Case Study on "Managing Your Money Olly Lloyd and Leona"

Case Study 5 pages (1366 words) Sources: 5 Style: Harvard

[EXCERPT] . . . .

Managing Your Money

Olly Lloyd and Leona Lloyd-Cardle are a young couple, with enough means to provide a more than decent living for themselves and their children. Still, the couple encounters some financial challenges, and these are due to two distinctive issues. On the one hand, Olly is rather unfamiliar with issues of financial management, and is quite a stranger to taxes and other financial matters. On the other hand, the second problem is constituted by the spending patterns of his wife -- Leona -- who is running credit on top of credit.

In this setting of the financial issues encountered by the young family, the role of the financial consultant is that of providing advice on four distinctive issues, perceived as most important for the Lloyd family. These four issues refer to the following:

Tax liabilities

Tax implications of Olly's future income

Financial management suggestions for Leona, and last

Stability of the children's future.

a) Tax liabilities

The tax liabilities represent the money owed to the state, as specific percentage of the income generated. Specifically, the tax liability is the sum of money that an individual has to pay the state when they have earned money through a taxable event. This taxable event could include instance such as salaries and wages, premiums and bonuses, the sale of an asset, an inheritance and so on.

The tax liability is an obligation and a legal claim. In case one defaults on this obligation, the government has the right and the power to confiscate specific assets or accounts

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, in an effort to recuperate what the individual owes the state (Investopedia, 2011).

In the case of the Lloyd family, taxes would be applied as follows:

Annual income of £125,000 (salary), for which a £43,000 tax is owned to the state (Listen to Taxman, 2011)

Annual bonus of £60,000, taxed at a 20 per cent rate, to a total of £12,000

Advisory fees of £25,000 + £ 185,000 + £25,000 = £235,000, taxed at a 50 per cent rate, for a total owned of £117,500

Income from property of £40,000 taxed at a 40 per cent rate, for a total owned sum of £16,000

Dividends of £17,600 + £21,750 = £39,350 taxed at a 32.5 per cent rate, for a total owned sum of £12,788

Government stocks of £9,650 + £14,500 = £24,150 -- exempted from tax

Gains from bank interest of £23,000 + £3,500 = £26,500 taxed at a rate of 20 per cent, for a total owned to the state of £5,300

Building society interests of £8,250 + £16,750 = £25,000 taxed at a rate of 20 per cent, for a total of £5,000

Foreign dividends of £4,000 + £1,500 + £86,000 + £58,000 = £149,500, taxed at affix rate of £30,000 (HM Revenue and Customs, 2009)

Properties of £1,500,000 + £520,000 + £60,000 = £2,080,000 -- no ad valorem tax for owned properties

In this setting then, the tax owned by the Lloyd's to the UK government is of £43,000 + £12,000 + £117,500 + £16,000 + £12,788 + £5,300 + £5,000 + £30,000 = £241,578.

b) Tax implications for new income

Within 2012, the Lloyd family's financial status would be impacted by two distinctive instances -- the new employment contract between Olly and Bony Music Entertainment Limited and the intention to sell the Lloyd House.

The Lloyd House was purchased in 2008 at a price of £214,500, but it has since then devalued, meaning that the family would not be able to sell it at the same price as they had purchased it. In a context of the internationalised economic crisis, the Lloyd House would be estimated at a sale price of 70 per cent of its initial price, adjusted by a depreciation rate of 23.5 per cent in 2011, which is further expected to increase by 2012 (Inman, 2008). The depreciation rate is as such approximated at 30 per cent. In this setting then, the house would be sold at a price of £150,150. The house is fully owned by the family, so no tax deductions would be offered for mortgage obligations.… READ MORE

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Quoted Instructions for "Managing Your Money Olly Lloyd and Leona" Assignment:

“

MANAGING YOUR MONEY - PERSONAL FINANCIAL PLANNING

ASSIGNMENT 1 2011/12

FINANCIAL BUDGETING AND PLANNING

CASE STUDY

X FACTOR SUCCESS STORY

Once upon a time there were two young hopefuls who decided to chance their luck and singing talent to the X Factor judges. This is their story.

Olly Lloyd was runner up, but still got a great record deal and set out on a recording career which is very successful. He has his own service company, SkipsaBeat Ltd., of which he is a Director. He pays himself an annual bonus in May each year, based on the profits for the previous year ended 31 March.

Whilst at Judges***** Houses he had met Leona Cardle, and they fell in love instantly. He married Leona in a closely guarded ceremony on Lake Garda, and sold the rights to Hi! Magazine for Â£2 million. They now have two children, John, 5, and Edward, 4. Both children attend the deeply posh Eastminster Preparatory School in *****. School fees are Â£17,000 per child per annum.

He has recently returned from a short spell in New York. During his time there he had been advised to lay down as many different mixes of his singles as possible and this had been a remarkably successful financial strategy, as he topped the US and UK download charts for months on end. He has returned to his wife and family in London and has been offered a new (part-time) contract as Executive Talent Advisor by Bony Music Entertainment (UK) Ltd (*****BME*****). He has been offered a large bonus, lots of perks and a contract of employment. His income for 2011/12 was from SkipsaBeat Ltd, which was employing him during his stay in New York. He will be able to work as a recording artist (using SkipsaBeat Ltd) and for BME simultaneously in 2012/13.

He has also, (despite bad advice from Simon Walsh) managed to deal successfully in shares and has over the years (legally) gathered some serious investments and bling.

Leona belongs to the old *****'county set*****' and is given to talking about *****˜Daddy*****' a lot and riding horses. She is a lady of independent means, most of her wealth having been passed onto her through a trust fund which she inherited at 21. However, she has no idea of what she is worth or how to manage her money.

They live in a flat in *****, and also own a country house in Berkshire valued at Â£1.5 million. They also own a timeshare in a property in Florida (value Â£60,000) and a cottage in Cumbria. The Berkshire property has a Â£150,000 mortgage attaching. The flat in ***** has a Â£238,000 mortgage attaching. The current value of the ***** flat is Â£520,000 and it was purchased in October 2008 at a cost of Â£250,000. Olly also owns Lloyd House, from which he receives rental income for office space, but which he is intending to sell in the next tax year.

MANAGING YOUR MONEY - PERSONAL FINANCIAL PLANNING

FIRST ASSESSABLE ASSIGNMENT

OLLY AND LEONA LLOYD-CARDLE

Olly is not particularly comfortable with numbers, (always a good sign in a musician) and he has approached you as his financial advisor t to explain his tax position and to calculate his liability to tax for the fiscal year 2011/12.

Olly and Leona*****'s personal financial positions are set out overleaf:

Olly L-C Leona L-C

Â£ Â£ Â£ Â£

EARNED INCOME 2011/12

(gross *****see notes for PAYE deducted)

SkipsaBeat Ltd

Salary 125,000

Bonus for year ended 31 March 60,000

2011 (paid in May 11)

Sloane Square Catering Co Ltd - 25,000

advisory fees

185,000 25,000

SAVINGS AND DIVIDEND INCOME 2011/12

(amounts received - net of tax)

Income from Property 40,000

Associated expenses -16,500

UK Dividends 17,600 21,750

UK Government stocks (Gilts) 9,650 14,500

Bank Interest 23,000 3,500

Building Society Interest 8,250 16,750

Foreign Dividends 4,000 1,500

(paid through UK agent)

86,000 58,000

TOTAL INCOME 271,000 83,000

Olly*****'s bonus from SkipsaBeat for the year ended 31 March 2012 is likely

to be 0.5% of total profits, which amounted to Â£2.4 million. This will be voted in March 2012 and paid in May 2012.

MANAGING YOUR MONEY - PERSONAL FINANCIAL PLANNING

FIRST ASSESSABLE ASSIGNMENT

OLLY AND LEONA LLOYD-CARDLE

NOTES : -

Olly intends to make the following asset disposal in the year ending 5 April 2013:

Investment Property Â£

(Lloyd House)

Sale proceeds 460,000

Cost on acquisition in 2008 214,500

This property is owned outright with no mortgage

Amounts of tax deducted at source from earned income under PAYE:

Olly Â£64,010

Leona Â£3,505

Olly gave Leona a new Porsche on 16 September 2011 for her birthday.

The value of the car is estimated to be Â£42,000.

During 2011/12 the Lloyd-Cardles are expected to receive the proceeds from an insurance claim relating to the destruction by flooding of one of their second homes, Riverside Cottage in Cumbria. The proceeds of the claim are expected to be in the region of Â£190,000.

Leona has an annual income of Â£25,000 for her advisory work for the Sloane Square Catering Company Limited, which she runs (part *****time) jointly with her mother. The income is in the form of directors*****' fees.

At a recent Charity dinner, Leona promised to make a donation to the Distressed Yuppies Trust, a charity she is very fond of. The gift is to be Â£3,000(net), given as a lump sum. However, she has a few problems with this.

Leona has recently been offered work as a session musician, but she is not keen to leave the children and would rather be lunching with her friends. She has difficulty understanding cash management and is continually overspending the household budget.

She has run up credit card debts (average APR 19.8%) of Â£52,000, which Olly doesn*****t know about, and she can no longer get credit. She also owes Â£3000 to RapidCashQuick , a payday loans provider who have an interest rate of 2784%. She has a hairdressing bill of Â£600 which she can*****t pay and she used the money for the next school fees to pay off her bill at her local clothes boutique, and the school are now threatening her with legal action and the exclusion of John & Edward (editor*****s note: enough to make your hair stand on end!)) if she does not pay the fees owed of Â£12,000 for this term.

MANAGING YOUR MONEY - PERSONAL FINANCIAL PLANNING

FIRST ASSESSABLE ASSIGNMENT

OLLY AND LEONA LLOYD-CARDLE

Olly holds all the certificates for the shares and bonds in the safe, and has the passwords for her bank and buildings society accounts, apart from her current account, which now has an unauthorised overdraft of Â£3500, and she is being charged fees of Â£35 on every transaction and overdraft interest of 19%. She has now started to receive phone calls from the bank demanding she pay money into her account to clear the overdraft. She has already spent all her director*****s fees from the Sloane Square Catering Company, so has no ready cash to do this.

The utility bills for the house are mounting up, and Olly thinks she is paying these from a fund of Â£10,000 he put into a joint account, but she has spent this. There are red letters from these companies also and they are threatening to both take legal action and cut off her electricity and gas supplies. These arrears are currently Â£2500. She is not sure what to do about this, but is hoping they will not cut her off.

Her horses are also expensive: she owes stabling fees of Â£5,500 and Â£1,200 to the feed merchant.

She has no idea how to budget for either her household or herself, and is hoping that *****something will turn up***** to get her out of this mess.

Olly is completely unaware of any of these problems.

MANAGING YOUR MONEY - PERSONAL FINANCIAL PLANNING

FIRST ASSESSABLE ASSIGNMENT

OLLY AND LEONA LLOYD-CARDLE

Olly*****'s letter detailing his new status and terms and conditions is reproduced

below :

Bony Music Entertainment Limited

Fredneedle Street

London

31-Oct-11

Dear Mr Lloyd-Cardle,

Following your success in New York we are pleased to offer you

a contact as Executive Talent Advisor , based at our London office,

at a salary of Â£95,000 per annum. You will be required to contribute

8% of your salary into the firm*****'s pension fund, the firm contributing a

further 10% on your behalf.

An annual bonus of 3% of profits will be payable in April of the

following year based on the profits to the previous 31 December.

The maximum amount will be payable under the firm*****'s profit

related pay scheme.

The new position will be effective from 5th April 2012.

Lunchtime meals will be available in the Executive Boardroom at a

cost to the firm of Â£2,500 per annum. Your annual private health

insurance membership for yourself and your family (Â£1,870) will also

be paid for by the company.

You will have sole use of a Jaguar SC XFR 5.0 V8 acquired new for you at a cost of Â£65,000. All fuel will be provided, together with insurance of Â£850 per annum and road fund licence of Â£250. (CO2 emissions: 292 g/km)

You will be expected to pay your annual subscription to the Musicians Union of Â£350,together with membership costs of Â£750 per annum for the Ministry of

Music Club, at which you are likely to make a number of business

contacts. You will be granted a clothing allowance of Â£2,500 per annum. All business entertaining will be reimbursed by the company.

During August you will be required to spend four weeks in

Singapore reviewing our Asia hopefuls. Your travel costs of Â£3,200

together with your weekly hotel bills of Â£1500 and a special Private

Health Insurance overseas premium of Â£200 will be paid by the company. Should you wish to prolong your stay as a holiday any extra expenses must be met by you pesonally.

I wish you a long and happy stay at BME.

Yours sincerely

N. Leeson

On behalf of Bony Music Entertainment (UK) Limited

MANAGING YOUR MONEY - PERSONAL FINANCIAL PLANNING

FIRST ASSESSABLE ASSIGNMENT

OLLY AND LEONA LLOYD-CARDLE

YOU ARE REQUIRED TO:

1) Ascertain the liability to all taxes for both Olly and

Leona for the fiscal year 2011/12. You may assume for

these purposes that they have been resident & ordinarily

resident in the UK for this fiscal year.

Outline the amounts which need to be budgeted for the liability to tax and when the various taxes need to be paid. You should bear

in mind that they have only a vague idea as to how the

different taxes operate and the basis on which they are

assessed. (30%)

2) Outline the tax implications on Olly*****'s future income

of the new contract of employment with BME (UK)

Ltd in 2012/13. You should express it in terms that Olly can

understand easily and detail each item accordingly.

Detailed computations are not required, but you should

advise on all aspects, including the sale of the investment

property (assume sale in 12/13). (20%)

3) Advise Leona on a strategy for tackling her financial

problems and guidelines for future cash management.

Give detailed explanations and specimen calculations

to support your advice. (35%)

4) Outline a strategy which would allow them to plan

for the future of their children.

No detailed computations are necessary, but you should

be able to give general guidelines on strategy. (15%)

The whole of the work above should total no more

than 1,500 words (excluding computations). You should

complete all parts of the assignment.

You should use the weightings above to allocate your efforts.

MANAGING YOUR MONEY - PERSONAL FINANCIAL PLANNING

FIRST ASSESSABLE ASSIGNMENT

OLLY AND LEONA LLOYD-CARDLE

Guidelines

For each individual, first, work out what the situation is, or what the problems are, and then think about possible solutions or courses of action which might mitigate or help their financial position.

You will need to do some calculations, but this is not the essence of the assignment. You need to clearly identify problems and work out how to change either attitudes and/or spending habits, or gain access to funds to make things better. There is no one *****˜correct***** solution and you need to support your recommendations with product research, for example, personal loan rates, and give internet or other references. For Leona you will need to do an outline cash budget.

Marks will be awarded as follows:

*****¢ Overall structure & presentation 10%

*****¢ Identification and analysis of problems 35%

*****¢ Presentation of possible solutions 30%

*****¢ Creativity of solutions 15%

*****¢ Research and referencing 10%

For the tax computations there is a clear numerical solution ***** for the problems, however, things are not so clear! What I mean by *****˜creativity***** is that marks will be given for trying to devise solutions which may be complex, and may not succeed. This will get more marks than something safer and more straightforward. I am aware that at this stage in your studies you do not necessarily have all the tools necessary to produce a full answer to all aspects of the case study, but you do have the basic principles. Any research you do on areas not yet covered will be useful for you in the future, and your current stage of learning will be taken into account in our marking.

You will need also to link your solutions to current research and/or theory, and ensure your recommendations are realistic by searching the market for possible products to support your solutions. Try not to advise a single product, but give a range of loan rates, for instance.

Enjoy!

Pat

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