ACCA P6 Advanced Taxation Question Based Revision - ?· |ACCA P6 Mock 1 3 Your income tax liability…

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ACCA P6 Advanced Taxation Question Based Revision - Answers |ACCA P6 Mock 1 2 Question One Letter Audit and Tax Co High Street Chippenham Mr H Gerald 4 The Stables Chippenham 1 April 2015 Dear Henry Thank you for coming to see me last week. I set out below my findings following my review of the inheritance tax calculations prepared by Vicky, my comments on your plans and some further advice to help you reduce your tax liability. (i) Inheritance tax In respect of the gift on 1 July 2008, the nil band available will not be reduced by the value of the gift on 1 November 2005 as the latter gift was a potentially exempt transfer that took place more than seven years prior to death. In respect of the death estate, the Sevilan inheritance tax should be deducted from the UK inheritance tax due and not from the value of the investment properties. I am pleased to tell you that the correction of these errors results in a reduction in the inheritance tax due of 111,520 as set out in the appendix to this letter. (ii) Investments and pensions Small Enterprise Investment Scheme Your options to consider are, investing in venture capital trusts (VCTs), the Enterprise Investment Scheme (EIS) and the SEED Enterprise Investment Scheme (SEIS). VCTs are quoted investment companies, which hold investments in unquoted trading companies, thus spreading the risk over a portfolio of companies. Your income tax liability would be reduced by 30% of the amount you invest in a VCT in any tax year up to a maximum of 30% of 200,000. This relief would be withdrawn if you were to sell the shares within five years. There is no tax on the dividends received from a VCT and no taxable gains or allowable losses arise on the sale of VCT shares. With EIS you buy shares in an individual unquoted trading company, and therefore the investment is perceived as higher risk. |ACCA P6 Mock 1 3 Your income tax liability would be reduced by 30% of the amount you invest in a EIS in any tax year up to a maximum of 30% of 1,000,000. This relief would be withdrawn if you were to sell the shares within three years. With SEIS you buy shares in an individual small start-up unquoted trading company, and therefore this is also perceived as higher risk. Your income tax liability would be reduced by 50% of the amount you invest in a SEIS in any tax year up to a maximum of 50% of 100,000. This relief would be withdrawn if you were to sell the shares within three years. Investing in SEIS does carry more perceived risk, so the best investment is dependant of your risk appetite. Pension contributions You and Violet can each make tax allowable pension contributions up to the higher of 3,600 and your relevant earnings. Relevant earnings consist of employment income, trading income and income from furnished holiday accommodation. Furnished holiday accommodation is property situated in the UK or EEA that satisfies the following conditions. It is furnished and let on a commercial basis as holiday accommodation. It is available for such lettings to members of the public for at least 210 days per year and is let for at least 105 days per year. Long-term occupation of the property (continuous occupation by the same person for more than 31 days) is limited to no more than 155 days per tax year. At present, neither you nor Violet is in receipt of any relevant earnings. However, if you were to purchase property in the UK, rather than in Sevila, and ensure that it satisfied the above conditions, you would be able to make additional tax allowable pension contributions. The annual allowance is 40,000, meaning you and Violet could make contributions of 40,000 each. The tax saved would depend on your tax rate for the year. (iii) Income tax planning Ownership of quoted shares and government stocks You are a higher rate taxpayer due to the level of your rental income, dividends and bank interest 73,000 +27,000 + (21,000 x 100/90). If the quoted shares and government stocks are owned personally by you, your annual tax liability on the income received would be 20,050 as set out below. As your income would be more than 120,000, your personal allowance would be fully withdrawn. This is only relevant to the tax cost decision if the alternative suggestion does not result in a total withdrawal so is included for the present. Tax on dividend income (21,000 25%) 5,250 Government stocks (27,000 40%) 10,800 Extra tax due to loss of PA (10,000 40%) 4,000 Total tax suffered 20,050 |ACCA P6 Mock 1 4 If the investments are transferred to a company, the company would pay corporation tax on the interest income (but not on the dividends) at the rate of 21% regardless of the level of its profits. This is because it is a company controlled by you that does not carry on a trading activity. A calculation of the annual total tax payable using this structure is set out below. Corporation tax Dividend computation payable to you Dividend income (exempt) 21,000 Government stocks 27,000 27,000 Taxable total profits 27,000 Corporation tax at 21% 5,670 (5,670) Profits paid as dividend 42,330 Income tax liability (42,330 25%) 10,582 Extra tax due to loss of PA (see below) (10,000 40% ) 4,000 Total tax liability (5,670 + 10,582 + 4,000) 20,252 There is an abatement to the personal allowance under this option either as gross personal income is 73,000 + 42,330 x100/90 = 120,033. As your income would be more than 120,000, your personal allowance would be fully withdrawn. It can be seen from the calculations above that it is more tax efficient for the investments to be owned by you personally. Transfer of assets to family members You could reduce the tax due on your investments by making an absolute gift of some of them to Violet (or your children). Violet will pay no income tax on her first 10,000 of income and will pay tax at a maximum of 20% on the next 31,865 whereas you are paying income tax at up to 40%.The same savings would be available if you were to transfer income generating assets to your adult children (on the assumption that they have no other income). Tax avoidance schemes Tax avoidance involves arranging ones affairs in such a way as to minimise ones tax liabilities and is perfectly legal. However, the promoter will provide details of the scheme to HM Revenue and Customs and may be issued with a reference number. You will need to include this reference number in your income tax return. The rental income is taxable in the UK because you are a UK resident. Any tax suffered in Sevila can be deducted from the UK liability but this cannot lead to a repayment of the Sevilan tax. Failure to disclose the rental income arising on the Sevilan properties would amount to tax evasion, a criminal offence. Please call me if you require any further explanations or advice. Yours sincerely Tax manager |ACCA P6 Mock 1 5 APPENDIX: Inheritance tax computation on death of father on 1 April 2015 Gifts of cash during fathers lifetime 1 July 2008 (370,000 6,000 AEs) 364,000 Less: Nil band (325,000) Taxable amount 39,000 Inheritance tax at 40% 15,600 Tapered (15,600 x 20%) 3,120 Death estate Per Vickys calculation 3,484,000 Add: Sevilan inheritance tax 160,000 Chargeable estate 3,644,000 Inheritance tax at 40% 1,457,600 Less: Relief for Sevilan tax (less than UK tax at 40% on the Sevilan properties) (160,000) 1,297,600 Total inheritance tax due (3,120 + 1,297,600) 1,300,720 Per Vickys calculation 1,412,240 Reduction in inheritance tax due 111,520 |ACCA P6 Mock 1 6 Question Two (a) i Assessable income for Hans Hans will be deemed UK resident as present for more than 183 days in the tax year 2014/15. UK income will be taxed on the arising basis and overseas income will be taxed on either the arising or remittance basis depending on the unremitted income. If unremitted income is less than 2,000 it will be taxed under the remittance basis and the personal allowance will be available. The Unremitted income is 1,700 so the above treatment is applicable. (a) (ii) Income tax payable Total OI SI DI Salary (Wk1) 90,570 90,570 Dividends 4,500 x 100/90 5,000 5,000 Interest from ISA - exempt Interest 760 X 100/80 950 950 Overseas income 4,900 X 100/45 10,889 10,889 Total income 107,409 101,459 950 5,000 Less Personal allowance (Wk2) (6,269) (6,269) Taxable income 95,190 950 5,000 6,373 (31,865) @.20 25,330 (63,325) @.40 380 950 @ .40 1625 5,000 @. 32.5 Income Tax liability 33,708 Less DTR Lower of UK @40% (10,889 X 40%) Overseas @55% (4,356) Dividend 5,000 x 10% (500) Interest (950 x 20%) (190) PAYE (25,000) Income tax payable 3,662 WK 1 Employment income Salary 75,000 X 11/12 68,750 Car 40,550 X 35% x 9/12 95 12% 215 120/5 24% 36% 10,644 Fuel 21,700 X 35% X 9/12 5,696 Other benefits 5,480 |ACCA P6 Mock 1 7 Employment income 90,570 WK 2 Revised personal allowance Personal allowance 10,000 Abatement: (107,409 - 100,000) X 50% (3704) Revised PA 6,269 (b) Accommodation Basic charge Higher of annual value 7,000 x 5/12 2,917 Rent paid by employer (5 x 660) 3,300 No expensive accommodation charge due to the company not owning the property. (c) i) Paper for paper takeover This is where there is an exchange of existing shares in a company for other shares of another company. If the transaction is a share for share exchange the tax consequences are no capital gains tax charged at the time of the takeover. New shares are treated as if they were acquired at the same time and cost of the old shares. Conditions for this to happened are: The company issuing the new shares ends up with more than 25% of the ordinary share capital of the old company or the majority of the voting power in the old company. Or the company issuing the new shares makes a general offer to shareholders in the other company which is initially made subject to a condition which, if satisfied, would give the first company control of the second company. The exchange must take place for bona fide commercial reasons, not to avoid capital gains tax. (c) ii) Calculation Cost Tongas 2,500 OS at 5.07 12,675 Bonus issue 2,500 x 9 22,500 Nil Total shares 25,000 12,675 |ACCA P6 Mock 1 8 Fijians Cost MV at takeover 6 shares for every 10 25,000/10 x 6 11,420* 68,250 Cash 25,000 x 30p 1,255* 7,500 12,675 75,750 * 68,250/75,750 X 12,675 * 7,500/75,750 X 12,675 Tax implications: Share for share No capital gains tax Cash Sale proceeds 7,500 Cost (1,255) Gain 6,245 Small part disposal is not applicable due to the cash being in excess of the 3,000 and 5% of the market value of the shares. (c) iii) Qualifying corporate bonds Definition It is a security that represents a normal commercial loan Must be expressed in sterling Person disposing of the bond must have acquired it after 13/3/84 Tax implications A capital gain is calculated at the time of the takeover, as if the corporate bond were cashed. The gain is not taxed at that time but frozen, and will only become chargeable on disposal. The increase in value of the qualifying corporate bond from the date of take over to the date of sale is exempt from capital gains tax. Only the frozen deferred gain becomes chargeable. |ACCA P6 Mock 1 9 Question Three (a) Income tax payable Total OI SI DI Pension 10,740 10,740 Interest 1,380 x 100/80 1,725 1,725 EASA (Gross) 390 390 Dividend 9,000 x 100/90 10,000 10,000 Dividend 27p x 30,000 = 8,100 x 100/90 9,000 9,000 Total income 31,855 10,740 2,115 19,000 Less Personal allowance (Wk1) (10,000) (10,000) Taxable income 740 2,115 19,000 144 (740) @.20 2880-740 211 2,115@ .10 1,900 19,000 @. 10 Income Tax liability 2,255 Dividend 19,000 x 10% (1,900) Interest (1,725 x 20%) (345) PAYE (450) Income tax repayable (440) WK 1 Revised personal allowance Personal allowance 10,660 Abatement: (31,855 - 27,000) X 50% (2427) Revised PA However everyone is entitled to the personal allowance of 10,000 apart from high earners 8,233 So use 10,000 |ACCA P6 Mock 1 10 (a) IHT payable Step 1 Lifetime transfers in life PET CLT Sept 09 March 11 09/10 10/11 Transfer of value 368,000 368,000 A/E 09/10 (3,000) 10/11 (3,000) 08/09 (3,000) 09/10 Used Chargeable amount 362,000 365,000 No lifetime Tax NRB at the date of gift 325,000 Less Gross chargeable transfers within 7 years of gift - (325,000) Taxable amount 40,000 Donor pays the tax @ 25% 10,000 Gross chargeable transfer (365,000 + 10,000) 375,000 Step 2 Lifetime transfers in death 15/02/15 15/02/08 PET CLT Sept 09 March 11 09/10 10/11 Gross chargeable amount 362,000 375,000 NRB at the date of death 325,000 325,000 Less Gross chargeable transfers within 7 years of gift - (362,000) (325,000) - Taxable amount 37,000 375,000 IHT @ 40% 14,800 150,000 Less Taper relief 9/09 02/15 5-6 years 60% (8,880) 20% (30,000) Lifetime tax paid - (10,000) IHT payable 5,920 110,000 |ACCA P6 Mock 1 11 Step 2 Lifetime transfers in death Residence 455,000 Building society account 25,000 EASE 45,000 NS & I Saving certificates 190,000 Various Chattels 50,000 Share in Harvest Ltd 3,450 x 12 41,400 BPR 100% (41,400) Shares in Banco Plc 30,000 x 6.27 wk1 188,100 Dividends 30,000 x 27p 8,100 Other 115,000 Income tax refund (a) 440 1,076,640 NRB at death 325,000 Less Gross chargeable transfers within 7 years of death (375,000 + 362,000) (737,000) NIL Taxable estate 1,076,640 @40% 430,656 The estate is equally split between James and amber each receiving 343,692 (1,076,640+41,400430,656)/2 WK 1 Share value on Banco PLc Lower of Quarter up rule 625 + (635-625) = 6.275 Bargin 625+635/2 =6.300 (c) i Trusts James has a choice of setting up either an interest in possession trust or a discretionary trust. Interest in possession trust An interest in possession trust is where the beneficiaries will be legally entitled to the income generated by the trust each year and it must be paid. This wouldnt suit James due to the fact he wants to keep control. Discretionary trust A discretionary trust is whereby the trustees have the discretion (choice) of how the funds will be used. If James was a trustee then this would give him the control he wants. |ACCA P6 Mock 1 12 Inheritance tax implications Gifts into relevant property are immediately chargeable to inheritance tax, and will attract inheritance tax if in excess of any unused band. If James dies within 7 years of the gift there may be a further charge incurred. (c) ii Other advice If James creates a discretionary trust this will be a chargeable lifetime transfer, and could give rise to a charge in lifetime and on death, if the gift falls within 7 years from death. James wouldnt qualify for BPR as he hasnt held the shares in Harvest Ltd for 2 years. What would be advisable is to pass his inheritance directly to the children by using a deed of variation and alter Joes estate. There will be no change on inheritance tax on the estate, however for James there will be no chargeable lifetime transfer and therefore preserve his nil rate band. |ACCA P6 Mock 1 13 Question Four (a) Income tax liability 2014/15 Pension 19,080 Building society interest (4,180 100/80) 5,225 Dividends (3,168 100/90) 3,520 Total income 27,825 Less: Personal allowance (W1) (10,088) Taxable income 17,737 Analysis of income: Savings 5,225; Dividends 3,520; Other income 8,992 Income tax 8,992 at 20% 1,798 5,225 at 20% 1,045 3,520 at 10% 352 17,737 Income tax liability 3,195 Capital gains tax liability 2014/15 Ordinary shares in Mega plc Market value (W2) (55,000 at 219.5p) 120,725 Less: Cost (W3) (46,933) 73,792 Main residence Deemed consideration 269,500 Less: Cost (161,260) Capital gain 108,240 Chargeable gain (W4) 8,277 Total chargeable gains 82,069 Less: Annual exempt amount (11,000) Taxable gains 71,069 |ACCA P6 Mock 1 14 Capital gains tax Basic rate (31,865 17,737) 14,128 18% 2,543 Higher rate 56,941 28% 15,943 71,069 Capital gains tax liability 18,486 W1) Personal allowance: born between 6.4.1938 and 5.4.1948 Lauras total income exceeds the income limit by 825 (27,825 27,000), so Lauras personal allowance of 10,500 is reduced by half of the excess to 10,088 (10,500 825). (W2) Market value Mega plc Shares Lower of: (i) up valuation (218 + (224 218) 219.5 (ii) Mid bargain (217 + 224) 220.5 (W3) Cost of Mega plc Shares Number Cost 16 Dec 2013 44,000 25,960 16 Jan 2014 RI (1:2) @ 1.38 22,000 30,360 66,000 56,320 9 July 2014 Disposal (55,000) 56,320 (55,000/66,000) (46,933) Balance c/f 11,000 9,387 W4) Chargeable gain on main residence The main residence was owned for 17 years. For 6 years, 20% was used for business purposes. Therefore 20% of 6/17 (= 78/204ths) of the gain is chargeable. The remaining gain is exempt under the PPR rules. Chargeable gain = (108,240 78/204 20%) = 8,277 |ACCA P6 Mock 1 15 (b) IHT implications of gifts Ordinary shares in Mega plc Lauras gift of shares in Mega plc on 9 July 2014 will be a PET of 114,725. This is calculated as 120,725 per the CGT valuation less two annual exemptions of 3,000 for 2014/15 and 2013/14. As a PET, no IHT is payable at the date of the transfer. Assuming Laura dies on 31 January 2019 (i.e. within 7 years of the gift), the PET will become chargeable. However, it will be covered by the nil rate band of 325,000 and therefore no tax is payable. Gift to the discretionary trust The cash gift of 340,000 into the discretionary trust on 25 September 2014 will be a chargeable lifetime transfer. No annual exemptions are available as they have been used against the gift on 9 July 2014. There are no chargeable transfers in the previous seven years (PETs are ignored in lifetime calculations). IHT payable is therefore: (340,000 325,000) 25% = 3,750 IHT of 3,750 is due by 30 April 2015. The gross gift to carry forward is 343,750 (340,000 + 3,750). Death tax As a result of Lauras death on 31 January 2019, additional IHT will be due. The PET made on 9 July 2014 becomes chargeable, and this will utilise 114,725 of the nil rate band. The nil rate band available is 210,275 (325,000 114,725). Gross chargeable transfer 343,750 IHT liability (343,750 210,275) 40% 53,390 Less: Taper relief (4 5 years) (53,390 40%) (21,356) 32,034 Less: IHT paid on lifetime gift (3,750) IHT due on death 28,284 Gift of the main residence Lauras gift of her main residence on 28 February 2015 will not be treated as a gift with reservation and will not be caught by the pre-owned asset rules. |ACCA P6 Mock 1 16 Although she has continued to live in the house, she is paying a full market rent for doing so. The gift will therefore be a PET of 269,500. No annual exemptions are available as they have been used against the gift on 9 July 2014. The PET becomes chargeable on death as follows: Gross chargeable transfer 269,500 No nil rate band available. IHT liability (269,500 40%) 107,800 Less: Taper relief (3 4 years) (107,800 20%) (21,560) IHT due on death 86,240 Gift with reservation If Laura did not pay a full market rent for continuing to live in her main residence, the gift on 28 February 2015 would be a gift with reservation. Instead of treating the gift as a PET, the house would be included in Lauras estate at its value on 31 January 2019. It is therefore beneficial that Laura is paying a full market rent, as property values are expected to increase and therefore inclusion in the estate at a higher value and the loss of taper relief will result in a higher IHT charge. |ACCA P6 Mock 1 17 Question Five a) Principal private residence relief The disposal of a property that has been occupied as a main residence throughout the period of ownership is exempt from CGT under the principal private residence provisions. If the property has not been used as a main residence throughout the period of ownership a capital gain is calculated in the normal way. Any exempt portion is then calculated using the formula below: Exempt gain = Total gain (Period of occupation/Total period of ownership) It is important to note, however, that in certain circumstances some periods of actual absence from the property are counted as periods of occupation. These circumstances are as follows: (a) Providing there has been a period of actual occupation as a main residence, the last 18 months of ownership is always exempt. (b) Providing there has been both a period of occupation as a main residence before and after the absence period: (i) Any absence period when the individual was employed overseas. (ii) Any absence period (or periods) that together do not exceed four years, throughout which the individual was working elsewhere in the UK in circumstances where the location of the employment was too far from the property to live in it. (iii) Any absence period (or periods) for any reason that together do not exceed three years. |ACCA P6 Mock 1 18 b) Sale of principal private residence (i) If Rosalind returns to occupy the house in Wales as her main residence prior to sale the CGT implications will be as follows: 2014/15 Gain on the sale of house with reoccupation Original house Extension Gross sale proceeds 80,000 20,000 Less: Disposal costs (80:20) (3,200) (800) Net sale proceeds 76,800 19,200 Less: Cost (W1) (122,000) (15,000) (Loss)/Gain before reliefs (45,200) 4,200 Less: PPR exemption (W2) 45,200 Chargeable gain Nil 4,200 Less: Annual exempt amount (11,000) Taxable gain Nil Nil 2015/16 Sale of shares Following the sale of her shares, after taking into account her annual exempt amount of 11,000, Rosalind will have a CGT liability of 3,332 ((22,900 11,000) 28%) for this tax year. If Rosalind sells the house in Wales without returning to occupy as main residence the CGT implications will be as follows: 2014/15 Gain on the sale of house without reoccupation As Rosalind will no longer return to occupy the house in Wales, the 39 month period 1 July 2010 to 30 September 2013 will no longer be exempt. As a consequence, the capital gains calculation is now as follows: Original house non-business asset Extension business asset (Loss)/gain before reliefs as before (45,200) 4,200 Less: PPR exemption (W2) 34,516 (Loss)/gain after PPR (10,684) 4,200 Less: Loss offset in 2014/15 4,200 (4,200) Allowable loss carried forward (6,484) Chargeable gain Nil |ACCA P6 Mock 1 19 2015/16 Sale of shares Following the sale of her shares, after taking into account her annual exempt amount of 11,000 and the capital loss of 6,484 brought forward from 2013/14, Rosalind will have a CGT liability of only 1,516 ((22,900 11,000 6,484) 28%). This will give an overall CGT saving under this alternative of 1,816 (3,332 1,516). Conclusion It would therefore appear advisable for Rosalind not to return to live in her house in Wales prior to its sale. Workings (W1) Cost of house The disposal of part of the property in June 2004 is a part disposal for CGT purposes. As a result, the A/(A + B) formula needs to be used to establish the remaining base cost for future disposal purposes. This is calculated as follows: Original cost 180,000 Incidental acquisition costs 3,000 183,000 Allocated to earlier disposal 70,000 / (70,000 + 140,000) 183,000 (61,000) Residual base cost 122,000 (W2) Principal private residence exemption If Rosalind returns to occupy the Welsh house as her main residence, as demonstrated below, her entire period of ownership will be exempt for CGT purposes. Total (months) Exempt (months) Chargeable (months) 1.7.2001 to 30.6.2004 36 36 (actual occupation) 1.7.2004 to 31.3.2008 45 45 (absence for UK work) 1.4.2008 to 30.6.2010 27 27 (actual occupation) 1.7.2010 to 30.9.2013 39 39 (absence for UK work remaining 3 months plus any other reason 36 months) 1.10.2013 to 31.3.2015 18 18 (last 18 months of ownership) 165 165 Nil |ACCA P6 Mock 1 20 If Rosalind does not reoccupy the house: The period 1 July 2010 to 30 September 2013 is no longer exempt. Therefore the chargeable portion is: 39/165 The PPR exempt portion is: 126/165 PPR = (126/165 45,200) = 34,516 (c) Income tax implications of renting a house Assuming that Rosalind decides to remain in Manchester the principal tax implications involved in renting out her house in Wales are as follows: She will be assessed on property business income, at her marginal tax rates (presumably 40%), on any net profit arising from the letting of this property. This will need to be declared as part of her self-assessment tax return. The assessable net profit is found by deducting from any rents receivable for any particular tax year the allowable expenditure calculated on the accruals basis. Allowable expenditure includes property insurance, letting agents fees, repairs (but not capital expenditure) and loan interest. If the property is let on a furnished basis an additional deduction, the wear and tear allowance, can be claimed. This is calculated as 10% of any assessable rents (less any council tax and water rates paid). Capital allowances can only be claimed on plant and machinery used in managing the property (e.g. lawnmower). If a loss arises, such losses can only be carried forward for offset against any future rental profits made. If the letting satisfies certain conditions the property will be classified as furnished holiday accommodation (FHA). The qualifying conditions are: the property is available for commercial letting, to the public, for not less than 210 days per tax year; and it is actually let for at least 105 days in a tax year; and the property must not be let for periods of long term occupation totalling in excess of 155 days in the relevant 12 month period. Long term occupation is a period of more than 31 consecutive days let to the same person. The benefits of being classed as FHA are: (i) Profits count as earnings for personal pension purposes. (ii) Normal capital allowances will be available for any furniture purchased.

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