November 2016 Examination

Transcription

1 November 2016 Examination PAPER 1 Personal Taxation TIME ALLOWED 3 ¼ HOURS (for Part I and Part II) You are required to answer all questions in each part (both parts printed together). The first 15 minutes is designated as reading time. During this time you may read your question paper and legislation and annotate your question paper. You are not permitted to write in the answer folders. The Presiding Officer will inform you when you can start writing. Calculators may not be used during this time. You are provided with two answer folders (one for each part of the paper). You must put your candidate number on the front cover of both folders. You must write your answers on the paper provided. Please start each answer on a new sheet of paper and write on one side of the paper only. Put your candidate number at the top of each page and make sure you place your answers in the correct answer folder. All workings should be shown and made to the nearest month and pound unless the question requires otherwise. There is an alternative part in Part II question 2 for Scots Law candidates.

2 Part I You must use the Part I answer folder. 1. Margaery is provided with a house to live in by her employer, Highgarden Ltd. The company acquired the property in 2001 at a cost of 185,000 and it has an annual value of 4,500. The property was worth 310,000 on 6 June 2015 when Margaery moved in. Margaery pays 400 rent per month. Highgarden Ltd furnished the house at a cost of 6,000 prior to Margaery moving in. Calculate the taxable benefit arising on Margaery for 2015/16. (4) 2. On 29 September 2015 Jon exercised his non-tax advantaged share options over shares in Castleblack plc, a company listed on the London Stock Exchange. The market value of the shares was 5.00 per share on the date of exercise and the exercise price was 3.00 per share. Briefly explain the employee National Insurance contribution implications of the exercise of the share options. You are not required to provide any calculations. (2) 3. Ramsay started work as a caretaker at a school on 9 December State four things which must be included in Ramsay s written statement when he commences employment. (2) 4. Edmund joined his employer s pension scheme on 6 April He made pension contributions of 2,000 in 2012/13, but has not made any further contributions. Edmund s employer made an employers pension contribution of 5,000 in 2014/15 and another contribution of 7,500 in 2015/16. Edmund intends to make pension contributions in 2016/17 and wants to know how much of his unused annual allowance is available to carry forward to 2016/17. Explain the maximum unused annual allowance that Edmund can carry forward to 2016/17. (Note that the annual allowance was 50,000 for 2012/13 and 2013/14. It was 40,000 for 2014/15.) (3) 5. State, giving the reason, the latest date by which HM Revenue & Customs may open an enquiry into a 2014/15 self-assessment tax return assuming it is filed on: 1) 10 October ) 14 July 2016 (2) Page 2 of 8

3 6. Sansa is UK resident and domiciled. She is a higher rate taxpayer. During 2015/16 she disposed of the following assets: (a) Antique furniture sold for 22,000, which she had inherited in March 2006 with a probate value of 1,500. (b) A painting, which she sold at a loss of 5,000. (c) A small piece of land in Overseabia, which resulted in a gain of 14,000 on which she suffered tax in Overseabia of 4,200. Calculate Sansa s Capital Gains Tax liability for 2015/16. (4) 7. Rickon purchased shares in Dragon Ltd on 11 February In March 2013 Dragon Ltd lost a large contract and the company was liquidated on 16 March Rickon did not find out about the liquidation until 28 August Explain the implication of Rickon making a negligible value claim in respect of the shares and in what tax year(s) any resulting loss can be utilised. (3) 8. Ned and Catelyn are married. They have three children and receive child benefit for all of them. Catelyn currently works and earned 16,000 during 2015/16. For 2015/16, Ned earned 62,000 and paid net personal pension contributions of 7,500. Calculate the high-income child benefit charge payable by Ned for 2015/16. (4) 9. Income tax relief is available for subscriptions of eligible shares in qualifying Venture Capital Trusts. 1) State two conditions which must be met for a company to qualify as a Venture Capital Trust. (2) 2) Explain how disposals of Venture Capital Trust shares are treated for Capital Gains Tax purposes. (1) 10. On 16 March 2015, Gilly was granted a share option to buy 20,000 shares under an Enterprise Management Incentives (EMI) scheme. The market value of the shares subject to the option was 2.50 on the date of grant and the exercise price of the option was Gilly exercised her option on 31 March 2016 and immediately sold the shares she acquired for 5.50 per share. Assume for the purposes of this question that the option remained a qualifying EMI option for the entire period from grant to exercise. Gilly is a higher rate tax payer and made no other capital disposals during the tax year. 1) Calculate the Capital Gains Tax payable on the sale of the shares. (2) 2) Explain how your answer to 1) above would differ if the exercise price of the shares were 2 per share. (Calculations are not required.) (1) 3) Explain how your answer to 1) above would differ if Gilly exercised the option and sold the resulting shares on 31 December (Calculations are not required.) (1) Page 3 of 8

4 11. Cersei currently owns 5,000 Lannister plc shares. Her transactions in these shares have been as follows: 4 May 2015 Bought 8,000 shares for 2.50 per share 22 January 2016 Sold 6,000 shares for a total of 24,000 1 February 2016 Bought 3,000 shares for 3.00 each Calculate the chargeable gain arising in 2015/16 on Cersei s disposal of her Lannister plc shares. (3) 12. Robert died on 10 April In his will he left a pecuniary legacy of 25,000 to his brother Renly, shares in Seven Kingdoms plc to his brother Stanis and the balance of his estate to his son, Tommen. Rental income of 35,000 arose on Robert s estate from his death to 5 April In addition, the estate received 3,500 net dividends on the Seven Kingdoms plc shares. As the administration of the estate had not yet been completed, on 31 March 2016 Robert s executors made an income distribution of 15,000 to Tommen, paid the dividends on the Seven Kingdoms plc shares to Stanis and paid the legacy of 25,000 to Renly. State the amounts to be shown on Form R185 for each of the beneficiaries. (3) 13. Arya submitted her self-assessment tax return for 2014/15 on 7 June During September 2016, she realised there was an error on her tax return and notified HM Revenue & Customs of the amendment to the return on 25 September Explain how long Ayra should retain the records relating to this return, assuming she is not in business. (3) Place your answers for Part I in the Part I answer folder. Page 4 of 8

5 Part II You must use the Part II answer folder. Marks are specifically allocated for appropriate presentation. 1. Your firm advises Joe, a UK resident higher rate taxpayer, who owns two residences in the UK. One is in Cheltenham, where he and his family spend most of their time, and the other is a flat in London which is only used intermittently. The Cheltenham property was bought in February 2015 on the same date that they sold their previous family home. The London flat was bought about five years ago but has increased substantially in value since then. Joe briefly occupied the flat immediately after acquisition and then the flat was let out for just one year. Since then, the flat has been available for the family to use as and when they are in London. Joe is very tempted to sell the London flat as soon as possible as he feels that the value will begin to fall soon. He has been told by a friend that no Capital Gains Tax will be payable as it is his home. Joe has no intention of ever selling his current Cheltenham property. Joe has also asked a question on behalf of his brother Milton, a higher rate taxpayer, who has been non-uk resident for over seven years and has not set foot in the UK in that period. For the past three years Milton has owned three properties in the UK. One is a residential property that he has never lived in but has been let to various tenants; another is a shop premises which is let to an unconnected retailer; the last is a residential property that has stood empty. The values of Milton s let property and the shop premises have risen sharply since acquisition while, in contrast, the vacant property has fallen in value. Milton is considering selling all three properties and would like to understand his tax position in relation to the disposals. Milton has given his authority for you to discuss his affairs with his brother Joe. You are required to write a letter to Joe in which you: 1) Explain the extent to which the gain arising on the disposal of the London flat will be subject to Capital Gains Tax if no action is taken, and what action Joe could take to mitigate the tax charge. (9) 2) Explain the extent to which Milton will suffer a Capital Gains Tax charge on the gains/losses arising on the disposal of his UK properties. (6) Total (15) Page 5 of 8

6 2. During 2015/16, Gertie owned three UK rental properties. Two of the properties are registered with the UK Land Registry but one, Ederle Cottage, is not. Ederle Cottage has been let for many years at 2,500 per month. The tenants did not pay the rent for May and June 2015 when it was due, but the collection of this rent was never in doubt and they cleared this outstanding balance in September Lawrence Lodge was bought on 6 May It did not have central heating and Gertie immediately spent 7,500 putting this in. She also undertook various repair projects costing 1,250, without which the property would not have been fit to let. On 6 October 2015 she started to advertise for tenants and some moved in two months later, paying 1,800 per month. After they moved in Gertie also spent 2,500 putting in double glazing. The tenants in Olmstead Villa moved out at the end of their one year lease on 5 June 2015; they had been paying rent of 4,500 per month. Gertie had started advertising for new tenants before the lease ended and, with effect from 5 August, she granted an eight year lease to new tenants for a premium of 125,000 and a monthly rent of 1,000. All properties are let fully furnished. Various additional costs were incurred by Gertie and payments were made during the tax year as follows: Ederle Cottage Lawrence Lodge Olmstead Villa Mortgage interest 15,000 1,909 14,000 Agent s fees 1, ,250 Buildings Insurance premium 2,000 1,250 3,500 Council Tax 2,650 1,000 3,100 Gas & electricity 1, Nil In relation to Lawrence Lodge: (a) (b) The Council Tax and mortgage interest covers the period from acquisition to the end of the tax year. The gas and electricity costs just relate to the seven month period before tenants moved in. In all cases, the buildings insurance was paid in advance for the year to 6 May The previous year s premiums for Ederle Cottage and Olmstead Villa were 1,818 and 3,182 respectively. In addition, Gertie received bank interest of 5,600 and dividend income of 12,800 during the year. Some years ago Gertie took out a loan of 450,000 and used the funds to buy a 10% shareholding in a trading company that she owns with her parents. The full loan is still outstanding and interest on the loan is payable at 14% per annum. 1) You are required to calculate the Income Tax payable by, or repayable to, Gertie for 2015/16, making clear your treatment of each item of income and expenditure. (18) Gertie owns both registered and unregistered land. Title to unregistered land is evidenced by ownership of the title deeds. 2) You are required to state the four items that comprise title of registered land. (2) [Alternative for Scots Law candidates: You are required to state the difference between a register of deeds and a register of title. (2)] Total (20) Page 6 of 8

7 3. Two potential new clients, Edith and Mabel, have recently approached your firm and described the following events. During 2015/16 Edith, a higher rate taxpayer, made a capital gain of 20,000 on the disposal of a set of books. In the same year, she subscribed 90,000 for a 20% shareholding in Sitwell Ltd, a qualifying Seed Enterprise Investment Scheme (SEIS) company with which she had no other connection. Edith made no other capital disposals or acquisitions in the year. Mabel, an additional rate taxpayer, made a capital gain of 100,000 in 2014/15 on which she avoided an immediate Capital Gains Tax charge by way of a 100,000 subscription for Enterprise Investment Scheme (EIS) shares in Stark Ltd. Mabel claimed an Income Tax reducer of 25,000 in relation to the investment. During 2015/16 Mabel sold her shares in Stark Ltd for 12,000. You are required to: 1) State the six principal issues that should be referred to in the covering letter accompanying the letter of engagement sent to each of Edith and Mabel. (3) 2) Explain, with relevant calculations, the tax implications for Edith as a result of the events occurring in 2015/16. (5) 3) Explain, with relevant calculations, the tax implications for Mabel as a result of the events occurring in 2015/16. (7) Total (15) Page 7 of 8

8 4. Edna, one of your clients, has been UK tax resident for many years and her job requires her to spend some time working abroad. During 2015/16 her time working abroad averaged over 35 hours a week. She has asked you whether she might have become non-uk tax resident for 2015/16, specifically by reference to the automatic non-uk resident test as a result of working full-time overseas. During 2015/16, Edna was outside the UK except for the following dates (in each case she arrived on the first date mentioned and left on the second): 1 June to 30 June 2015 in the UK for a family holiday. During that period, she worked for two hours in the morning and two hours in the afternoon on four Fridays. In addition, she worked throughout one weekend starting work at 9am on the Saturday and not finishing until 3:30am on the Monday. 1 October to 31 October 2015 in the UK on a work assignment. Edna worked full-time for each of the 22 weekdays in this period except for one day when she only worked three hours in the morning and took the afternoon off. 29 January 2016 to 1 February 2016 Edna landed in the UK at 6pm on 29 January and, on arrival, immediately boarded a train to Newcastle. She spent the four hour journey dealing with work s before checking into a hotel at midnight. For the rest of her stay she worked full time, notwithstanding that it was over a weekend, leaving at 10pm on 1 February after a full day s work. Another of your clients, Rex, who has been non-uk resident for many years, has supplied you with the following information in relation to his circumstances for 2015/16: (a) (b) (c) (d) His wife is a UK resident. He has no home in the UK and when he visited the UK during 2015/16, he and his wife stayed in hotels. He did no work in the UK or anywhere else. He travelled extensively, but spent 90 days in the UK during 2015/16 more than he spent in any other country. (e) He was present in the UK for 104 days during 2014/15. You are required to: 1) Explain, with calculations, whether Edna is automatically non-uk resident for 2015/16 by reason of working full time overseas. (7) 2) Identify how many ties Rex has to the UK for the purposes of the Statutory Residence Test and state how many days he was able to spend in the UK during 2015/16 without becoming UK resident. (3) Total (10) Place your answers for Part II in the Part II answer folder. Page 8 of 8