ACCA Paper P6 Advanced Taxation Dec-2013globalnotes.weebly.com/.../10219498/_______p6_answer_d13.pdf · 2018. 9. 12. · ACCA P6 (UK): ADVANCED TAXATION 4 KAPLAN PUBLISHING IHT on

ACCA

Paper P6

Advanced Taxation

Dec-2013

To gain maximum benefit, do not refer to these answersuntil you have completed the interim assessmentquestions and submitted them for marking.

ACCA P6 (UK) : ADVANCED TAXATION

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© Kaplan Financial Limited, 2013

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1 PHIL MITCHEL

Key answer tips

The format of this question is similar to the style adopted by the P6 examiner, and it isimportant to become comfortable with seeking out the information needed as well asthe detailed requirements, which may be buried in the question. Here you are askedto respond to an email from your manager, providing notes for her to take to a clientmeeting. It is therefore not necessary to adopt a formal letter style, and you canassume your manager understands basic tax terms, but it is important to lay out youranswer clearly, with appropriate headings and clearly referenced workings.

This is a classic capital taxes question, covering IHT and CGT in detail. It is a commonexam scenario to have to deal with both the IHT and CGT implications of lifetime gifts,and it is important that you are comfortable with dealing with both taxes in the samescenario, and that you recognise where different valuation rules and exemptions orreliefs will apply.

Part (a) is a straightforward inheritance tax question involving a number of lifetimegifts which become chargeable on death and then the tax on the death estate.

Part (b) is a capital gains calculation involving Entrepreneurs’ relief and gift relief.

Part (c) covers the commonly tested topic of deeds of variation.

To: Martina Smith

From: Tax assistant

Date: 13 June 2013

Subject: Notes for meeting – Phil Mitchel (deceased)

(a) Inheritance tax implications of Phil’s death

Key answer tips

This part is a straightforward inheritance tax calculation which includes a number ofregularly tested topics such as related property, business property relief (includingexempt assets) and simpler areas such as annual, marriage and spouse exemptions. The question should not pose too much difficulty to a well-prepared and well-practiced student.

However, note that the requirement is primarily for ‘explanations’ which can besupported by calculations. Therefore, your answer needs to explain clearly in words(not just numbers) the implications for IHT of the lifetime gifts which are all PETs, butbecome chargeable on death, and then the death estate.

As a result of Phil’s death on 23 March 2013, IHT will arise on:

• any potentially exempt transfers (PETs) becoming chargeable as aconsequence of his death within seven years of the date of the gift.

• his estate at death.


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IHT on PETs becoming chargeable on death

(1) Cash transfers to Phil’s son in 2007, 2008 and 2009 being a transfer from one individual to another individual will be regarded as PETs when made, but will now become chargeable as death has occurred within seven years.

(2) Transfer to Phil’s wife in July 2012. This transfer will be an exempt transfer for IHT purposes which means no IHT at the date of the gift or when Phil dies.

(3) Transfer to Phil’s son in July 2012. This transfer to his son being a transfer from one individual to another will be regarded as a PET when made, but will now become chargeable as death has occurred within seven years of July 2012.

The transfer will be valued using the related property rules with Phil’s wife’s 25% shareholding counting as related property.

As Phil’s son still holds the shares in March 2013, business property relief (BPR) will be available at 100%. However, the BPR must be restricted as the company has assets that are held for investment purposes. Therefore only 90% of the value is eligible for relief.

Tutorial note

All lifetime gifts are PETs, therefore there is no IHT payable.

IHT on lifetime gifts as a result of Phil’s death

There is no IHT due on the gifts in 2007, 2008 and in 2009 as they are covered by the nil rate band of £325,000, as shown below:

Gross Chargeable

Transfer (GCT)

IHT

£ £ £ 28.3.07 PET Transfer of value 46,000 Less: AE – 2006/07 (3,000) AE – 2005/06 (3,000) ––––––– Chargeable amount 40,000 40,000 Nil ––––––– –––––––20.6.07 PET Transfer of value 37,000 Less: ME (5,000) AE – 2007/08 (3,000) AE – 2006/07 (used) (Nil) ––––––– Chargeable amount 29,000 29,000 Nil ––––––– –––––––


11.3.08 PET Transfer of value 18,000 Less: AEs (already used) (Nil)

––––––– Chargeable amount 18,000 18,000 Nil ––––––– –––––––3.3.09 PET

Transfer of value 211,000 Less: AE – 2008/09 (3,000)

AE – 2007/08 (Nil) ––––––– Chargeable amount 208,000 208,000 Nil ––––––– ––––––– –––––––Covered by nil rate band 295,000 –––––––

£ £ 10.7.12 Inter spouse gift – exempt Nil Nil –––––– ––––––

PET − 20.7.12 Transfer of value (W1) 501,399Less: BPR (100% × £501,399 × 90%) (451,259) AE – 2012/13 (3,000) AE – 2011/12 (3,000) –––––––GCT c/f 44,140NRB at death (March 2013) 325,000 Less: GCTs in 7 yrs pre gift (include PETs which become chargeable on death) (20.7.05 – 20.7.12) (£295,000 above) (295,000) (30,000) ––––––– –––––––Taxable amount

14,140 –––––––IHT due on death (£14,140 × 40%) 5,656Less: Taper relief

(20.7.12 to 23.3.13) (< 3 years) (Nil)Less: IHT paid in lifetime (PET) (Nil) –––––––IHT payable on death 5,656 –––––––Due date (six months from end of the month of death) 30.9.13Paid by Bradley


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Phil: Death estate computation £ £

Shares in Queen Ltd (W2) 818,182

Less: BPR (100% × £818,182 × 90%) (736,364)

––––––– 81,818 Shares in Club Ltd 100,000 Less: BPR (100% × £100,000) (100,000) ––––––– Nil Property used by Queen Ltd (Note 1) 750,000 Less: BPR (50% × £750,000) (375,000) ––––––– 375,000 Property used by Club Ltd (Note 2) 175,000 Less: Outstanding mortgage (75,000) ––––––– 100,000 Other assets 650,000 –––––––– 1,206,818 Less: Exempt legacy to spouse (325,000) –––––––– Gross chargeable estate 881,818

NRB at death (March 2013) 325,000 Less: GCTs in 7 yrs pre death (23.3.06 – 23.3.13) (£295,000 above + £44,140)

(339,140)

––––––– (Nil) ––––––– Taxable amount 881,818 –––––––

IHT (£881,818 × 40%) 352,727 ––––––– Payable by Executors

Notes

(1) Queen Ltd is controlled by Phil and his wife, therefore the property used by this company will qualify for BPR at the rate of 50%.

(2) Club Ltd is not controlled by Phil, this property will therefore not qualify for BPR.

Tutorial note

The exempt legacy is £325,000 given the confines of the syllabus. In fact, where there is an exempt legacy and business property is left in the residue of an estate, the legacy is abated. However, this complication is not within the P6 syllabus.


Workings

(1) Shares in Queen Ltd – Valuation at July 2012Before After

Phil 40% (10%) 30%Wife 25% 25% –––– –––– 65% 55% –––– ––––Value of holding £2,100,000 £1,450,000 £

Value before (£2,100,000 × 65 40

) 1,292,308

Value after (£1,450,000 × 55 30

) (790,909)

––––––––Diminution in value = transfer of value 501,399 ––––––––

(2) Shares in Queen Ltd – Valuation at 23 March 2013

At 23.3.13Phil 30%Wife 25% –––– 55% ––––Valuation of 55% holding £1,500,000

Value of Phil’s shares ( 55 30

× £1,500,000) £818,182

(b) (i) Capital gains tax implications

Key answer tips

This part is a capital gains calculation involving Entrepreneurs’ relief and gift relief.

It is very important to be clear about the interaction of these two reliefs, and tounderstand that if gift relief is claimed, Entrepreneurs’ relief and the benefit of the10% tax rate will be lost.

This may mean it is better not to claim gift relief if the recipient of the gift will not beentitled to Entrepreneurs’ relief on a subsequent disposal (for example because theyhold the asset for less than a year, or they do not work for the company).

Again, note that the requirement is for explanations. So, be careful not to just give anumerical answer as the majority of the marks will be for explaining clearly the CGTimplications.


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Disposal to Phil’s wife on 10 July 2012

As an inter-spouse gift, this will be treated as a no gain/no loss disposal and will not give rise to a chargeable gain.

Disposal to Phil’s son on 20 July 2012

This is a disposal to a connected person and therefore market value will be used to give the deemed proceeds figure.

2012/13

Gain qualifying for Entrepreneurs’ relief

£ Market value 150,000 Less: Cost (650,000/65%) × 10% (100,000) ––––––– Chargeable gain 50,000 Less: Annual exempt amount (see Tutorial note) (10,600) ––––––– Taxable gain assessable on Phil 39,400 ––––––– Capital gains tax (£39,400 × 10%) 3,940 –––––––

As Phil worked for the company and held at least 5% of the shares for at least 12 months, he will qualify for Entrepreneurs’ relief (see Tutorial note).

Base cost of shares to Bradley = £150,000 (market value of 10% interest in July 2012)

Tutorial note

1 Entrepreneurs’ relief is only available for shares in trading companies.

A trading company with investments will qualify if the investments are not substantial. HMRC regard 20% to be substantial, therefore Queen Ltd will qualify as a trading company as its investments only represent 10% of its total assets.

2 Phil has no other chargeable disposals in 2012/13, therefore all of the annual exempt amount is available.

3 All of Phil’s earlier lifetime gifts are cash gifts, and are therefore exempt from CGT.

Disposal of Bradley’s shares in December 2013

The proposed disposal by Phil’s son Bradley in December 2013 will be of a 20% holding from a 40% holding (10% gifted by his father in July 2012 and 30% inherited from his father in March 2013).

The shares will be pooled, and the cost of the shares sold will be taken as half of the total cost.


2013/14

Disposal of 20% holding from pool £

Sale proceeds 550,000 Less: Cost (W) (484,091) ––––––– Chargeable gain 65,909 Less: Annual exempt amount (10,600) ––––––– Taxable gain 55,309 –––––––Capital gains tax (£58,309 × 28%) 15,487 –––––––Working: Share pool Acquisitions No of shares Cost

£ July 2012 10% 150,000 March 2013 (see Tutorial note) 30% 818,182 ––––– ––––––– 40% 968,182Disposal (20/40) (20%) (484,091) ––––– –––––––Pool c/f 20% 484,091 ––––– –––––––

Tutorial note

The ‘cost’ of the shares inherited on Phil’s death is the probate value, i.e. the valueincluded in Phil’s death estate.

(ii) If gift relief is claimed

Disposal to Phil’s son Bradley – 20 July 2012

• The gain of £50,000 would have been deferred against the basecost of the shares to Bradley (Note below).

• No chargeable gain would arise on Phil in 2012/13.

• Phil’s Entrepreneurs’ relief on the shares would be lost.

• Phil’s annual exempt amount for 2012/13 would be wasted.

• The base cost of the shares to Bradley would be £100,000(£150,000 market value − £50,000 gain).


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Tutorial note

Gift relief is not restricted by CBA/CA as although surplus cash balances are excepted assets for IHT purposes, cash is an exempt asset for CGT.

Disposal of Bradley’s shares – December 2013

Disposal of 20% holding from share pool

• The base cost of the shares acquired in July 2012 and thus the total pool cost would be £50,000 lower. This would reduce the base cost for the shares sold by £25,000 (half of £50,000), and therefore the gain arising on the disposal would be correspondingly higher.

• Where gift relief is claimed on a lifetime gift, any IHT payable as a result of the gift is an allowable deduction in the capital gain computation when the donee sells the asset.

• Bradley can therefore deduct £5,656 (part (a)) from the gain that is chargeable to capital gains tax.

• However, as there will be no Entrepreneurs’ relief on the disposal by Bradley, the tax payable on the chargeable gain will be at 28% instead of 10%.

• This means that the total tax payable with a gift relief claim will be higher.

• It is therefore advisable for gift relief not to be claimed in this instance.

(c) Deed of variation

Key answer tips

This part covers the commonly tested topic of deeds of variation. There is a slight twist here in that the question asks for the disadvantages of making such a deed, and the answer covers the possibility of challenge by HMRC if the new beneficiary under the deed simply gifts the assets back to the original beneficiary in the future. However, the remainder of the answer is very standard material and provides easy marks if you have learnt the rules.

Tax saving Phil is survived by his wife, June and son, Bradley. He has left £325,000 to June which is an exempt legacy, but the remainder of the estate is chargeable. IHT on Phil’s estate can be saved if his will is varied to leave more assets to June. All of the assets could be left to June and no IHT would be payable on Phil’s death. June could then make lifetime gifts to Bradley in the future to pass on both Phil’s and her assets. Lifetime gifts can be planned to ensure the maximum use of exemptions such as the normal expenditure out of income and annual exemptions.


As these gifts will be PETs, there will be no IHT payable if the spouse lives forseven years after the gifts. However, even if she dies within seven years, IHT willhave been saved as the value of the gift is frozen at the time of the gift andtaper relief is available after three years. Potential disadvantages in varying the terms The use of a deed of variation is a useful tax planning tool. However, careshould be taken in varying the terms of a will in favour of an exempt person,where the intention is for that person to subsequently gift assets to the originalbeneficiary of the will. HMRC may challenge the variation where they believe that there is a series ofassociated operations put in place to deliberately avoid a tax liability. In addition, in entering into a deed of variation, Bradley must formallyrelinquish his right to his inheritance in favour of his mother. He must do sovoluntarily and with no expectation or right of any future consideration (i.e. apromise of future gifts). He must therefore be happy to give up his right and trust his mother to pass theassets to him in the future either during her lifetime or on her death. Conditions required for a valid deed of variation The deed must: • Be in writing and signed by all beneficiaries that are affected by the deed. • Not be made for any consideration. • Be executed within two years of death. • State that it is intended to be effective for tax (IHT and/or CGT) purposes.

ACCA marking scheme Marks (a) IHT arises on: PETs within 7 years of death 0.5 The death estate 0.5

IHT on PETs at death: Cash transfers to son 0.5 Transfer to wife – exempt 0.5

Shares transferred to son 0.5 Related property rules 1.0 BPR – explanation 1.0 Diminution in value 2.0 BPR – calculation 1.0

Annual exemptions – 0.5 each 3.0 Marriage exemption 0.5 NRB 0.5 IHT due on death 0.5

Taper relief – none available 0.5 Lifetime tax paid – none 0.5

Due date 0.5 IHT on death estate: Related property re Queen shares 0.5 BPR on Queen shares 1.0 BPR on Club shares 0.5

BPR on property used by Queen 1.0 No BPR on property used by Club 1.0

Outstanding mortgage 0.5 Exempt legacies 0.5

GCTs in last 7 years 0.5 No NRB available 0.5 IHT at death 0.5

–––– 20.0

Max 16.0 ––––



Marks (b) (i) Inter-spouse gift no gain / no loss 1.0 Disposal to son – connected person – use market value 0.5 Gain before reliefs 1.0 Annual exempt amount 0.5 Entrepreneurs’ relief: tax at 10% 1.0 Shares acquired via gift and inheritance pooled 1.0 Additions to pool – 0.5 each 1.0 Disposals from pool 1.0 Cost of shares 0.5 Annual exempt amount 0.5 CGT at 28% 0.5 –––– 8.5 Max 7.0 –––– (ii) 0.5 each valid point Max 4.0 –––– (c) 0.5 each valid point Max 4.0 –––– Appropriate format and presentation 2.0 Effective communication 2.0 –––– Max 4.0 –––– Total 35 ––––

2 DUNCAN MCBYTE

Key answer tips

This is a fairly straightforward employment income question, covering various benefits, termination payments and share option schemes.

Part (a) requires explanations and calculations of the income tax and NIC suffered by an employee (but not the employer) as well as income tax on employment income. It covers time apportionment, a termination bonus (which is taxable as it is contractual), living accommodation, mileage allowance, a beneficial loan, use of company assets, other payments on behalf of the employee, deductible expenses and share options.

Part (b) is a written question on share option schemes. It is an important exam skill to be able to write about the implications of the tax rules, not just to apply them in a numerical calculation.

Part (c) involves recognition of a qualifying furnished holiday letting, followed by application of the rules regarding FHLs to the numbers in the question.


(a) Income tax and NIC implications of remuneration package

Duncan earns over £8,500 p.a. and is therefore a P11D employee.

Salary

The salary of £65,000 will be assessed as employment income on the receiptsbasis. It will be liable to both income tax and NICs.

There are no NIC implications for Duncan as regards any other aspect of theremuneration package, therefore Duncan’s NIC liability for 2012/13 will be:

£(£42,475 – £7,605) × 12% × 9/12 3,138 (£65,000 – £42,475) × 2% × 9/12 338 ––––– 3,476 –––––

Termination bonus

The termination bonus of £40,000 will be taxable in full since Duncan iscontractually entitled to it. It is taxable in 2015/16; the tax year in which Duncanreceives it.

The termination bonus is also liable to NICs in 2015/16.

Tutorial note

Benefits of employment are liable to Class 1A NICs, but this is paid by the employer.There is no NIC liability for the employee on benefits.

Living accommodation

Duncan will be assessed to income tax (but not NICs) on the benefit of the livingaccommodation provided to him.

There will be an additional benefit based on the market value of £170,000, sincethe apartment cost in excess of £75,000 and was purchased more than six yearsbefore first being provided.

The benefits assessed in 2012/13 will be: £Rateable value (£6,700 × 9/12) 5,025 Additional benefit (£170,000 − £75,000) × 4% × 9/12 2,850 ––––– 7,875 –––––

Mileage allowance

The mileage allowance received will be tax free as it falls within HMRC’sauthorised mileage allowance payment (AMAP).

However, Duncan can make an expense claim to reduce his taxableemployment income for 2012/13 as follows.



Duncan travelled 13,500 (1,500 × 9 months) business miles in 2012/13:

£ 10,000 miles at 45p 4,500 3,500 miles at 25p 875 –––––– 13,500 –––––– ––––– HMRC – AMAP 5,375 Less: Mileage allowance received (13,500 at 30p) (4,050) ––––– Allowable deduction 1,325 –––––

As Duncan only receives £4,050 from his employers towards his business miles for 2012/13 and HMRC mileage allowance gives tax relief for £5,375, the difference of £1,325 will reduce his employment income and his income tax liability for 2012/13.

Beneficial loan

Duncan will be assessed to income tax (not NICs) on the difference between the interest paid on the loan and the official rate of interest.

Based on the ‘average’ method, the taxable benefit for 2012/13 is as follows:

£

Interest at official rate 2

£50,000 + £60,000 × 4% × 9/12

1,650

Less: Interest paid (425) ––––– 1,225 –––––

Based on the ‘precise’ method, the taxable benefit for 2012/13 is as follows:

£ 1 July 2012 to 31 December 2012 (£60,000 × 4% × 6/12) 1,200 1 January 2013 to 6 April 2013 (£50,000 × 4% × 3/12) 500 ––––– 1,700 Less: Interest paid (425) ––––– 1,275 –––––

Duncan will not elect for the precise basis as he will have a higher assessable benefit.

HMRC are unlikely to insist on the precise basis applying as the difference in the two methods is not material and there is no evidence of deliberate manipulation of the repayments to affect the assessable benefit.

The assessable loan benefit for 2012/13 is therefore £1,225.


Use of computer

Duncan must pay income tax on the benefit of the use of the computer of £180(£1,200 × 20% × 9/12).

Other payments

Only the cost of the sports club membership of £800 will be assessed to incometax as a taxable benefit on Duncan for 2012/13.

The subscription of £125 will be assessed, but a corresponding expensededuction can then be claimed since it is a professional subscription. The neteffect on his employment income is therefore £Nil.

No taxable benefit arises in respect of the payment of liability insurance or thecost of work-related training as they are specifically exempted from tax.

Share options

There will be no income tax or NICs payable in respect of the share options.

No employment income charge will arise either at the time of grant or upon theexercise of the options as the options have been granted under an approvedscheme.

The exemption is available since the total market value of Duncan’s options atthe time of grant (15,000 × £1.75 = £26,250) does not exceed £30,000, and theoptions will not be exercised less than three years from the time of grant.

Employment income summary – 2012/13 £Salary (£65,000 × 9/12) 48,750 Accommodation benefit 7,875 Loan benefit 1,225 Use of computer benefit 180 Sports club membership 800 ICCC membership 125 –––––– 58,955Less: Allowable expenses

Mileage allowance deficit (1,325) Subscription to professional body (125)

––––––Employment income 57,505 –––––– Collection of tax on benefits Income tax The income tax on Duncan’s benefits for 2012/13 will be collected under the self-assessment regime, and will be payable by 31 January 2014. In the second tax year 2013/14, the income tax will be collected through thePAYE system by adjusting Duncan’s tax code. It is likely that Duncan will have anegative code, which will be indicated by the letter K appearing in front of thecode. NICs There are no NICs payable by Duncan in respect of the benefits of employmentreceived.



(b) Benefit of an approved share option scheme

If the share options had not been granted under the company share option scheme, an employment income charge would arise at the time that the share options were exercised.

The employment income charge would be liable to income tax and, as the shares are readily marketable securities (i.e. shares in a quoted company), Class 1 NICs would be payable.

This charge on 30 June 2015 would be based on the market value at that date less the amount paid for the shares. The total assessment would therefore have been £48,750 [15,000 × £3.25 (£5.00 – £1.75)].

On the subsequent disposal of the shares, the employment income charge would be deducted from the chargeable gain arising. Therefore, the options are liable to an income tax and NIC charge on exercise and a lower gain on disposal.

Granting the options under the company share option scheme is therefore beneficial since:

(i) the tax liability is postponed until such time as the shares are actually disposed of,

(ii) the increase in value to the exercise date is subject to capital gains tax, not income tax and NIC, and

(iii) the resulting CGT liability on the disposal will be lower than the income tax and NIC liability based on the above employment income assessment due to the availability of the annual exempt amount for CGT and the 28% rate of tax (assuming Duncan is still a higher rate taxpayer).

(c) Property business profits

Duncan’s letting of his main residence should qualify to be treated as a trade under the furnished holiday letting rules.

It is available all year and is to be let for 154 days (22 × 7 days), so that it is both available for letting for at least 210 days and it will be let for at least 105 days.

The assessment is therefore calculated using the trading income rules and capital allowances on plant and machinery will therefore be available.

Duncan can also deduct the interest in calculating the profits from renting.

His profit for 2012/13 will be as follows:

£ £ Rental income 18,000 Less: Expenses Letting agency (£18,000 × 22.5%) 4,050 Running costs 900 Interest (£6,400 × 9/12) 4,800 Capital allowances (£6,000 × 100%) 6,000 ––––– (15,750) –––––– Property business profits 2,250 ––––––


Tutorial note

Capital allowances are given on the furniture instead of wear and tear allowance.

ACCA marking scheme Marks (a) Termination bonus taxable in full 1.0 NIC liability 1.0

No NIC on benefits 0.5 Living accommodation: Rateable value 0.5

Explanation of using MV not cost 1.0 Additional benefit 1.0 Mileage allowance: Amount received is tax free 0.5 Expense claim calculation 1.5 Allowable deduction 1.0 Beneficial loan: Assessed based on official rate 1.0 Average method 1.0 Precise method 1.0 Use of computer 1.0 Sports club membership 0.5

Professional subscription 0.5 Liability insurance and work related training – exempt 0.5 Share options: No tax at grant or exercise – approved scheme 1.0 Conditions satisfied 1.5 Calculation of employment income 1.0 Collection of 2012/13 income tax on benefits 0.5 Collection of 2013/14 income tax on benefits 0.5

–––– 18.0

Max 17.0 ––––

(b) Unapproved scheme: Charge at exercise 1.0 Calculation of charge 1.0

Approved: Postponement of liability until sell shares 1.0 Less tax payable: CGT 28% less AEA 1.0

–––– 4.0

Max 3.0 ––––

(c) Meets conditions for FHL 2.0 Calculation using trading income rules 0.5

Rental income 0.5 Letting agency fees 0.5

Running costs 0.5 Interest 0.5 Capital allowances 0.5 –––– 5.0

Max 5.0 –––– Total 25 ––––



3 PIERRE

Key answer tips

This is a detailed property income question, covering many aspects of tax in this area, including capital gains in respect of rental property and PPR relief. There are a couple of more challenging areas in this question, such as the treatment of reverse premiums and small part disposals of land, but even if you do not know how to deal with these items, you should still be able to achieve enough marks to pass the question.

It is important to lay out your answer clearly – the calculation of total property business income is shown first below, followed by clearly labelled workings in respect of each property. You should make it as easy as possible for the marker to give you credit for your workings by labelling and referencing them clearly.

(a) Property business income assessment – 2012/13

£ Income:

Property 1 (W1) 2,070 Property 3 (W2) 23,150 Property 4 (W3) 2,917

Less: Expenses Property 3 (1,500) Property 4 (£1,000 + £3,000) (4,000)

–––––– Property business income 22,637 ––––––

Workings

(W1) Property 1

As Pierre is renting part of his main residence on a furnished basis ‘rent a room’ relief is available. Total exemption of this income will not, however, be possible because his gross rents from this source exceed the limit of £4,250.

Pierre will therefore have the option of either:

(i) Claiming ‘rent a room’ relief and being taxed on the excess rents over the £4,250 limit:

£ Rents 6,320 Less: Limit (4,250) ––––– 2,070 –––––


(ii) Being taxed on this rental income in the ‘normal’ way (i.e. rentsless allowable expenses including the wear and tear allowance):

£ Rents 6,320Less: Expenses (720)

Interest (2/6 × £4,000) (1,333) Wear and tear (10% × £6,320) (632)

––––– 3,635

–––––

Pierre should, therefore, make the necessary election for ‘rent a room relief’ by 31 January 2015 (i.e. 12 months from the 31 January followingthe end of the relevant tax year).

It should be noted that the nomination of property 2 as his mainresidence for PPR purposes should not prevent property 1 being treatedas his main residence for ‘rent a room’ relief purposes. This is because theCGT nomination is specifically stated to be for PPR purposes only.

(W2) Property 3

£ Rental income:£9,000 × 2/12 1,500 £9,000 × 7/12 5,250 Assessable premium: £20,000 (Note) × (51 – 10) / 50 16,400 –––––– 23,150

––––––

Note: Total premium

= cash received of £10,000 plus the £10,000 increase in value arising from structural improvements

= £20,000.

Tutorial note

The premium assessable as property income could be calculated as follows:

£Premium 20,000 Less: £20,000 × 2% × (10 – 1) (3,600) –––––– Assessable premium 16,400 ––––––



(W3) Property 4

Rent from 6 September 2012: (£5,000 × 7/12) £2,917 ––––––

The inducement payment is likely to be caught by the reverse premium legislation and will therefore be taxed as a trading receipt of Les Amis Limited in that company’s corporation tax computations.

No relief is available to Pierre as he is not a dealer in land and therefore cannot treat the payment as a trading expense.

(b) Capital gain on disposal of the garden – Property 2 £ Sale proceeds 19,600

Less: Deemed cost of part disposed of

£40,000£80,000 +£19,600

£19,600×

(7,871)

–––––– Chargeable gain 11,729 Less: Annual exempt amount (10,600) –––––– Taxable gain 1,129 ––––––

However, this disposal will qualify as a ‘small land disposal’ as the proceeds are not more than 20% of property value before disposal and, are less than £20,000.

Pierre may therefore elect to deduct the sale proceeds from the £40,000 original cost to give a base cost for future disposal purposes of £20,400 (£40,000 – £19,600).

Whether Pierre wishes to make the election will depend on his future disposal plans. The election will save CGT on the taxable gain of £1,129 giving a CGT saving of £203 (£1,129 × 18%), as the gain will fall into Pierre’s basic rate band.

(c) Property 2

Principal Private Residence Relief (‘PPR’)

An individual is entitled to PPR relief in respect of only one residence.

It is important therefore that Pierre makes an election to nominate which of his two residences will be treated as his main residence for the purposes of this relief. Such an election needs to be made within two years of the acquisition of the second property (i.e. in Pierre’s case by 30 June 2013).

The two-year period runs from the acquisition of the property and not from the first date that the second property started being used as a residence.

In the absence of such an election HMRC will decide for Pierre which property is to be treated as his main residence. There is a danger that they will select property 1 because Pierre seems to live in this property for more time than property 2. This could be detrimental to Pierre as his current plan is to retain property 1 and dispose, either partially or entirely, of property 2.


If a nomination for property 2 is made and accepted by HMRC it will run fromthe time Pierre started using this property as a residence (i.e. from 1 July 2012)to the date the property is disposed or a further election/variation of originalelection is made.

The implication for property 1 is that this nominated period will be a chargeableperiod of occupation for determining any potential future gain on a disposal ofthis property. Pierre will therefore have to balance this against any short termCGT savings that he may make on a disposal of property 2.

It should further be noted that HMRC could reject the nomination of property 2if, for example, they considered that this property was simply acquired for thepurposes of resale or is being used as temporary accommodation.

Future Disposals

With regard to the future proposed disposal(s) Pierre will need to carefullyconsider the order in which he sells any further portions of this property. Thefollowing possibilities appear to exist.

1 Sells the house and retains a portion of the garden for future sale

Whilst it is likely that the sale of the house itself would qualify for the PPRexemption (subject to any restrictions for non-occupation as mainresidence), case law has determined that the subsequent sale of anyresidual land would not qualify for PPR relief. This is because at this pointthe land no longer forms part of a main residence. A future chargeablegain is therefore likely to arise.

There is the further issue that if the house is sold by 30 June 2014 (i.e.within 36 months of acquisition) there will be no restriction of the PPRexemption. This is because, providing there has been some actualoccupation (which there has), the last 36 months of ownership of theproperty will always be taken as deemed occupation (if not already actualoccupation) and therefore exempted.

This may well, therefore, entirely cover both the gain on the disposal ofthe house and the earlier part disposal referred to above.

2 Sells a portion of the garden and retains the house for future sale.

In this case the PPR exemption is likely to apply to the disposal of part ofthe garden (being less than 0.5 hectares) and also any eventual disposalof the house itself (again subject to any restrictions for non-occupation asmain residence). If Pierre has any choice this is therefore likely to be thepreferred sequence.



ACCA marking scheme Marks (a) Property business income assessment for 2012/13 1.0 Rent a room relief available 1.0 Taxable amount if rent a room relief claimed 1.0 Taxable amount if taxed ‘normally’ 1.5 Deadline for election 1.0 Rent on property 3 1.0 Assessable premium 2.0 Rent on property 4 0.5 Treatment of inducement payment 1.0 –––– 10.0 Max 8.0 –––– (b) Deemed cost of part disposed 1.5 Annual exempt amount 0.5 Qualifies as small part disposal of land 1.0 Deduct sale proceeds from original cost 1.0 Current tax saving 1.0 –––– 5.0 Max 4.0 –––– (c) 1 mark for each valid point Max 8.0 –––– Total 20 ––––

4 ANWAR CHRISTOPHER

Key answer tips

Overseas aspects of tax for individuals are commonly tested. This is a topic which lends itself well to multi tax scenario questions; however this question concentrates on the income tax consequences with just two marks at the end on inheritance tax.

It considers the position of a long term UK resident individual who is not UK domiciled.

Part (a) is purely written and requires an explanation of how Anwar will be taxed, given his tax status, the choices available and a conclusion regarding which basis of assessment he should choose.

Part (b) is purely computational and requires the computation of his income tax liability based on an arising basis. Therefore, even if you did not correctly identify the correct basis of assessment in part (a), full marks could still be obtained in part (b).

Part (c) is a straightforward calculation of self assessment payments.

Part (d) requires a written explanation of treatment of inter-spouse transfers for inheritance tax purposes.


(a) Options for assessment to income tax – non-UK domiciles

Key answer tips

In these questions, it is important to be able to determine someone’s residence,ordinary residence and domicile and then to apply the appropriate rules for theirstatus to the facts in the question.

Here you are told that Anwar has lived in the UK for ten years so he is clearly residentand ordinarily resident, but you are also told that he is not UK domiciled.

As his unremitted overseas income exceeds £2,000 he has the choice between thearising and remittance basis. Note that whichever he chooses, UK income is alwaystaxed on an arising basis.

For 2012/13 Anwar is resident and ordinarily resident in the UK, but not UKdomiciled.

As his unremitted overseas income exceeds £2,000, (he has overseas income of£23,000 and has remitted less than £21,000) he has the choice of beingassessed on his overseas income either on the arising basis or the remittancebasis as follows:

Arising basis

• All UK income on an arising basis

• Overseas income on an arising basis

• Full personal allowances available

• This means that all of the £23,000 overseas earnings would be taxed inthe UK.

Alternatively, Anwar can elect to use the remittance basis.

Remittance basis

• If the remittance basis is claimed, he will still be assessed on his UKincome on an arising basis, but his overseas income will only be assessedif remitted to the UK

• Anwar has remitted £18,000 to the UK but he can claim that the £10,000used to lend money to an unquoted trading company is not classed as aremittance for this purpose.

• This means that Anwar would only be assessed on the £8,000 transferredfrom his foreign bank account, not the full £23,000 earned

• However, there will be no personal allowance available or annual exemptamount for CGT

• Christopher will also have to pay a £30,000 remittance basis charge as hehas been resident and ordinarily resident for more than 7 out of theprevious 9 tax years.

Conclusion

Anwar should not claim the remittance basis for 2012/13 as this will clearlyresult in a much higher tax charge.



Tutorial note

Remember that whichever basis he chooses, UK income is always taxable on an arising basis.

Anwar has been in the UK for the last 10 years and hence would be liable to a remittance basis charge of £30,000. When he has been in the UK for 12 out of the last 14 years his potential remittance basis charge rises to £50,000.

(b) Income tax computation – 2012/13

Key answer tips

This part consists of a fairly detailed income tax computation. You are told to do this calculation on the basis that he has chosen to be taxed on the arising basis. You need to work through the narrative in the question to identify all of Anwar’s sources of income. This includes interest from the capital bonds, which you are expected to calculate at the rate given, and also identify the tax on this interest which will have been deducted at source.

There is also qualifying loan interest, as Anwar has borrowed money to invest in a close company (Christopher Ltd is clearly close as Anwar is the sole shareholder). This interest can therefore be deducted from his total income.

Finally there is a double tax relief calculation. This must be done by calculating the tax that would be payable if Anwar had not received any foreign income and comparing this with the income tax liability. You cannot simply calculate the UK tax on foreign income by applying UK rates, as it has been partly taxed at the basic rate and partly at the higher rate, and it has also pushed the savings income and dividend income into the higher rate band.

Note that it is not compulsory to lay out the income tax computation in this four column format, and it may be quicker to simply include all income in one column and then do a short calculation to analyse the types of income.

Total income

Other income

Savings income

Dividend income

£ £ £ £ Trading income 15,000 15,000 Employment income Christopher Ltd (8 × £1,000) 8,000 8,000 Initial Ltd (UK duties) 7,000 7,000 (Pakistan duties) 23,000 23,000 Interest National Airlines (£800 × 9.75%)

78 78

Glucozade dividends (£270 × 100/90) 300 300 –––––– –––––– ––– ––– Total income 53,378 53,000 78 300


Totalincome

Otherincome

Savingsincome

Dividendincome

£ £ £ £Total income (brought forward) 53,378 53,000 78 300 Less: Interest paid (Note) (6,400) (6,400)

–––––– –––––– ––– ––– Net income 46,978 46,600 78 300 Less: PA (8,105) (8,105)

–––––– –––––– ––– ––– Taxable income 38,873 38,495 78 300

–––––– –––––– ––– –––

Income tax £ £

34,370 at 20% (other income) 6,874 4,125 at 40% (other income) 1,650

–––––– 38,495

78 at 40% (savings) 31 300 at 32.5% (dividends) 97

–––––– 38,873 –––––– –––––– 8,652Less: Double tax relief (W) (5,507) ––––––Income tax liability 3,145 Less: UK tax deducted at source

Dividends (£300 × 10%) (30)Interest (£78 × 20%) (16)

PAYE (950) ––––––Income tax payable 2,149 ––––––

Tutorial note

The loan interest paid to Abbeyminster Bank is paid for a qualifying purpose, themaking of a loan to a close company in which Anwar has a material interest.

The interest payable to Abbeyminster is therefore eligible for relief as a deductiblepayment.



Working: Double taxation relief

Double tax relief is available on the Pakistan source income on the basis of the lower of the Pakistan tax suffered or the UK tax on the Pakistan income, treating the Pakistan income as the top slice.

The UK tax excluding the Pakistan income is calculated as follows:

£ Other income (£38,495 − £23,000) 15,495 Savings income 78 Dividend income 300 –––––– Revised taxable income 15,873 –––––– Income tax £ £ 15,495 at 20% (other income) 3,099

78 at 20% (savings) 16 300 at 10% (dividends) 30

––––– –––––– 15,873 3,145 ––––– ––––––

UK tax on Pakistan income (£8,652 – £3,145) = £5,507 (Note)

Pakistan tax suffered = (£23,000 × 35%) = £8,050

DTR is therefore £5,507

Tutorial note

Alternative calculation of DTR: If the top slice of the £23,000 employment income is removed, the tax saving will be: £ Employment income removed (£23,000 × 20%) 4,600 Amount in the HR band now taxed at lower rate: – Employment income (£4,125 × (40% – 20%)) 825 – Savings income (£78 × (40% – 20%)) 15 – Dividends (300 × (32.5% – 10%)) 67 ––––– Tax saving 5,507 –––––


(c) Self assessment balancing payment – year ended 5 April 2013

Key answer tips

This part is a straightforward calculation of the balancing payment due. Rememberthis will include Class 4 NICs and capital gains tax.

£ £ Income tax payable (part (b)) 2,149 Class 4 NIC liability (£15,000 − £7,605) × 9% 666 –––––– 2,815Chargeable gain (per question) 185,000 Less: Annual exempt amount (10,600) ––––––– Taxable gain 174,400 ––––––– Capital gains tax payable (£174,400 × 28%) 48,832 ––––––Total tax payable 51,647 Less: Payments on account 31.1.2013 (2,600) 31.7.2013 (2,600) ––––––Balancing payment – due 31.1.2014 46,447 ––––––

(d) Inheritance tax consequences of transferring property to spouse

Key answer tips

This part requires a written explanation of inter-spouse transfers for inheritance taxpurposes. Make sure you consider both spouses’ domicile status and mention thetreatment of both UK and non-UK situated assets.

As Anwar is not domiciled in the UK, the property he owns that is locatedoutside the UK is excluded property.

Providing he transfers such property to another non UK domiciled person thereis no UK inheritance tax charge. If, however, he were to transfer such propertyto Wendy, who is UK domiciled, the property becomes chargeable toinheritance tax in the UK when she subsequently transfers it.

Anwar should not therefore transfer any of his overseas assets (e.g. his interestin the Peshawar estate) to Wendy.

Anwar’s UK situated assets are chargeable to UK inheritance tax in any event.



Tutorial note

There is no limit to the value of assets Anwar can transfer to Wendy (i.e. non-UK domiciled individual transfer to UK domiciled individual).

The spouse exemption is only limited to £55,000 where a UK domiciled spouse transfers property to a non UK domiciled spouse.

This is because the property transferred would become overseas property owned by a non-UK domiciled individual and it would thereby become excluded property.

ACCA marking scheme Marks (a) 1 mark for each valid point Max 6.0 –––– (b) Trading income 0.5 Employment income: Christopher Ltd 0.5 Initial Ltd – UK duties 0.5 Initial Ltd – Pakistan duties 0.5 Interest 0.5 Dividends 0.5 Qualifying interest payment 1.0 Personal allowance 0.5 Tax calculation 1.5 Double tax relief: Revised taxable income 1.0 Revised income tax 1.0 DTR 0.5 Tax at source on dividends 0.5 Tax at source on interest 0.5 PAYE 0.5 –––– 10.0 Max 9.0 –––– (c) Income tax payable from part (b) 0.5 Class 4 liability 1.0 Capital gains tax liability 1.0 Deduct payments on account 1.0 –––– 3.5 Max 3.0 –––– (d) 0.5 mark for each valid point Max 2.0 –––– Total 20 ––––


5 MOLLY MOP

Key answer tips

This is a classic income tax and IHT question, where the income tax calculated in part (a) is then included in the death estate calculation in part (b). In order to deal withboth parts of the question you need to identify the information relating to Molly’sincome and the information relating to the capital value of her assets.

(a) Molly Mop

Income tax computation − 2012/13

Key answer tips

The income tax computation includes interest from income bonds and governmentstocks, both of which are received gross, as well as dividends from a unit trust, whichare treated just like normal dividends. It also includes trust income which is receivednet of 50% tax, and must be grossed up, and then the tax can be deducted from theincome tax liability. Remember that an investment in a VCT generates 30% income taxrelief.

£ £ Earned income

State pension (£107 × 52) 5,564 Private pension 12,200 Savings income

Interest on government stocks (£100,000 × 4%) 4,000 Building society interest (£150,000 × 5.5%) 8,250 Interest on bonds (£10,000 × 7%) 700 Interest on ISAs (exempt) Nil

–––––– 12,950Other investment income

Trust income (£1,500 × 100/50) 3,000 Dividend income

Shawl plc (20,000 × 27p × 100/90) 6,000 Bit-Part Ltd (45,000 × 10p × 100/90) 5,000 Global Trust (£450 × 100/90) 500

–––––– 11,500 ––––––Total income 45,214 Less: PAA (see Tutorial note) (8,105) ––––––Taxable income 37,109 ––––––



Analysis of income:

Dividends Savings Other income £11,500 £12,950 (£37,109 − £11,500 − £12,950) = £12,659 –––––– –––––– ––––––

Income tax £ £

12,659 × 20% (other income) 2,532 12,950 × 20% (savings) 2,590

8,761 × 10% (dividends) ––––––

876

34,370 2,739 × 32.5% (dividends)

–––––– 890

37,109 –––––– ––––––

6,888 Less: VCT relief (£10,000 × 30%) (3,000) –––––– Income tax liability 3,888 Less: Dividends (£11,500 × 10%) (1,150) Savings (£8,250 × 20%) (1,650) Trust income (£3,000 × 50%) (1,500) –––––– Income tax repayable (412) ––––––

Tutorial note

Molly’s level of total income results in her PAA being fully abated to the normal personal allowance.

(b) Inheritance tax liability as a result of Molly’s death in April 2013

Key answer tips

The inheritance tax computation includes some BPR with excepted assets, units in a global trust (which are always valued at the lower quoted price), an ISA account (remember this is taxable for IHT purposes), as well as various other assets. You must also deal with the transfer of the husband’s unused nil rate band and the new 36% rate of IHT where a large enough charitable legacy is made.

You are asked to indicate who is liable for the tax and when it is due, and there are marks for spotting that the tax in respect of the property can be paid by instalments.

[


Lifetime gifts – CLT in June 2007

£ Transfer of value 160,000 Less: AE 2007/08 (3,000) AE 2006/07 b/f (3,000)

––––––– Net chargeable amount 154,000

–––––––

No inheritance tax is payable during Molly’s lifetime on this gift, nor on herdeath, as the gift is covered by the nil rate band of £300,000 (at the time of thegift) and £325,000 (on death).

The gross chargeable transfer (GCT) to carry forward is therefore £154,000(£154,000 + £Nil).

Death estate £ £

Main residence 245,000 Ordinary shares in Shawl plc (20,000 × 4.14 (410 + ¼ × (426 − 410)) 82,800 Ordinary shares in Bit-Part Ltd 236,250 Less: BPR (100%) (W1) (123,750) ––––––– 112,500UK government stocks 100,000 × 91p (90 + ¼ × (94 – 90)) 91,000 Units in Global Trust (25,000 × £2.10) 52,500 Building society deposits 150,000 NS&I Pensioners Guaranteed income bonds 10,000Shares in VCT 10,000 ISA account 3,210 Chattels, cash and other assets 165,000 Income tax repayable (part (a)) 412 –––––––– 922,422Less: Charity legacy (60,000) ––––––––Gross chargeable estate 862,422 NRB at death (April 2013) 325,000 Plus: Husband’s unused NRB (W2) 225,000 ––––––– 550,000 Less: GCT in 7 yrs pre death (April 2006 – April 2013) (154,000) ––––––– NRB available (396,000) ––––––––Taxable amount 466,422 ––––––––IHT (£466,422 × 36% (W3)) 167,912 ––––––––

Estate rate = £167,912/£862,422 × 100 = 19.470%



IHT is payable as follows:

IHT of £167,912 is payable by the executors, of which £47,702 (£245,000 × 19.470%) in relation to the main residence can be paid in instalments (see Tutorial note).

The IHT not payable by instalments would be due on the earlier of 31 October 2013 or the delivery of the account by the personal representatives.

The IHT payable by instalments would be due in ten equal annual instalments commencing on 31 October 2013.

Tutorial note

The IHT in relation to the Bit-Part Ltd unquoted shares can also be paid by instalments, as they satisfy the detailed specific conditions in the IHT instalment option legislation. However, knowledge of this level of detail is not required in the examination.

Workings

(W1) Business Property Relief BPR at the rate of 100% is available in respect of the business asset

element of the 45,000 ordinary shares in Bit-Part Ltd as they are a holding in an unquoted company.

Although Molly has owned the shares for less than two years, they were acquired upon her husband’s death and would have qualified for business property relief at that date.

The amount of BPR is restricted for excepted assets as follows:

£236,250 × £1,050,000

£500,000) – 0(£1,050,00 = £123,750

(W2) Transfer of unused nil rate band from husband

Molly’s husband died on 7 April 2012. The nil rate band at that date was £325,000 of which £100,000 would have been used to cover the non exempt legacy to the children. The unused amount of £225,000 can be transferred to Molly. There is no need to calculate a proportion of the nil rate band to transfer as the band is unchanged at £325,000 from April 2012 to April 2013.

(W3) Rate of tax to use for the death estate

£ Taxable amount 466,422 Add back charitable legacy 60,000 ––––––– Baseline amount 526,422 ––––––– Apply 10% test 52,642 –––––––

As the charitable legacy is more than £52,642, the reduced rate of 36% can apply to calculate the tax on the estate.


ACCA marking scheme Marks (a) State pension 0.5 Private pension 0.5

Interest on government stocks 0.5 Building society interest 0.5 Interest on pensioners income bonds 0.5 Interest on ISA exempt 0.5

Trust income 0.5 Dividend income: Shawl plc 0.5 Bit-Part Ltd 0.5 Global Trust 0.5

PAA 0.5 Analysis of income 0.5

Tax calculation 1.5 Tax at source on dividends 0.5 Tax at source on interest 0.5 Tax at source on trust income 0.5

–––– Max 9.0

–––– (b) Lifetime gift covered by NRB 0.5 Main residence 0.5

Shawl plc shares 0.5 Bit-part Ltd shares 0.5

BPR 1.5 Recognition that minimum ownership is met as inherited 1.0

Government stocks 0.5 Unit trust 0.5

Building society deposits 0.5 NS%I bonds 0.5

Shares in VCT 0.5 ISA account 0.5

Income tax repayable from part (a) 0.5 Exempt legacy to charity 0.5 Transfer husband’s NRB 0.5 GCTs in seven years before death 0.5

IHT payable 0.5 Reduced rate of 36% applicable 1.0

Estate rate 0.5 IHT payable by executors 0.5 IHT remain residence can be paid in instalments 0.5 Due date for IHT not payable by instalments 0.5 Due with delivery of account by personal representatives if earlier 0.5 Due dates for instalments 0.5

–––– 14.0 Max 11.0 –––– Total 20

––––



Documents

ACCA Paper P6 Advanced Taxation Dec-2013globalnotes.weebly.com/.../10219498/_______p6_answer_d13.pdf · 2018. 9. 12. · ACCA P6 (UK): ADVANCED TAXATION 4 KAPLAN PUBLISHING IHT on