Question: Daisy, aged 32, was recently relocated by her employer to manage one of the company’s new ventures in Manchester, England with an increased salary of £64,385 per annum.

23 Oct 2022,5:26 AM

 

1. Daisy, aged 32, was recently relocated by her employer to manage one of the company’s new ventures in Manchester, England with an increased salary of £64,385 per annum. In order to make the move as easy as possible for this valued employee, the company bought a flat where Daisy has been living, rent-free, since 1 April 2019.  The flat cost the company £352,000 and it has an annual rateable value of £12,495.  On 30^th April 2019, the company paid Daisy £15,149 to meet her removal expenses.

 

Daisy enjoyed the use of a company car until 31st July 2019 when the company ended its company car scheme.  Although the car was bought for the second-hand price of £15,000 when Daisy first received it on 1 September 2018, its list price had been £16,995 when it was new.  The CO₂ emissions of the car are rated at 133g/kg.  Daisy was allowed to use the car on weekends and holidays and her employers met all the fuel costs (petrol) for the vehicle.  Since she requires a car to meet the duties of her employment, her employers loaned her £15,000 on 1 April 2019 to allow to source a new, reliable vehicle.  Daisy has repaid £700 towards this loan on the last day of each calendar month.  The interest charge on the loan is 1%.  Daisy has recorded her business mileage and received £1,500 in expenses from her employers for the 3000 miles she covered between 1 August 2019 and 5 April 2020.  Daisy’s P60 for the year ending 5 April 2020 shows gross pay of £62,785 with PAYE of £16,843.45 deducted during the year.

 

On 15th October 2019 Daisy sold an antique sword which fetched £4,200.  She had owned the sword since 18^th April 1992 when she purchased it from an antique dealer for £6,380.   Daisy made capital gains of £17,932 when she disposed of other assets in 2019-20.

 

Required:

 

• Calculate Daisy’s income tax and capital gains tax liability for the year 2019/20 clearly showing the amount of tax she is to pay or have repaid by HMRC.

 

Assume an official interest rate of 2%.

 

 

• Outline the features of two of the tax efficient schemes listed below:
• Enterprise investment scheme
• Venture Capital Trusts
• New individual savings accounts

 

2. Phoebe (d.o.b. 06 July 1965) receives rental income from two properties that she owns in Liverpool, England, where she lives. The details of income and expenses for each property for the year 2019-20 are given below:

 

Property 1

 

Rent received by Phoebe for this property amounted to £12,600 in 2019/20

 

Phoebe had the following expenses renting to this flat during the fiscal year 2019/20:

 

Landlord insurance                                                                 £522

General repairs                                                                      £192

Estate agent commission   (for the collection of rents)          £1,814

Council tax                                                                             £840

Installation of double glazing                                           £1,825

Mortgage interest                                                               £2,480

 

Property 2

 

A shop that has been rented since 6^th July 2019 for a rent of £1200 per month.  Phoebe also received a lease premium of £18,000 in respect of the 10 year lease she granted to her tenant who operates a sandwich shop from the premises.

 

In addition to this rental income Phoebe received dividends of £10,750 from UK companies and building society interest of £1,800 in 2019/20.  She also received wages of £11,500 for part-time work that she undertook throughout the year.

 

Required:

 

• Calculate Phoebe’s property income for the year 2019/20 and her total income tax payable for the year.

(15)

• For the purposes of income tax:

(i)       Which types of revenue are treated as property income in the income tax computation?

(ii)      Giving examples, explain the expenses that are allowed to be deducted from Property income.

(iii)      Explain how losses in Property income are treated in the computation of income tax.

 

 

3. Mr Jones sadly died on 20 October 2019 at the age of 82. Mr Jones has one son (Jack) and one daughter (Polly) and was a widower, his wife having died some time ago on 15 January 2007.  Mr Jones had been a client at your firm for a number of years and had made the following gifts during his lifetime:

 

 

26 July 2010	A gift of £210,000 made to a discretionary trust and agreed that he would pay any tax arising at the time of the gift.
25 October 2012	Mr Jones gave his son Jack a vintage car worth £55,000.
18 August 2013	Mr Jones decided to give his caravan to his daughter Polly as he no longer made use of it.  The caravan was worth £24,500 at the time of the gift.
20 December 2014	He gifted £500 to each of his 3 grandchildren.  Total gift of £1,500.
28 January 2015	Mr Jones gave his son Jack a cash gift of £125,000 on the occasion of his wedding.
31 July 2015	A gift of £250,000 made to a discretionary trust.  However, Mr Jones stipulated that the trustees must pay any tax arising at the time of the gift.
15 January 2019	A cash gift to a close friend of £3,000 as a wedding present
25 July 2019	Mr Jones gave his daughter Polly £100,000 as a deposit for her new house

 

 

At the time of his death, Mr Jones’s estate comprised:

	£
Main residence	640,500
A small coffee shop business that Mr Jones has been running with his son in his retirement	175,000
Collection of antiques	65,000
Furnishings and other assets	12,000
Quoted stocks and shares	36,000
Cash balances	235,000

 

 

In his will Mr Jones has stated that the coffee shop should go to his son who intends to continue running the business.  The antiques are to be donated to a local museum and he has decided to give £25,000 cash to a major political party.  The remaining assets are to be divided equally between his son Jack and daughter Polly.

 

When Mr Jones wife died on 15 January 2007 she left the majority of her estate to her husband Mr Jones.  However, she did use £200,000 of her nil-rate band through gifts left to their children and grandchildren.  She did not use any of her Residence nil-rate band.

 

 

Required:

 

 

• Calculate the IHT due during Mr Jones lifetime and as a result of his death. Your answer should show full workings and state the date that any IHT is due.

 

 

• Mr Jones’s son Jack has approached you with some concern regarding the amount of inheritance tax that was due on the death of his father. Jack has one son David, who is 22, and although Jack is still young and in good health, he has asked for your advice on the ways he can reduce the amount of inheritance tax that his child will need to pay.  He informs you that he owns one luxury property, his main residence, and has a large amount of income through the coffee shop and his employment as a professional accountant.

 

In order to reduce this he is considering gifting his main residence to his son David now to reduce his liability on death.  Although it would be his intention to continue living in his property until his death, he has been informed that after 7 years the property would not form part of his estate on death for inheritance tax purposes.

 

Required:

 

Advise Jack of the full inheritance tax implications on his suggestion of gifting his main residence to his son David now and continuing to live there and, given Jack’s situation, suggest how this could become a viable option.

 

4. Boris is the owner of Boris the Animal Boarding Kennels that he has been operating through a leased premise for a number of years. Boris prepares his accounts to 30 June each year.  When Boris leased the premises, he paid a premium of £96,000 for a 22-year lease.  On 1 October 2018, Griffin was admitted as a partner to the business.  The profit or loss account for Boris the Animal Boarding Kennels for the year to 30 June 2019 is as follows:

£

Gross Profit                                   148,235

Bank interest received                      2,460

 

Less other expenses:

 

Wages and salaries (Note 1)          22,945

Rates                                                 3,225

Depreciation                                    03,230

Bad & doubtful debts (Note 2)             680

Telephone expenses (Note 3)          0,900

Travelling costs (note 4)               005,380

Sundry expenses (note 5)              14,350

Professional fees (note 6)               04,300

Motor expenses (note 7)                   7,440

Insurance (note 8)                                                                             8,270 (70,720)

Net Profit                                       079,975

 

Notes:

1. During the year, Boris took drawings of £13,665 for home improvements, which is included in the figure for wages and salaries. In addition, Boris also paid £350 to his son for doing well in his end of year school exams.  This is also included in the wages and salaried figure.  The remainder of the figure is paid to part time staff who help in the business.

 

2. During the year £220 was written off as bad debts and the general provision for bad debts was increased by £460.

 

3. It has been agreed that 45% of the telephone costs relate to private use.

 

4. Included in the travelling costs are £1,850 which was incurred by Griffin for travelling to and from work.

 

5. The sundry expenses are made up of:

£

Subscription to a professional trade association                              3,225

Business entertaining   6,675

Entertaining friends and family                                       3,500

Staff Christmas night out                                              ,200

Other (allowable) expenses                                   ,750

 

6. Professional fees include £2,385 relating to fees for capital expenditure. The remainder relates to accounting fees.

 

7. Motor expenses include the following:

(Boris £)                                            (Griffin £)

Servicing & Repairs                                                            825 365

Fuel & Oil                                                                 2,850 1,450

Road tax                                                                      70 240

Speeding fines                                                              1,300 340

 

8. The insurance figure includes private health care insurance for both Boris (£963) and Griffin (£467). The remainder relates to insurance for business purposes.

 

9. During the year Boris allowed his sister to use the kennels for her three dogs for free while she was away. The cost element for the three dogs would usually have been £600, but Boris would have added a 20% mark-up on this due to the time of the year that the dogs were admitted.  Although Boris did not charge his sister, he has put £200 into the business for this.

 

10. It has been agreed by HMRC that 20% of all Boris’s cars are for private use. Griffin’s vehicle is only used for business purposes.

 

11. Capital allowances for the year end 30 June 2019 are £17,490

 

 

Required:

 

• Calculate the taxable trading profits of Boris the Animal Boarding Kennels for the ended 30 June 2019.

(12)

 

• Assuming that the profits are shared on a ratio of 3:2 in favour of Boris, calculate the share of profits for Boris and Griffin for the year ended 30 June 2019.

(3)

 

• A close friend of Boris, Mr Brown, has approached you seeking advice regarding loss relief for sole traders.

 

Mr Brown’s business has suffered in recent years due to increased competition in his area and an increase in the number of customers preferring online shopping.  As a result of this, Mr Brown has made significant losses over the past four accounting periods and is on the verge of deciding to cease trading.

 

Mr Brown is unaware of the options available to deal with the losses that he has incurred and has approached you to seek advice on how they would be applied if he decides to stay in business or if he decides to cease trading.

 

           Required:

 

Based on Mr Brown’s inquiry and using numerical examples to support your discussion, explain to Mr Brown the options that are available to him to relieve his trading losses.

 

(10)

(25)

 

 

Income tax rates

 

Non-savings income

 

RUK Taxpayer

Basic rate – taxable income up to £37,500  20%

Higher rate – between £37,501 and £150,000                                                        40%

Additional rate – above £150,000                 45%

 

Savings income

 

Starting rate band (first £5000 of taxable income)                                                            0%

Basic rate band                                              20%

Higher rate band                                            40%

Additional rate                                                45%

 

Dividends

 

First £2000                                                       0%

Ordinary rate                                                 7.5%

Upper rate                                                   32.5%

Additional rate                                             38.1%

 

Income tax allowances

 

Personal Allowance (PA)*                       £12,500

Married Couples Allowance (one spouse born before 6 April 1935)                                   £8,915

Minimum Married Couples                        £2,450

 

 

Income limit for age-related allowances (MCA)                                                       £29,600

 

*Income limit for PA                               £100,000

 

 

 

Capital allowances

 

Writing Down Allowance
Main pool	18%
Special Rate Pool	6%
Annual Investment Allowance from 1 January 2016 AIA Rate	£200,000 (1) 100%
First year allowance (FYA)
Low emission cars (<50g/km)	100% (2)
Zero-emission goods vehicles	100%
Energy saving plant & equipment	100%

⁽¹⁾ The AIA Limit has been temporarily raised to £1m between 1 January 2019 and 31 December 2020

 

⁽²⁾ Expenditure on charging points for electric vehicles incurred between 23 November 2016 and 5 April 2023 is also eligible for 100% FY

 

Capital gains tax

 

CGT tax rate

Gains in the basic rate band                                                                                        10%⁽¹⁾

Gains above the basic rate band                                                                                 20%⁽¹⁾

Entrepreneurs’ relief rate                                                                                             10%

Entrepreneurs’ relief lifetime limit                                                                  £10,000,000

Annual exemption                                                                                                  £12,000

 

• Taxable gains on the disposal of residential property are taxed at 18% and 28%

 

 

 

Inheritance tax

 

0% band   £0 - £325,000                                                                                     0%

Rate on chargeable lifetime transfers                                                                20%

Rate on death                                                                                                    40%

(unless at least 10% of net estate given to charity then                                  (36%)

 

Main residence nil-rate band for 2019-20 is £150,000

 

Nil Rate Band

Tax year
2009/10 to 2019/20	£325,000
2008/09	£312,000
2007/08	£300,000
2006/07	£285,000

 

 

Taper relief

Period between transfer and death	%age tax reduction
0-3 years	0%
3-4 years	20%
4-5 years	40%
5-6 years	60%
6-7 years	80%

 

 

 

Corporation Tax

 

Financial year	FY2019	FY2018	FY2017	FY2016
Main rate of corporation tax	19%	19%	19%	20%
Patent box (effective rate)	10%	10%	10%	10%
R&D SMEs Payable credit	14.5%	14.5%	14.5%	14.5%
R&D expenditure credit1	12%	12%	11%	11%

 

1           R&D expenditure credit be 12% from 1 January 2018

 

 

Approved Mileage Allowances

 

first 10,000 miles in tax year             each mile over 10,000 miles

 

Cars and vans                                           45p per mile                           25p per mile

Motor cycles                                              24p per mile                           24p per mile

Bicycles                                                     20p per mile                           20p per mile