【正确答案】Text references. Income tax administration is covered in Chapter 15. Inheritance tax is covered in Chapters 16 to
18. Overseas income tax is dealt with in Chapter 10 and overseas aspects of capital gains tax in Chapter 14, which
also covers principal private residence relief. Badges of trade are covered in Chapter 6. Ethics are covered in
Chapter 30.
Top tips. Set out your memorandum neatly with appropriate headings.
Easy marks. The calculation of the income tax on the overseas property should have been easy marks, in particular
because you were told to assume that the interest and penalties would amount to 100% of the income tax liability.
Examiner's comments. Part (a) required a memorandum concerning a number of personal tax issues relating to
Grifter, a man who was considering two possible strategies to reduce his mortgage. The question included a letter
from Grifter setting out various aspects of his financial position and the two options to be considered. There was
also an email from the candidate's manager, which set out the steps to be carried out in order to evaluate the two
options. It was very pleasing to note that the vast majority of candidates followed the instructions carefully such
that many were able to score high marks for this part of the question.
The memorandum was in two parts. Part (i) required calculations of the income tax due in respect of undeclared
income relating to an overseas investment property and calculations of the inheritance due in respect of the
property following the death of the person who gave it to Grifter. It also required candidates to comment on the
client's behaviour in relation to a tax refund that he had received.
This first part of the memorandum was done well by the majority of candidates with many scoring full marks in
respect of the income tax and some scoring full marks for both the income tax and the inheritance tax. The most
common error was the failure to gross up the income in respect of the tax suffered overseas. Most candidates
identified the need for Grifter to determine whether or not the tax refund had been received in error and to refund it
to the tax authorities if he was not entitled to it.
The second part of the memorandum concerned the two possible ways of reducing the mortgage; the sale by Grifter
of either a number of motor cars or his house. The sale of the motor cars was not handled as well as expected due
mainly to a lack of thought and self-belief. Whilst many candidates pointed out, correctly, that motor cars were
exempt from capital gains tax, a large number then went on to calculate capital gains tax on the sale of Grifter's cars
as if the rules somehow could not apply to this particular situation. There was also a failure by a significant minority
of candidates to include the 'detailed explanation' of the tax treatment of the sale of the cars as requested by the
manager, which required consideration of the badges of trade. This was not technically difficult and most
candidates would probably have made a good job of it if they had taken sufficient care to identify the need to do so.
In questions of this type candidates need to start by identifying all of the tasks they have been asked to carry out by
both the client and the manager. They should then ensure that all of these tasks are addressed in the time available.
Sufficient time will be available provided candidates do not allow themselves to be sidetracked into discussing
irrelevant issues.
The sale of the house was handled quite well by most candidates with the majority recognising the relief available
because the property was Grifter's principal private residence. The only common mistake here was to allow three
years of the period of absence as deemed residence. This was not available as the period of absence was not
preceded by a period of actual occupation.
Despite many candidates scoring well on this question, I would make two general criticisms of their performance,
1 Many candidates could save themselves time by not providing explanations unless they are asked for. In his
email the manager requested candidates to 'keep any narrative to a minimum unless I have specifically
asked for it'. Unfortunately, this guidance was ignored by a large number of candidates who provided very
time consuming step-by-step explanations of the calculations they were about to perform. A requirement to
calculate means just that: calculate.
2 Candidates must recognise the commercial aspect of the tasks they are performing. In this question there
was a need to think in terms of after tax proceeds, i.e. the cash proceeds less any tax liabilities as opposed
to, in the case of Grifter's house, the taxable gain less the tax liability (which was a meaningless figure). A
failure to do this led to some candidates reaching the conclusion that the Porsche should not be sold
because 'it would result in a loss' whereas, of course, the Porsche should be sold because its sale would
result in ￡62,560 (￡68,000 × 92%) in the hands of Griffer.
Part (b) required a briefing note on the remittance basis. This is an area of the tax system that has recently been the
subject of significant changes and candidates were clearly well prepared for it to be examined. Although there was
often a lack of precision over the terminology used, candidates' knowledge of this complicated area was often very
good with many scoring very high marks for this part of the question. Again, however, many candidates' exam
technique let them down in that they were not satisfied in explaining the rules once but for some reason felt the
need to repeat them, thus wasting time. In addition, many candidates wasted further time by explaining the
meaning of residence, ordinary residence and domicile which was not required.


(a)
To : The files
From: Tax assistant
Date: 7 December 2012
Subject Grifter
(i) Property in Shadowsia
Income tax and inheritance tax liabilities
The income tax due on the rental income is calculated below.
￡
Annual rent remitted ￡484 × 12 5,808
Add: Shadowsian tax deducted ￡5,808 × 12/88 792
Taxable rental income 6,600
UK income tax @ 40% 2,640
Less: DTR - Shadowsia tax (clearly lower than UK) (792)
Tax due for one year 1,848
Tax 2007/08 to 2011/12 ￡1,848 × 5 9,240
Add: estimated interest and penalties 9,240
Total amount due 18,480
The death of Grifter's uncle within seven years of giving him the property in Shadowsia results in an
inheritance tax liability as set out below.
￡
Value of property 94,000
Less: fall in value ￡(94,000 - 48,000) (46,000)
Potentially exempt transfer now chargeable (no AEs available) 48,000
IHT @ 40% (no nil rate band available) 19,200
Less: taper relief (5 to 6 years @ 60%) (11,520)
Inheritance tax payable on PET 7,680
Grifter can choose to pay the inheritance tax in ten equal annual instalments starting on 31 May 2013
if he wishes because the PET consisted of land and buildings which Grifter retained until his uncle's
death. However, interest will be charged from that date on the whole amount outstanding. Any
outstanding inheritance tax liability will be payable immediately if Grifter sells the property. In (ii)
below, when calculating the amount by which Grifter could reduce his mortgage, I have accounted for
the whole of the inheritance tax liability.
The tax refund
If Grifter is certain that the tax refund has been made to him in error, he should repay it immediately.
He may be committing a civil and/or a criminal offence if he fails to do so.
If Grifter does not return the refund, we would have to consider ceasing to act as his advisers. In
these circumstances we are required to notify the tax authorities that we no longer act for him,
although we do not have to provide any reason for our action. We should also submit a money
laundering report to the Serious Organised Crime Agency as the retention of the refund may amount
to a crime.
(ii) Reduction in mortgage
Sell the cars
￡
Sale proceeds ￡(84,000 + 127,000 + 68,000) 279,000
Less: auctioneer's fees (22,320)
Net proceeds of sale 256,680
Tax on profit on sale of cars (see below) 0
Less: income tax payable as in (i) above (18,480)
inheritance tax payable as in (i) above (7,680)
repayment of income tax refund (14,600)
Available to reduce mortgage 215,920
The tax treatment of the proposed sale of the cars
The tax implications of the proposed sale of the cars depend on whether Grifter is regarded as trading
or not. If he is regarded as trading, the profit on each of the cars would be subject to income tax. If
he is not regarded as trading, the profit on the sale of each car would be a capital profit. These capital
profits would not be subject to tax because cars are exempt from capital gains tax.
It is my view that the profits from the sale of the cars would be treated as capital profits. This
conclusion is based on reference to the 'badges of trade' which are used to determine whether or not
a trade is being carried on. The particular factors which have led me to this conclusion are:
· Cars are not a category of asset that is purchased solely with the intention of realising a profit.
They can also be purchased to be used and enjoyed.
· The cars were purchased to be used (and have been so used) rather than to be resold at a
profit.
· The proposed sale of the cars is not one of a series of disposals.
· The cars have been owned for considerable periods of time.
Sell the house
￡
Net proceeds of sale ￡(1,200,000 - 6,400) 1,193,600
Less: capital gains tax payable (W1) (79,449)
other amounts as in (i) above ￡(18,480 + 7,680 + 14,600) (40,760)
payment to reduce mortgage as above (215,920)
Available to purchase house 857,471
Less: professional fees in respect of purchase (4,000)
853,471
Less: SDLT @ 4% × 853,471 × 4/104 (32,826)
Maximum capital cost of house 820,645
Workings
1 Capital gains tax on sale of house
￡
Net proceeds of sale ￡(1,200,000 - 6,400) 1,193,600
Less: cost (500,000)
Gain before PPR relief 693,600
Less: PPR relief (W2)