p6 - final

Final Assessment

KAPLAN PUBLISHING of 17

ACCA FINAL ASSESSMENT

Advanced Taxation

QUESTION PAPER Time allowed Reading time: 15 minutes Writing time: 3 hours This paper is divided into two sections Section A BOTH questions are compulsory and MUST be

attempted Section B TWO questions ONLY to be attempted Tax rates and allowances are on pages 3 – 6

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

JUNE 2009

Kaplan Publishing/Kaplan Financial

ACCA P6 Advanced Taxation

of 17 KAPLAN PUBLISHING

© Kaplan Financial Limited, 2008 All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.

Final Assessment


Tax rates and allowances Some tax rates and allowances will be reproduced in the examination paper for Paper P6. In addition, other specific information necessary for candidates to answer individual questions will be given as part of the question.

Income tax %

Basic rate £1 – £34,800 20 Higher rate £34,801 and above 40

Personal allowances

£

Personal allowance 6,035 65 – 74 9,030 75 and over 9,180 Income limit for age related allowances 21,800

Car benefit percentage The base level of CO2 emissions is 135 grams per kilometre. Car fuel benefit The base figure for calculating the car fuel benefit is £16,900. Personal pension contribution limits

£

Annual allowance 235,000 Lifetime allowance 1,650,000

The maximum contribution that can qualify for tax relief without any earnings is £3,600. Authorised mileage allowance

All cars:

Up to 10,000 miles 40p Over 10,000 miles 25p



Capital allowances

Plant and machinery %

Writing-down allowance 20 Special rate expenditure Writing-down allowance 10 First-year allowance – Low emission motor cars (CO2 emissions of less than 110 grams per kilometre) (17 April 2002 to 31 March 2013)

100

Annual investment allowance £50,000

Industrial buildings Writing-down allowance 3

Corporation tax

Financial year 2006 2007 2008

Small companies rate 19% 20% 21% Full rate 30% 30% 28%

£ £ £

Small companies rate lower limit 300,000 300,000 300,000 Small companies rate upper limit 1,500,000 1,500,000 1,500,000 Marginal relief fraction Small companies rate 11/400 1/40 7/400

Marginal relief (M – P) × I/P × Marginal relief fraction

Value Added Tax £

Registration limit 67,000 Deregistration limit 65,000

Final Assessment


Inheritance tax %

£1 – £312,000 Nil Excess 40

Capital gains tax

Annual exemption Individuals

£ 9,600

Rate of tax 18%

Entrepreneurs’ relief £1,000,000

National insurance contributions

(Not contracted out rates) %

Class 1 Employee £1 – £5,435 per year Nil £5,436 – £40,040 per year 11.0 £40,041 and above per year 1.0 Class 1 Employer £1 – £5,435 per year Nil £5,436 and above per year 12.8 Class 1A 12.8 Class 2 £2.30 per week Small earning exemption £4,825 Class 4 £1 – £5,435 per year Nil £5,436 – £40,040 per year 8.0 £40,041 and above per year 1.0

Rates of interest

Official rate of interest: 6.25% Rate of interest on underpaid tax: 7.5% (assumed) Rate of interest on overpaid tax: 3.0% (assumed)



Stamp Duty and Stamp Duty Land Tax

Ad Valorem Duty Rate

Residential property

£125,000 or less (1) Nil £125,001 – £250,000 1% £250,001 – £500,000 3% £500,001 or more 4%

(1) For non-residential property, the nil rate is extended to £150,000.

Shares 0.5%

Fixed duty £5

Calculations and workings need only be made to the nearest £. All apportionments may be made to the nearest month. All workings should be shown.

Final Assessment


SECTION A

BOTH questions are compulsory and MUST be attempted QUESTION 1 An extract from an e-mail from your manager is set out below.

I attach a schedule received this morning from Brian Snow, the managing director of Worldwide plc, a large UK resident trading company. He has requested a meeting next week to discuss the tax implications of various transactions undertaken by the company during the year ended 30 September 2008. This email will make more sense when you have read Brian’s schedule, so I suggest you read that first. I would like you to prepare briefing notes for me to take to my meeting with Brian. Your notes should cover the following: - Advice for Worldwide plc on the corporation tax implications of transactions (1) – (5).

I need you to support this with calculations where possible. - Could you also set out some details about how Worldwide plc will be affected by the

requirement to make quarterly instalment payments in respect of its corporation tax liability for the year ended 30 September 2008. Brian is not sure how this system works, and wants to know when the company will have to pay its tax, as they have never had to pay by instalments in the past. You don’t need to calculate the corporation tax liability here.

- Advice on the conditions that must be met for Worldwide plc to register with Wanted Ltd as a group for VAT purposes, together with an explanation of the consequences of being group VAT registered. Could you also set out some thoughts as to whether or not you think this would be beneficial for Worldwide plc.

- An explanation of the VAT implications if Worldwide plc imports goods from overseas, either from within the European Union or from Narnia.

The schedule from Brian Snow is set out below.

Worldwide plc – Year ended 30 September 2008 Worldwide plc has forecast trading profits for the year ended 30 September 2008 of £2,250,000. The following transactions have taken/will take place during the year ended 30 September 2008. (1) On 1 November 2007 Worldwide plc purchased a 90% shareholding in Nouveau Inc,

a manufacturing company resident in and controlled from the country of Northia. Its forecast profits for the year ended 31 March 2008 are £700,000, and these will be subject to corporation tax at the rate of 25% in Northia.

On 15 April 2008, Nouveau Inc is planning to pay a dividend of £300,000, and this will be subject to withholding tax at the rate of 5%.

(2) During May 2008, Worldwide plc is planning to sell 10,000 units of a product to Nouveau Inc at a price of £12.75 per unit. This is 25% less than the trade-selling price given to other customers.



(3) On 1 November 2007, Worldwide plc set up a branch in the country of Eastina. The branch is controlled from Eastina, and its forecast profits for the period to 30 September 2008 are £175,000. These are subject to tax at the rate of 40% in Eastina. Half of the profits after tax will be remitted to the UK.

(4) On 31 March 2008, Worldwide plc is planning to sell its 80% shareholding in Surplus

Ltd, an investment company resident in the UK, for £1,750,000. The disposal, if chargeable, will result in a gain (after indexation allowance) of £840,000. However, the sale agreement states that the sales proceeds will be reduced by any corporation tax liability Surplus Ltd had in respect of intra-group capital transactions taking place prior to the date of sale.

Worldwide plc transferred an office block to Surplus Ltd on 20 June 2002, when the

office block was valued at £630,000. The office block originally cost Worldwide plc £260,000 on 17 May 1997. It is still owned by Surplus Ltd, and is currently valued at £720,000. The indexation allowance from May 1997 to June 2002 is £31,980, and from May 1997 to March 2008 it is £91,520. Surplus Ltd prepares its accounts to 30 September, and pays corporation tax at the full rate.

(5) On 1 February 2008, Worldwide plc purchased an 85% shareholding in Wanted Ltd, a

UK-resident company. The company is forecast to make a trading loss of £240,000 for the year ended 30 September 2008. On 20 December 2007, Wanted Ltd sold investments for £425,000, resulting in a capital loss of £170,000.

VAT issues Worldwide plc and Wanted Ltd are not currently registered as a group for VAT purposes, but are considering the possibility of registering as a VAT group. Worldwide plc’s sales are all standard rated, whilst Wanted Ltd’s are zero-rated. The purchases for both companies are standard rated. In addition, Worldwide plc incurred standard rated overhead expenditure of £300,000 that cannot be directly attributed to either of the companies’ sales. Worldwide plc charges Wanted Ltd a management charge of £10,000 per quarter in respect of the services of its accountancy department. It is likely that Worldwide plc will start importing goods in the near future, either from VAT registered companies within the European Union, or from Narnia.

Notes: In all cases, the overseas forecast profits are the same for accounting and taxation purposes. The double taxation treaties between the UK, Northia and Eastina provide that overseas taxes are relieved as a tax credit against UK corporation tax.

Final Assessment


Required: Prepare the briefing notes requested by your manager. You should assume today’s date is 15 March 2008. The marks are allocated as follows. (a) Advice for Worldwide plc regarding the corporation tax implications of transactions (1)

to (5) for the year ended 30 September 2008, with supporting calculations. (20 marks) (b) Explanation of how Worldwide plc will be affected by the requirement to make

quarterly instalment payments in respect of its corporation tax liability for the year ended 30 September 2008. You are not expected to calculate Worldwide plc’s corporation tax liability for the year ended 30 September 2008. (3 marks)

(c) (i) Advice for Worldwide plc of the conditions that must be met for it to register

with Wanted Ltd as a group for VAT purposes, and explanation of the consequences of being group VAT registered. (3 marks)

(ii) Advice for Worldwide plc as to whether or not it would be beneficial for the

companies to be registered as a group for VAT purposes. (4 marks) (iii) Explanation of the VAT implications if Worldwide plc imports goods from a

VAT registered company in a country that is a member of the European Union.

Explanation of the difference in treatment of VAT if Worldwide plc imports the

goods from Narnia. (3 marks) Appropriateness of the format and presentation of the notes and the

effectiveness with which the information is communicated (2 marks) (Total: 35 marks)



QUESTION 2 Diane Minor has recently e-mailed John Dukes, a partner in your firm. John has forwarded the following extracts of the e-mail to you for your consideration.

Extract 1 As you know I have had enough of city life and have just resigned from my lucrative directorship of XYZ plc. The £200,000 salary and perks I have had for the last ten years may sound attractive but I now want to work less and get my work-life balance back in order. So, on 1 April 2009 I plan to set up my own business which I will operate from the top floor of my house. With the initial set up costs and marketing I need to do, I think that in my first year to 31 March 2010 I will make a small loss of about £4,000. However, in the year ended 31 March 2011 I estimate that I should have gross income of £50,000 and the following expenses: (1) Car running expenses (including petrol) of £3,200. The car will cost £15,600, has CO2

emissions of 178 g/km and a manufacturer’s list price of £16,750. I estimate that I will use the car approximately 25% for private purposes and I will fund all of my petrol costs from the business.

(2) Other allowable expenses of approximately £3,500. I then anticipate steadily increasing income and profits thereafter.

Extract 2 I am unsure as to whether I should initially set up the business as a sole trader or through a company. I would be grateful if you could advise me as to the differences in tax treatment of each trading vehicle. For example, I have been told that there are significant advantages in operating as a company rather than a sole trader, but not necessarily when you are making losses. I am not sure why though. In either case, I will need to withdraw income net of income tax and national insurance to live on and I think that I need net income of around £18,000 per annum. If the business is run as a company I could have some of it paid as a dividend at the end of the year, say £5,000.

Assume today’s date is 3 March 2009 and that your partner has asked you to prepare notes for a meeting with Diane.

Final Assessment


Required: (a) Prepare notes contrasting the tax treatment of trading as a sole trader and as a

company in preparation of the meeting with Diane covering the following issues:

(i) The rates of tax paid on profits (ii) The liability to National insurance (iii) The payment dates of tax (iv) The withdrawal of profits (v) The relief for trading losses

Recommend whether she should set up as a sole trader or company.

(10 marks) (b) Prepare computations comparing the total tax and National insurance payable on the

estimated figures for the year end 31 March 2011 assuming Diane trades as a sole trader or through a company.

Assume that if Diane trades as a company, she will withdraw a gross salary of

£16,220 (which equates to a net salary of £13,000) and will receive cash dividends of £5,000.

Ignore the loss in the year ended 31 March 2010 for this part. (15 marks) Assume that the tax rates and allowances for 2008/09 and Financial Year 2008 apply throughout the question. (Total: 25 marks)



SECTION B

TWO questions ONLY to be attempted QUESTION 3 Millie, aged 48, owns a sole trader business which she started in 1994. The business is a shop selling crafting products and pottery. The business has built up a good reputation in the area and at crafting shows. As a result, in the next month or so, Millie wants to incorporate the business into a new company, Crafty Products Ltd. The consideration for the assets of the business will be shares in the new company, or a mixture of shares and cash. Millie will be the sole shareholder and director. The following information has been obtained from a telephone conversation with Mille and from client files. Estimated gains on incorporation:

Asset Market value

Estimated capital gains (before reliefs)

£ £

Stock 30,000 Nil Goodwill 50,000 50,000 Property 80,000 15,000

Crafty Products Ltd - To prepare accounts to 31 December each year. - Tax adjusted trading profits for year ended 31 December 2010 estimated at £85,000. - After deducting gross salary to Millie of £45,000.

Millie - Has substantial investment income. - Higher rate taxpayer. - No other capital disposals in the tax year. - Wants to maximise the use of available reliefs at the time of incorporation. - Does not want to transfer the cash in the business to the company. - Wants to maximise the amount of cash she can take as consideration for her

business assets. - Is considering retaining ownership of the business property as a personal asset and

renting it to the company as a way of extracting funds. - Wants to extract a further £20,000 as an additional bonus payment or as a dividend, if

the business is doing well.

Final Assessment


Required: Assuming that today’s date is 7 December 2009, write a letter to Millie advising her of the following: (a) The two capital gains tax (CGT) deferral reliefs available on the incorporation of her

business.

You should explain how each relief operates and state the conditions necessary for the relief to be given, including the time limit for any claims to be made.

You are not required to consider the use of either an Enterprise Investment Scheme (EIS) or a Venture Capital Trust (VCT).

(6 marks) (b) Assuming that Millie has decided to retain the business property as a personal asset

and to charge rent to the company for the use of the property:

(i) Advise Millie and the new company of the tax consequences that will arise and state the effect of retaining the property on the availability of the capital gains tax (CGT) deferral reliefs identified above. (5 marks)

(ii) Calculate the maximum amount of cash sale proceeds Millie could receive for

the sale of the goodwill to the new company, without incurring a capital gains tax (CGT) liability. (3 marks)

(c) Assuming Millie wishes to extract an additional bonus payment of £20,000 gross from

the company in the year ended 31 December 2010, advise whether the payment should take the form of additional salary or a dividend payment.

For the dividend, assume that the £20,000 represents the cash dividend paid by the company. Your answer should be supported by relevant calculations. (5 marks)

Assume that the tax rates and allowances for 2008/09 and Financial Year 2008 apply throughout the question. Presentation, structure and format of the answer. (1 mark) (Total: 20 marks)



QUESTION 4 Elise Teen, a UK resident who was born on 9 June 1955, is a self-employed management consultant. She is seeking advice on how to invest some surplus funds she has, which are currently invested in an ordinary deposit account at a building society. She would like to invest these funds before 6 April 2009, in a way that will reduce her overall liability to income tax. The following information has been obtained from a meeting with Elise. Elise – background and financial position - Single - Surplus funds £330,000 - Only outgoing is interest of £8,800 per annum (gross) on her mortgage of £160,000. - Plans to invest £250,000 (gross) in a personal pension plan Taxable income 2008/09 - Assessable profits from her profession estimated at £350,000 - Only other income £6,600 interest on the deposit account with the building society.

Elise’s nephew Simon is a director of Sharp Ltd, an unquoted trading company. He is planning to sell his shares in Sharp Ltd to his son, and would like you to advise him on the capital gains tax implications. The following information has been obtained from client files. Simon – background - Aged 48 years. - Married to Stella, aged 32 years - Acquired 25% of the shares in Sharp Ltd, at par, on its incorporation on 1 October

1997 - Works as a full-time director of Sharp Ltd - Higher rate taxpayer - No other capital disposals in 2008/09 Sharp Ltd - Has share capital of 200,000 £1 ordinary shares - Current value of shares is as follows:

Shareholding Value per share

15% £12.00 25% £14.00 35% £15.50 50% £17.00

Final Assessment


Sale of shares in Sharp Ltd - On 31 March 2009, Simon is to sell 30,000 of his shares in Sharp Ltd to his son for

£75,000. Required: (a) (i) Calculate the income tax liability by Elise in 2008/09 assuming she invests

£250,000 (gross) in her personal pension plan. Your answer should include an explanation of the tax implications of investing

this amount in her pension plan. Advise Elise of whether or not it would be beneficial for her to actually

contribute this amount, and whether or not this is a suitable investment for her. (9 marks)

(ii) As an alternative to investing in a personal pension scheme, Elise is

considering utilising her surplus funds by repaying some, or all, of her mortgage.

Outline the tax implications and advise Elise of the suitability of this

alternative given her particular circumstances. (2 marks) (iii) Elise has asked you to recommend a pension fund to invest in and arrange

the setting up of the fund. If you do so, your firm will receive a commission of 10% from the pension

fund company. Explain what action you should take in accordance with the ACCA Ethical

Guidelines. (2 marks)

(b) Compute the capital gain assessable on Simon as a result of the sale of the shares in Sharp Ltd to his son, assuming all beneficial reliefs are claimed.

Show the capital gains base cost carried forward for the son’s shares. (7 marks) You should assume that the tax rates and allowances for 2008/09 apply throughout. Ignore stamp duty. (Total: 20 marks)



QUESTION 5 Li Yu is resident and ordinarily resident in the UK, but is not domiciled in the UK. Following her marriage to a UK citizen, Li is planning to become UK domiciled, and wants to know how this will affect the potential inheritance tax liability on her death. She would also like you to calculate her income tax for 2008/09. The following information has been obtained from a recent meeting with Li. Li Yu – background - Aged 63. - Born in the country of Kinga. - Lived in the UK since 6 April 1993. - Employed by the Kingan National Bank in London.

Assets owned at 5 April 2009 - Main residence valued at £263,500. This is situated in the UK and has an outstanding

endowment mortgage of £80,000. - A house in Kinga worth £60,000. - 40,000 shares in Kestrel plc, a company quoted on the UK Stock Exchange at 308p −

316p. - Antiques worth £35,000. These were bought in Kinga but are now situated in Li’s UK

residence. - Bank deposits of £65,000 with the Kingan National Bank, of which £45,000 is held at

the London branch and £20,000 at the main branch in Kinga. - An interest-free loan of £15,000 to Li’s brother who is resident in Kinga. The loan was

used to purchase property situated in the UK.

Income – tax year 2008/09 - Salary from Kingan National Bank in London £38,030, from which £6,400 income tax

was deducted under PAYE. - Interest from Kingan National Bank of £1,680 (net) credited to the bank account in

London - Interest from Kingan National Bank of £750 (net of 15% foreign tax) credited to the

account in Kinga. None of this interest was remitted to the UK. - Dividends from Kestrel plc of 15p per share. Li’s will - Under the terms of her will, Li has left all of her assets to her three children. - If she were to die, Kingan death duty of £21,000 would be payable irrespective of her

domicile.

Final Assessment


Notes: There is no double taxation agreement between the UK and Kinga. All of the above figures are in pounds sterling.

Required:

(a) Advise Li of:

(i) when she will be treated as domiciled in the UK for the purposes of IHT; and (ii) how she could acquire domicile in the UK under general law. (4 marks)

(b) Advise Li as to the potential increase in her liability to UK IHT if she were to become domiciled in the UK.

Your answer should include an explanation of why Li’s assets are or are not subject to UK IHT. (10 marks)

(c) Calculate the UK income tax payable by Li for 2008/09. Your answer should include an explanation of why Li’s overseas income is or is not

subject to UK income tax. (6 marks)

(Total: 20 marks)

Final Assessment

ACCA

Paper P6

Advanced Taxation June 2009

Final Assessment – Answers

To gain maximum benefit, do not refer to these answers until you have completed the final assessment questions and submitted them for marking.

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Final Assessment

ANSWER 1

Marks

To: Tax manager From: Tax assistant Date: 15 March 2008 Subject: Notes for meeting – Worldwide plc (a) Corporation tax implications of each transaction Receipt of dividend from Nouveau Inc The dividend received from Nouveau Inc will be included in Worldwide

plc’s corporation tax computation as foreign income in the year ended 30 September 2008.

Relief is available for withholding tax, and as Worldwide plc owns more

than 10% of the share capital of Nouveau Inc, relief will also be given for the underlying tax paid in Northia.

Overseas tax suffered

£ £

Dividend received (95%) 256,500 Withholding tax (5%) 13,500 _______ 13,500

(£300,000 x 90%) 270,000 Underlying tax (270,000 × 75

25 ) 90,000 _______ 90,000

Gross dividend income 360,000 _______ _______ Overseas tax suffered 103,500 _______

The UK tax paid by Worldwide plc for the year ended 30 September

2008 will be at an average rate of 29% ((30% x 6/12) + (28% x 6/12)), as the accounting period straddles the Financial Years 2007 and 2008.

The total tax paid in Northia of £103,500 is less than the UK corporation tax on the foreign income of £104,400 (£360,000 at 29%). Therefore the double tax relief (DTR) available is £103,500.

Transfer pricing The proposed sales to Nouveau Inc (a non-resident group company) will be made at an undervalue. This will reduce UK trading profits and hence UK corporation tax in Worldwide plc. As Worldwide plc is a large company, the transfer pricing rules will apply. Therefore when calculating Worldwide plc’s corporation tax liability, a true market price must be substituted for the transfer price.

½ 1 1 1

2 1

½

7 marks c/f



Marks

7 marks b/f

The market price will be an arm’s length price that would be charged if the parties to the transactions were independent of each other. For the year ended 30 September 2008, Worldwide plc will be subject to self assessment, so the company is required to make the adjustment itself on the CT600. An adjustment of £42,500 (10,000 × £12.75 × 25/75) will be required, unless the discount is justified by different trading terms. Branch in Eastina The branch in Eastina is controlled from that country, and Worldwide plc will therefore be assessed on this overseas income as trading profits. The branch profits are subject to UK corporation tax in full regardless of the amount remitted to the UK. The tax paid in Eastina of £70,000 (£175,000 at 40%) is more than the UK corporation tax on the overseas income of £50,750 (£175,000 × 29%) and so double taxation relief will be restricted to £50,750. The excess foreign tax of £19,250 (£70,000 - £50,750) may be relieved by carry forward against future corporation tax payable by Worldwide plc. Sale of shareholding in Surplus Ltd Degrouping charge The office block was transferred from Worldwide plc to Surplus Ltd, a 75% subsidiary, within 6 years of the date that Surplus Ltd is to leave the 75% group. The transfer would originally have been a no gain/loss transfer. However, a chargeable gain of £338,020 (£630,000 − £260,000 − £31,980) will now be assessed on Surplus Ltd (i.e. the company leaving the group) for the year ended 30 September 2008 (i.e. in the year the company leaves the group). The related corporation tax liability is £98,026 (£338,020 at 29%).

½ 2 1 1

1 1 2

½

Gain on sale of shares The sale of the shares in Surplus Ltd is not exempt under the substantial shareholding rules as Surplus Ltd is an investment company.

1

17 marks c/f


Final Assessment

Marks

17 marks b/f

The gain of £840,000 therefore becomes chargeable. However the gain will be reduced to £741,974 (£840,000 − £98,026) as the sale agreement states that the sale proceeds will be reduced by any corporation tax liability in respect of intra-group capital transactions. As a result, the related corporation tax liability for the year ended 30 September 2008 will be £215,172 (£741,974 at 29%). Purchase of shareholding in Wanted Ltd Trading loss Wanted Ltd will be able to group relieve its trading loss to Worldwide plc (and 75% subsidiaries) under s402 ICTA 1988. Relief will be limited to the lower of £160,000 (£240,000 × 8/12) and 8/12 of the claimant company’s PCTCT (assuming they have coterminous accounting periods). Capital loss The capital loss of £170,000 is a pre-entry loss which has restricted use. It will not be possible for Worldwide plc to utilise this loss against the gain arising on the disposal of the shares in Surplus Ltd by transferring the shareholding to Wanted Ltd prior to disposal outside the group.

1

½ 1 2

½ 1

________ Max 20 marks ________

(b) Quarterly instalment payments Worldwide plc is a large company for the year ended 30 September

2008, as it will pay the full rate of corporation tax. However, an exception will apply if profits do not exceed £10 million

(reduced according to the number of associated companies), and Worldwide plc was not a large company for the year ended 30 September 2007.

If instalments are required, the four quarterly instalments for the year

ended 30 September 2008 will be due on 14 April 2008, 14 July 2008, 14 October 2008 and 14 January 2009.

1 1 1

3 marks c/f



Marks

3 marks b/f

The amount of the instalments will be based on the expected corporation tax liability for the year ended 30 September 2008, and so Worldwide plc will have to produce an accurate forecast of its corporation tax liability for the year. (c) (i) Conditions and consequences of group registration

Two or more companies are eligible to register as a group for VAT purposes if:

• one of them controls each of the others, or one person

(whether a holding company, an individual or a business partnership) controls all of them, and

• each of them is resident in the UK, or has an established place of business in the UK.

The consequences of being registered as a group for VAT purposes are that:

• each VAT group must appoint a representative member

which accounts for the group’s output tax and input tax • all members of the VAT group are jointly and severally

liable for any tax due from the representative member • any supply of goods or services by a member of the

group to another member of the group is disregarded for VAT purposes

• any other supply of goods or services by or to a group member is treated as a supply by or to the representative member.

An application for group VAT registration must be made by one of the companies and takes effect from the date of receipt although HMRC then have 90 days in which to refuse the application.

1

________ Max 3 marks ________

½ for each valid point

________ Max 3 marks ________

(ii) Benefit of group registration

• Input tax relating to supplies that are wholly used in making taxable supplies will be fully recoverable.



Final Assessment

Marks

If not group registered:

− Worldwide plc makes standard rated taxable supplies and can therefore recover its input VAT in full.

− Wanted Ltd makes wholly zero-rated taxable supplies and can therefore recover all of its input VAT in full.

If Worldwide plc and Wanted Ltd apply for group registration full recovery of all input VAT is still possible as there are no exempt supplies made by either company. The input VAT recovery is therefore the same whether or not they are group registered.

• The recovery of the input VAT of £52,500 (£300,000 x

17.5%) suffered on the group’s overhead expenditure is also available in full, whether or not the companies form a VAT group.

• There may be a reduction in the administration costs in

only having to prepare one VAT return.

• If not group registered, Worldwide plc must charge VAT on the management charge to Wanted Ltd and account for the output VAT on its VAT return.

Wanted Ltd can recover the input VAT suffered on the management charge in its VAT return.

If group registered, inter group charges are ignored for VAT purposes which therefore improves the group cash flow position.

• However, as Wanted Ltd makes totally zero-rated

supplies, if registered on its own it will be in a net repayment position.

Therefore, from a cash flow perspective, Wanted Ltd would prefer to be monthly registered to receive regular cash repayments rather than setting off its repayment on a quarterly basis against the group’s overall VAT liability.

________ Max 4 marks ________



Marks

(iii) Importing goods

From a country in the European Union

• As both Worldwide plc and the supplying company are VAT registered:

– the supply is treated as zero-rated in the EU

country of origin, and – chargeable at the appropriate rate in the

country of destination.

• Therefore, as the customer in the country of destination, at the time of acquisition, Worldwide plc must account for VAT at 17.5%.

• Worldwide plc can then reclaim the VAT suffered as

input VAT in the appropriate quarterly VAT return.

From a country outside the European Union

• VAT is charged on goods imported from outside of the

EU as if it were a customs duty.

• Normally collected from the importer at the place of importation (i.e. port or airport).

• If placed in a bonded warehouse or free zone, VAT can be postponed until they are removed from the warehouse.

• Approved traders can pay all their VAT on imports through the Duty deferment system which allows payment on 15th of the month following the month of importation.

1

½

½

½

½

½

1

________ Max 3 marks ________

2 marks for format and

presentation


Final Assessment

ANSWER 2 Marks

(a) Notes for a meeting with Diane Minor – 3 March 2009

Trading as a sole trader or as a company

Operating as a: Sole trader

Company

(i) The rates of tax paid on profits

All profits of the trade are assessed on Diane to income tax, regardless of the drawings from the business.

After deducting the personal allowance of £6,035, profits would be assessed to income tax at 20% on the first £34,800 and 40% on the excess above £34,800.

Profits of the trade are assessed to corporation tax.

Profits below £300,000 will be assessed at 21%.

However, Diane will be assessed to income tax on her employment income drawn from the business and her dividend income.

(ii) The liability to National Insurance

Diane would be liable to: Class 2 NICs (flat rate £2.30 per week), and Class 4 NICs based on trading profits. The maximum amount would be £2,768 plus 1% on any profits in excess of £40,040.

The company would be liable to:

Class 1 secondary contributions on cash earnings paid to Diane (but not dividends), and

Class 1A on the benefit of the company car provided to Diane.

Diane will be treated as an employee and therefore she will be liable to Class 1 primary contributions on her cash earnings.

The maximum amount would be £3,807 plus 1% on any excess over £40,040.

Max 2

Max 2

4 marks c/f



Marks


Company

(iii) The payment dates of tax

Income tax and Class 4 NICs are due under self assessment in two payments on account on 31 January in the tax year and 31 July following the tax year. The payments are based on the previous year’s tax position. A balancing payment is due on 31 January following the end of the tax year. Class 2 NICs are payable monthly by direct debit

Corporation tax is due nine months after the end of the chargeable accounting period. Class 1 NICs are due under the PAYE system on the 19th of each month (i.e. within 14 days of the end of the tax month), or by 22nd of each month if paid electronically.

(iv) The withdrawal of profits by Diane

Any drawings by Diane would not be allowable deductions in the adjustment of profit computation of the business. Diane is assessed on the same amount regardless of the amount withdrawn from the business There is no immediate income tax or NIC payable when income is withdrawn.

Diane is assessed to income tax and NICs on her employment income and income tax on any dividends received from the company. The costs of employing Diane (including secondary NICs) are allowable deductions in the company’s adjustment of profits computation. Dividend payments are not allowable deductions.

4 marks b/f

Max 2

Max 2

8 marks c/f


Final Assessment

Marks


Company

(v) The relief for trading losses

A trading loss in the first year can be set against Diane’s personal income and gains as follows:

• Total income and gains in the tax year of the loss and/or the preceding year in any order (s64 ITA 2007 and s261B TCGA 1992 relief)

• Total income of the three preceding years on a FIFO basis (s72 ITA 2007 relief)

Alternatively the losses can be carried forward and set against future trading income only (s83 ITA 2007 relief).

A trading loss in a company can only be used by that company. The losses can not be carried back and utilised against Diane’s personal income. As the loss is in the first year, it can only be set against other profits of the same year (if any) under s393A ICTA 1988 or carried forward and set against future trading profits in the company under s393(1) ICTA 1988.

Recommendation

Diane had considerable earnings in the preceding years and has made a loss in the opening year of trading. It is recommended that she should therefore initially start as a sole trader and carry the loss back against her previous employment income.

She will obtain loss relief at 40% immediately, rather than carrying the loss forward or creating the loss within a company which can only be carried forward. Carrying the loss forward means that the benefit of the loss is deferred unto the future and it is likely that relief for the loss will be at a lower rate of tax.

Once profitable, she can consider whether she should incorporate the business and take advantage of the lower rates of corporation tax and tax planning opportunities to minimise her overall tax bill by operating as a company.

8 marks b/f

Max 2

1

1 1

________ Max 10 marks ________



Marks

(b) Comparison of trading as a sole trader vs a company

Total tax payable – trading as a sole trader

Basis periods 2008/09 1 April 2009 to 5 April 2009 2009/10 1 April 2009 to 31 March 2010 2010/11 year ended 31 March 2011 Diane’s Income tax computation – 2010/11

£

Trading income (W1) 41,850 Less Personal allowance (6,035)______

Taxable income 35,815 ______

Income tax

£ £

34,800 × 20% 6,960 1,015 ×______ 40% 406

35,815 ______ ______ Income tax 7,366 ______

National insurance contributions – 2010/11

£

Class 2 NICs (£2.30 × 52 weeks) 120 ______ Class 4 NICs (£40,040 − £5,435) × 8% 2,768 (£41,850 − £40,040) × 1% 18 ______ 2,786 ______

See W1 ½

1

½ 1

3 marks c/f


Final Assessment

Marks

Total tax payable – trading as a company Accounting period for corporation tax is the year ended 31 March 2011

Corporation tax computation

£

PCTCT (W2) 21,709 ______ Corporation tax liability (£21,709 × 21%) 4,559 ______

National insurance contributions

£

NIC payable by Diane (£16,220 − £5,435) × 11% 1,186 ______ NIC payable by the company (£1,380 + £991) (W2) 2,371 ______

Diane’s Income tax computation – 2010/11

£

Employment income (£16,220 + £7,739) (W3) 23,959 Dividend income (£5,000 × 100/90) 5,556 ______ Total income 29,515 Less: Personal allowance (6,035)______

Taxable income 23,480 ______ Analysed as: Dividends £5,556, Other income £17,924

Income tax

£ £

17,924 × 20% (other income) 3,585 5,556 ×______ 10% (dividends) 556

23,480 ______ ______ Income tax liability 4,141 Less: Tax credit on dividends (£5,556 × 10%) (556)______

Income tax payable 3,585 ______

3 marks b/f

See W2

½

½

½

½ ½

½

1 ½

7½ marks c/f



Marks

Summary of total tax payable

Sole trader Company £ £

Income tax 7,366 3,585 NICs − Class 1 primary 1,186 − Class 1 secondary and 1A 2,371 − Class 2 120 − Class 4 2,786 Corporation tax ______ 4,559 ______ Total tax payable 10,272 ______ 11,701 ______

7½ marks b/f 2

Workings

(W1) Adjusted trading profit for year ended 31 March 2011

£

Income 50,000 Less: Car expenses (75% × £3,200) (2,400) Other allowable expenses (3,500) Capital allowances on car (£3,000 maximum × 75%) (2,250)______

Adjusted trading profit 41,850 ______

(W2) Trading income for the company

£

Income 50,000 Less: Car expenses (no private use restriction)

(3,200)

Other allowable expenses (3,500) Capital allowances on car (no private use restriction) (3,000) Diane's gross salary (16,220) Employer's Class 1 NICs (£16,220 − £5,435) × 12.8% (1,380) Employer's Class 1A NICs (W3) (991)______

Adjusted trading profit = PCTCT = Profits 21,709 ______

½ ½

½

½ ½

½ ½

½ See W3

13½ marks c/f


Final Assessment

Marks

(W3) Class 1A NICs

Appropriate percentage = 15% + (175 – 135) ÷ 5 = 23%

£

Car benefit (£16,750 × 23%) 3,852 Fuel benefit (£16,900 × 23%) 3,887 _____ 7,739 _____ Class 1A NICs (£7,739 × 12.8%) 991 _____

13½ marks b/f

½ ½

½

________ 15 marks ________



ANSWER 3 Marks

Client Address Firm address Date: 7 December 2009

Dear Millie

Thank you for your recent letter. Dealing with the queries that you have raised in turn:

Incorporation: Capital gains tax deferral reliefs available

There are two CGT deferral reliefs available to you upon the incorporation of your business, namely incorporation relief and gift relief. The reliefs operate as follows;

Incorporation relief

All or part of the gains arising on the incorporation of your business can be deferred if all of the following conditions are met:

• The business is transferred as a going concern • All the assets (other than cash) are transferred to the company • The consideration received is wholly or partly in the form of shares.

If all of the conditions are met, incorporation relief is an automatic relief.

The amount of gain that can be deferred is calculated as follows:

companythefromionconsideratofvalueTotalcompanythefromreceivedsharesofValue

The amount of gain relating to any non-share consideration received becomes chargeable in the year of incorporation.

The gain that can be deferred is deducted from the base cost of the shares you receive from the company. The gain does not become chargeable until you subsequently dispose of the shares in the company.

As the assets of your business are transferred at their market value to the company, the base cost of the shares you receive will be equal to the value of the business assets transferred less the deferred gain.

Incorporation relief defers the indexed gain on incorporation before Entrepreneurs’ relief.

You can elect to disapply incorporation relief, for example if you wish to claim Entrepreneurs’ relief. However, this is only likely to be advantageous:

• if the gain on incorporation would be covered by your capital gains tax annual exemption and capital losses, or

• if you intend to dispose of the shares in the company within one year, so that the shares would not qualify for Entrepreneurs’ relief. If you intend to retain the shares for one year or more, the same amount of Entrepreneurs’ relief will be available on the shares as is available now at the time of incorporation.

½ mark for each valid

point

(Max 6 marks)


Final Assessment

Marks

If you want to make the election to disapply incorporation relief, you must elect by 31 January 2013. Gift relief Where a qualifying asset is gifted, or sold at an undervalue, to the company, a gift relief election can be made to reduce the gain arising on you at the time of the gift to £Nil. Qualifying assets for gift relief include business assets, such as your goodwill and property. No gain arises on your stocks as they are not chargeable assets for capital gains tax purposes. The company is deemed to acquire the assets gifted at their market value at the date of transfer less the deferred gain. The company will therefore pay higher tax later when it disposes of the asset. As with incorporation relief, the deferral is before the consideration of Entrepreneurs’ relief If any consideration is given in respect of a chargeable asset, any excess over allowable costs is taxed immediately and only the balance is deferred. The election for gift relief must be made by 31 January 2016. Effect of retaining the property Incorporation relief requires a transfer of all of your assets (other than cash) to the company. Therefore, if you decide to retain the personal ownership of the property and not transfer it to the company, gift relief is the only option available to you to defer the gains on incorporation The tax consequences of charging the company rent for the use of the property Income tax For income tax purposes, you will receive rental income, which will be charged to income tax at 40%, as you are a higher rate taxpayer. Any expenditure incurred by you on the repair, maintenance or management of the property will be deductible from the taxable rents received.


point ________

Max 6 marks _________

½

½


point

(Max 5 marks)



Marks

If applicable, any interest relating to a loan that you may have taken out to acquire the property can be deducted in arriving at net taxable property business income where the property is let on a commercial basis It should be possible to apportion the loan interest to that part of the property that is rented to the company and claim an appropriate deduction. To do this, however, the rented part of the property needs to be used exclusively for business purposes. The rent charged should not exceed market rates, as any excess is likely to be treated as an additional dividend payment to yourself as the company is a ‘close company’ for tax purposes. Corporation tax

The company will pay rent to you. This payment will be a deductible expense against the taxable trading profits of the company.

Given the level of your expected profits next year, this allowable deduction is likely to give a tax saving of 21%.

National insurance

As the rental income is regarded as investment rather than earned income in your hands, there will be no Class 1 NIC liability either for the company or for yourself.

Capital gains tax

For capital gains tax (CGT) purposes, the property will continue to be treated as a business asset for rollover relief purposes. Charging rent will not affect the availability of this relief.

However, the property will no longer qualify for Entrepreneurs’ relief if rent is charged.

Inheritance tax

For inheritance tax (IHT) purposes, the property will continue to be eligible for business property relief.

However, the rate of relief will be lower as an asset used by your company which you control is only eligible for 50% relief, as opposed to 100% relief available for the transfer as part of an unincorporated business.

Charging rent will not affect the availability of this relief.


point

(Max 5 marks)

Conclusion From a tax viewpoint, and based on current legislation, the charging of rent to the company would give rise to a current (ongoing) tax cost without any obvious long term benefit.

_______ Max 5 marks _______


Final Assessment

Marks

Maximum cash consideration to accept on incorporation Assuming you do not transfer the property to the company, goodwill is the only business asset which gives rise to a chargeable gain on incorporation. As you started the business from scratch, the base cost of the goodwill you have built up in the business is £Nil. Therefore, the gain arising on incorporation (before taper relief) is equal to the sale proceeds you receive for the goodwill. Entrepreneurs’ relief of 4/9 will be available, and therefore only 5/9 of the gain will be chargeable. You also have all of your capital gains tax annual exemption of £9,600 available. The company could therefore pay you £17,280 (£9,600 × 9/5) for part of the goodwill, either in cash by raising a loan or by crediting the amount to your director’s loan account. There would be no immediate capital gains tax to pay and you can withdraw cash on your director’s loan account in the future without any further tax consequences. Extraction of £20,000 additional bonus from the company Bonus v Dividend Appendix A provides calculations detailing the tax position of making a gross lump sum salary or dividend payment to yourself in the year ended 31 December 2010. You will note that whilst the company will obtain a corporation tax deduction for a payment in the form of salary, the additional employee’s and employer’s Class 1 NIC makes this a fairly expensive option. Taking all relevant taxes into account (including the company’s corporation tax position) the dividend route provides the greater after tax cash receipt of £15,000 compared to £13,978 if the payment takes the form of salary. The dividend route is therefore recommended. We trust that the above is of assistance to you but should you have any further queries please do not hesitate to contact me.


point

(Max 3 marks)

_______ Max 3 marks _______

See Appendix

½

½

_______ Max 5 marks _______

Yours sincerely, A N Accountant

1 mark

for format



Marks

Appendix A: Profit extraction by bonus or dividend As a higher rate taxpayer, with a salary of £40,000: • if you are paid a bonus of £20,000 (gross), you will be liable to income

tax at 40% and National Insurance at 1% • if you are paid a cash dividend of £20,000, you will be liable to income

tax at 32.5% (with a tax credit of 10%) on dividend income of £22,222 (£20,000 x 100/90). However, there is no National Insurance liability payable on dividends.

Additional Income tax Additional salary Dividend £ £ £

20,000 ______ × 40% 8,000

22,222 ______ × (32.5% – 10%) 5,000

Additional Class 1 NIC Employee’s (£20,000 x 1%) 200 ______ Nil ______ 8,200 ______ 5,000 ______ Corporation Tax savings Employer’s Class 1 NICs (£20,000 × 12.8%)

2,560

Nil

Gross salary 20,000 ______ Nil ______ Employment costs 22,560 ______ Nil ______ Savings at 21% 4,738 ______ Nil ______ Tax cost Additional income tax and Class 1 NICs 8,200 5,000 Additional employers NIC 2,560 Nil Corporation tax savings (4,738)______ Nil ______ 6,022 ______ 5,000 ______ After tax cash received (Note)

Bonus/dividend received 20,000 20,000 Tax cost (above) (6,022)______ (5,000)______

13,978 ______ 15,000 ______ Note: This after tax cash receipt takes all relevant taxes into account,

including the company’s corporation tax position.

½

½

½

½

½

½

½ 1

1


Final Assessment

ANSWER 4

Marks

(a) (i) Elise – Income tax computation – 2008/09

£

Trading profits 350,000 Interest (£6,600 x 100/80) 8,250 Less: PA (6,035)_______

Taxable income 352,215 _______ Analysed as: Savings £8,250, Other income £343,965 Income tax £ £ 284,800 ×_______ 20% (other income) 56,960

284,800 Extended basic rate band (Note) 59,165 x 40% (other income) 23,666

8,250 ×_______ 40% (savings income) 3,300

352,215 _______ _______

83,926 Excess contribution charge (£250,000 − £235,000) = £15,000 × 40% 6,000 _______ Income tax liability 89,926 _______

½

½ ½

1½

½

Note: Higher rate tax relief is given to Elise by extending her

basic rate band by the gross amount of her pension contribution of £250,000.

£

Basic rate band threshold 34,800 Gross PPP contribution 250,000 _______ Extended BR threshold 284,800 _______

1

4½ marks c/f



Marks

Tax implications of investing in a personal pension plan 4½ marks b/f

• Subject to certain restrictions, any amount can be contributed to a personal pension plan, regardless of age or earnings.

• Tax relief, however, is only available on contributions up to the amount of earnings relevant to the tax year.

• Elise can invest up to £350,000 (i.e. her trading profits) into her personal pension plan in 2008/09 and obtain tax relief largely at 40%. She will therefore obtain relief for all of her £250,000 gross contribution.

• Although the amount of contributions can qualify for tax relief, there is effectively an annual limit of £235,000 eligible for relief.

• Any contributions in excess of this annual allowance are taxed at the rate of 40%. An additional liability will arise, the tax being paid under the self-assessment system which effectively cancels out the tax relief given on the excess over £235,000.

½ for each valid point (Max 2)

Advice on contributions

• Elise could contribute the full £250,000, however due to the annual allowance being £235,000, she will only obtain tax relief on £235,000.

• It is therefore advisable for Elise to limit her contribution in 2008/09 to a maximum of £235,000.

½

½

Pension as a suitable investment

The 40% tax relief on contributions is very tax efficient. Her contributions are then being invested in a tax-free growth environment. When she retires, up to 25% of the value of the fund will be available as a tax-free lump sum, with her annual pension being taxable but probably at the basic rate.

The main problem is that at 53 there are only a few years of anticipated growth before she plans to retire, and there may not be a good return in such a short period.

However, there is no requirement that Elise should start to draw her pension when she retires, in fact she could continue to make tax-relieved contributions.

If Elise has other income it may be advisable to delay taking a pension. Elise can delay drawing her pension up to the age of 75 years.

½ for each valid point (Max 2)

________

Max 9 marks ________


Final Assessment

Marks

(ii) Repayment of mortgage

Mortgage interest rates are generally higher than rates that can be obtained on building society deposit accounts. Therefore, in principle, it would be better to repay a loan liability, save the outgoing interest and forgo the lower incoming interest. This is especially true as there is no tax relief for the interest paid but the interest receivable is taxed at 40%.


________


(iii) Recommendation of pension fund

You should inform Elise Teen that if you arrange the pension fund for her: • your firm will receive a commission; and • the amount involved. You need to ensure that the receipt of a commission does not taint your advice to Elise and maintain the normal standards of care in the best interests of the client.

1 1

________ 2 marks ________



Marks

(b) (i) Capital gain on disposal of shares

Simon is treated as disposing of the shares at market value at the date of the gift. He is disposing of 30,000 shares which is a 15% holding

(200,00030,000 × 100). Each share therefore has a market value of

£12.

1

2008/09 £

MV at disposal (30,000 × £12) 360,000 Cost (30,000 x £1 par value) (30,000)_______

Gain before reliefs 330,000 Less: Gift relief (W) (285,000)_______

Gain after gift relief 45,000 Entrepreneurs’ relief (£45,000 x 4/9) (20,000)_______

Chargeable gain 25,000 Less: Annual exemption (9,600)_______

Taxable gain 15,400 _______ Simon will qualify for Entrepreneurs’ relief as the shares have been owned for at least 12 months, Simon works for the company and owns at least 5% of the shares.

½ ½

See W 1

½

Gift relief The amount of gain deferred by gift relief is £285,000 (W) provided Simon and the son make the necessary joint election. Base cost for Simon’s son The deferred gain is then held over against the base cost of the gifted shares for Simon’s son.

£

MV of shares acquired 360,000 Less: Gain held over (285,000)_______

Base cost of shares 75,000 _______ The base cost of £75,000 will be used when the son subsequently disposes of the shares. The held over gain will crystallise in the son’s hands when he disposes of the shares.

½

½ 1

½ 6 marks

c/f


Final Assessment

Marks

6 marks b/f

Working: Amount of gift relief on sale at undervaluation

£

Actual sale proceeds 75,000 Less Original cost of shares (issued at par) (30,000)______

Excess 45,000 ______

The £45,000 gain crystallises in 2008/09 but is eligible for Entrepreneurs’ relief. Gift relief is £285,000, being the rest of the gain (£330,000 − £45,000).

1 1

________




ANSWER 5 Marks

(a) (i) Domicile for IHT purposes

Li will be deemed domiciled in the UK for the purposes of IHT if she is resident in the UK for 17 out of the 20 years of assessment, ending with the year of assessment in which a chargeable transfer is made.

Li has been resident in the UK since 1993/94 and will therefore be subject to UK IHT if she dies or makes a chargeable transfer during 2009/10 or a subsequent year.

(ii) Domicile under general law

Li can only have one place of domicile at any given time, denoting the country considered her permanent home.

She can become domiciled in the UK by acquiring a domicile of choice. This will require the severing of all ties with Kinga, and settling in the UK with the intention of staying there indefinitely.

The intention will have to be demonstrated by positive actions, such as making a will under UK law and obtaining British citizenship.

1 1

½

1

½

_________Max 4 marks _________

(b) Potential increase in UK IHT if domiciled in UK

If Li is not domiciled in the UK she will only be charged to UK IHT in respect of her UK assets.

The following rules apply in determining the location of assets:

(i) Land and buildings are situated where they are physically located, so the property situated in the UK is chargeable whilst the property in Kinga is not.

(ii) Registered shares and securities are situated where they are registered, or where they would normally be dealt with in the ordinary course of business. Therefore the shares in Kestrel plc are chargeable as UK assets.

(iii) Chattels are situated where they are physically located at the relevant time, so the antiques are chargeable.

(iv) Bank accounts are situated at the branch that maintains the account. Therefore the deposit at the London branch is chargeable, whilst the deposit at the Kingan branch is not.

(v) A debt is situated where the debtor resides, so the loan to her brother is not chargeable.

½

½ each point

Max 2

2½ marks c/f


Final Assessment

Marks Li will be charged to UK IHT on her worldwide assets if she becomes

domiciled in the UK (whether this is under general law or is deemed for IHT purposes).

Not domiciled in UK

Domiciled in UK

£ £

Main residence (Note) 263,500 263,500 House in Kinga − 60,000 Shares in Kestrel plc (40,000 at 310p) 124,000 124,000 ((308p + ¼(316p – 308p) = 310p) Antiques 35,000 35,000 Bank accounts 45,000 65,000 Debtor − _______ 15,000 _______ Chargeable estate 467,500 _______ 562,500 _______ Note: An endowment mortgage is repaid upon death by the related

life assurance contract, and is not therefore deductible as a debt.

All of the nil rate band is available as there are no lifetime gifts.

£ £ IHT on estate (£467,500/£562,500 − £312,000) × 40% 62,200 100,200 Estate rate 13.305% = (£62,200/£467,500) × 100

Estate rate 17.813% = (£100,200/£562,500) × 100

Double taxation relief = lower of: (i) Overseas tax = £21,000 (ii) UK tax = £16,923 (W) ______ (16,923)______

IHT payable 62,200 ______ 83,277 ______

Increase in liability if UK domiciled

The potential increase in Li’s liability to UK IHT if she were to become domiciled in the UK is £21,077 (£83,277 − £62,200).

Working: UK tax on overseas assets £

Bank account in Kinga 20,000 Debtor in Kinga 15,000 House in Kinga 60,000 ______ 95,000 ______ IHT @ ER (17.813%) 16,923 ______

2½ marks b/f

Max 4

1

2

½

_______ 10 marks _______



Marks

(c) Li Yu – Income tax computation − 2008/09 Li is not UK domiciled and has been resident in the UK for 7 of the 9

previous tax years. However, as her unremitted overseas income is less than £2,000:

she will automatically be taxed on the remittance basis she will keep her entitlement to the personal allowance she will not suffer the £30,000 remittance basis charge

£

Employment income 38,030 Bank interest (£1,680 × 80

100 ) 2,100

Overseas bank interest remitted - Dividend income (15p × 40,000 × 90

100 ) 6,667 ______ Total income 46,797 Personal allowance (6,035)______

Taxable income 40,762 ______

Analysis of income:

Dividend income

Interest income

Other income

£6,667 ______ £2,100 ______ (£40,762 − £6,667 − £2,100) = £31,995 ______

Income tax

£ £ 31,995 × 20% (other income) 6,399

2,100 ______ × 20% (savings) 420

34,095 705 ______ × 10% (dividends) 70

34,800 5,962 ______ × 32.5% (dividends) 1,938

40,762 ______ ______ Income tax liability 8,827 Less: Tax suffered at source Dividends (10% × £6,667) (667) PAYE (6,400) Interest (20% × £2,100) (420)______

Income tax payable 1,340 ______

2

½

½

½

1½

1 ________

6 marks ________


p6 - final

Documents