问答题
4.King, a wealthy client of your firm with a significant property portfolio, requires advice on the sale of some unquoted shares and on the capital gains tax and inheritance tax implications of transferring assets to a trust and to his two children.
King:
– Is resident and domiciled in the UK.
– Is an additional rate taxpayer.
– Has used his capital gains tax annual exempt amount for the tax year 2015/16.
– Has made one previous lifetime gift of ￡25,000 to his daughter, Florentyna, on 1 June 2014.
– It should be assumed that King will die on 1 May 2017.
King’s family:
– King’s daughter, Florentyna, is 34 years old and has two young children.
– Florentyna will have income from part-time employment of ￡10,000 in the tax year 2015/16. This is her only source of taxable income.
– King’s son, Axel, is 40 years old and has an 18-year-old daughter, who is a university student.
King’s plans:
– On 1 September 2015, King will sell some of his shares in Wye Ltd.
– On 1 October 2015, King will put a cottage he owns in Newtown and the after-tax cash proceeds from the sale of the shares in Wye Ltd into an interest in possession trust for Florentyna and her children.
– On 1 March 2016, King will gift his share of a flat in Unicity to Axel.
Sale of shares in Wye Ltd:
– Wye Ltd is an unquoted investment company.
– King acquired 5,000 shares in Wye Ltd on 1 June 2002 at a cost of ￡5 each.
– These shares will be worth ￡45 each on 1 September 2015.
– King will sell sufficient shares to generate after-tax proceeds of ￡30,000.
Cottage in Newtown:
– This property is wholly owned by King.
– It is expected to have a value of ￡315,000 on 1 October 2015.
Creation of the interest in possession trust:
– King will pay any inheritance tax arising as a result of the gifts made to the trust.
– Florentyna will be the life tenant and her two young children will be the remaindermen of the trust.
– Florentyna will live in the cottage in Newtown and the trustees will invest the cash in quoted shares which will generate annual dividends of ￡3,000.
Flat in Unicity:
– The flat in Unicity is jointly owned by King and his wife, Joy, in the proportions: King 75% and Joy 25%.
– King and Joy have recently signed a contract with Axel’s daughter to rent the flat to her for three years starting on 1 September 2015.
– The rental agreement is on a commercial basis.
– King has obtained the following expected valuations for the flat as at 1 March 2016
问答题
(a) Calculate the minimum number of shares in Wye Ltd which King must sell to generate after-tax proceeds of ￡30,000. (3 marks)
【正确答案】Minimum number of shares in Wye Ltd to be sold to generate ￡30,000 of after-tax proceeds
Each share sold will generate sale proceeds of ￡45 and result in a gain of ￡40 (￡45 – ￡5).
King’s annual exempt amount for the tax year 2015/16 has already been used.
King is an additional rate taxpayer so will pay capital gains tax at 28% on his taxable gains.
The capital gains tax in respect of a single share is ￡11·20 (￡40 x 28%).
The after-tax proceeds from the sale of a single share is therefore ￡33·80 (￡45·00 – ￡11·20).
Therefore the number of shares to be sold to generate ￡30,000 in after-tax proceeds is 888 (￡30,000/￡33·80).
Tutorial note: Alternative calculation, if X is the number of shares to be sold:
45X – (40X x 28%) = 30,000
45X – 11·2X = 30,000
33·8X = 30,000
X = 888
【答案解析】
问答题
(b) (i) Advise King, with the aid of supporting calculations, of the capital gains tax and immediate inheritance tax implications of the proposed gift of assets into the interest in possession trust on 1 October 2015.(6 marks)
【正确答案】Gifts into the interest in possession trust
Capital gains tax
￡30,000 cash
This is an exempt asset for capital gains tax purposes.
Cottage in Newtown
A chargeable gain will arise on the gift of the property by reference to its market value at the date of the gift.
Gift relief will be available on the transfer as it is a chargeable lifetime transfer for inheritance tax purposes. King does not need the trustees’ consent for this; he alone can elect for the full gain arising to be deferred such that no capital gains tax will be payable now. The election must be submitted by 5 April 2020 (within four years after the end of the tax year in which the transfer is made).
Inheritance tax
The transfer into an interest in possession trust is a chargeable lifetime transfer and accordingly an immediate lifetime charge may arise.
The value of the transfer is ￡345,000 (￡315,000 + ￡30,000). This will be reduced by the annual exemption for 2015/16 of ￡3,000. The annual exemption for the tax year 2014/15 is not available to bring forward as it will have been used against the potentially exempt transfer made to Florentyna in that year. The net chargeable value is therefore ￡342,000.
No chargeable lifetime transfers have been made in the seven years prior to 1 October 2015, so King’s full nil rate band is available to use. Therefore, as King is to pay the inheritance tax, the amount due will be ￡4,250 ((￡342,000 –
￡325,000) x 25%).
Tutorial note: Potentially exempt transfers have no effect on the nil rate band while the donor is still alive.
【答案解析】
问答题
(ii) Explain how Florentyna will be taxed on the income arising in the trust and calculate the additional income tax, if any, payable by her in respect of this income for the tax year 2015/16. (4 marks)
【正确答案】Income tax payable on the trust income by Florentyna
As the trust is an interest in possession trust, all of the income must be paid out to the life tenant of the trust, Florentyna.
The only income will comprise dividends from the quoted shares so it will be received by Florentyna net of a notional 10% tax credit and taxed as dividend income in her hands.
Florentyna’s 2015/16 personal allowance will have been used against her employment income. Therefore, as Florentyna is a basic rate taxpayer, she will be liable to income tax at the rate of 10% on the grossed up dividend income. However,
there will be no additional tax to pay as the liability will be covered by the accompanying tax credit from the trust.
【答案解析】
问答题
(c) Explain, with the aid of supporting calculations, why the disposal of the flat in Unicity may be caught by the associated operations rules and the increase in the inheritance tax liability which would arise on King’s death on 1 May 2017 if these rules were to apply. (7 marks)
【正确答案】Gift of the flat in Unicity
For the purposes of inheritance tax associated operations may be defined as:
(a) two or more operations which affect the same property; or
(b) any two or more operations, where one is effected with reference to the other(s)
Where the rules apply, the series of transactions will be regarded as a single gift at the time of the final transaction in the series such that the total value transferred will be subject to tax.
The flat will be gifted to Axel, subject to a pre-existing tenancy agreement between King and Joy, as original owners of the property, and Axel’s daughter as tenant. Because of this agreement, the property will not have a right to vacant possession,such that its value will be reduced. The creation of the tenancy agreement and subsequent gift of the property may therefore be considered to constitute ‘associated operations’ for inheritance tax purposes by HM Revenue and Customs (HMRC). If this is the case, HMRC may treat the letting agreement with Axel’s daughter and the transfer of the property to Axel as a single transaction, such that the transfer of the flat will be valued on a vacant possession basis for inheritance tax purposes.
As a result, when the potentially exempt transfer becomes chargeable, the value of the gross chargeable transfer will be increased by ￡67,143 to ￡267,143 (working). If King dies on 1 May 2017, his nil rate band will be fully used against his two previous lifetime gifts (to Florentyna and the trust), such that there will be an additional inheritance liability due to the application of the ‘associated operations’ rules of ￡26,857 (￡67,143 x 40%)
Working:
King’s share of the property is valued on a related property basis.
Without vacant possession
【答案解析】