800 = £6,560
Carly’s liability after top-slicing relief is therefore £7,800. From her total liability to tax of £24,360 (Step 1), we deduct the £6,560 top-slicing relief (Step 5) and the basic rate tax credit of £10,000 (£50,000 @ 20%), leaving £7,800. If Carly had taken out an offshore bond, the five-step process to follow is identical, except that we only deduct the top-slicing relief from her total tax liability at the very end of our calculation. There is no deduction for the basic rate tax credit.
Chapter 1, Section 2.2, fifth paragraph has been amended to read:
Assessing a client’s appetite for risk, and matching it to their objectives, is a fundamental part of financial planning. Typically, the higher the risk taken, the greater the potential financial return. There is a direct relationship between risk and return, known as the risk-return trade off.
Chapter 4, Section 1.1.2, first paragraph has been amended to read:
The client’s ability to take on risk is, in theory, positively correlated to their time horizon; this essentially means that the younger they are, the more risks their portfolio should be able to tolerate. The client’s willingness and capacity to assume risk is based on their financial situation as discussed in chapter 1.
Chapter 4, Section 1.3.5 has been amended to read:
With a LISA, any contribution made by the individual will be matched with a 25% top-up from the government. With the maximum allowance for 2021–22 being £4,000, this means that the maximum contribution by the government is £1,000. The bonus is given on contributions made until the investor is 50, and the plan is designed to provide a retirement fund or to be used to buy a property. If the cash is withdrawn before the age of 60, other than to use as a deposit for a first home, the bonus plus any interest and growth on that bonus is lost and usually a withdrawal charge of 25% of the amount withdrawn is imposed. This penalty took effect from April 2018. The withdrawal charge was temporarily reduced from 25% to 20% from 6 March 2020 to 5 April 2021 as a result of the coronavirus (COVID-19) pandemic.