Your manager has received schedules of information from Ray and Shanira in connection with their personal tax affairs. These schedules and an extract from an email from your manager are set out below.
Schedule of information from Ray – dated 8 June 2016
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I was born in 1958. I am resident and domiciled in the UK. Shanira and I are getting married on 17 September 2016. Ray – unincorporated business I was employed part-time until 31 March 2016. The annual salary in respect of my part-time job was £15,000. I receive bank interest (net) of £3,000 and cash dividends of £3,420 each year. The whole of my income tax liability has always been settled via tax deducted at source. I began trading on 1 June 2016. I purchased a computer on 3 June 2016, which is used both in the business and personally. I am not registered for the purposes of value added tax (VAT). You have advised me that my taxable trading profits have been calculated using the accruals basis, rather than the cash basis, and the budgeted taxable trading profits of the business are: Eight months ending 31 January 2017 £35,000 Year ending 31 January 2018 £66,000 You have already informed me that my taxable trading profit based on these budgeted profits, and my income tax liability in respect of all of my income will be: Tax year Taxable trading profit Income tax liability 2016/17 £46,000 £10,762 2017/18 £66,000 £18,762 What tax payments will I be required to make between 1 July 2016 and 30 September 2018? |
Schedule of information from Shanira – dated 8 June 2016
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I was born in 1960. I am resident and domiciled in the UK. Ray and I are getting married on 17 September 2016. Gifts from Shanira to Ray On 1 February 2016, I gave Ray a house situated in the country of Heliosa. We have only ever used this house for our holidays. The house was valued at £360,000 at the time of this gift. I purchased the house on 1 September 1999 for £280,000. I will make the following further gifts to Ray between now and the end of the calendar year 2016: – Painting I purchased this painting at auction for £15,000 on 1 March 2012. It is a painting which we both love and would never sell. However, I obviously paid too much for it, as its current market value is only £7,000. – Shares in Solaris plc I will give Ray the whole of my holding of 7,400 ordinary shares in Solaris plc. The current market value is £9·20 per share. I acquired these shares on 1 October 2014 when Solaris plc purchased the whole of the ordinary share capital of Beem plc. This takeover was a genuine commercial transaction. At the time of the takeover: – I owned 3,700 ordinary shares in Beem plc, which I had purchased on 1 June 2008 for £12,960. – In addition to the shares in Solaris plc, I also received £14,800 in cash from Solaris plc. – An ordinary share in Solaris plc was worth £8·40 on 1 October 2014. |
Extract from an email from your manager – dated 9 June 2016
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Additional information in relation to Shanira – Shanira is a higher rate taxpayer. – The gift of the house to Ray on 1 February 2016 was Shanira’s first lifetime gift. – You should use the current market values of the painting and the shares in Solaris plc in order to calculate the chargeable gains arising on these gifts. – Neither gift relief nor entrepreneurs’ relief will be available in respect of the proposed gift of the shares in Solaris plc. – Shanira has not made any other chargeable disposals since 5 April 2015. – There is capital gains tax in the country of Heliosa but no inheritance tax. – There is no double tax treaty between Heliosa and the UK. Please prepare a memorandum for the client files which addresses the following issues: (a) Ray – unincorporated business (i) – Calculations of the income tax and national insurance contribution payments to be made between 1 July 2016 and 30 September 2018 and the dates on which they will be payable. – Ray has told me that he does not intend to withdraw all of the profits of the business. Instead, he will either increase his inventory levels or acquire additional equipment, and he has asked how this will affect his taxable income. (ii) – Ray is incurring input tax and is considering registering voluntarily for VAT. Set out the information we need in order to advise him on whether or not voluntary registration is possible and/or financially beneficial and explain why the information is needed. – An explanation of whether or not Ray can recover the input tax in respect of the computer purchased on 3 June 2016 if he registers for VAT. (b) Gifts from Shanira to Ray (i) – A calculation of the capital gains tax payable in respect of the gift of the house in Heliosa based on the currently available information, together with any further information required to finalise the liability, and the due date of payment. – An explanation, with supporting calculations, of when the further gifts should be made to Ray. The objective here is to maximise Ray’s capital gains tax base cost without creating a capital gains tax liability for Shanira. In order to achieve this objective, you should consider dividing the proposed gift of the shares into two gifts to be given on different days. (ii) – The maximum possible inheritance tax liability which could arise in respect of the proposed gifts to Ray of the painting and the shares, if Shanira were to follow our advice in respect of their timing, together with the circumstances in which this liability would occur. Tax manager |
Required:
Prepare the memorandum as requested in the email from your manager. The following marks are available:
Ray – unincorporated business.
(i) Income tax and national insurance contribution payments, and the level of his taxable income.
(ii) Value added tax (VAT).
Ray and Shanira
Memorandum
Client Ray and Shanira
Subject Various personal tax matters
Prepared by Tax senior
Date 9 June 2016
Ray – unincorporated business
(i) Payments of tax and national insurance contributions
Income tax and class 4 national insurance contributions
31 January 2018 Amount payable in respect of 2016/17 (W) £12,767
First payment on account for 2017/18 (£12,767 x 0·5) £6,383
31 July 2018 Second payment on account for 2017/18 £6,384
Class 2 national insurance contributions
2016/17 £119 (£2·75 x 52 x 10/12)
Payable in two instalments on 31 January 2017 (4/10) and 31 July 2017 (6/10)
2017/18 £143 (£2·75 x 52)
Payable in two instalments on 31 January 2018 and 31 July 2018.
Tutorial notes:
1. Ray will not be required to make payments on account of his tax liability for the tax year 2016/17 because the whole of his tax liability for the previous year was settled via tax deducted at source.
2. The instalments required in respect of the class 2 national insurance contributions will be calculated by reference to the number of weeks in each half of the tax year that Ray is carrying on his trade. This has been simplified to the nearest month in this answer.
3. Credit was also available where candidates explained that class 2 national insurance contributions can be paid by direct debit or to candidates who outlined the new Finance Act 2015 payment dates of 31 January 2018 (2016/17) and 31 January 2019 (2017/18).
Working
2016/17 – income tax and class 4 national insurance contributions payable
Gifts from Shanira to Ray
(i) Capital gains tax
(ii) Inheritance tax.
Professional marks will be awarded for the approach taken to problem solving, the clarity of the explanations and calculations, the effectiveness with which the information is communicated and the overall presentation.
Gifts from Shanira to Ray
(i) Capital gains tax
House in the country of Heliosa
The chargeable gain on the gift of the house was £80,000 (£360,000 – £280,000). This will result in a UK capital gains tax (CGT) liability of £19,320 ((£80,000 – £11,000) x 28%).
The UK CGT will be reduced by double tax relief in respect of any CGT payable in Heliosa. Therefore, in order to finalise Shanira’s CGT liability, we will need to confirm the amount of CGT payable in Heliosa on the sale of the house.
The UK CGT is due to be paid on 31 January 2017.
Proposed gifts
Before the wedding, a gift from Shanira to Ray will be treated as a disposal at market value, giving rise to either a chargeable gain or an allowable loss. After the wedding, no chargeable gain or allowable loss will arise on any assets sold or gifted by Shanira to Ray, or vice versa. Instead, the asset will be treated as having been disposed of for an amount equal to the disposer’s CGT base cost.
Painting
The painting is currently worth less than its cost. Accordingly, it should be given to Ray before the wedding in order to realise the capital loss of £8,000 (£7,000 – £15,000).
Tutorial note: Although a gift of the painting prior to the wedding will result in a lower CGT base cost for Ray (£7,000 as opposed to £15,000), given that the couple wish to retain the painting rather than sell it in the future, this is not an issue.
Shares in Solaris plc
Shares given to Ray prior to the wedding will have a CGT base cost for Ray equal to their market value at the time of the gift, i.e. £9·20 per share. Shares given after the wedding will have a CGT base cost for Ray equal to Shanira’s base cost, which is substantially lower. Accordingly, prior to the wedding, Shanira should give Ray the maximum number of shares which she can without giving rise to a CGT liability.
Shanira will have a capital loss in respect of the gift of the painting of £8,000. She will also have her annual exempt amount for 2016/17 of £11,000. Accordingly, she can make a chargeable gain of £19,000 without giving rise to a CGT liability.
The chargeable gain on a gift of all 7,400 shares would be:
In order to realise a chargeable gain of £19,000, Shanira should give Ray 2,439 (£19,000/£7·79) of the shares prior to the wedding. The remaining 4,961 shares should not be gifted until after they are married.
Working
Sale proceeds in respect of the shares in Beem plc
Base cost in respect of Solaris plc shares (paper-for-paper):
£12,960 x (£62,160/£76,960) = £10,468
(ii) Inheritance tax
The maximum inheritance tax (IHT) liability in respect of the gift of the painting and the first tranche of shares made before the wedding will arise if Shanira were to die within three years of the gifts, such that no taper relief would be available. There would be no IHT payable in respect of the gift of shares made after the wedding, as this will be an exempt inter-spouse transfer.
There would also be IHT to pay in respect of the gift of the house in Heliosa, but this will arise regardless of whether the CGT planning is carried out or not.
