The Chartered Tax Adviser Examination

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1 The Chartered Tax Adviser Examination May 2015 Taxation of Individuals Advisory Paper TIME ALLOWED 3 ¼ HOURS 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 folder. The Presiding Officer will inform you when you can start writing. Calculators may not be used during this time. You should answer all SIX questions. Start each answer on a new sheet of paper and write on one side only. Do not write in the margins. All workings should be shown and made to the nearest month and pound unless the question specifies otherwise. Marks are specifically allocated for presentation. Candidates who answer any law elements in this paper in accordance with Scots law or Northern Ireland law should tick the appropriate box on the front of each answer folder. Unless otherwise indicated by the provision of additional table information, you may assume that 2014/15 rates and allowances continue to apply for 2015/16 and future years. Candidates referring to actual or pending rates and allowances for 2015/16 and future years will not be penalised.

2 1. Dr Neil Pollock is a personal tax client of your firm. He has held a number of senior positions in state schools across the country and has now decided to move into the private sector. You have received the following letter from Dr Pollock: Dear Tax Manager I have been fortunate enough to be offered the headship at Highend School, a prestigious boarding school in Wiltshire. Having worked in the state sector for my entire career I am surprised by the range of additional benefits on offer. The School Governors have kindly provided me with a summary of the principal benefits on offer and these are outlined below: Benefit offered Outline Estimated Value Joining bonus I will receive a bonus of 120,000, equivalent to one year s basic salary, on appointment. In the event I leave the school within the first five years this bonus will be fully repayable by me to the school. 120,000 subject to potential claw-back Relocation support Accommodation I will be required to relocate my family to Wiltshire from Scotland and my employer will meet the following costs: 1) travel for the whole family to visit the area and transport furniture and belongings; 2) costs associated with the sale of our current home; and 3) reimbursement of my current gym membership cancellation fee. Either: 1) On-site: a property within the school grounds adjacent to the student boarding accommodation. 2) Off-site: a four bedroom house approximately 18 miles from the school. This property is held on a five year lease. The school paid an initial lease premium of 60,000 and pays a monthly rent of 300. In the case of the property on-site I will be responsible for the security of the school on most weekends and I will also be part of the team providing 24 hour pastoral care for the student boarders. If I choose the off-site accommodation I will be asked to pay a nominal rent of 200 per month. Maximum reimbursement of 10,000 Both properties have a market value of 750,000 and an annual value of 1,800 Continued Page 2 of 9

3 1. Continuation Education cost support Golf club membership Mobile phone My daughter will attend Highend School at a cost to me of 500 per term. When my daughter reaches age 16, I will receive a round sum payment towards the cost of bus travel to the local sixth form college. Reimbursement to me of the cost of annual membership of a local golf club of my choice. A mobile phone will be provided to each of myself and my wife. The average termly fee for attendance at the school is 5, per annum 1, per phone I should be most grateful if you would please explain the personal tax implications of these to me. I look forward to your advice. Yours sincerely Dr N Pollock You are required to write to Dr Pollock and advise him on the potential tax implications of each of the benefits being offered. (15) Page 3 of 9

4 2. You are a Manager in a medium sized professional accountancy practice and you have recently been seconded to the property team. The Tax Partner has several client meetings over the coming two weeks and you have been asked to prepare a briefing note in advance of his meetings highlighting the key Income Tax considerations for the following clients: Mrs Jill Topps Jill owns and occupies High House; a farmhouse close to a popular holiday destination. Three of the adjacent farm buildings have been converted to self-catered holiday cottages and these are available for letting from the beginning of April to the end of October each year. In 2013/14 all three of the cottages were let for between 135 and 160 days but, due to poor weather conditions, her short term lettings in 2014/15 on two of the properties were just 77 and 89 days. The third cottage has been let furnished to the manager of the local post office on a two year lease from April In 2014/15 Jill spent 1,200 on three new washing machines to replace those in the cottages. Jill s only other source of income is as a beneficiary of a substantial discretionary family trust. The annual distributions of income result in Jill being a higher rate taxpayer. The trust distributions will cease when she reaches age 60 and she is therefore keen to maximise her pension contributions. Paul Schuman Paul is resident and domiciled within the UK. He inherited a substantial investment property in Oxland, a small country in South East Asia, from his late wife. There is serious political instability in Oxland and in January 2015 the Oxland government imposed a temporary ban on the remittance of their currency from the country. The ban is still in place but it is anticipated that it will be lifted in the middle of In Oxland property depreciation is a tax deductible expense and during the year to 31 March 2015 his Oxland tax return showed net rental income from property equivalent to 130,000 after deducting depreciation of 20,000. Oxland levies a flat rate tax of 5% on profits from residential property. Miss Astrid Dubois On 1 July 2014 Astrid permanently left the UK and returned to her native country of Sizeland. She retained her UK property, a three bedroom detached house in Norwich. Until 1 July 2014 she let one of the bedrooms at 350 per month to Jane Mast, a local professional chef. They have become good friends over the years and Jane had full use of the house. When Astrid left the UK, Jane and her boyfriend started to rent the whole of the property at 2,000 per month. Neither Astrid nor Jane have notified HM Revenue & Customs of the change in status. The property is valued at 600,000 and Astrid arranged a buy to let mortgage of 290, ,000 was used to pay off her credit card balances, she has allocated 4,000 to fund a round the world trip and the balance was used to fund the purchase of an apartment in Sizeland. Sizeland has a flat rate tax on overseas rental profits of 10% but there is no double tax treaty between the UK and Sizeland. Continued Page 4 of 9

5 2. Continuation David Bicks David is UK resident and domiciled. He owns La Hacienda, a villa in the Caribbean. In 2014/15 it was let commercially for 236 days with no single letting for longer than 14 days. The only time when the property is not available for letting is for two weeks each Christmas when the property is occupied by David and his family. In 2014/15 the rental income was 10,000 which included a receipt of 800 in February 2015 to cover a two week booking for the Easter break from Saturday 28 March to Friday 10 April. His letting agent charges 1,200 per annum to advertise the property and liaise with prospective tenants. He pays 40 a month for garden maintenance and in May 2014 he had to pay 350 to repair the driveway wall which had been reversed into by one of his tenants. David also owns a three bedroom buy-to-let property in the UK which was purchased in 2007 with a 95% mortgage. The relatively high interest charge means that in 2014/15 the property generated a net loss. Throughout the year David s son occupied a room in the property rent free whilst attending a local university. You are required to prepare a briefing note for the Partner explaining the tax position of the four clients including the basis on which their rental income will be subject to UK tax. (20) Page 5 of 9

6 3. You are a Tax Senior in a firm of accountants and have recently been exchanging s with a new client, Andrew Brookfield, about his tax affairs and also those of his wife, Imelda. Below is the latest from Andrew, which arrived yesterday: Dear Tax Senior I have received a letter from HM Revenue & Customs saying that 50% of the rental income received from my property at 110 Black Edge Lane, since 1 December 2011 (when it was first let out), should have been declared on my own tax returns rather than 100% being declared on Imelda s returns. I am quite content that my wife receives all of the income: it is paid directly into her bank account and she certainly spends all of it! I am also sending you the Land Registry documents which confirm that we hold the property as tenants in common [Scots Law - own in common ], with my share being 5%. Surely, they should accept this documentation as proof that I should not be taxed on half of the income! To confirm, the net rental income received after deducting mortgage interest is always the same amount each tax year of 15,050. Imelda receives no other income than this, whilst I receive a salary from my employment of 45,000 per annum. From 1 October 2014 I was provided with a company car. It is an Audi A5 diesel with a list price of 31,470 and has a CO 2 emissions level of 120g/km. I don t receive any fuel benefit. We have been continuing to claim Child Benefit for our eight year old and have received per week. I am concerned that we may have to repay some of this because I now receive the benefit of a company car. Imelda is expecting our second child and I wonder whether we should even bother to register for Child Benefit for our new baby if it turns out that my income is now too high. We are not really aware of the new rules and would appreciate some guidance on what to do. We wish to borrow some money to assist with the new baby and I am considering taking out a loan or overdraft with my bank but my employer has also mentioned that I would qualify for an employee loan. I think we would need to borrow in the region of 20,000. I would be grateful for your advice on whether there is a best course of action, from a tax point of view. Finally, we would like your firm to deal with the preparation of our 2014/15 selfassessment tax returns and I will provide the necessary paperwork at our meeting next week. I will just mention though that I bought 2,000 8% Treasury Stock on 1 January The gross interest is paid every six months on 1 April and 1 October, so I received gross interest of 80 on 1 April I also sold 10,000 3% Treasury Stock on 31 August I received 150 of gross interest on 30 June 2014 and the next interest was paid on 31 December 2014 but the purchaser received this interest. I am aware that disposals of Treasury Stock are exempt from Capital Gains Tax. I look forward to meeting you and your Tax Partner next Friday. Regards Andrew You are required to prepare briefing notes for the Tax Partner ahead of your meeting with Andrew and Imelda Brookfield, addressing all of the issues raised in Andrew s and outlining the advice to be provided to both of them at the meeting. Where relevant, illustrate your notes with brief calculations for 2014/15 only. (20) Page 6 of 9

7 4. Sarah is UK resident and domiciled and owns a number of properties and land in the North West of England. On 16 April 2014 one of her properties was damaged in a flood. Sarah made a claim on the buildings insurance the next day and on 15 May 2014 the insurance policy paid out and Sarah received a cheque for 72,000. She then engaged builders to repair the property at a cost of 65,000 which was completed on 30 June The property originally cost 175,000 in 2002 and the restored property was valued at 250,000. Sarah has never lived in the property as it is occupied by an elderly aunt. Sarah owned an expensive painting that she inherited some years ago and which she kept in the property occupied by her aunt. It was completely ruined in the flood. Sarah had taken out a separate insurance policy on the painting and made a claim on 17 April She received a pay-out of 525,000 on 30 June Sarah is aware that the probate value of the painting was 375,000. Sarah also sold three acres of a plot of land she owned to a local farmer for 8,500 on 3 July The full plot of 15 acres had originally been purchased for 22,000 in January The 15 acres were valued before the sale at 50,000 and the remaining 12 acres after the sale were valued at 39,000. On 20 January 2015 Sarah sold at auction an antique cabinet for 4,375 after auctioneer s fees of 325. She had bought the cabinet for 6,950 in May Whilst at this auction, Sarah spotted a painting by an up-and-coming artist for 480,000 and decided to replace the one lost in the flood. Some years ago, Sarah had granted an option to her brother, Michael, to buy one of her investment properties for 112,000. Michael had paid 5,000 for this option when the market value of the option at the time stood at 32,000. Sarah paid Capital Gains Tax of 1,200 on the occasion of the option being granted. On 5 February 2015, Michael exercised this option and paid Sarah 112,000 for the optioned property. The market value of the property on this date was 158,000. Sarah had purchased the property for 82,000 in Sarah was born on 25 July During the 2014/15 tax year she had other income from pensions and property totalling 20,345. You are required to calculate the Capital Gains Tax due by Sarah for the 2014/15 tax year, providing explanations of the tax treatment of the various events and considering all beneficial elections which can be made. (15) Page 7 of 9

8 5. Your client Mr Rodgers has provided you with details of the following share purchases and sales in EIS qualifying companies that he has made in the 2014/15 tax year: 1) Sold 100 shares in Davius Ltd on 15 May 2014 for 35,000. These were purchased on 15 April 2012 for 18,000. He obtained full Income Tax relief in 2012/13. He became a paid director of Davius Ltd in April 2014, receiving 5,000 each year, which is considered to be a reasonable level of remuneration given the duties he undertakes. 2) Subscribed for 75 shares in Tradion Ltd on 15 September 2014 at a cost of 35,000. He encouraged his wife to invest and on 1 December 2014 she also subscribed for 75 shares, with her shares costing 37,000. These were the only issues of shares in 2014/15 and following these investments, the company had issued a total of 1,000 shares. Mr Rodgers father already owned 200 shares in Tradion Ltd, which he purchased in 2013 and his sister had subscribed for 100 shares in February ) Sold his entire holding of 1,000 shares in Linear Ltd on 30 January 2015 for 10,000. He subscribed for 300 shares in May 2011 for 22,000, with the remaining 700 shares subscribed for in December 2011 at a cost of 55,000. He obtained full Income Tax relief on each subscription. Mr Rodgers made no claim for EIS deferral relief on the purchase of his investments. He also did not make any other capital disposals in 2014/15 and was an additional rate taxpayer in the year. You are required to calculate, with explanations where relevant, any Income Tax and Capital Gains Tax charges arising in 2014/15 as a result of these transactions. (15) 6. Miss Travin, aged 45, works for Alltime Ltd as an assistant to the Managing Director. She has a basic salary of 32,000 and also receives a 10% bonus each year. PAYE of 6,500 was deducted in 2014/15. As the firm had a record profit for the accounting year ended 31 December 2014, it was decided each member of staff would be paid an additional bonus of 750. On 1 May 2015 the board of directors signed off the accounts at the annual general meeting, having agreed the profit for the year. The bonuses will be paid to staff members at the end of May During 2014/15, Miss Travin received gross interest of 1,825 from her various holdings in Treasury Stocks and 125 from her cash ISA. In January 2015 she cashed in her holding of National Savings Certificates, receiving accumulated interest of 185. She also rented out the spare room at her home, receiving 450 per month. The additional utility costs of having a lodger amounted to 850 in the year. She receives gross interest of 1,100 each year from a holding in a foreign company. 25% is deducted as withholding tax in the foreign country and she received the net amount on 1 December Under the Double Tax Agreement between the UK and the foreign country, there is no allowance for tax withheld at source. She has a direct debit set up of 25 per month to a registered charity under gift aid, which commenced in February Following an inheritance, she paid a single lump sum premium for a UK life policy of 30,000 on 1 October She has withdrawn 1,500 on the anniversary of the payment each year, until she cashed in the policy on 1 February 2015 for 41,500. Page 8 of 9

9 You are required to calculate the tax payable or repayable by Miss Travin for 2014/15, with explanations where relevant. (15) Page 9 of 9