Practice question and answer bank

1 Eric and Melanie                                                       39 mins

Eric is a partner in a firm of architects. His taxable trade profits for 2015/16 are £101,200. In 2014, he took out a loan to buy some plant and machinery used in the partnership business. The amount of loan interest in 2015/16 was £1,000.

Eric has a bank account with the Halifax Bank. His account was credited with interest of £1,600 on 31 March 2016. In October 2015 Eric invested £11,000 in a venture capital trust.

Eric is married to Melanie. Melanie is employed as an educational consultant. In 2015/16 she had earnings of £150,415. PAYE of £53,000 was deducted from these earnings.

Melanie received dividends of £4,500 during 2015/16. She also cashed in National Savings & Investments Certificates and received £250 interest in addition to the repayment of the capital invested.

Eric and Melanie are considering buying a cottage together on 6 April 2016 and renting it out. The cottage will cost £120,000. The net rental income will be about £12,000 per year. Eric and Melanie have not decided exactly in what proportions they will contribute to the cost of buying the cottage.

Required

  • Compute the income tax payable by Eric and Melanie for 2015/16. (10 marks)
  • Explain how the rental income from the cottage will be taxed on Eric and Melanie. What advice would you give them to reduce their total tax liability? Assume Eric and Melanie have the same other income and expenditure in 2016/17 as in 2015/16 and that the rates of tax and allowances

also remain the same in both tax years.                                                                 (5 marks)

  • A friend of Melanie has offered her the opportunity to subscribe £12,000 for shares in an EIS company. If Melanie does so she will borrow the money from the bank at an interest rate of 8%. Melanie’s friend assures her that the company will start to pay dividends in five years’ time. Alternatively Melanie could invest £12,000 to buy a 10% stake in a company currently owned by another friend, and in this case dividends are likely to be paid at the rate of £1,000 in the first year, increasing by £100 a year. Melanie would like to know how much her cash outlay will be over five

years for each investment.                                                                                      (5 marks)

(Total = 20 marks) 2 Lee and Harry     31 mins

  • You have received the following e-mail from a client, Lee:

‘I am just about to start a new job and thought that I ought to start making some pension provision now that I am in my mid-30s. My initial salary is £30,000 a year, but I am hoping that, with bonuses, it may increase in the next few years.

My new employer operates a workplace pension scheme and I have been given a booklet about it which says that I will be automatically enrolled into the scheme but that I can opt out of the scheme. The booklet says that the scheme is a ‘money purchase’ scheme and that my employer will make contributions to the scheme in addition to the amount that I pay into it.

Could you answer the following questions:

  • Should I opt out of my employer’s workplace pension scheme and make other pension arrangements? What is a ‘money purchase’ scheme?
  • If I stay in my employer’s pension scheme, how much can I contribute to the scheme and how much can my employer contribute? The booklet refers to an annual limit and a lifetime limit. How do these work?
  • I have heard that there is tax relief on my contributions to a pension scheme. How does that work if I am in my employer’s pension scheme?

 

 

Required

Draft an email in response.                                                               (11 marks)

  • It is March 2016. Another of your clients, Harry will have employment income of £121,200 for 2015/16. Harry has no other income in 2015/16.

Required 

  • Compute Harry’s tax liability for 2015/16 based on this information.
  • Advise Harry how he can make a personal pension contribution which would be most tax

efficient.                (5 marks)                             (Total = 16 marks)

                                   3 Hamburg                                                 39 mins

(a)      Hamburg retired in January 2015 and used income from his investments to live on.

On 31 December 2015, he received the following interest payments on his National Savings & Investments accounts:

Direct Saver account        £90 Investment account               £380

Hamburg received an income payment of £7,103 from a discretionary trust set up by his aunt on 1 February 2016. The whole of the trust fund was invested in quoted shares.

Hamburg also received dividends of £19,125 during 2015/16 from his own investments.

Hamburg owned £20,000 6% Treasury loan stock which he bought in 1997. Interest is payable gross on 1 June and 1 December each year. On 21 May 2015, Hamburg sold £10,000 of the loan stock ex interest. The accrued interest due to the purchaser was £35. Hamburg sold a further £7,500 of loan stock including interest of £150 on 1 October 2015.

On 1 May 2015 Hamburg started to invest in rented properties. He bought three houses in the first three months, as follows.

House 1

Hamburg bought house 1 for £62,000 on 1 May 2015. It needed a new roof before it was fit to be let out, and Hamburg paid £5,000 for the work to be done in May. He then let it unfurnished for £600 a month from 1 June to 30 November 2015. The first tenant then left, and the house was empty throughout December 2015. On 1 January 2016, a new tenant moved in. The house was again let unfurnished. The rent was £8,400 a year, payable annually in advance.

Hamburg paid water rates of £320 for the period from 1 May 2015 to 5 April 2016 and a buildings insurance premium of £480 for the period from 1 June 2015 to 31 May 2016.

House 2

Hamburg bought house 2 for £84,000 on 1 June 2015. He immediately bought furniture for £4,300, and let the house fully furnished for £8,000 a year from 1 August 2015. The rent was payable quarterly in arrears. Hamburg paid water rates of £240 for the period from 1 June 2015 to 5 April 2016. He claimed the wear and tear allowance for furniture.

House 3

Hamburg bought house 3 for £45,000 on 1 July 2015. He spent £1,000 on routine redecoration and £2,300 on furniture in July, and let the house fully furnished from 1 August 2015 for £7,800 a year, payable annually in advance. Hamburg paid water rates of £360 for the period from 1 July

2015 to 5 April 2016, a buildings insurance premium of £440 for the period from 1 July 2015 to 30

June 2016 and a landlord’s contents insurance premium of £180 for the period from 1 August 2015 to 31 July 2016. He also paid £850 for a new sofa. He claimed the wear and tear allowance for furniture.

During 2015/16 Hamburg also rented out one furnished room of his main residence. He received £4,600 and incurred allowable expenses of £875.

Required

Compute Hamburg’s income tax payable or repayable for 2015/16.          (14 marks)

(b)     Hamburg is thinking about investing in two holiday cottages in Cornwall.

Required

Outline the requirements for the cottages to be furnished holiday lettings and the income tax

treatment of such lettings. (6 marks)
  (Total = 20 marks)
4 Taker 29 mins
  • Taker is employed at an annual salary of £50,000. He is not in a pension scheme, but receives the following benefits in 2015/16.
    • He has the use of a motor car with a petrol engine, which cost £20,000. Its CO2 emissions are 137g/km. Fuel is provided for both business and private motoring, and Taker contributes £500 a year (half the cost of fuel for private motoring) for fuel.
    • He makes occasional private calls on the mobile phone provided by his employer.
    • He has private use of his employer’s digital camera (which cost £600).
    • He has an interest free loan of £7,000 from his employer.
    • His employer pays £4,000 a year to a registered childminder with whom the employer has a contract. The childminder looks after Taker’s three year old son for 48 weeks during the year.

In 2015/16, Taker pays expenses out of his earnings as follows.

  • He pays subscriptions to professional bodies (relevant to his employment) of £180.
  • He makes business telephone calls from his home landline. The cost of business calls is £45. The cost of renting the landline for the year is £100, and 40% of all Taker’s calls are business calls.
  • He pays a golf club subscription of £150. He does not play golf at all, but goes to the club to discuss business with potential clients. These discussions frequently lead to valuable contracts.

Required

Compute Taker’s taxable earnings for 2015/16.                                (8 marks)

  • Taker is considering changing his employment and has received two offers. One is from a nearby company which is offering a salary of £50,000 a year and a choice of the provision of a company car with a taxable benefit of £3,250 (no private use fuel would be provided) or an increase in salary of £3,000 and a mileage allowance of 40p per business mile. If he does not accept the company car Taker would need to buy a new car costing £15,000 with annual running expenses of £2,200, including private use fuel of £500. Taker would sell the car after 3 years for £5,000, and estimates that extra interest charges over the period would amount to £1,800. Taker would drive 6,000 business miles a year.

The other offer is from a company 100 miles away, and it offers a salary of £55,000. Taker would be required to relocate, and the company would pay allowable relocation expenses of £12,000. Taker does not wish to sell his old house and would let it out unfurnished for £6,000 a year renting a property at the new location for £4,000 a year. Alternatively the company would pay only £6,000 of relocation expenses but would provide Taker with a company flat which cost the company £120,000 four years ago and which has an annual value of £2,500. Taker could obtain an additional £1,000 rent for letting out his old house furnished. Taker estimates that he would spend three years in this job before moving back to his old house. He thinks his actual relocation costs will be £2,000 lower if he chooses the company flat.

Required

For each offer, compute the effect on Taker’s net income of the available options. (You should

ignore NICs.)      (7 marks)              (Total = 15 marks) 5 Poster plc     19 mins

  • Albert works for Poster plc. He receives a salary of £49,500. He is entitled to company car (benefit £4,500). No private fuel is provided. Albert is also provided with private medical insurance at a cost to the company of £750.

Required

Show all NICs payable for 2015/16 in respect of Albert, before any deduction is made for the

employment allowance.                                                                      (3 marks)

  • Poster plc has had a good year and wants to reward its employees. Instead of paying bonuses it has decided that the employees should all have an additional holiday and it is offering the following options:
    • A week on a health farm. The place will be booked by Poster plc, and will cost £2,000.
    • A week’s sailing on a yacht chartered directly by the employees. The charter costs £5,000 per week, and a professional skipper a further £1,000 per week. Three members of staff must charter together, and each will take a partner.
    • A voucher which may be exchanged for a holiday at a high street travel agent. The face value is £2,200, but the voucher cost the company £2,000.
    • For employees with commitments that mean they cannot leave home, a payment of £1,500 cash.

Required

Explain the NICs payable under each of these options.                     (7 marks) 

(Total = 10 marks)

                                    6 Envirotech plc                                        39 mins

You have received the following letter from Colin, who is managing director of Envirotech plc, a trading company.

1 April 2016

Dear Brian,

I wonder if you could help me with three issues relating to employment taxation.

Bonus schemes

For the last 10 years we have been paying relatively modest cash bonuses to our workforce. It has been suggested that if we pay the bonuses in the form of shares, our employees would be committed to our company, and could see their hard work reflected in the value of their shares. We don’t envisage that the employees would be required to give up any of their employment rights in exchange for shares. Is there a tax advantaged way of dealing with this?

Share options

You will be aware that Derek (assistant Chief Executive on a salary of £200,000 a year) is due to retire on 30 June 2016 after 20 years with the company.

In 2012 Envirotech plc granted him the right to buy 100,000 shares for £1.50 each. These options are not tax advantaged options. Derek could exercise at any time until 2018 but actually did so last week as he is keen to get the shares before he leaves the company. The share price is currently up around £3.60. Derek wants to know what the position is for income tax and CGT.

Retirement bonus

We are considering awarding Derek a ‘thank you’ bonus of £30,000 in cash as a retirement gift. Derek doesn’t know yet. The company has no obligation to do this, but Derek who was born in 1958 and has been with us since the beginning. He has been talking about retreating to the Algarve to play a bit of golf and the rest of the Board thought that this would be a nice gesture.

Yours sincerely,

Colin

You are required to write a letter to Colin dealing with his queries. (20 marks)
7 Helen and Gemma  39 mins

(a)       Helen started trading as a physiotherapist on 1 July 2010. Her accounts were initially made up to 30 June each year but in 2013 she changed her accounting date to 30 September by preparing accounts for the fifteen months to 30 September 2013. She ceased trading on 31 December 2015 and accounts were prepared for the three months to 31 December 2015.

Helen’s trade profits were as follows.

£

Year to 30 June 2011                                                                               36,000

Year to 30 June 2012                                                                               48,000

Fifteen months to 30 September 2013            60,000 Year to 30 September 2014   30,000

Year to 30 September 2015                                                                     24,000

Three months to 31 December 2015                                                      10,000

Required

Show the taxable trade profits for each tax year. Show clearly when overlap profits arise and how

these are relieved.                                                                             (10 marks)

(b)       Gemma has traded for some years preparing accounts to 30 April each year. Her business has been making profits at the rate of £2,300 per month for the last three years. She has decided to sell her business and is unsure whether to sell on 31 March 2016 or 30 April 2016. Gemma has no other income in 2015/16 and expects to have property business income of £27,000 in 2016/17 onwards. She had overlap profits on commencement of £1,100.

Required

For each of the proposed sale dates, compute Gemma’s combined income for 2015/16 and 2016/17 after tax and Class 4 national insurance contributions and so advise her whether she should sell the business on 31 March 2016 or 30 April 2016 to maximise her income after tax and

Class 4 national insurance contributions.                                        (10 marks)

                                                                                               (Total = 20 marks)

                                    8 Sheila                                                      19 mins

Sheila began trading as a dress designer on 1 January 2016, made up her first accounts to 31 March 2016 and thereafter made up accounts to 31 March each year.

Sheila incurred the following expenditure on plant and machinery.

Date                Item                                                                                                         £

4.1.16             General plant                                                                                10,000

1.3.16            Integral feature in building (air conditioning system)             126,100

25.9.16           Delivery van                                                                                  11,800

15.10.16         General plant                                                                              491,000

15.11.16         Car for Sheila CO2 emissions 150 g/km                                      18,600

30.11.17         General plant                                                                                10,000

30.3.18           Car for salesperson CO2 emissions 110 g/km                               9,000

The private use of Sheila’s car is 35%.

Required

Calculate the maximum capital allowances for all periods of account. Assume that the rates and rules

applying to capital allowances in 2015/16 apply in later years.                 (10 marks)

                                   9 Arrol and Louisa                                    49 mins

Arrol, a dentist, has been employed for several years as a representative by Bean Ltd, dental equipment manufacturers. His salary was £22,000 in the year ended 5 April 2015 and £25,000 in the year ended 5 April 2016. His employer provides him with a motor car which has a petrol engine (list price £19,370) and has CO2 emissions of 197g/km. All petrol is purchased on Bean Ltd’s account at a garage. Arrol makes a nominal £25 a month reimbursement to Bean Ltd for part of the petrol used by him in private usage of the motor car.

On 1 May 2015 Arrol and his wife Louisa received substantial gifts in cash from a relative. On that day Arrol exchanged contracts and completed purchase of a private dental practice. Since then he has continued his employment and has worked part time in his practice. The result of the practice for the first year of trading to 30 April 2016 as adjusted for income tax but before capital allowances was a loss of £28,652. Indications are that the practice will be profitable in the year ending 30 April 2017, and after that will become very profitable.

Dental furniture (chairs, lamps etc) was purchased with the practice for £12,800. Additions to this equipment in the year ended 30 April 2016 cost £11,960 on 26 January 2016. Arrol wishes to claim the maximum capital allowances as soon as possible.

In 2015/16 Arrol and Louisa had other income as follows.    
  Arrol Louisa
  £ £
Bank interest received 235  
Building society interest received 3,005 5,388
Interest on National Savings & Investments investment account   1,832
Salary as part-time receptionist in Arrol’s practice   7,735

Required

  • Calculate Arrol’s income tax liability in 2015/16 on the assumption that he claims to have the loss incurred in 2015/16 set against his general income of that year.
  • Calculate Louisa’s income tax liability in 2015/16.
  • Calculate the loss of 2015/16 remaining unrelieved after the loss relief given in part (a), state the alternative ways in which this loss may be relieved and give Arrol any advice you consider beneficial to maximise the tax relief.

(25 marks)

                                   10 ABC Partnership and Ernie                39 mins

  • Adam, Bert and Charlie started trading as the ABC partnership on 6 April 2012, sharing profits in the ratio 2:2:1, after charging annual salaries of £15,000, £12,000 and £10,000 respectively.

On 5 July 2013 Adam retired and Bert and Charlie continued to trade in partnership, taking the same salaries as before, but dividing the balance of the profits in the ratio 3:2.

On 6 May 2015 Donald was admitted as a partner on the terms that he received a salary of £18,000 a year, that the salaries of Bert and Charlie should be increased to £18,000 a year each and that of the balance of the profits, Donald should take one tenth, Bert six tenths and Charlie three tenths.

The trade profits of the partnership as adjusted for tax purposes are as follows.

Year ending 5 April                                                                                   Profits

£

  • 102,000
  • 208,000
  • 126,000
  • 180,000

Required

Show the taxable trade profits for each partner for 2012/13 to 2015/16 inclusive.                                                                                                         (15 marks)

  • Ernie has been running a hardware store for several years. His shop assistant is retiring. Ernie has no other employees. Ernie would like to take his wife Freda into the business. He is unsure whether to take her on as a part time salaried assistant, or to take her into partnership sharing profits 2:1. Ernie’s profits are in the order of £73,500 a year before deducting his assistant’s wages. If Ernie took on a new assistant, on the same terms as he would employ Freda, he would expect to pay wages of £24,500 a year. Freda has no other income.

Required

Advise Ernie of the advantages or disadvantages of employing Freda as an employee or of taking her into partnership with him:

  • assuming Freda would receive £24,500 of gross income in both scenarios.
  • assuming a profit share for Freda that would maximise the couple’s tax saving. (10 marks)

(Total = 25 marks)

                                    11 Susan, Maria and James                    39 mins

  • Susan received the following income in 2015/16.

UK dividends                                                                                          £9,000

Overseas property business income (gross)                                     £14,705

UK earnings income (gross)                                                               £22,470

Overseas tax of £4,705 was deducted by the overseas authorities before the overseas property business income was paid to Susan.

Required

  • Calculate the tax payable by Susan if she has suffered £2,200 of tax under PAYE for the

year.                                                                                          (7 marks)

  • To correct an error made on the behalf of the overseas country in 2015/16 on 1 November

2017 Susan receives from the overseas authorities a refund of £2,600 of the overseas tax

suffered. What should Susan do in respect of this receipt? (3 marks)

  • Maria was born in Brazil and had lived there all her life until she married Henry, a UK resident, in June 2015. Maria owns a house in Brazil. She does not work.

Maria and Henry bought a flat in London in July 2015. Maria spent 150 days in the UK during the tax year 2015/16 living in the flat. She spent the remaining 215 days living in her house in Brazil.

Required

Explain, giving reasons, whether Maria is UK resident in the tax year 2015/16.                                                                                                        (5 marks)

  • James, who is domiciled in Utopia, and has always lived there, is to be seconded to the UK for one year from 1 April 2016, although he will be required to carry out some duties in Utopia for which he will be paid £20,000.

Required

Explain how James will be taxed on his earnings and whether he will have any UK tax liability on his

interest of £1,000 from a Utopian bank account.                              (5 marks)

(Total = 20 marks)

                                   12 Sophie                                                   37 mins

Sophie made the following disposals in 2015/16:

  • A painting for proceeds of £50,000 at auction on 12 October 2015. The auctioneer’s costs of sale were 1% of the gross proceeds. Sophie had bought the painting for £2,500.
  • A freehold shop on 1 February 2016 for £85,000. The shop was acquired by Sophie’s husband Terry for £45,000. He had transferred the shop to Sophie in 2008 when it was worth £60,000.
  • 2 acres of land on 10 July 2015 for £18,000. This was part of a 10 acre plot of land acquired by Sophie for £11,000. Immediately before the sale, the 10 acre plot as a whole was valued at £92,000. At the date of the sale, the remaining 8 acres was valued at £70,000.
  • 4,000 shares in JKL plc to her son Jason for £20,000 (their market value) on 23 December 2015. Sophie bought the shares on 1 February 2007 for £52,000. Jason sold the shares in January 2016 for £18,000.

Sophie has taxable income of £50,000 in 2015/16.

Terry has made no capital disposals during the year. He has taxable income of £30,000 in 2015/16.

Jason is a student with no capital assets and no taxable income in 2015/16.

Required

  • Calculate the capital gains tax liability for Sophie for 2015/16, giving details of your treatment of the disposals.
  • Advise Sophie of any steps that could have been taken to reduce the capital gains tax liability for 2015/16.

(19 marks)

                                   13 John and Matilda                                29 mins

John acquired 20,000 shares in Miller plc on 1 May 2008 for £40,000. On 10 July 2015, Miller plc was taken over by Wall plc. Clearance was obtained from HMRC that this was a bona fide commercial arrangement. John received 1 ordinary share (worth £4.90) in Wall plc and cash of £1.60 for each Miller plc share.

John’s wife, Matilda, made the following purchases of ordinary shares in Read plc, a quoted company.

Date   Number Cost
      £
15 May 2008   1,800 1,900
1 October 2015   2,000 25,750

On 12 July 2015, there was a 1 for 1 bonus issue.

On 30 September 2015 Matilda sold 3,200 of the shares for £42,000.

Entrepreneurs’ relief does not apply to any of the disposals. John and Matilda each have taxable income of £20,000 in 2015/16. John had £16,560 of allowable losses brought forward at 6 April 2015.

Required

  • Compute the chargeable gain on the takeover of Miller plc for John. Show the base cost of his

shares in Wall plc.                                                                                (4 marks)

  • Explain whether there would have been any advantages for John if instead of receiving cash on the

take over of Wall plc shares he had received loan stock.                  (4 marks)

  • Compute the chargeable gain or allowable loss on the sale of Matilda’s shares. (4 marks)
  • State how much capital gains tax John and Matilda will have to pay for 2015/16 if they have no other chargeable gains or allowable losses in that tax year. Show any amounts carried forward.

(3 marks)

          (Total = 15 marks) 14 Hazel          23 mins  

Hazel has been running a retail business as a sole trader for the past three years. She wishes to incorporate the business and will hold 100% of the shares issued. She also wishes to receive some of the consideration for incorporation other than in shares provided that this does not trigger a tax charge.

Hazel estimates that her business is worth £155,000, comprising the following assets which would result in the following gains on disposal:

Asset Market value Gain
  £ £
Cash  25,000 n/a
Goodwill  30,000 30,000
Freehold shop 90,000 50,600
Inventory 20,000 n/a
Creditors (10,000) n/a

Hazel has no other chargeable assets.

Required

Prepare a report for Hazel addressing the following issues set out below, and where appropriate, include supporting calculations.

  • State the conditions that must be satisfied if Hazel’s business is to be sold to a company without

incurring an immediate CGT charge.                                                       (2 marks)

  • Assuming the relief is available, advise Hazel on the maximum amount of non-share consideration she could receive on incorporation without triggering a CGT liability.            (5 marks) (c) State any disadvantages in using the relief that Hazel should be aware of.       (3 marks)

(d) Identify and describe another relief that Hazel might use without incurring an immediate CGT charge.

(2 marks)

You may assume that the rates and allowances for the tax year 2015/16 continue to apply for the foreseeable future.

(Total = 12 marks)

                                  15 Wendy, Henry and Frank                    49 mins

  • On 30 June 2015 Wendy assigned the lease of a building originally acquired as an investment for £30,750; the lease expires on 30 June 2031. She had acquired the lease for £8,000 on 1 January 2007 and the building had never been her principal private residence.

You may assume that the relevant percentages from the lease percentage table are as follows:

16 years         64.116

  • years 622
  • years 100

Required

Calculate Wendy’s gain or loss on the assignment.                           (5 marks)

  • Henry is a sole trader. He bought a factory for use in his trade on 10 July 2014 for £150,000.

On 9 November 2015, the factory was damaged in a flood. Henry received compensation from the water company of £20,000 on 1 September 2016. He had incurred costs of £15,000 in July 2016 on renovations. The value of the factory after the renovations is £250,000.

On 1 December 2017, Henry sold the factory for £260,000.

Required

Show the chargeable gains (if any) for Henry for 2015/16, 2016/17 and 2017/18 assuming that any claims to defer gains are made. Henry made no other disposals except to utilise his annual exempt amount each year.           (8 marks)

  • Frank bought a house on 1 August 1994 for £50,000. He lived in the house until 31 January 1999. He then went abroad to work as a self-employed engineer until 31 January 2004.

Frank went back to live in the house until 31 July 2009. He then moved in with his sister.

Frank sold the house on 31 July 2015 for £180,000.

Required

  • Calculate the gain on sale after all reliefs.
  • Advise Frank whether he could have taken any action to reduce the gain on sale.
  • Assuming Frank’s sister had died in July 2014 leaving her house to Frank and that Frank intends to sell this house also, reinvesting the proceeds of both sales in a larger house, what steps could Frank have taken to reduce any capital gains? Frank is likely to make a gain

on the sale of his sister’s house.                                           (12 marks)

                                                                                               (Total = 25 marks)

                                   16 Mark and Sarah                                   33 mins

Mark and Sarah are a married couple who have asked your advice about some tax administration issues.

Mark’s income tax liability for 2014/15 was £16,000. He had suffered tax by deduction at source of £4,000 and paid two payments on account of £6,000 each on the due dates.

He submitted his 2014/15 return on 31 January 2016 and made a claim to reduce his payments on account for 2015/16 on the basis that his total liability for 2015/16 would be £14,000 with tax suffered of £5,000.

He made the payments on account of £4,500 on 28 February and 31 August 2016.

Finally, on 31 March 2017 he submitted his return for 2015/16 which showed total tax due of £17,000 and tax deducted at source of £4,000. He therefore paid a further £4,000 on the same date.

Sarah’s tax return for 2015/16 included a transaction which it was commonly understood gave rise to a tax liability of £10,000. The return was filed in December 2016. In February 2017 another taxpayer who had undertaken a similar transaction challenged HMRC’s interpretation of the legislation, succeeding before the Tax Tribunal and the case is expected to proceed to the Court of Appeal during early 2018. If the alternative interpretation was correct it would have saved Sarah tax of £8,000.

Required

  • Outline the time limits for submission of returns and payments of tax under self assessment for

2015/16 and detail the provisions for failure to comply.                  (9 marks)

  • Calculate the interest on overdue tax chargeable in respect of Mark’s tax payments for 2015/16.

(3 marks)

  • Advise Sarah of any action she should take to enable her to take advantage of the alternative interpretation should the other taxpayer be successful before the Courts. (5 marks)

(Total = 17 marks)

                                   17 Rodin                                                    31 mins

Rodin dies unexpectedly on 20 December 2015. His record of gifts is as follows.

Date                                                              £                                                   Recipient

25.12.06                                                   60,000                                                 Son

21.1.09                                                   321,000                             Discretionary trust

(Rodin paid the IHT)

20.8.12                                                     31,000                                             Daughter

19.6.13                                                     88,000                             Discretionary trust

(Trustees paid the IHT)

1.8.15                                                       73,000                                                 Cousin

1.9.15                                                     400,000                                                 Wife

Both Rodin and his wife have always been UK domiciled.

Required

  • Compute all amounts of inheritance tax due on these gifts. (10 marks)
  • Comment on whether your answer would have been the same had Rodin’s wife not been domiciled in the UK at the time of the transfer to her. Assume that no election has been made in respect of

her domicile.                                                                                        (2 marks)

  • Rodin’s cousin wishes to give £50,000 to each of his son and daughter and to transfer £350,000 to a discretionary trust for his grandchildren. His daughter is widowed, and he thinks it likely that in the next few months she will remarry. Rodin’s cousin has not made any gifts recently. What advice

would you give Rodin’s cousin?                                                          (4 marks)

(Total = 16 marks)

                                   18 Hubert                                                   49 mins

Hubert, for whom you act as tax adviser, had over the years acquired 3,000 £1 ordinary shares in Bod Ltd, an unquoted trading company with an issued share capital of 5,000 ordinary shares. None of the shares were acquired under the Enterprise Management Incentive scheme. All the assets of Bod Ltd are in use for the purpose of its trade. Hubert has been a director of the company since 1992. His wife, Rose, also owns 1,000 ordinary shares in the company.

Hubert had acquired his shares as follows.    
  Shares Cost                              
    £
1.11.95 2,200 3,300
15.6.05 200 1,366
18.8.11 600 3,000

The current market values attributable to various percentage shareholdings in Bod Ltd are estimated as follows.

% Value of £1
Shareholding ordinary share
100 40.50
80 36.67
60 25.00
40 or below 18.00

On 1 April 2016 Hubert sold 2,000 of his shares in Bod Ltd for £10,000 to his daughter Maxine, who sold them to an unconnected buyer ten days later. Hubert has taxable income of £100,000 in 2015/16.

He has made no previous transfer of assets other than a gift of £349,000 cash to a discretionary trust (which did not include Hubert as a beneficiary) on 1 May 2015. Hubert had agreed to bear any costs or taxes in respect of the gift. Apart from his shares in Bod Ltd, Hubert currently has no other assets apart from cash of £40,000. He has left everything in his will to his son Roger. You should assume that today’s date is 14 April 2016.

Required

  • Advise Hubert of his potential inheritance tax and capital gains tax liabilities.
  • Advise Hubert on the inheritance tax implications which would arise if he were to die on 20 April 2016. (Assume that any CGT on lifetime gifts is unpaid at the date of death but that any IHT has been paid.)
  • Roger has suggested to Hubert that he should gift his shares in Bod Ltd now rather than retaining them until his death. Prepare brief notes of matters which will have a bearing on a decision in preparation for a meeting with Hubert.

Assume that the IHT nil rate band is £325,000 and the CGT annual exempt amount is £11,100 throughout and that the rules and rates of CGT and IHT are the same in 2016/17 as in 2015/16.

(25 marks)

                                   19 Rhys                                                      21 mins

On 17 July 2008 Rhys settled his portfolio of quoted shares on the RJ discretionary trust. Rhys died on 3 September 2015.

Under his will Rhys left his estate on discretionary will trusts for his sister Blodwen and her children, with the trust to be wound up and the capital to be distributed to Blodwen’s children on her death.

Blodwen died on 28 February 2020.

Half of the assets of the RJ discretionary trust were distributed to beneficiaries on 5 March 2017 and the remainder was finally distributed on 18 April 2021.

Rhys made no other gifts other than to use his annual exemptions each year.

Required

  • Explain the occasions of charge to IHT in respect of the above transactions. Calculations are not

required.                                                                                               (9 marks)

  • Comment on how your answer would have been affected had Rhys died on 3 July 2015. (2 marks)
  (Total = 11 marks)
20 Dan

Dan was involved in the following transactions during 2015/16.

16 mins
(a)      Purchased a freehold warehouse in England for £520,000.  
  • Purchased a freehold house in Wales for £600,000.
  • Purchased 1,000 ordinary shares in Ursale Ltd (an unquoted company) for £15,000.
  • Purchased, through the CREST system, 5,000 ordinary shares in HSBC plc (a company listed on the London Stock Exchange) for £30,000.
  • Received a freehold plot of land in England worth £200,000 as part of a divorce settlement.

Required

State the stamp taxes consequences of these transactions, briefly indicating how the transaction should be reported to HMRC and how any tax will be paid.

  (8 marks)
21 Fraser Ltd 29 mins

Fraser Ltd is a trading company. It prepares accounts to 31 March in each year.

The statement of profit or loss for the year ended 31 March 2016 showed a profit before taxation of £413,278.

The following items were included in the accounts.

Income £
Dividend from an unconnected UK company (including tax credit) 1,655
Interest on bank deposits 6,834
Interest from gilts (gross) 2,208
Surplus on the disposal of an office building and a lease 61,806
Expenditure  
Directors’ remuneration 62,075
Miscellaneous 3,837
Depreciation 13,876

The company’s bank deposits and gilts are held for non-trading purposes.

The company sold an office building for £117,789 on 15 August 2015. It had cost the company £79,000 in May 2006.

A lease of one of the company’s retail outlets was sold on 30 April 2015 for £39,242. The term of the lease was 30 years from 1 November 2002 and the company acquired it on 1 November 2007 at a cost of £17,500. The lease percentage for 17 years is 66.470, for 18 years is 68.697 and for 25 years is 81.100.

Miscellaneous expenses comprise the following.

£

Hire purchase interest on two new fork lift trucks                                                  783

Christmas gifts to customers: 40 executive desk diaries bearing the company’s name                                                                                                     2,085

Entertaining customers            969       3,837

The main pool value of plant at 1 April 2015 was £nil. With the exception of the acquisition of the two new fork lift trucks under the hire purchase agreements at a cash price of £9,800 each on 1 December 2015 there were no purchases or sales of plant in the year ended 31 March 2016.

Fraser Ltd has build up a cash surplus and is considering several schemes.

Fraser Ltd is considering acquiring a new office building. There are two possible options.

  • Office building A could be acquired at a cost of £150,000.
  • Office building B could be acquired at a cost of £400,000. Fraser Ltd would need to raise additional finance of £250,000, partly through a bank loan and partly through the issue of loan stock. Initially the office building would be too large, and Fraser Ltd would let out approximately half of the building to another company.

Alternatively, Fraser Ltd would purchase all of the issued share capital of Simmonds Ltd. The cost of the investment would be £250,000, and Fraser Ltd would need to raise £100,000 through bank loans.

To do well in the new area in which Simmonds Ltd operates, Fraser Ltd is likely to have to buy patents and similar rights, which it expects would cost £50,000. These will be written off over their useful lives in the accounts.

Instead of raising loan finance, Fraser Ltd is contemplating issuing new shares. Required

(a)     Compute Fraser Ltd’s taxable total profits for the year ended 31 March 2016. (10 marks)
(b)     Advise Fraser Ltd of the corporation tax consequences of its proposals.

Assume indexation  May 2006 – August 2015                0.307

(5 marks)
                                   November 2007 – April 2015         0.228  

(Total = 15 marks)

                                   22 Melson Ltd                                           19 mins

Melson Ltd, a UK resident trading company, made the following disposals in the year ended 31 December 2015.

  • On 31 May 2015 it sold a warehouse for £125,000. The company had bought the warehouse for £65,000 on 1 July 2005. It has always been rented out to another company. Melson Ltd had invested £100,000 in another warehouse for use in its own trade on 1 May 2015.
  • On 18 June 2015 Melson Ltd sold a retail shop for £75,000. It had bought it for £20,000 on 1 April 2000 and had spent £4,000 extending the shop in July 2002. The shop has always been rented out to another company.
  • On 25 July 2015 Melson Ltd sold an office building for £180,000. It had bought the office building for £65,000 on 16 October 2000 and it has always been rented out to another company.
  • On 30 July 2015 Melson Ltd sold 12,000 ordinary shares in Leigh Ltd, a trading company, for £180,000. This was a 12% holding which Melson Ltd had acquired in July 2002 for £12,000.

Required

Compute Melson Ltd’s chargeable gains for the year ended 31 December 2015.       

Assume retail prices index      
May 2015 = 257.8 July 2005 = 192.2    
June 2015 = 258.0 July 2002 = 175.9    
July 2015 = 258.2 October 2000 = 171.6    
  April 2000 = 170.1   (10 marks)
23 Major Ltd     31 mins

Major Ltd is a trading company resident in the United Kingdom. It has one wholly owned subsidiary, which it acquired several years ago. Until 2015 Major Ltd prepared accounts each year to 31 July, but decided to change its accounting date to 31 March. The information below relates to the eight month period to 31 March 2016:

  £
Income  
Adjusted trading profit 425,000
Rents received less expenses 30,000
Loan interest received – (see Note 1) 24,000
Capital gains 40,000
Franked investment income (FII) (received September 2015) 20,000
Payments  
Qualifying charitable donation (paid September 2015) 3,000
Loan interest paid (see Note 2) 30,000

Notes

  • The loan interest was received in respect of a loan of £100,000 made by the company to Z Ltd, a main supplier of materials to Major Ltd. The directors of Major Ltd are concerned about the financial position of Z Ltd, but have decided to take no action at present.
  • The loan interest paid was to a UK bank in respect of funds raised to acquire the subsidiary company.

Major Ltd is considering investing in another supplier and has identified two possibilities. 20% of the shares of S Ltd are being offered for sale by one of the retiring directors at a cost of £40,000. Alternatively Major Ltd could subscribe for new shares in T Ltd, taking an 8% holding at a cost of £15,000. Whichever acquisition is made Major Ltd would hope to sell the shareholding after a few years at twice its original cost, although it is possible that either of the two target companies could collapse. Major Ltd would have to borrow to fund the purchase.

Required

  • Compute the corporation tax payable by Major Ltd in respect of the above accounting period and advise how it should be paid.
  • Advise the directors of Major Ltd in a brief memo of the taxation implications of the loan to Z Ltd proving irrecoverable.
  • Advise Major Ltd of the tax consequences of its alternative share acquisitions.

(16 marks)

                                   24 Hogg Ltd                                               12 mins

  • Hogg Ltd prepares accounts for the year to 31 March 2016. In September 2015 it estimates that its corporation tax liability for the year will be £500,000. In April 2016 it revises its estimate to £520,000. In January 2017 it submits its corporation tax return, showing a total liability of £525,000. The company has always been a large company.

Required

State the amounts that would have been paid and due dates for the payment of corporation tax by

Hogg Ltd in respect of the year to 31 March 2016.                           (3 marks)

  • Explain the maximum late-filing penalty that would arise if Hogg Ltd did not submit its corporation tax return for the year to 31 March 2016 in January 2017 but instead submits the return on 10

October 2017.    (3 marks)              (Total = 6 marks) 25 Norma 19 mins

Norma is intending to start a new business on 1 April 2016, and anticipates a profit of £60,000 in the first year of trading. She is undecided whether to:

  • Operate as a sole trader,
  • Operate as a limited company and draw out all the profits as a dividend, or
  • Operate as a limited company, draw a salary of £15,000 a year and draw out all the remaining profits as a dividend.

Required

Compare the tax and national insurance resulting from each alternative. You should assume that the tax rates and allowances for the tax year 2015/16 and for the financial year to 31 March 2016 will continue to

apply for the foreseeable future.                                                                  (10 marks)

                                    26 Clarke Ltd                                             19 mins

Alex, one of the directors of Clarke Ltd, has had a serious disagreement with the other directors over the direction in which the business should be moving, and as a consequence wishes to resign as a director and dispose of his shares. It has been agreed that Clarke Ltd will repurchase Alex’s shares for £5 per share, either in March 2016 or in June 2016.

In January 1999, Alex subscribed for 5,000 shares at par. In May 2011 he purchased a further 2,000 from another director, Benny, at a cost of £3 per share. Benny had also subscribed for these share at par in January 1999. Clarke Ltd is an unquoted trading company and has 150,000 ordinary shares in issue. Alex has utilised his capital gains tax annual exempt amount on the disposal of other assets in both 2015/16 and 2016/17. He has taxable income of £160,000 in 2015/16 and 2016/17.

Required

Explain how the repurchase will be dealt with for tax purposes for Alex and indicate whether it would be preferable for the repurchase to take place in March or June 2016, assume the tax rules and rates in

2015/16 continue to apply. (10 marks)
27 Daley plc 29 mins

Assume that it is December 2016.

Daley plc has recently become a client, having previously prepared its own accounts and corporation tax computations on the basis that reliefs should always be claimed as soon as possible. The return for the year to 30 June 2016 has been prepared but not yet filed.

The company has had the following results since it started to trade.

      Six months  
  Year ended Year ended ended Year ended
  31.12.13 31.12.14 30.6.15 30.6.16
  £ £ £ £
Trading profit/ (loss) (29,000) 110,000 85,000 (202,000)
Interest income 10,000 11,000 12,000 14,000
Chargeable gains/(losses) 18,000 (5,000) 2,000 (1,000)
Qualifying charitable donation Nil 2,000 3,000 1,000

It is expected that Daley plc’s profits in the year to 30 June 2017 will be in the region of £150,000, and that this level will be maintained in the future.

Required

  • Compute the corporation tax liability for all four periods on the basis that relief is claimed as soon as possible, and show all amounts to be carried forward at 30 June 2016.
  • Write a letter to the directors of Daley plc explaining how losses can be relieved, calculating the tax saving if relief is claimed as soon as possible and explaining whether an alternative way of using the loss would have been more beneficial in terms of tax saving.

Assume that tax rates and allowances for FY 2015 apply to all years.       (15 marks)

                                   28 Huis Ltd                                                 29 mins

  • Huis Ltd is a close company which is not required to pay corporation tax by instalments. On 31 May 2015, six months before the company’s year end, it lent £45,000 to Sartre, a shareholder. Sartre is not an employee of the company. The loan carried a market rate of interest.

The company advised Sartre on 31 March 2017 that he would not be required to repay the loan. It has also agreed to include Sartre in its medical insurance scheme at an annual cost of £1,000, and to allow him to use the company yacht (annual value £24,000) for a month each summer.

Required

Set out the tax consequences of the transactions with Sartre, giving the dates on which any amounts are payable to HMRC.

  • Beauvoir Ltd is an investment company. It has had the following results for the last two years.
  Year ended Year ended
  31.3.15 31.3.16
  £ £
Property income 14,000 25,000
Interest income 20,000 100,000
Management expenses

Required

36,000 45,000
Compute the company’s corporation tax liability for both years.   (15 marks)
29 H Ltd, S Ltd and N Ltd   35 mins

H Ltd has owned 60% of the issued ordinary share capital of S Ltd since its incorporation, the remaining 40% being held by individuals. Both UK companies have always prepared accounts to 30 June, their most recent accounts showing the following.

  H Ltd S Ltd
  Year ended       Year ended Year ended       Year ended
  30.6.15                30.6.16 30.6.15                30.6.16
          £                        £         £                        £
Adjusted trading profit      2,000     30,000            100,000
Adjusted trading loss                            (48,000)  
Qualifying charitable donation paid       12,000              12,000

On 1 January 2015, H Ltd acquired 100% of the issued ordinary share capital of N Ltd, a company which had always previously prepared accounts to 31 December.

N Ltd’s accounts for the period of 1 January 2015 to 30 June 2016 show the following.

£

Adjusted trading profit, before capital allowances                                            65,250

Investment interest, amount accrued over six months to 30 June 2016         20,000

N Ltd had capital allowances of £4,250 in the year to 31 December 2015 and £17,569 in the 6 months to 30 June 2016.

The group is planning several property transactions for 1 January 2017:

  • N Ltd will sell a factory for £200,000 realising a loss of £13,333. N Ltd also has an unused capital loss of £26,667 which arose on a disposal of a warehouse in November 2014.
  • H Ltd will sell an office block for £250,000 realising a chargeable gain of £80,000.
  • S Ltd will sell a warehouse for £300,000 realising a gain of £70,000.
  • S Ltd will acquire a new warehouse at a cost of £290,000.

Required

  • Compute the corporation tax payable by H Ltd, S Ltd and N Ltd for the above periods of account, assuming all available claims and surrenders are made to minimise the corporation tax payable by the group. Assume the rates for FY15 apply throughout.
  • Draft a memorandum to the directors of H Ltd suggesting the extent to which H Ltd, S Ltd and N Ltd can minimise the corporation tax on chargeable gains for the year to 30 June 2017.              (18 marks)

                                   30 Exotica Inc and W Ltd                         29 mins

  • Exotica Inc (for which you act as United Kingdom tax adviser) is a company resident and incorporated in Ruritania, a country which is outside the European Union and does not have a double tax agreement with the UK. The company manufactures items of advanced industrial equipment and now wishes to increase its sales within the UK.

It intends to acquire an office in London and to staff it with full-time salesmen assigned from its head office in Ruritania. Exotica Inc is still considering whether the salesmen will be given the authority to conclude contracts with UK customers or whether such authority will be reserved for the head office only. It is also considering whether customers’ orders should be met from stocks held in Ruritania or whether stocks should be maintained in the UK. While tax considerations will be taken into account, other commercial factors are likely to influence these decisions strongly.

Required

Advise Exotica Inc on the corporation tax implications of the various alternative courses of action still under consideration.

  • The directors of W Ltd have decided to set up an operation in a country where the rate of corporation tax is 18%.

They are considering two alternative approaches:

(i)         to run the overseas operation as a permanent establishment of the UK company; or (ii)    to run it as a foreign-registered subsidiary of the UK company.

Required 

Draft a report to the board on the taxation implications of each of the alternative proposals.

(15 marks)

                                    31 Paul                                                       19 mins

Paul is in business as a general builder but he is also in partnership with John as ‘A1 Repairs’, Peter as ‘Kwik Repairs’ and in partnership with his wife, Jane, as ‘Speedy Builders’.

Required

Discuss how many VAT ‘persons’ exist here. (10 marks)
32 VAT groups 19 mins

It is February 2016. Barry Franklin, the Finance Director of Banner plc, has written to you, asking for your advice on certain VAT matters. Banner plc has two wholly owned subsidiaries, Flag Ltd and Ensign Ltd. All three companies are fully taxable and are included in a group registration for VAT. Two months ago, in December 2015, Banner plc acquired 75% of the ordinary share capital of Union Ltd, a partly exempt company. Union Ltd generally recovers around 60% of its input tax. To date, no action has been taken to include Union Ltd in the group registration.

As Union Ltd is not wholly owned, other group companies will be required to pay for any losses surrendered to them as group relief.

Mr Franklin has specifically asked whether Union Ltd should be included in the group registration and, if so, what action he should take in this regard.

All four companies are UK resident with an established place of business in the UK.

Required

Write a letter in reply to Mr Franklin.                                                           (10 marks)

                                   33 Stewart Ltd                                          19 mins

Stewart Ltd, a partially exempt trader, has the following information for the year ended 31 March 2016:

Supplies

Quarter ended                Taxable (excl VAT)                       Exempt    Total (excl VAT)

£                                           £                                  £

30.6.15                                   403,920                                   52,072                455,992

30.9.15                                 *384,177                                   23,194              *407,371

31.12.15                                 467,159                                   18,791                485,950

31.3.16                                   520,321                                   37,439                 557,760

*1,775,577                                131,496           *1,907,073

* This includes £25,000 in respect of a computer used in the business and subsequently sold. The computer was originally purchased for £45,000 in 2014.

Input tax

                          Re taxable                Re exempt                                              

 Quarter ended                   supplies                     supplies             Non-attributable       Total

£                                £                                £                 £

30.6.15                               44,404                        3,120                       14,719  62,243

30.9.15                               39,098                        2,775                       12,613  54,486

31.12.15          24,926  1,374     10,412  36,712  31.3.16     36,020                               49,815

144,448                                                                    203,256

Stewart Ltd has decided to use the actual recovery rate percentage to account for VAT in each quarter in the year ended 31 March 2016 rather than the recovery rate for the year ended 31 March 2015. You may assume that neither of the de minimis Tests 1 nor 2 apply and the conditions for the annual test are not satisfied.

Required

Calculate the amount of recoverable input tax for each quarter and the annual adjustment, if any.

                                                                                                                        (10 marks)

                                    34 Tax planning                                        49 mins

You are a partner in a firm of certified accountants with particular responsibility for tax planning.

Required

Draft an answer to each of the following queries which have been passed on to you by your fellow partners. You should assume that today’s date is 1 April 2015.

  • Client A is about to commence business as a management consultant on 1 May 2015. She was previously employed as a school headteacher for several years at a salary in excess of £55,000 a year. The business involves virtually no expenditure on capital assets. She expects to make operating losses in her first two years of trading, after which she expects the business slowly to become profitable. She will have no other taxable sources of income. For reasons of prestige she is proposing to trade through a specially formed company, A Ltd. However, she could delay forming the company for a short while and she asks what the best course of action would be from a tax viewpoint.
  • Client B currently manufactures fitted bedroom furniture for the general public from a small workshop. The market is highly competitive. He has a turnover of £60,000 a year which yields a current gross profit percentage of 40% and he incurs minimal overheads. He has been offered a contract to manufacture bookcases for a VAT registered trader at a price of £25,000 a year from 1 March 2016 (exclusive of any VAT). B estimates that this project would involve a similar cost structure to his existing operations. B is concerned that, since he will become liable to register for VAT if he takes on the new contract, it may not be worthwhile to accept it.

He has asked for calculations showing the net annual gain to him from taking on the contract. He has also enquired whether it would be possible to avoid the requirement to register by setting up a new company, B Ltd, to carry out the new contract. (Note. You are required to consider VAT issues only.)

  • Client C is about to acquire shares in a publicly quoted company for £350,000 out of his own funds. The shares currently yield a dividend of £28,000 a year paid in September and March each year. The prospects for significant capital appreciation in the future are excellent. At the end of ten years C may decide to sell some or all of the shares. It has been suggested to C by a friend, D, that instead of buying the shares himself he should form a new investment company, C Ltd. C would subscribe for 350,000 £1 shares in C Ltd, which would then use the cash to buy the shares. D has told C that he could draw out director’s remuneration of up to £10,000 a year and that C Ltd could deduct this against the dividend income and that the balance of £18,000 would only be liable to corporation tax of 20%. D has also said that C could obtain tax relief by paying premiums into a personal pension scheme. C has asked whether the advice which he has received from D is correct.
  • Client D is setting up in business as an aromatherapist. She is considering structuring her business either as a sole trader or through a limited company. If she operates as a sole trader she will be starting in business on 6 April 2015, making up her first accounts to 5 April 2016 with an expected trading profit of £30,000. If she uses a limited company, it will start in business on 1 April 2015, make up accounts to 31 March 2016, with expected taxable trading profits of £30,000. Client D would extract all available profits by way of dividends on 31 March 2016.

Client D has investment income which exactly covers her personal allowance for 2015/16. Client D wants to know how much net spendable income she would have from the business in each of these cases.       (25 marks)

                                    35 Hulse Finds Ltd                                    35 mins

Paul and his friend Nick set up the company Hulse Finds Ltd with Paul and Nick holding 40% of the shares each. The remaining 20% of the company is held by five of their friends. Hulse Finds Ltd runs a shop in Didsbury selling unusual objects which are sourced from around the world. Paul and Nick work full time in the management of the company but their five friends are passive investors in the business.

Paul took out a bank loan of £150,000 secured on his apartment in central Manchester to purchase his shares whereas Nick used his redundancy payout from his old employer (a large bank).

Hulse Finds Ltd incurred significant start-up costs in its first 18 months of trade. Taxable total profits were £60,000 and £160,000 in the years to 31 March 2015 and 2016 respectively.

During June in the second year the company made a loan to Chris (one of the investor friends) of £10,000.

Nick has identified a company Sweet Nothings Ltd (SNL) as a possible acquisition. The company sells

French furniture and fixtures which it imports into the UK. After negotiations with the board of directors of SNL it has been agreed that Hulse Finds Ltd can purchase the trade and assets of SNL on 1 April 2017.

SNL has trading losses which are being carried forward of £50,000 and capital losses being carried forward of £25,000. Hulse Finds Ltd will set up a wholly owned subsidiary SN2 Ltd to acquire the trade and assets of SNL.

Predicted taxable total profits for the two companies for year ended 31 March 2018 are:

Hulse Finds Ltd              £250,000 SN2 Ltd Trading profits 40,000

Capital gains                                                       10,000

By 2019 Paul and Nick expect the existing business to have grown considerably and they expect to have taxable profits of £1 million in the year ended 31 March 2019. SN2 Ltd is expected to have taxable profits of £100,000 in the same period.

Paul and Nick have been looking to expand overseas in order to take advantage of new emerging markets. They intend to start a new business in Newland on 1 April 2018.

It is anticipated that the overseas business will make a trading loss of £60,000 in the year ended 31 March 2019, a profit of £80,000 in the year ended 31 March 2020 and a profit of £100,000 per year in future years.

The system of corporation tax in Newland is broadly the same as that in the UK, although loss relief is only available to companies resident in Newland. In addition, the rate of corporation tax is 45% regardless of the level of profits and there is no withholding tax when dividends are paid to overseas shareholders. There is no double tax treaty between the UK and Newland.

You are meeting with Paul and Chris next week. Assume that the rates of corporation tax in FY15 also apply in later years.

Required

Make brief notes on the following for discussion at that meeting:

  • Any relief for Paul’s investment in the company? (2 marks)
  • What is the impact to the company, if any, of the loan to Chris and would this be different if Chris
was an employee of the company? (4 marks)
(c)      What are the tax implications of the acquisition of SNL? (5 marks)
(d)      Discuss the tax implications of the proposed expansion overseas. (7 marks)
  (Total = 18 marks)
36 Financial planning 29 mins

The directors of M Ltd, a medium-sized unquoted company engaged in manufacturing, have decided to embark on a major expansion of the business.

The company has a significant amount of unissued share capital and, to finance the expansion, the directors have been considering issuing further shares. They have also considered raising loan capital, using as security identified pieces of valuable property owned by the company.

Required

Draft a report to the board, dated 19 May 2015, setting out the taxation implications for the company under each of the alternative methods of raising finance.

Your report should also identify any taxation implications for the providers of this finance.                                                                                                     (15 marks)

                                   37 Daniel                                                   49 mins

An extract from an email from your manager is set out below.

I had a telephone conversation with Daniel, the managing director of Saturn Ltd, first thing this morning. We discussed the anticipated results of the Saturn Ltd group of companies and the proposed acquisition of a majority holding in Tethys Ltd. All the relevant details are included in the attached memorandum.

I need the following:

  • A memorandum that I can use to prepare for my telephone call to Daniel. I realise that he did not give me all of the information we need so please identify any additional information that you think could have an effect on our advice.
  • A summary of the information we need and any action we should take before agreeing to become tax advisers to the Saturn Ltd group.

Tax manager

The memorandum attached to the email is set out below.

To:                  Internal filing

From:             Tax manager

Date:               2 June 2016

Subject:         Saturn Ltd group of companies

This memorandum sets out the matters discussed with Daniel, the managing director of Saturn Ltd, earlier today.

Group structure

Saturn Ltd has three wholly-owned subsidiaries: Dione Ltd, Rhea Ltd and Titan Inc. Titan Inc trades in and is resident in the country of Galactica. The other three group companies are resident in the UK. Saturn Ltd has owned all three subsidiary companies for many years.

Budgeted results for the year ending 30 June 2016

It is estimated that Dione Ltd will make a tax adjusted trading loss of £187,000 in the year ending 30 June 2016; it will have no other income or capital gains in the period. The budgeted taxable total profits of the other companies in the group are set out below.

£

Saturn Ltd              385,000 Rhea Ltd                90,000

Titan Inc                                                                                                                                                265,000

 

 

Rhea Ltd is expected to make a trading loss of £(200,000) in the year ending 30 June 2017 and will have no other income or gains, Dione Ltd is expected to make minimal profits in that year.

Proposed acquisition of 65% of Tethys Ltd

On 1 August 2016, Saturn Ltd will purchase 65% of the ordinary share capital of Tethys Ltd for £235,000 from the personal representatives of George Jetson. The whole of the balance of the company’s share capital is owned either by Edith Clanger or by her family company, Clangers Ltd; Daniel cannot remember which.

It is anticipated that Tethys Ltd will make a tax adjusted trading loss of approximately £80,000 in the year ending 31 December 2016.

In early 2017, Tethys Ltd will sell its manufacturing premises for £240,000 and move to a rented factory. The premises were acquired new for £112,000 in 2008 and immediately brought into trade use. We agreed that the indexation factor on the disposal can be assumed to be 27%.

Information requested by Daniel

(i)                The best use of the loss of Dione Ltd, and the amount of tax that can be saved.

(ii)              The amount of the trading loss of Tethys Ltd for the year ending 31 December 2016 that can be used by Saturn Ltd and the ability of Tethys Ltd to use this loss in the future. (iii)          In respect of the sale of the manufacturing premises:

–             Whether or not Tethys Ltd should charge value added tax (VAT) on the sale of the property

–             The taxable profit arising in respect of the sale

–             The amount of the gain that could be rolled over if Tethys Ltd or any of the other Saturn Ltd group companies acquired assets costing £200,000, the types of asset that would have to be purchased and the period during which the assets would need to be acquired

(iv)    Any stamp taxes payable by the Saturn Ltd group in respect of the proposed transactions.

Tax manager

Required

  • Prepare the memorandum requested by your manager. The memorandum should include explanations together with supporting calculations and should identify any further information that you think is required. The following marks are available for the four components of the memorandum:
    • The best use of the loss of Dione Ltd; (3 marks)
    • The use of the trading loss of Tethys Ltd for the year ending 31 December 2016; (6 marks)
    • Advice in connection with the sale of the manufacturing premises by Tethys Ltd; (7 marks)
    • The stamp taxes payable by the Saturn Ltd group. (2 marks)

Additional marks will be awarded for the appropriateness of the format and presentation of the memorandum and the effectiveness with which the information is communicated.               (2 marks)

  • Prepare a summary of the information needed to satisfy our obligations under the money laundering legislation and any action that should be taken before agreeing to become tax advisers

to the Saturn Ltd group.                                                                      (5 marks)

                                                                                                           (Total = 25 marks)

                                    38 Stuart and Rebecca                            51 mins

Your manager has had a meeting with Stuart and Rebecca and has sent you a copy of the following memorandum.

To                    The files

From              Tax manager

Date               1 December 2016

Subject          Stuart and Rebecca – Estate planning

Stuart has recently been diagnosed with a serious illness. He is expected to live for another two or three years only. He is concerned about the possible inheritance tax that will arise on his death. Rebecca is in good health.

In November 2016 Stuart sold a house in Plymouth for £422,100. Stuart had inherited the house on the death of his mother on 1 May 2004 when it had a probate value of £185,000. The subsequent pattern of occupation was as follows:

1 May 2004 to 31 August 2006                  Occupied by Stuart and Rebecca as main residence

1 September 2006 to 30 June 2010           Unoccupied

1 July 2010 to 30 September 2012            Let out (unfurnished)

1 October 2012 to 31 May 2013                Occupied by Stuart and Rebecca

1 June 2013 to 30 November 2016            Used occasionally as second home

Both Stuart and Rebecca had lived in London from September 2006 onwards. On 1 September 2012 Stuart and Rebecca bought a house in London in their joint names. No other capital disposals were made by Stuart in the tax year 2016/17. He has £29,150 of capital losses brought forward from previous years.

Stuart intends to invest the gross sale proceeds from the sale of the Plymouth house, and is considering two investment options, both of which he believes will provide equal risk and returns. These are as follows:

(1)          Acquiring shares in Omikron plc, a listed UK trading company, with 50,250,000 shares in issue. Its shares currently trade at 42p per share, or

(2)          Acquiring further shares in Omega plc. The issued share capital of Omega plc is currently

10,000,000 shares. The share price is quoted at 208p – 216p with marked bargains at 207p, 211p, and 215p

Stuart and Rebecca’s assets (following the sale of the Plymouth house but before any investment of the proceeds) are as follows:

Assets                                                                               Stuart                                               Rebecca

£                                                         £

Family house in London     450,000 450,000 Cash from property sale    422,100 – Cash deposits                165,000 165,000

Portfolio of quoted investments      –             250,000 Shares in Omega plc           see files see files Life insurance policy           note       note

Note. The life insurance policy will pay out a sum of £200,000 on the death of the first spouse to die.

Tax manager

An extract from an email from your manager is set out below.

Please prepare a letter from me to Stuart incorporating the following:

1             State the taxable capital gain on the sale of the Plymouth house in November 2016, setting out the amounts of any reliefs claimed.

2             Given his recent diagnosis, advice for Stuart on which of the two proposed investments (Omikron plc/Omega plc) would be the more tax efficient alternative.

Give reasons for your choice.

3             Assuming that Stuart:

(i)           uses proceeds from the house sale to purchase 201,000 shares in Omega plc on 3 December

2016; and

(ii)          dies on 20 December 2018,

calculations of the potential IHT liability which would arise if Rebecca were to die on 1 March 2019, and no further tax planning measures were taken.

Assume that all asset values remain unchanged.

4             Advice on any lifetime IHT planning that could be undertaken to help reduce the potential liability calculated above.

Tax manager

You have extracted the following further information from client files.

  • Stuart is a self-employed business consultant. He is married to Rebecca.
  • They have one adult child, Sam, who is single.
  • Both Stuart and Rebecca have wills whose terms transfer all assets to the surviving spouse.
  • On 1 June 2013 Stuart and Rebecca elected for their London house to be their principal private residence with effect from that date, up until that point the Plymouth property had been their principal private residence.
  • Omega plc was formerly Omega Ltd and Stuart and Rebecca helped start up the company. The company was formed on 1 June 1996, when they each bought 24,000 shares for £1 per share. The company became listed on 1 May 2005. On this date their holding was subdivided, with each of them receiving 100 shares in Omega plc for each share held in Omega Ltd.
  • Neither Stuart nor Rebecca has made any previous chargeable lifetime transfers for IHT purposes.

Required 

Prepare the letter requested by your manager. Marks are available for the four components of the letter as follows:

  • Relevant calculations of the taxable capital gain on the sale of the Plymouth house in November
  1. (8 marks)
  • Advice on which of the two proposed investments would be more tax efficient alternative. (3 marks)
  • Calculations of the potential IHT liability which would arise if no further tax planning measures are

taken and Rebecca dies in March 2019.                                             (6 marks)

  • Advice on any lifetime IHT planning that could be undertaken for both Stuart and Rebecca to help

reduce their potential IHT liability (in three above).                          (7 marks)

Appropriateness of the format and presentation of the report and the effectiveness with which its advice is

communicated.                                                                                                (2 marks)

You may assume that the rates and allowances for the tax year 2015/16 continue to apply for the foreseeable future.

(Total = 26 marks)

                                   39 Landscape Ltd                                      49 mins

Landscape Ltd is an unquoted trading company that operates a nationwide chain of retail shops.

  • Landscape Ltd employed Peter Plain as a computer programmer until 31 December 2015. On that date he resigned from the company, and set up as a self-employed computer programmer. Peter has continued to work for Landscape Ltd, and during the period 1 January to 5 April 2016 has invoiced them for work done based on an hourly rate of pay. Peter works five days each week at the offices of Landscape Ltd, uses their computer equipment, and does not have any other clients. The computer function is an integral part of Landscape Ltd’s business operations. Peter considers himself to be self-employed but Landscape Ltd’s accountant is not sure if this is correct.
  • On 15 March 2016 Landscape Ltd dismissed Simon Savannah, the manager of their shop in Manchester, and gave him a lump sum redundancy payment of £55,000. This amount include statutory redundancy pay of £2,400, holiday pay of £1,500, and £5,000 for agreeing not to work for a rival company. The balance of the payment was compensation for loss of office, and £10,000 of this was not paid until 31 May 2016.
  • Trevor Tundra is one of the Landscape Ltd’s shareholders, and is not a director or employee of the company. On 6 April 2015 Landscape Ltd provided Trevor with a new motor car that had a CO2 emissions figure of 200g/km and that had an original list price of £14,000. No private petrol was provided. On 1 July 2015 Landscape Ltd made an interest free loan of £40,000 to Trevor. He repaid £25,000 of the loan on 31 August 2015, and the balance of the loan was written off on 31 March 2016.
  • On 1 October 2015 Landscape Ltd opened a new shop in Cambridge, and assigned three employees from the London shop to work there on a temporary basis.
    • Ursula Upland is to work in Cambridge for a period of 18 months. Her ordinary commuting is a daily total of 90 miles, and her daily total from home to Cambridge to home again is 40 miles. She uses her private motor car for business mileage.
    • Violet Veld was initially due to work in Cambridge for a period of 30 months, but this was reduced to a period of 20 months on 1 January 2016. Violet walks to work whereas the cost of her train fare from home to Cambridge is £30 per day. This is paid by Landscape Ltd.
    • Wilma Wood is to work in Cambridge for a period of six months. Her ordinary commuting is a daily total of 30 miles, and her daily total from home to Cambridge is 150 miles. Wilma passes the London shop on her daily journey to Cambridge. She uses her private motor car for business mileage.

All three employees worked at Cambridge for 120 days during 2015/16. Landscape Ltd pays a mileage allowance of 41p per mile for business use.

  • Landscape Ltd is considering setting up a share incentive plan to reward its key employees. The company would like to know how many tax and NIC free shares it can give to each employee and how long the employees concerned must hold the shares for in order to obtain this advantage.

Required

Explain the income tax implications arising from the payments and benefits that have been made or provided by Landscape Ltd to Peter, Richard, Simon, Trevor, Ursula, Violet and Wilma. Your answer should be confined to the implications for 2015/16 and should assume that Landscape Ltd meets the

definition of a close company.                                                                      (25 marks)

Marks for this question will be allocated on the basis of:

6 marks to (a)

4 marks to (b)

4 marks to (c)

Required

Explain the income tax implications arising from the payments and benefits that have been made or provided by Landscape Ltd to Peter, Richard, Simon, Trevor, Ursula, Violet and Wilma. Your answer should be confined to the implications for 2015/16 and should assume that Landscape Ltd meets the definition of a close company.

Marks for this question will be allocated on the basis of:

6 marks to (a)

4 marks to (b)

4 marks to (c)

7 marks to (d)

4 marks to (e)

 

                                   40 Marilyn                                                 31 mins

Marilyn was widowed on 20 May 2014. Under the terms of the will of her late husband Max she benefited absolutely from his share of the family home which they had held jointly as tenants in common. The mortgage on the family home was repaid out of the proceeds of a joint first death life assurance policy. In addition Marilyn inherited the holiday home in Cornwall, bank balances and a portfolio of quoted investments, all of which had previously been owned by Max personally. Marilyn’s will leaves her estate equally to their twin sons, Douglas and Archie, aged 24, absolutely. Under Max’s will the chattels passed to his brother Mark. Max, who had died suddenly, had made no lifetime gifts. The base cost, probate value and current market value of the items contained in Max’s estate are as follows:

  Base cost  Probate value May 2014 Market value February 2016
  £ £ £
Family home (½ share) 61,500 90,000 110,000
Holiday home 42,000 63,000 73,000
Quoted investments      
Spiro plc 10,000 ordinary shares 50,000    
quoted at   685-677 635-647
with bargains marked at   690, 670, 675 630, 642, 641
Unit trusts 50,000 60,300 81,000
Unit trusts contained in ISAs 40,000 48,800 67,600
Bank deposits contained in ISAs 9,000 11,000 11,300
Bank deposit account 20,000 20,000 20,000
Chattels      
Chirico painting – Creation 4,000 5,000 7,000
Rene writing desk 8,000 7,000 4,000
Beckman’s Diary – first edition 3,500 3,000 4,500

Marilyn also has £33,400 on deposit at Berkley’s Bank, unit trust units invested in stocks and shares NISAs valued at £72,000 and a cash ISA of £10,600.

Marilyn is concerned about the exposure to inheritance tax in the event of her death.

Required

  • Calculate the inheritance tax liability that arose on Max’s estate as a result of his death on 20 May 2014 and that which would arise on Marilyn’s estate if she were to die today (ie February 2016).

Assume that no claims are made which might reduce the inheritance tax liability on either estate.

(8 marks)

  • Advise Marilyn about any beneficial claims that may be made to reduce the inheritance tax liability on her death. (7 marks)
  • State how Marilyn can retain the tax benefits on the ISA investments owned by Max at his death.

(1 mark)

                              (Total = 16 marks) Approaching the answer

You should read through the requirement before working through and annotating the question as we have done so that you are aware of what things you are looking for.

Marilyn was widowed on 20 May 2014. Under the terms of the will of her late husband Max she benefited

Spouse

exemption       absolutely from his share of the family home which they had held jointly as tenants in common. The

mortgage on the family home was repaid out of the proceeds of a joint first death life assurance policy. In addition Marilyn inherited the holiday home in Cornwall, bank balances and a portfolio of quoted investments, all of which had previously been owned by Max personally. Marilyn’s will leaves her estate equally to their twin

sons, Douglas and Archie, aged 24, absolutely. Under Max’s will, the chattels passed to his brother Mark. Max, Taxable?

who had died suddenly, had made no lifetime gifts. The base cost, probate value and current market value of the

ONLY death estate items contained in Max’s estate are as follows:

                                                   Base cost     Probate value                                                                   Market value

May 2014                                                                                                                                                     February 2016

£                               £                                                                             £

Family home (½ share) 61,500 90,000 110,000 Holiday home 42,000 63,000 73,000

Quoted investments

Spiro plc 10,000 ordinary shares                                          50,000

Lowest of                  quoted at                                                                                                           685-677                                     635-647

  • ¼ up with bargains marked at                690, 670, 675       630, 642, 641
  • Average Unit trusts            50,000   60,300   81,000 highest and            Unit trusts contained in ISAs          40,000   48,800   67,600 lowest      Bank deposits contained in ISAs          9,000     11,000   11,300 marked    Bank deposit account         20,000   20,000   20,000 bargain           Chirico painting – Creation               4,000     5,000     7,000 Rene writing desk          8,000     7,000     4,000

Beckman’s Diary – first edition                                               3,500                     3,000                                                         4,500

Marilyn also has £33,400 on deposit at Berkley’s Bank, unit trust with units invested in stocks and shares ISAs valued at £72,000 and a cash ISA of £10,600.

Marilyn is concerned about her exposure to inheritance tax in the event of her death.

Required

  • Calculate the inheritance tax liability that arose on Max’s estate as a result of his death on 20 May 2014 and that which would arise on Marilyn’s estate if she were to die today (ie February 2016).

Assume that no claims are made which might reduce the inheritance tax liability on either estate.

 

Transfer of unused

nil rate band                                                                                                                                        (8 marks)

  • Advise Marilyn about any beneficial claims that may be made to reduce the inheritance tax liability

on her death.                                                                                               (7 marks)

  • State how Marilyn can retain the tax benefits on the ISA investments owned by Max at his death.

(1 mark)

(Total = 16 marks)

 

 

1 Eric and Melanie

Tutorial note. By this stage you should be proficient at setting up an income tax computation in three columns, grossing up income etc. This question also tests a new area at Paper P6 – tax reducers – and introduces an element of tax planning which will usually be found in questions at this level.

(a)        (i)        Eric

 Non-      savings  Savings  Dividend    income  income  income  Total

£                        £                         £                     £

Taxable trade profits                         101,200

 Less deductible interest  (1,000)             
 Net income  100,200  2,000  Nil  102,200
 Less personal allowance (W1) (9,500)             
 Taxable income  90,700  2,000   Nil  92,700

BI £1,600  100/80                                                   Total income      101,200                         103,200

Tax  
  £
 £31,785  20% 6,357
 £58,915  40% 23,566
 £2,000  40%      800
   30,723
 Less: tax reducer  

VCT £11,000  30% )

Tax liability

Less tax deducted at source        (400)  Tax payable            27,023

(ii)       Melanie

Non-     savings Savings Dividend   income income Income Total

£                        £                         £                       £

Earnings                                             150,415

Dividends £4,500  100/90                                                                       5,000

Net income                                        150,415                  Nil                   5,000           155,415

Less personal allowance                             (0)                                                   

Taxable income                                 150,415                  Nil                   5,000           155,415

No personal allowance is available as net income exceeds £121,200.

Tax

 
  £
£31,785  20%  6,357
£118,215  40% 47,286
£415  45% 187
£5,000  37.5%   1,875
Tax liability  55,705
Less:  dividend tax credit  (500)
            PAYE  (53,000)
Tax payable      2,205

Note. Interest on the National Savings & Investments Certificate is exempt from income tax.

 

(b)       The total income will be split 50:50 between Eric and Melanie if no declaration of underlying interests is made.

The tax liability would be:

£

Eric     £6,000  40%                                                                                                                   2,400

Add tax on reduction in personal allowance (W2)                                                                     1,200

Melanie £6,000  45%                                                                                                                2,700

Total extra tax                                                                                                                              6,300

It would be better for the cottage to be bought by Melanie as despite the additional income being taxed at 45%, this is lower than Eric’s effective rate of 60%. If Eric wished to have some interest in the cottage he could be given a notional 5% (say) as this would only have a marginal extra tax cost. A declaration for this treatment, to tax income in terms of their actual interests, would need to be made. If Eric’s other income increases in future, such that the personal allowance is fully abated before taking account of the extra income, then it may be better for Eric to own the cottage if his income does not reach the higher rate limit.

Workings

1         Personal allowance

£

Net income as above                                                                              102,200

Reduction £(102,200 – 100,000)  0.5                                                      1,100

Personal allowance £(10,600 – 1,100)                                                       9,500

2

£

Net income including rent                                                                      108,200

Reduction £(108,200 – 100,000)  0.5                                                     4,100

Personal allowance £(10,600 – 4,100)                                                      6,500

So there is a tax increase resulting from the further loss of personal allowance of £9,500 – £6,500 = £3,000  40% = £1,200.

(c)       EIS investment

Assuming the shares are subscribed for the initial investment will qualify for EIS relief at the rate of 30%. In this case the interest paid on the bank loan will not qualify for tax relief. Her outlay over five years will be £12,000 – £(12,000  30%) + £(12,000  8%  5) =  £13,200.

Purchase of 10% stake

In this case the bank interest paid will be allowed as deductible interest, but the dividends received will be liable to additional rate tax. Her outlay will be £12,000 + £[(12,000  8%  5)  (100 – 45)%] – £(1,000 + 1,100 + 1,200 + 1,300 + 1,400)  (100 – 37.5)/90 =  £10,473.

2 Lee and Harry

Tutorial note. Although you are asked to reply by e-mail, you must remember that you are writing to a client and present a structured reply.

(a)       To:      Lee@red.co.uk

From: An Advisor@taxadvice.co.uk

Date:  [    ]

Re:      Pension advice

Thank you for your email about pension advice. My answers to your questions are as follows:

(1)       If you opt out of your new employer’s workplace pension scheme, you could start a pension with a financial institution such as a bank or insurance company. However, your employer

would probably not contribute to private pension arrangements so you need to bear this in mind when considering whether or not to opt out of your employer’s scheme.

A money purchase scheme is one where the value of your pension benefits depends on the value of the investments in the pension scheme at the date that you start to receive pension benefits. This is distinct from a defined benefits scheme where the pension benefits are defined from the outset. If you decide to use private pension arrangements, these are also likely to be money purchase arrangements.

  • You can contribute an amount up to your earnings into the pension scheme and obtain taxrelief on those contributions (although the annual allowance which I explain below, effectively limits relief). You can also make any amount of further contributions, for example out of capital, but these will not obtain initial tax relief. However, since there is no income tax or capital gains tax payable by a pension fund, it may still be beneficial for such extra contributions to be made into this tax-exempt fund.

In addition, your employer can make any amount of contributions provided these are at least the minimum prescribed by law and provided that the tax authorities are happy that such contributions are wholly and exclusively for the purposes of the employer’s trade.

The annual allowance limits the inputs that can be put into the pension fund and still receive tax relief. For 2015/16, this limit is £40,000. If you are a member of a pension scheme but do not use your full allowance for a tax year, you can carry forward the excess amount to be used against pension contributions for up to 3 tax years. The amounts that you contribute and obtain tax relief on, plus any contributions made by your employer, will count towards the annual allowance. If those contributions exceed the annual allowance, there will be a tax charge on the excess which is payable by you. This might be relevant in later years when your earnings may be above the annual allowance limit.

The lifetime allowance limit is the maximum value of the pension fund that you are allowed to build up to provide pension benefits without incurring adverse tax consequences. The lifetime allowance is £1,250,000 in 2015/16. This limit is tested against the value of your pension fund when you receive pension benefits. If your fund exceeds the lifetime allowance at that time, there will be a tax charge of 55% on funds used to provide a lump sum and 25% on funds used to provide a pension income. Although there are no adverse tax consequences if your pension fund exceeds the lifetime allowance other than at the time that pension benefits are received, it would be wise to keep an eye on how your fund is growing so that you can adjust your contributions accordingly so as to keep within the lifetime allowance.

  • Your employer will deduct your pension contributions gross from your pay before applying PAYE. This means that tax relief is given automatically at your highest rate of tax and no adjustment is needed in your tax return. As an example, if you contribute £1,000 to your pension and that amount of income would have been taxed at 40%, your pay will be reduced by £1,000 but the amount of tax that would be deducted from your pay would be reduced by £400, so that the net amount of the contribution payable by you would be £600.

The above is only an outline of the basics of pension provision as this is very complex area, so I suggest that we meet once you have decided how you wish to proceed.

AN Advisor

(b)       (i)       Harry Tax liability 2015/16

Non-

savings

income

£

Employment income/Net income/Taxable income (no PA available)                       121,200

Tax

£

£31,785  20%                                                                                                                 6,357

£(121,200 – 31,785) = 89,415  40%                                                                           35,766

Tax liability                                                                                                                      42,123

(ii)    Pension contribution

If Harry made a gross pension contribution of £21,200 in 2015/16, his adjusted net income would be reduced by this amount which would bring it down to £100,000. This would mean that there is no excess over the income limit and his personal allowance would be available in full.

Harry’s tax liability would then be:

Non-

savings

income

£

Employment income/Net income             121,200 Less personal allowance      (10,600)

Taxable income                                                                                                             110,600

Tax

£

£31,785  20%                                                                                                                  6,357

£21,200  20% (increased limit)                                                                                     4,240

£(110,600 – 31,785 – 21,200) = 57,615  40%                                                            23,046

Tax liability                                                                                                                      33,643

This is a tax saving of (£42,123 – 33,643) =  £8,480.

3 Hamburg

Tutorial note. It is important to realise that for individuals income from a property business is computed for tax years on an accruals basis. Don’t forget to look out for rent a room relief in questions.

(a)

    Non-        
    Savings Savings Dividend Total  
    Income income income    
    £ £ £ £  
  Income from UK property business (W1)  12,820        
  Trust income £7,103  100/55  12,915        
  Interest     – Direct Saver a/c    90      
                    – investment a/c    380      
                    – gilt interest (W2)    640      
  Accrued income on sale    150      
  Dividends £19,125  100/90                       21,250    
  Net income  25,735  1,260  21,250  48,245  
  Less personal allowance  (10,600)                          
  Taxable income  15,135  1,260  21,250  37,645  
Tax        
         £
  £15,135  20%        3,027
  £1,260  20%        252
  £15,390  10%        1,539
  £31,785        
  £5,860  32.5%         1,904
  Tax liability        6,722
  Less:  tax deducted on dividends        (2,125)
           tax deducted on trust income         (5,812)
  Tax repayable

Workings

1

       (1,215)
     £    £
 Rent        
 House 1: first letting £600  6        3,600
 House 1: second letting £8,400  3/12      2,100
 House 2 £8,000  8/12      5,333
 House 3 £7,800  8/12        5,200
       16,233
 Expenses      
 House 1: new roof, disallowable because capital  0  
 House 1: water rates  320  
 House 1: buildings insurance £480  10/12  400  
 House 2: water rates  240  
 House 2: furniture £(5,333  240)  10%  509  
 House 3: redecoration  1,000  
 House 3: water rates  360  
 House 3: buildings insurance £440  9/12  330  
 House 3: contents insurance £180  8/12  120  
 House 3: furniture £(5,200  360)  10%   484  
      (3,763)
 UK property business income from 3 houses    12,470

Hamburg should claim rent a room relief in respect of the letting of the furnished room in his main residence, since this is more beneficial than the normal basis of assessment (£4,600 – £875 = £3,725). This means that Hamburg will be taxed on additional income of £350 (£4,600 – £4,250) from the UK property business.

Total property income £(12,470 + 350)                                                                   £12,820

2  £

Interest June 2015 £20,000  6%  6/12                                                                            600

Less due to purchaser                                                                                                                )

 

Interest December 2015 £2,500  6%  6/12                                                                       75

640

(b)       If the cottages are to be treated as furnished holiday lettings, the first condition is that the lettings must be made on a commercial basis with a view to the realisation of profit.

Each property must be available for letting to the public for not less than 210 days in a tax year. Between them, the properties must be let for at least 105 days each in the 210 day period. For example, if the first cottage is let for 135 days in the year, the second cottage must be let for at least 75 days in the year to give an average of 105 days. If one of the cottages satisfies the 105 day test but the aggregation of the other cottage would pull the average down to below 105 days, the landlord can choose to treat the cottage which satisfies the 105 days test as furnished holiday accommodation.

In addition, each property must not normally be in longer term occupation (ie for more than 31 days) for more than 155 days in the year.

If the cottages satisfies these conditions, the income from the lettings is taxed as income from a UK property business but as if the landlord was carrying on a trade (except for the basis period rules). This means that capital allowance are available on furniture (instead of the 10% wear and tear allowance) and the income qualifies as relevant earnings for pension contribution purposes. However, loss relief is restricted to carry forward loss relief against future income from this accommodation.

4 Taker

Tutorial note. The CO2 emissions of the car are rounded down to 135g/km. The baseline figure for CO2 emissions given in the tax rates and allowances tables is 95g/km at which the % is 14%. The % increases by 1% for each 5g/km that this figure is exceeded, ie here to 22%.

The exemption for childcare is only available for the weeks in which the childminder looks after Taker’s son. Since Taker is a higher rate employee, the weekly exempt amount is £28.

Part (b) requires you to compare the after tax effects of different options based on your knowledge of the benefits rules.

     
  £ £
Salary    50,000
Car £20,000  22%    4,400
Fuel £22,100  22% (partial contribution gives no reduction)    4,862
Mobile telephone – exempt    0
Use of digital camera £600  20%    120
Loan does not exceed £10,000   0
Childminder (4,000 – [48  £28])      2,656
     62,038
Less: professional subscriptions  180  
          cost of business telephone calls (no deduction for line rental)  45  
           golf club: fails wholly, exclusively, and necessarily test     0  
         (225)
Earnings    61,813

(a)

(b)       Company car

If Taker chooses the company car he will be charged 40% income tax on a car benefit of £3,250, ie a cost of  £1,300 per tax year.

If Taker accepts the higher salary the position will be:

£

Extra salary                                                                                                                                    3,000

Less tax @ 40%                                                                                                                          (1,200)

1,800

Add mileage allowance 6,000  40p                                                                                            2,400

Add tax relief on expenses claim 6,000  (45p – 40p)  40%                                                       120

Net additional income from company                                                                                         4,320

Less running costs (excluding private use fuel) (2,200 – 500)                                                (1,700)

Less depreciation (15,000 – 5,000)  1/3              (3,333)  Less extra interest paid £1,800  1/3            (600)

Net cost per tax year                                                                                                                  (1,313)

Taking the additional salary would only cost Taker an extra  £13, so the decision should be made on non-cash flow grounds.

Note. The cost of private use fuel is excluded from running costs as it would also be a cost of accepting the company car.

If Taker moves to rented accommodation for three years the position is as follows:  
   £
 Relocation cost paid  12,000
 Less tax on excess (12,000 – 8,000) @ 40%   (1,600)
   10,400
 Net rent on old house £6,000  3  (100 – 40)%  10,800
 Less rent paid £4,000 × 3  (12,000)
 Net inflow (before actual relocation costs)    9,200
If Taker moves to the company flat for three years the position is as follows:  
   £
 Relocation cost paid (not taxable)  6,000
 Less tax on benefit of company flat £(2,500 + (120,000 – 75,000)  3%)  3  40%   (4,620)
   1,380
 Net rent on old house £(6,000 + 1,000)  3  (100 – 40)%  12,600
 Net inflow (before actual relocation costs)  13,980

Company flat

If Taker chooses to rent accommodation he will be £(13,980 – 9,200) =  £4,780 worse off over three years and will also have to pay an extra £2,000 in relocation costs. The relative merits of the different accommodation must also be taken into account.

5 Poster plc

Tutorial note. Part (a) is revision of the basic rules of NICs for an employee which should be familiar from F6.

Part (b) illustrates how different payments and benefits can have different NIC implications.

  • Albert

£

 Primary contributions            Total earnings exceed UEL

£(42,385 – 8,060) = £34,325  12% (main)              4,119  £(49,500 – 42,385) = £7,115  2% (additional)           142

Total primary contributions                                                                                                       4,261

 Secondary contributions                                                                                                                     

£(49,500 – 8,112) = £41,388  13.8%                                                                                       5,712

 Class 1A contributions                                                                                                                         

£(4,500 + 750) = £5,250  13.8%                                                                                                 724

  • (i) A week on a health farm. This is a payment in kind and Poster plc will be liable to Class 1A NICs on each place, at a cost of £2,000 8% = £276. There will be no NICs for the employee.
    • A week’s sailing on a yacht chartered by the employee. This is the payment of the employee’s personal liability and so is liable to Class 1 NICs. Each employee‘s share of the bill is £(5,000 + 1,000)/3 = £2,000 and Class 1 NICs for each employee will be £2,000  12% = £240, or £2,000  2% = £40 if the upper earnings limit is exceeded. Poster plc will be liable to secondary Class 1 NICs, at a cost of £2,000 8% = £276 per employee.
    • A voucher which may be exchanged for a holiday at a high street travel agent. Vouchers are liable to Class 1 NICs even if they cannot be exchanged for cash. The cost to the employee will be £2,000  12% = £240, or £2,000  2% = £40 if the upper earnings limit is exceeded. Poster plc will be liable to secondary Class 1 NICs, at a cost of £2,000 8% = £276 per employee.
    • Payment of £1,500 cash. This is liable to primary Class 1 NICs of £1,500  12% = £180 per employee, or £1,500  2% = £30 if the upper earnings limit is exceeded. Poster plc will be liable to secondary Class 1 NICs, at a cost of £1,500 8% = £207 per employee.

6 Envirotech plc

Tutorial note. You need to identify which type of share scheme is appropriate for the particular needs of the employer. In this case, the Share Incentive Plan would best fit the requirements of the employer.

Our address

Your address

Date

Dear Colin,

Thank you for your letter, I shall reply to your queries in turn.

Bonus scheme

There is indeed a tax advantaged scheme, the Share Incentive Plan (SIP) which can be used to reward employees with shares. I set out the main features of the scheme below.

The company establishes a UK trust which acquires shares and appropriates them to employees in accordance with the plan. These shares are free of charge (‘free shares’). The value of these free shares cannot exceed £3,600 to any employee in any tax year (although the award can be less). These free shares must stay in the trust for a period of five years if the award is to be completely free of income tax in the hands of the employee. If the employee removes the shares between three and five years after appropriation, there is an income tax charge on the value of the shares at award (or at withdrawal if lower). If the employee removes the shares from the trust before three years have elapsed, there will be an income tax charge on the value of the shares at the date of withdrawal.

The ‘free shares’ could replace your existing cash bonus scheme. The SIP provisions provide further incentives to your employees to invest in the company as outlined below.

‘Partnership shares’

Employees who are awarded free shares can purchase up to £1,800 worth of ‘partnership shares’ from their pre-tax salary. Thus, for example, an employee can authorise Envirotech plc to deduct up to £150 per month from gross salary. This money is passed to the trustees who then acquire shares on behalf of the employee.

The income tax rules on the withdrawal of partnership shares from the trust are the same as the rules for the free shares.

‘Matching shares’

Where an employee buys partnership shares, the company can award free ‘matching shares’. The ratio of matching shares to partnership shares must be specified and cannot exceed 1:2 (ie the maximum value of ‘matching shares’ award to an employee in any tax year will not exceed £3,600).

The income tax rules on withdrawal of these shares from the trust are the same as for free and partnership shares.

‘Dividend shares’

Employees can opt to reinvest the dividends on their SIP shares to acquire further shares. Any such dividends reinvested are not treated as taxable income for the participant.

The company may specify what percentage of dividends can be used to acquire dividend shares.

General Conditions

All employees (full or part-time) must be invited to participate in the scheme. Employees with less than 18 months service can be excluded.

The shares must be ordinary shares of a class listed or a recognised stock exchange, fully paid up and not redeemable.

An employee can only participate in one SIP in any given tax year.

Share options

As the options granted to Derek were not tax-advantaged, Derek will have an income tax charge at the date he exercised his options. You will see from the Appendix attached that his income tax liability will be £94,500 since Derek is a 45% taxpayer.

Assuming Derek sells his shares in the very near future, he will have no CGT to pay as his allowable cost is effectively equal to the market value of the shares at the date of exercise. If he retains the shares, any growth will be subject to CGT.

Retirement bonus

It is likely that the £30,000 ‘thank you’ bonus will be taxable in full and will not be eligible for the exemption given to ex-gratia payments.

HMRC are likely to argue that the payment is made in return for services thereby making the bonus taxable under normal principles. It is therefore important that any documentation stresses that the payment is exgratia.

Failing this, HMRC could contend that as a payment is made to an employee ‘at or near the age of retirement’ the payment should be taxable in full in the same way as a benefit under a non-registered pension scheme.

I hope this deals with your queries but do please let me know if I can be of further help.

Yours sincerely

Brian

Appendix

Derek

Tax on exercise of share options                                                                                                                £

100,000  £(3.60 – 1.50)                                                                                                                     210,000

Income tax @ 45%                                                                                                                                 94,500

7 Helen and Gemma

Tutorial note. Part (a) of this question is a very basic revision of material examinable in Paper F6. You must be fully competent with these basic computations at Paper P6. Part (b) is an example of how the rules on cessation of a sole trade can be used in a tax-efficient manner.

(a)

£

2010/11 (1.7.10 to 5.4.11)     9/12  £36,000  27,000

2011/12 (1.7.10 to 30.6.11)                                                                                                       36,000

2012/13 (1.7.11 to 30.6.12)                                                                                                       48,000

Overlap profits of £27,000 arise as a result of the trade profits accruing in the nine months to 5.4.11 being taxed in both 2010/11 and in 2011/12.

There is a change of accounting date which results in one long period of account ending during 2013/14. As a result the basis period is the fifteen months to 30 September 2013 and three months’ worth of the overlap profits can be relieved:

2013/14  £
Basis period (1.7.12 – 30.9.13)   60,000
Less overlap profits 27,000  3/9     (9,000)
     51,000
2014/15 (year to 30.9.14)  £30,000
  £
2015/16 (1.10.14 to 31.12.15)  
Year to 30.9.15   24,000
Three months to 31.12.15   10,000
Less overlap profits (27,000  9,000)  (18,000)
    16,000

The trade ceases during 2015/16 so the basis period for this year runs from the end of the last basis period to the date of cessation. Overlap profits which were not relieved on the change of accounting date are relieved against this final year’s taxable profits.

(b)       Sale on 31 March 2016

Taxable trading profits

Y/e 30.4.15

    £
Profits 12  £2,300

P/e 31.3.16

 27,600
Profits 11  £2,300  25,300
Less overlap profits    (1,100)
Taxable trading profit

Income tax 2015/16

Final year of trading: basis period 1 May 2014 to 31 March 2016.

  24,200
Trading income £(27,600 + 24,200)/Net income  51,800
Less personal allowance   (10,600)
Taxable income    41,200
Income tax:  
£31,785 @ 20%  6,357
£9,415 @ 40%    3,766
Income tax liability

Class 4 national insurance contributions 2015/16

 10,123
Trading income   51,800
Class 4 NICs:  
£(42,385 – 8,060) = 34,325 @ 9%  3,089
£(51,800 – 42,385) = 9,415 @ 2%       188
Class 4 NICs

Income tax 2016/17

   3,277
     £
Property business income/Net income  27,000
Less personal allowance  (10,600)
Taxable income   16,400
Income tax:  
£16,400 @ 20%     3,280

Class 4 national insurance contributions 2016/17 Nil as Gemma does not trade in this year.

Sale on 30 April 2016

Taxable trading profits

 

       £
Profits 12  £2,300

Y/e 30.4.16

   27,600
Profits 12  £2,300    27,600
Less overlap profits     (1,100)
Taxable trading profit

Income tax 2015/16

Current year basis: basis period 1 May 2014 to 30 April 2015.

   26,500
Trading income/Net income    27,600
Less personal allowance    (10,600)
Taxable income     17,000
Income tax:    
£17,000 @ 20%

Class 4 national insurance contributions 2015/16

      3,400
Trading income     27,600
Class 4 NIC:    
£(27,600 – 8,060) = 19,540 @ 9%

Income tax 2016/17

    1,759
Trading income    26,500
Property business income     27,000
Net income    53,500
Less personal allowance    (10,600)
Taxable income     42,900
Income tax:    
£31,785 @ 20%    6,357
£11,115 @ 40%      4,446
Income tax liability

Class 4 national insurance contributions 2016/17

   10,803
Trading income     26,500
Class 4 NIC:    
£(26,500 – 8,060) = 18,440 @ 9%

Summary

    1,660
   Sale on   Sale on 
  31.3.16 30.4.16
   £  £
Trading income (before overlap relief)  52,900  55,200
Property business income  27,000  27,000
Less:  income tax 2015/16   (10,123)   (3,400)
           income tax 2016/17   (3,280)  (10,803)
            Class 4 NIC 2015/16   (3,277)  (1,759)
            Class 4 NIC 2016/17          (0)   (1,660)
Income after tax and Class 4 NIC  63,220  64,578

Y/e 30.4.15

Gemma should therefore sell her business on 30 April 2016 to maximise her income after income tax and class 4 NIC.

 

8 Sheila

Tutorial note. Watch out for special rate pool assets such as integral features. Use the annual investment allowance first against special rate pool assets for maximum tax efficiency.

       Main  Special  Private   
   AIA    pool  rate pool  use car Allowances
   £    £  £  £    £
p/e 31 March 2016              
Additions qualifying for AIA only              
1.3.16 Integral feature  126,100            
AIA 3/12  £500,000  (125,000)            125,000
Transfer balance to special rate pool      1,100     1,100      
Additions not given AIA              
4.1.16 Plant     10,000        
WDA @ 18%  3/12         (450)         450
WDA @ 8%  3/12            (22)           22
TWDV c/f     9,550  1,078      
Allowances              125,472
y/e 31 March 2017              
Additions qualifying for AIA              
25.9.16 Van  11,800            
15.10.16 Plant    491,000            
   502,800            
AIA  (500,000)            500,000
Transfer balance to main pool        2,800     2,800        
       12,350        
Additions not qualifying for AIA              
15.11.16 Car          18,600  
WDA @ 18%      (2,223)      2,223
WDA @ 8%        (86)   86
WDA @ 8%

TWDV c/f Allowances y/e 31 March 2018

TWDV b/f

Additions qualifying for AIA

30.11.17 Plant AIA

Addition not qualifying for AIA

30.3.18 Car

 

WDA @ 18%

WDA small pool

 

 

 

 

 

 

10,000

(10,000)

 

 

 

 

  10,127

 

 

10,127

 

 

 

 

   9,000

19,127

 

992

 

 

992

 

 

 

 

 

 

 

(992)

 (1,488)  65%       967

17,112

 503,276

 

17,112

 

 

10,000

 

 

3,443

992

  (3,443)

 

WDA @ 8%                                                                                                                               )  65%          890

TWDV c/f                                                                               15,684                    0

Allowances          15,325
           
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