Your manager has had a meeting with Jonny who is establishing a new business. An extract from an email from your manager, a schedule and a computation are set out below.
Extract from the email from your manager
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Jonny was born in 1968. His new business will begin trading on 1 November 2015. Jonny will use an inheritance he received following the death of his mother to finance this new venture. We have been asked to advise Jonny on his business and his inheritance. Some of the work has already been done; I want you to complete it. Please prepare a memorandum for Jonny’s client file addressing the following issues: (a) Unincorporated business I attach a schedule which sets out Jonny’s recent employment income and his plans for the new business. I think you will find it useful to read the schedule before you go through the rest of this email. You should assume that Jonny does not have any other sources of income or any taxable gains in any of the relevant tax years. (i) Jonny’s post-tax income Jonny has asked for an approximation of his post-tax income position for the first two trading periods. I want you to prepare calculations in order to complete the following table, assuming that any available trading loss reliefs will be claimed in the most beneficial manner. You should include explanations of the options available to relieve the loss, clearly identifying the method which will maximise the tax saved (you do not need to consider carrying the loss forward). Table to be completed
Include a brief explanation as to why these calculations are only an approximation of Jonny’s budgeted post-tax income. (ii) Salesmen Jonny intends to hire two salesmen to get the business started. Their proposed contractual arrangements are as set out in the attached schedule. Explain which of the proposed contractual arrangements with the salesmen indicate that they would be self-employed and state any changes which should be made to the other arrangements in order to maximise the likelihood of the salesmen being treated as self-employed. (iii) New contracts for the business Jonny is hoping to obtain contracts with local educational establishments and has asked us to help. One of our clients is a college and an ex-client of ours provided services to a number of schools and colleges. Accordingly, we have knowledge and experience in this area. Explain the extent to which it is acceptable for us to use the knowledge we have gained in respect of our existing client and ex-client to assist Jonny. (b) Jonny’s inheritance from his mother Jonny’s mother died on 31 July 2015. She left the whole of her estate, with the exception of a gift to charity, to Jonny. I attach a computation of the inheritance tax due; this was prepared by a junior member of staff and has not yet been reviewed. I can confirm, however, that all of the arithmetic, dates and valuations are correct. In addition, there were no other lifetime gifts, and none of the assets qualified for business property relief. I want you to review the computation and identify any errors. You should explain each of the errors you find and calculate the value of the inheritance which Jonny will receive after inheritance tax has been paid. Tax manager |
Schedule – Employment income and plans for the new business
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Jonny’s income Jonny worked full-time for many years until 30 June 2013 earning a salary of £6,000 per calendar month. From 1 July 2013, he worked part-time earning a salary of £2,000 per calendar month until he ceased employment on 31 March 2015. Two budgets have been prepared for Jonny’s business based on customer demand being either strong or weak. You should assume that no tax adjustments are required to Jonny’s budgeted profit/loss figures for the first two trading periods. For strong demand, the taxable trading profit for the first two tax years has been computed; these figures are correct and you do not need to check them. You will, however, need to calculate the equivalent figures for weak demand.
Salesmen Jonny is proposing to enter into the following contractual arrangements with two part-time salesmen: – They will work on Tuesday and Wednesday mornings each week for a two-month period. – They will be paid a fee of £300 for each new sales contract obtained. No other payments will be made. – They will use their own cars. – Jonny will lend each of them a laptop computer. |
Computation – Inheritance tax payable on the death of Jonny’s mother
Unincorporated business:
(i) Jonny’s post-tax income.
(ii) Salesmen.
(iii) New contracts for the business.
Jonny
Memorandum
To The files
Prepared by Tax senior
Date 10 September 2015
Subject Jonny – New business
Inheritance tax
Other matters
Unincorporated business
(i) Jonny’s post-tax income
Weak demand – taxable trading profit/(loss) for the first two tax years
Notes
1. Strong demand – 2015/16
The taxable trading income will be covered by the personal allowance.
2. Strong demand – 2016/17
The tax liability will be £1,840 ((£19,200 – £10,000) x 20%).
3. Weak demand – 2015/16
The taxable trading income will be nil, such that the tax liability will be nil.
The loss of £9,500 can be offset against:
(i) Total income of 2015/16 and/or 2014/15.
In 2015/16, Jonny will have no taxable income.
In 2014/15, Jonny had employment income of £24,000 (12 x £2,000), such that he was a basic rate taxpayer.
Or
(ii) Total income of 2012/13, 2013/14 and 2014/15 in that order
In 2012/13, Jonny had employment income of £72,000 (12 x £6,000), such that he had more than £9,500 of income taxable at the higher rate.
The loss should therefore be offset in 2012/13, resulting in a tax refund of £3,800 (£9,500 x 40%).
4. Weak demand – 2016/17
The taxable trading income will be covered by the personal allowance.
Post-tax income position
Jonny’s inheritance from his mother.
Professional marks will be awarded for following the manager’s instructions, the clarity of the explanations and calculations, problem solving, and the overall presentation of the memorandum.
Notes
1. Assume that the tax rates and allowances for the tax year 2014/15 apply to all tax years.
2. Ignore national insurance contributions throughout this question.
Jonny’s inheritance from his mother
Errors identified
1. Chattels (for example, furniture, paintings and jewellery) with a value of less than £6,000 are not exempt for the purposes of inheritance tax (although they are exempt for the purposes of capital gains tax).
2. The annual exemption is not available in respect of transfers on death.
3. The reduced rate of inheritance tax of 36% will apply. This is because:
– the chargeable estate, before deduction of the charitable donation but after deduction of the nil rate band, is £689,000 (£619,000 (£591,000 + £25,000 + £3,000) + £70,000); and
– the gift to the charity of £70,000 is more than 10% of this amount.
Value of inheritance receivable by Jonny
