问答题 An extract from an e-mail from your manager following a meeting he has had with Charleston Dance is set out
below.
I attach a memorandum summarising the matters discussed in a meeting I had yesterday with Charleston. I also
attach a calculation of the inheritance tax due on his father's death as prepared by his friend, Lindy. I have not had
the chance to look at this in detail but I can confirm that the annual exemptions and the taper relief have been
applied correctly and that there are no arithmetical errors; please review it with care.
I want you to write a letter from me to Charleston covering the following issues.
(i) Inheritance tax
- Brief explanations of any errors you find when you review Lindy's calculation of the inheritance tax
due on Charleston's father's death and the effect of correcting the errors on the total inheritance tax
due.
(ii) Investments and pensions
- The suitability of investing in venture capital trusts and a summary of the tax reliefs available in
respect of such an investment.
- The maximum tax allowable pension contributions that can be made by Charleston and Betty and the
effect on this, if any, of purchasing further rental properties.
(iii) Income tax planning
- Calculations, with supporting explanations to show that the total tax payable would increase (rather
than decrease!) if he were to transfer all of the quoted shares and government stocks to a company
wholly owned by him. Use the income figures from Lindy's inheritance tax calculation for these
purposes and assume that the whole of the new company's post-tax income would be paid as a
dividend to Charleston.
- The income tax advantages of Charleston transferring investments to Betty or their children.
- The points that Charleston needs to be aware of in connection with tax avoidance schemes and the
taxation of the Balboan properties.
Thank you
The memorandum prepared by your manager is set out below.
To The files
From Tax manager
Date 29 May 2012
Subject Charleston Dance
I met Charleston and his wife Betty on 28 May 2012. The couple have two children who are both at university.
Charleston's father died on 1 April 2012 leaving Charleston the whole of his estate. Charleston and Betty
immediately resigned from their jobs and now have no income other than that generated from Charleston's
inherited investments.
Charleston agreed to send me a schedule of the assets he inherited from his father together with a calculation that a
friend of his, Lindy, has done of the inheritance tax due. The schedule will also include details of gifts made by his
father whilst he was alive and the income generated by the inherited investments.
Charleston has asked me to comment on the following ideas.
Charleston's investment ideas
1 Charleston and Betty intend to make the maximum possible tax allowable personal pension contributions.
2 Charleston will sell his father's home and invest much of the proceeds in further rental property situated
either in the UK or in the country of Balboa, which is not in the European Economic Area (EEA).
3 Charleston wants to invest in unquoted trading companies but does not want to invest in enterprise
investment scheme shares due to the level of risk involved.
Charleston's tax planning ideas
1 Lindy has convinced him that he would save income tax if he formed a company and transferred the quoted
shares and government stocks inherited from his father into it. Charleston would own the whole of the
company.
2 A London based financial institution has sent Charleston details of a number of tax avoidance schemes that
they are promoting. Lindy has assured Charleston that there is no need to disclose the income from the
Balboan properties to HM Revenue and Customs (HMRC) because the income is taxed in the country of
Balboa.
Charleston is concerned about the legality of the tax avoidance schemes and the accuracy of Lindy's
suggestion.
Our input
I told Charleston that I would suggest an alternative to enterprise investment scheme shares as well as other tax
planning opportunities. I also suggested that it may be possible to increase his tax allowable pension contributions
depending on the property he buys.
Charleston, Betty and the children are resident, ordinarily resident and domiciled in the UK. Charleston's father was
also resident, ordinarily resident and domiciled in the UK.
Tax manager
Lindy's calculation of the inheritance tax due and the income generated by the inherited investments is set out
below.
Inheritance tax computation
Father's lifetime gifts
￡ ￡
1 November 2002 - Gift of cash to Charleston - more than seven years 200,000
prior to death
1 July 2005 - Gift of cash to Charleston 370,000
Annual exemptions (6,000)
364,000
Nil band 325,000
Gifts in last seven years (￡200,000 - ￡6,000 (Two annual exemptions)) (194,000)
(131,000)
233,000
Inheritance tax at 40% 93,200
Taper relief (￡93,200×80%) (74,560)
18,640
Father's death estate
Annual
income
received
￡ ￡ ￡
UK assets:
Father's home 1,300,000
UK quoted shares and related dividends 500,000 21,000
UK Government stocks and related interest 600,000 27,000
Bank accounts and related interest, furniture 410,000 8,000
and paintings
Cars 34,000
Investment properties in the country of Balboa and 800,000 72,000
related rental income
Less: Balboan inheritance tax (160,000)
640,000
Chargeable estate 3,484,000
Inheritance tax at 40% (no nil band available) 1,393,600
Total tax due (￡18,640 + ￡1,393,600) 1,412,240
Required
Prepare the letter requested in the e-mail from your manager. Marks are available for the three sections of the letter
as follows:
(i) Inheritance tax;
(ii) Investments and pensions;
(iii) Income tax planning.
Professional marks will be awarded for the appropriateness of the format and presentation of the letter and the
effectiveness with which the information is communicated.
Assume that the tax rules and rates for 2011/12 continue to apply in subsequent years.