[shoban]

was unhedged better than the option for the interest rate question?

[shoban]

Hi John, thanks for the reply.

So, am I correct in my understanding of events 1 – 4? In the case of a bank, the incentive is to rectify risky lending made in the past, at a loss? For Moonstar, the incentive is to raise funds at a “lower cost of capital”.

I went through Moonstar a few days before reading the article. In Moonstar, it clearly states that the process is transferring the rights to the rental income. Also, when you look at the total gains for the investors, it exceeds the amount invested as expected. eg. Tranche B receives $3.24m per year for 10 years on an investment of $27m (0.9 x $200m x 15%). Therefore making a non-discounted profit of $5.4m ($32.4m-27m).

However, in the article, this is not the case. If we are saying that it is only the risks and rewards of the interest income that has been transferred then: Tranche A receives $13.4m per year for 10 years ($134m total) on an investment of $223.13m (0.85 x $350m x 75%).

There is clearly a missing element here? Perhaps these are two different types of arrangements?

And again with Moonstar, the investors are only paying for 90% of the collateral of the investment right? So the total funds that they would raise would be $180m less costs associated with setting up the arrangement / attracting investors? However, the investment requires $200m and there is no mention of the remaining $20m anywhere.

The first sentence to the answer to part b) of the question says: “the finance costs of the securitization may be lower than the finance costs of ordinary loan capital”. In the question it says: “Moonstar Co has had some difficulties over the last few years … the company has at times struggled to pay its finance costs. As a result Moonstar Co’s credit rating has been lowered, affecting the terms it can obtain for bank finance.” In the question, the finance costs of $200k are not coming out of Moonstar’s pocket but are being deducted from the cash received in the SPV & thus reducing the return to investors. So what are Moonstar’s finance costs?

[shoban]

Just to clarify,

the general order of events is:

(1) Bank lends money in the form of mortgages to customers. The total principal lent out totaling $350m.
(2) At some point in the future the bank either
i) is unhappy with the risk/return of the mortgages & feels the need to diversify this risk completely, or
ii) need to quickly liquidate funds for higher NPV investments
(3) At this point in time the average term left on the mortgages is 10 years and the average yearly yield is 6%.
(4) The bank proceeds with the securitization of the mortgages as detailed in the article. In this process, they receive $297.5m (0.85 x $350m) from selling CDOs to investors.

Hopefully, I have understood the above events correctly?

The big question for me is – WHY? the bank gives away $350m and gets back only 85% and no longer has a claim to any of the yield? What was the point in making loans in the first place then? This would obviously be a huge loss for the bank?

Am I correct in (2) as being possible explanations for this?

Following on from (4)

(5) the SPV now owns the $350m of mortgages (100%), and the bank has none left. the buyers of the CDOs own the SPV and have claim to the rewards through the tranche system. If a mortgage holder defaults, that would lower the return on investment for the investors – starting from tranche 3, and the bank would have no impact.
(6) At the end of the 10 year period, the investors get their initial capital back along with that year’s yield. The safety of this return depends on whether or not customers default on their mortgages or not.

What happens to the 15% – the investors only paid 85% right? At least in the article where it does the return on high-risk investment calculation it uses $350m x 85% x 10% = $29.75m as the amount invested.

[shoban]

Thanks for the reply.

I am still very confused about question 1:

1) If they are selling just the income, why would the investors pay $350m? For example the tranche A cash flow to investors each year is $13.4m and this accounts for 75% of the collateral value. The mortgages have a 10-year maturity, so there is no way they make 75% of $350m if that was the amount they were to invest?

2) What happens with non-interest-only mortgages?

[shoban]

Forgot to mention that the election was irreovacable. I put that her residence nil rate band would start to be tapered if her overseas property exceeded £40k since she would get the full value of her husbands estate.

If she didnt elect and husbands death is more than 7 years after transferring 50% of the house does she get to use the full 325k of spouse exemption against the death estate? I wrote something along those lines, not sure if it is right tho

[shoban]

Re liquidation question part c: it was held by a company if i am remembering correctly. I put that it would be a capital distribution & less than 10% shareholding so no relief available?

For the terminal loss question: what did you do with the capital loss? Does it set off against trading income in the same year? I wrote that it can’t be carried back, not sure if thats right. Did we have to include unrelieved qcd in the final figure?

[shoban]

I got the question wrong, but the 2nd winding up period ends 1 year after it starts and so on until completion. (Ceasing trade doesn’t change this)

[shoban]

Residency part was only 1 out of 2 ties i believe.

1 night spent in uk accomodation available for more than 90d.

Her parents dont qualify as close family?
Started work in march so not substantive work

Remittance basis – i put no rb charge as only 2 prior uk resident tax years. Unremitted > 2k so she has to claim remittance basis ( it wont be automatic). Claiming means loss of personal allowance and annual exempt amount vs not claiming (arising basis) means use of personal allowance and annual exempt amount.

Does the remitted gains go into capital gains or nsi?

[shoban]

On the winding up question where was i supposed to use the indexation allowance? Was it on part c cost of shares or somewhere in part b?

Think i messed up part b – i put the disposal through capital allowances and crystalised the gain to calculate the corp tax and deducted that from the proceeds?

Question 1 – iht on gifts to son. Do you need to include more than 1 scenario here i just did death before taper relief comes into effect on 1st gift? It mentions not to include taper relief i think?

[shoban]

I’m terrible at remembering exam papers & also missing some of the mark allocations so please correct if possible.

Question 1 – 35 marks

a) partnership loss – relief options available (5)
B) whether incorporation relief should be disclaimed (15)
C) iht on gift of cash to son (6?)
D) unexpected income tax refund (5)
Formatting (4)

Question 2 – 25 marks
Salivo? Expanding business – either by renting new machinery or by purchasing with loan

a) i) State Loss relief options available £20000 loss (?)
ii) Explain & determine best use of £20000 loss (?)

b) Compare after tax finance position after 7 years of trading depending on whether the asset is rented or bought (?)

c) Flat rate/annual vat scheme & affect on vat liability on leaving the scheme (specifically in relation to rent paid on machinery?) (?)

Question 3 – 20 marks

Tom Juliet & Opal
a) i) eligibility for remittance basis (3)
ii) remittance basis vs arising basis (?)

b) IHT implications of electing to be uk domiciled for iht purposes (?)

c) Determine residence status of daughter (5)

Question 4 – 20 marks

a) single company

i) final 2 accounting period loss
ii) explain best use of losses and state unrelieved losses

b) winding up

i) periods of account (3)
ii) amounts distributable to shareholders (4)
iii) corporation tax implications of distribution to company with 6% shareholding (3)

[shoban]

Anyone have issues with having to scroll unnecessarily to proceed with the exam?

Not being able to zoom out so you can actually see both the text and the full length of your word document was so absurd – you pretty much have to settle for seeing only 1 at a time with the resizing.

I don’t know if its due to monitor size?

[Author]

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