Your manager has had a meeting with Florina and Kanzi who are clients of your firm. Florina’s father, Winston, also attended the meeting. The notes prepared following the meeting and an email from your manager setting out the work he requires you to do are set out below.
Meeting with Florina, Kanzi and Winston on 6 September 2017
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The meeting was attended by Florina and Kanzi (who have been living together since 1999 but are not married) and Winston (Florina’s father). All three individuals are resident and domiciled in the UK. They have no sources of income or chargeable gains other than those referred to below. Florina Florina is a director of and shareholder in Flight Hip Ltd. She earns an annual salary of £50,000 and receives a dividend of £20,000 from the company every year. She received total taxable benefits of £25,000 from the company in the tax year 2016/17. Flight Hip Ltd is not a close company Florina’s benefits include a company car together with free petrol for both business and private use. The car’s benefit percentage by reference to its CO2 emissions is 26%. Florina drives 19,000 miles per year of which 2,000 miles are in the performance of her employment duties. The total cost of all of the petrol used by Florina in the tax year 2016/17 was £3,000. Florina’s only other income consists of dividends of £1,500 received in June every year from Landing Properties Ltd. Landing Properties Ltd is an unquoted UK resident company, unrelated to Flight Hip Ltd. Florina purchased 4,000 shares (a holding of less than 1%) in Landing Properties Ltd for £8,000 on 1 August 2001. She is considering selling these shares to Padarn, an unconnected individual, for their market value of £40,000. This would result in a capital gains tax liability of £4,180. I suggested that it may be possible to reduce the tax due by making a gift of some of the shares to Kanzi, who would then sell them to Padarn, and I agreed to provide Florina with further details. Kanzi Kanzi is an artist. His annual taxable trading income is approximately £14,000. Although Kanzi is not employed by Flight Hip Ltd, the company provides him with a car and free petrol. The car’s benefit percentage by reference to its CO2 emissions is 23%. Kanzi drives 5,000 miles per year; the total cost of the petrol used by Kanzi in the tax year 2016/17 was £800. Winston Winston is in very poor health and is not expected to live for more than 12 months. It is estimated that Winston’s total chargeable estate is currently worth £1,400,000. The values of his assets are not expected to change between now and his death. Winston intends to make a donation of £150,000 to a registered UK charity. This donation will be either a lifetime gift or a legacy from his estate on death. Winston’s current will leaves the whole of his estate to Florina and his two other children. Winston’s only previous lifetime gift was a chargeable transfer, after the deduction of exemptions, of £200,000 to a trust on 1 June 2015. Winston wants to carry out some sophisticated tax-planning in order to reduce the inheritance tax which will be payable in respect of his death estate. |
Email from your manager – dated 7 September 2017
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Please carry out the following work. (a) Florina and Kanzi Florina’s remuneration from Flight Hip Ltd Calculate the total tax saving which could be achieved by Florina and Flight Hip Ltd if, in the tax year 2017/18, the company were to make a single lump sum payment of £20,000 into a personal pension fund for Florina instead of paying her a dividend of £20,000. These calculations should take account of the tax which Florina will pay when she eventually withdraws the £20,000 from the pension fund. You should assume that: (1) there will be no further contributions into the fund in future years; and (2) Florina will be a basic rate taxpayer when she makes a withdrawal from the fund. Provision of free petrol By comparing the income tax due in respect of the petrol with the value of the petrol received, determine whether Florina and Kanzi would be better off if: – Florina were to reimburse Flight Hip Ltd for the cost of the petrol used by her for private purposes; and/or – Flight Hip Ltd were to stop providing Kanzi with free petrol. Sale of shares in Landing Properties Ltd Explain whether or not gift relief would be available in respect of a gift of shares in Landing Properties Ltd from Florina to Kanzi. On the assumption that gift relief would be available, calculate, with supporting explanations, the number of shares which Florina should give to Kanzi, prior to the eventual sale of the shares to Padarn, and the maximum reduction in the total capital gains tax payable which could be achieved. (b) Winston’s charitable donation Prepare calculations, with supporting explanations, to show, by reference to inheritance tax only, whether it is more tax-efficient for Winston to make the charitable donation now or via his will. You should ignore the possibility of any further inheritance tax planning taking place. (c) Becoming Winston’s tax adviser Winston wants to appoint us to replace his existing tax advisers. Explain any difficulties which we may have complying with the fundamental principles of professional ethics in relation to acting for Winston and suggest appropriate safeguards. Tax manager |
Required:
Carry out the work requested in the email from your manager. The following marks are available:
Florina and Kanzi.
Note: The following mark allocation is provided as guidance for this requirement:
Florina’s remuneration from Flight Hip Ltd 4·5 marks
Provision of free petrol 4 marks
Sale of shares in Landing Properties Ltd 5·5 marks
Florina, Kanzi and Winston
Florina and Kanzi
Florina’s remuneration from Flight Hip Ltd
Payment of dividend of £20,000
It would be financially beneficial for Kanzi to stop receiving free petrol from Flight Hip Ltd, as Florina’s tax liability in respect of the benefit exceeds the cost of the petrol.
Tutorial note: The provision of the car and free petrol to Kanzi will give rise to a taxable benefit for Florina. This is because Kanzi is not an employee of Flight Hip Ltd but is a member of Florina’s household.
Sale of shares in Landing Properties Ltd
Gift from Florina to Kanzi – gift relief
Landing Properties Ltd is an unquoted company. However, for gift relief to be available, it must also be a trading company.
On the assumption that gift relief is available, Florina should sell sufficient shares to realise a chargeable gain equal to her annual exempt amount of £11,100, i.e. 1,387 shares (£11,100/£32,000 x 4,000).
The remaining 2,613 shares should be given to Kanzi in order to use his annual exempt amount and to take advantage of the fact that he is a basic rate taxpayer as opposed to a higher rate taxpayer. Florina’s chargeable gain in respect of this gift will be held over against Kanzi’s base cost in the shares.
Sale of 2,613 shares by Kanzi
Winston’s charitable donation.
Winston’s charitable donation
Lifetime gift – inheritance tax on death estate
Gifts to charity are exempt from inheritance tax.
Becoming Winston’s tax adviser.
Becoming Winston’s tax adviser
Professional competence
We must ensure that we have access to the appropriate expertise to carry out the sophisticated tax planning required by Winston.
Objectivity
It is possible that providing advice to Winston in connection with his estate planning could give rise to a conflict of interest, because a course of action which reduces Winston’s total inheritance tax liability may not necessarily be beneficial for Florina.
We should obtain permission from both Florina and Winston to act for both of them and should consider making a different member of the firm responsible for each of them.
Confidentiality
Winston and Florina have attended a tax-planning meeting together and so do not appear to require their affairs to be kept confidential from each other. However, we should ensure that we have clear guidelines in place in order to maintain confidentiality where necessary and we should obtain written permission to discuss the affairs of one of them with the other when it is appropriate to do so.