案例分析题

Your manager has had a meeting with Snowdon, a potential new client. Extracts from the memorandum prepared by your manager following the meeting, an inheritance tax computation prepared by Snowdon, and an email from your manager detailing the work you are required to do are set out below.

Extracts from the memorandum prepared by your manager – dated 6 June 2018

Snowdon is resident and domiciled in the UK. He requires advice in respect of a cottage he purchased from his sister, Coleen, and his unincorporated business, ‘Siabod’, which he started on 1 July 2009.

Purchase of the cottage from Coleen

Snowdon’s sister, Coleen, died on 1 June 2018.

Coleen had sold a holiday cottage to Snowdon on 1 May 2014 for £225,000. At that time, the cottage was worth £260,000. Coleen had purchased the cottage for £165,000. The cottage qualified for capital gains tax gift relief and Snowdon and Coleen submitted a valid joint claim.

Coleen made a gift to a trust on 1 March 2010. This resulted in a gross chargeable transfer after all exemptions of £318,000.

Snowdon provided me with a computation he had prepared of the inheritance tax due as a result of Coleen’s death in respect of the cottage. Snowdon is aware that he is not an expert when it comes to inheritance tax, such that this computation is unlikely to be totally accurate.

Siabod business

Budgeted figures relating to the unexpanded Siabod business for the year ending 30 June 2019 are:

Turnover 255,000

Tax adjusted trading profit 85,000

Income tax on £85,000 using current rates 22,700

Class 4 national insurance contributions on £85,000 using current rates 4,115

The Siabod business is partially exempt for the purposes of value added tax (VAT). Snowdon’s budgeted input tax for the unexpanded business for the year ending 30 June 2019 was £18,000. He would have been able to recover the whole of this amount because the business would have been below the de minimis limits.

Since the above figures were prepared, Snowdon has decided to expand the Siabod business and increase its budgeted turnover for the year ending 30 June 2019 from £255,000 to £435,000. In order to carry out this expansion, Snowdon will adopt either strategy A or strategy B. Whichever strategy is adopted, the partial exemption percentage of the business will continue to be 76% (recoverable).

Strategy A

Under this strategy Snowdon will recruit an additional employee with an annual salary of £48,000.

Strategy B

Under this strategy Snowdon will appoint a sub-contractor, Tor Ltd, which will carry out the work required for the expansion. Tor Ltd will charge fees of £90,000 plus VAT each year.

Budgeted costs of expanding the business

Extracts from the memorandum prepared by your manager – dated 6 June 2018 (continued)

Additional information

– Prior to the expansion of the Siabod business, Snowdon’s liability to employer’s class 1 national insurance contributions for the year exceeded £3,000.

– Apart from the profits of the Siabod business, Snowdon’s only income is £740 of bank interest each year.

Inheritance tax computation prepared by Snowdon – dated 6 June 2018

Inheritance tax due in respect of the cottage

问答题
Purchase of the cottage from Coleen.

【正确答案】
Snowdon
Memorandum
Client Snowdon
Subject Personal tax matters
Prepared by Tax senior
Date 7 June 2018
Purchase of the cottage from Coleen
Errors in Snowdon’s computation
1. The value of the gift for the purpose of inheritance tax (IHT) is the fall in value of Coleen’s estate, i.e. £35,000 (£260,000 – £225,000) being the value of the cottage less the amount paid by Snowdon.
2. The cottage was a lifetime gift and not a gift on death. Accordingly, the annual exemption for both the year of the gift and the previous year are available: a total of £6,000 (2 x £3,000).
3. The 40% rate of taper relief is correct. However, the relief should be 40% of the inheritance tax due as opposed to 40% of the gift.
4. The nil rate band of £325,000 should be reduced by chargeable transfers in the seven years prior to 1 May 2014. Accordingly, it will be reduced by the chargeable lifetime transfer made by Coleen on 1 March 2010.
Inheritance tax due in respect of the gift of the cottage

【答案解析】

问答题
Expansion of the Siabod business.

【正确答案】
Expansion of the Siabod business
Strategy A

Tutorial note: Prior to expanding the business, Snowdon was a higher rate taxpayer and was therefore entitled to a savings income nil rate band of £500. Following the expansion of the business, he will be an additional rate taxpayer and will not be entitled to this allowance.
Workings
1. Strategy A – recoverable input tax

The VAT attributable to exempt supplies can be recovered in full as it is below the annual de minimis limit of £7,500 (£625 x 12) and is less than half of the total input tax.

【答案解析】

问答题
Procedures we should follow before we agree to become Snowdon’s tax advisers.

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 and style of the memorandum.

【正确答案】
Procedures we should follow before we agree to become Snowdon’s tax advisers
– We must obtain evidence of Snowdon’s identity (for example, his passport) and his address.
– We must have regard to the fundamental principles of professional ethics. This requires us to consider whether becoming tax advisers to Snowdon would create any threats to compliance with these principles.
– Integrity: we must consider the appropriateness of Snowdon’s attitude to complying with the law and the disclosure of information to HM Revenue and Customs (HMRC).
– Professional competence: we must ensure that we have the skills and competence necessary to be able to deal with the matters which may arise in connection with Snowdon’s affairs.
If any such threats are identified, we should not accept the appointment unless the threats can be reduced to an acceptable level via the implementation of safeguards.
– We should contact Snowdon’s existing tax adviser(s) in order to ensure that there has been no action by Snowdon which would preclude the acceptance of the appointment on ethical grounds.
– We must carry out a review in order to satisfy ourselves that Snowdon is not carrying on any activities which may be regarded as money laundering.

【答案解析】