The Chartered Tax Adviser Examination

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1 The Chartered Tax Adviser Examination November 2015 Taxation of Individuals Advisory Paper Suggested Solutions

2 Question 1 1) A Tax Manager Big Firm London AB12 3CD 31 May 2015 Mr P Johnson Blocks Group Ltd Anywhere Hampshire AB01 3CD Dear Paul Further to our recent discussions I have outlined below the personal tax implications of the termination payments made by Franks Ltd. Background to the Taxation of a Termination Payment Provided certain strict criteria are met then a qualifying termination payment will be tax-free up to a maximum of the first 30,000. (1/2 mark) In addition the whole of a qualifying payment will be exempt from any National Insurance (NIC) liability, this exemption is not limited to the first 30,000. (1/2 mark) Statutory Redundancy Payments To the extent the individual receives a statutory redundancy payment then this will be treated as a qualifying termination payment. On the assumption that this is less than 30,000 then it will be free of Income Tax and NIC. (1 mark) Payments in Lieu of Notice (PILON s) On the basis the payments to shop floor workers are non-contractual then again these will be treated as qualifying termination payments which, if they fall within the 30,000 limit, will be exempt from Income Tax and will be fully exempt from NIC. (1 mark) As the PILONs paid to the Senior Management Team are provided for in their contracts of employment they will not be treated as qualifying termination payments and will be subject to Income Tax and NIC in full. (1 mark) Incentive Payments Those employees who continue to work will be subject to Income Tax and NIC on the full amount of any bonus payment that they receive. (1 mark) Ex-Gratia Payments The ex-gratia payments are non-contractual and will be treated as qualifying termination payments. (1/2 mark) The first 30,000 of the combined statutory redundancy and ex-gratia termination payment will be free of Income Tax whilst the whole amount will be exempt from NIC. To the extent the termination 2

3 payment exceeds 30,000 then the excess will be subject to Income Tax. (1/2 mark) As the termination payment is spread over two tax years then individuals will need to disclose the appropriate receipt in both their 2014/15 and 2015/16 tax returns (1/2 mark); only one 30,000 exemption will apply (1/2 mark) Training Support There are statutory provisions to ensure that the cost of retraining support will not be treated as a taxable benefit for the employee. (1 mark) Approved Share Option Plan The payment to the Managing Director in compensation for the surrender of his share options will be fully taxable and subject to PAYE and NIC. (1 mark) Overseas Exemption To the extent a termination payment is made to an individual who has been employed by the company overseas then some or all of the payment may be exempt from Income Tax. (1/2 mark) Where at least three quarters of the total period of service was performed overseas then the whole of any termination payment will be exempt (1/2 mark) as will a termination payment made to an employee whose total period of service exceeds 10 years and the final ten years have been spent abroad or their total period of employment exceeds 20 years and at least half has been spent overseas including 10 out of the last 20 years. (1/2 mark) If none of the above tests are satisfied then a proportion of the termination payment will be exempt from Income Tax represented by the ratio of the overseas period of employment to total period of employment. (1/2 mark) I hope that the above is clear, but if you have any questions please feel free to give me a call. Yours sincerely Tax manager 2) Sarah Johnson s taxable income 2014/15: Salary 84,000 Private medical insurance 1,800 Car benefit 2,200 Accrued holiday pay (1/2 mark) 3,000 PILON (1/2 mark) 32,000 Taxable termination payment (Note 1) 28,437 Total taxable income 151,437 3

4 Note 1: The total termination package is as follows: Termination payment 55,000 Statutory redundancy 4,500 Value of car transferred (1/2 mark) 16,000 Total 75,500 Statutory exemption (1/2 Mark) (30,000) Balance 45,500 Exempt proportion: 84/224 (Note 2) (1 mark) (17,063) Taxable 28,437 Note 2: Employment history in months: UK Overseas June 1996 to June July 2000 to June July 2001 to June July 2004 to February Total

5 CIOT MARKING GUIDE TOPIC MARKS Part 1 Presentation 1 First 30,000 tax free All of termination payment is free of NIC Statutory redundancy will be a qualifying payment 1 Non contractual PILON is tax free 1 Contractual PILON is taxable in full 1 Incentive payment will be subject to PAYE 1 Ex gratia will be a qualifying payment Excess is taxable but not NICable Taxable in year of actual receipt Only one 30,000 exemption regardless of years of receipt Retraining support is tax free 1 Surrender of share option will be taxable 1 An element of overseas duties will exempt some of the termination payment 100% exempt if more than 75% of time overseas 100% if ten out of last 20 years as overseas service Otherwise a proportion is exempt on a time apportioned basis Part 2 Accrued holiday pay fully taxable PILON is taxable The market value of the car is added to the termination payment 30,000 deducted from total before overseas employment deduction 84/22 will be exempt 1 TOTAL 15 5

6 Question 2 1) Bob Murray Income Tax payable for 2014/15 State pension 8,000 UK private pension 20,000 Foreign pension (W1) 9,000 Dividends from UK companies (plus 10% tax credits) 1,500 Dividends from overseas companies (W2) 7,778 Total income received 46,278 Less: personal allowance (10,000) Taxable income 36,278 ====== Tax due: 27,000 at 20% (W3) 5,400 6,115 at 10% (W3) 611 3,163 at 32.5% 1,028 7,039 Less: Married couples allowance (3,140 x 10%) (314) Income tax liability before DTR 6,725 10% credit on UK dividends (150) 10% tax credit on foreign dividends (778) Foreign tax credit relief (W4) (712) Tax deducted from pension (3,600) Total income tax due 1,485 Less: payments on account (1,300) Balance payable 185 First payment on account for 2015/ Total tax payable on 31 January === Second payment on account payable 31 July === Workings 1) Foreign pension Gross Pension 10,000 Less: 10% deduction (1,000) Taxable 9,000 ===== 2) Dividends from overseas companies Northland gross dividend plus 10% tax credit 2,222 Southland gross dividend plus 10% tax credit 5,556 Taxable 7,778 ===== 6

7 3) Basic rate band 31,865 Gift aid (gross) 1,250 Income taxable at basic/lower rates 33,115 Allocated as follows: ===== Pension income less personal allowances 27,000 Dividends taxable at lower rates 6,115 4) Foreign Tax Credit relief Northland dividend suffered highest rate of overseas tax so treat as top slice. Foreign tax credit relief available is lower of: UK tax on dividend 2,222 x 32.5% 722 Less: UK tax credit (222) OR overseas tax suffered 750 Southland dividend straddles the tax band UK tax on dividend Less: UK tax credit (3,163-2,222) x 32.5% (5, ) x 10% (556) OR overseas tax suffered 600 Foreign tax credit relief 712 7

8 2) Alice Murray UK Pensions 8,000 Gross interest 2,800 10,800 Minus age related personal allowance 10,660 Taxable income 140 ===== Tax due Higher of: Tax due on taxable income 140 x 10% 14 OR Tax due on gift aid payments 500 at 20% Less: tax deducted at source (560) Income tax refundable (460) 3) Briefing Note To: Re: Tax Partner GAAR The General Anti-Abuse Rule The GAAR was introduced to tackle abusive tax avoidance which might otherwise have been allowable in the past. Where a taxpayer enters into an arrangement which HMRC can show to be abusive if viewed objectively, then the GAAR permits a tax adjustment which is just and reasonable in all the circumstances even if the tax regulations would otherwise allow it. The GAAR is not intended to apply where a taxpayer has different courses of action available to him and makes a reasonable choice. There are four safeguards for the taxpayer: 1) The burden of proof is on HMRC to show that the scheme is abusive and where the main purpose or one of the main purposes is to achieve a tax advantage. 2) There is a double reasonableness test, whereby HMRC must show that the arrangements cannot reasonably be regarded as a reasonable course of action. 3) The Court can consider relevant material as to the purpose of the legislation that the taxpayer is alleged to have abused and not just the legislation itself. 4) HMRC are required to obtain the opinion of an independent advisory panel prior to pursuing a case. Before Mr Murray invests in the tax saving scheme he needs to be sure that it not only complies with the tax legislation, but also that when viewed objectively, it is not abusive. If HMRC can show that it comes within the GAAR legislation they could then make an adjustment to Mr Murray s tax assessment which is just and reasonable in all the circumstances, eliminating any tax advantage which he would otherwise achieve. 8

9 CIOT MARKING GUIDE TOPIC MARKS Mr Murray Deduct 10% from foreign pension 1 Gross up UK and foreign dividends by 10% (1/2 given if just UK grossed) 1 Extend basic rate band by gift aid 1 Allocation of tax rates 1 Married couples allowance allocated to husband and at correct rate 1 Identifying that DTR is lower of UK tax/overseas tax 1 Calculate the DTR on overseas dividends 1 Deduct payments on account made in Tax due 31 Jan Tax due 31 July Payment dates 1 Mrs Murray Personal allowance 1 Tax due on taxable income 1 Tax due on gift aid payments 1 Tax repayable 1 GAAR briefing note Can apply just and reasonable tax charge even if law not strictly broken 1 Does not apply to a reasonable course of action where choices available 1 4 safeguards Burden of proof that abusive with HMRC Double reasonableness test Court can consider material re purpose of legislation HMRC need independent opinion Apply to Mr Murray 1 TOTAL 20 9

10 Question 3 Paul Jones Proceeds 620 x 2,000 1,240,000 Base cost (Note 1) (52,824) Annual exemption (11,000) 1,176,176 X 10% (1 mark) 117,618 ER will apply as he is employed and holds over 5% of the share capital and voting rights. Note 1 Paul s base cost is made up of: Section 104 pool Shares Base Cost Holding at March ,200 (1 mark) Legacy from Susan, October ,000 (1 mark) Gift to Mary Jones (Note 2) (350) (29,820) (1/2 mark) Transfer to Steve Light (Note 2) ( 30) (2,556) (1/2 mark) Balance ,824 Note 2 The share of the base cost of the shares gifted to Mary Jones and transferred to Steve Light will be calculated as a proportion of the pooled base cost of the total holding: 350/1,000 x ( 10, ,000) for the gift to Mary Jones 30/650 x ( 10, ,000-29,820) for the transfer to Steve Light Mary Jones Proceeds 350 x 2, ,000 Base cost (Note 3) (29,820) Capital losses brought forward (Note 4) (24,000) Annual exemption (11,000) 635,180 X 28% (Note 5) 177,850 10

11 Note 3 As an inter-spouse transfer the gift from her husband will be on a no gain/no loss basis. She will acquire the shares at the same base cost as her husband. The gift will be matched from his s104 pool. From s104 pool ,820 (1 mark) Note 4 The offset of brought forward capital losses will exclude the connected party losses of 8,000 (1 mark) Note 5 Mary will not qualify for Entrepreneurs Relief as she is not an employee or office holder of the company at the point of sale. (1 mark) Keith Part Proceeds 20 x 2,000 (Note 6) 40,000 Base cost (Note 7) (4,600) Annual allowance (11,000) 24,400 X 28% (Note 8) 6,832 Note 6 The 30 shares acquired under EIS will be exempt from CGT (1 mark) Note 7 Acquired on joining 20 x 230 4,600 (1/2 mark) He would have been taxed on the full market value at the date of acquisition and this would form the CGT base cost of his shares. Note 8 ER will not apply as holding less than 5% (1/2 mark) Steve Light Non ER ER (Note 9) Proceeds 200 x 2, , ,000 Base cost (Note 10) (48,000) (150,000) Annual exemption (Note 11) (11,000) 41, ,000 X 28% 11,480 X 10% 15,000 11

12 Note 9 The EIS shares will have lost their CGT exempt status as Steve Light became an employee within the qualifying period (1 mark) The 50 shares held up to the exercise of the EMI share options will not qualify for ER as they represent less than 5% of the share capital (1 mark). The shares acquired on exercise of the EMI share option scheme will qualify for ER as granted more than 12 months prior to disposal (1 mark). Note 10 Non ER shares July x ,000 June x 1,000 30,000 ER shares 50 48,000 1 September ,000 (1 mark) The shares acquired in June 2009 are employment related securities and the base cost will be the market value on the date of receipt. Base costs will not be pooled as EMI option shares sold on same day as acquisition (1 mark) Note 11 Annual exemption allocated to non ER gains in priority (1 mark) 12

13 CIOT MARKING GUIDE TOPIC MARKS Disposal will qualify for ER 1 Identifying March 1982 value as base cost 1 Legacy base cost will be market value on date of death 1 Base cost used on gift to Mary as proportion of total pooled value Base cost allocated to shares transferred to Steve Light from balance of pooled cost Base cost of gift is transferred from husband s holding as an inter-spouse transfer 1 Connected party losses may not be offset against this gain 1 No ER as ceased employment prior to sale 1 EIS exemption 1 Base cost is market value on joining as he will have been subject to income tax on this value No ER as holding less than 5% EIS exemption lost as individual became an employee within the qualifying period 1 The shares acquired originally will not qualify for ER as less than 5% 1 The EMI shares will qualify for ER as they were granted more than 12 months prior to 1 sale Base cost will be the market value at the date of grant 1 The base cost of the holdings will not be pooled as acquired and sold on same day 1 CGT allowance allocated to non ER gains in priority 1 TOTAL 15 13

14 Question 4 Smith Accountants High Street Anytown Mr & Mrs J Parker Corner House Any Street Yorkshire 5 November 2015 Dear John and Sarah Capital Gains Tax Following our meeting, I set out the current Capital Gains Tax (CGT) position for your two properties. London Flat This property was Sarah s main residence from November 2000 and John s main residence from November 2003 until you moved to New Zealand in November Gifts between husband and wife are made on a no gain no loss basis for capital gains tax, so you will have a base cost for capital gains tax for this property of 100,000 each. When Sarah gifted half of the house to John after your marriage, you were both living in the property together. When calculating principal private residence (PPR) relief, John s period of ownership is treated as beginning when Sarah purchased the property in November 2000 even though he was not living there at the time, so for both of you, the first four years from November 2000 will qualify for PPR relief. Although you did not move back into the property on your return, two further periods will qualify for PPR relief as they come within the criteria for periods of deemed occupation. Firstly, any period of absence is treated as deemed occupation where the taxpayer or the taxpayer s spouse was employed abroad, if no other residence qualified for relief during the absence. Normally you would have needed to have moved back into the property on your return to qualify, but this condition does not apply where you are unable to move back into the property because your employment required you to work elsewhere. The period from November 2004 until November 2008 should also therefore qualify for PPR relief for you both. Secondly, for a residence that has been your PPR, the final 18 months of ownership are always treated as a period of occupation, even if another property qualifies as your PPR at the time. Therefore, if the London flat were sold in November 2015, PPR relief will be available for 9 out of the 15 years of ownership. Lettings relief is also available for the London flat because the property has been your PPR and it has also been let out. This is the lower of: 1) The gain already exempt under the PPR rules; 2) The gain relating to the letting period and not already covered by PPR relief; and 3) 40,

15 So, based on 2104/15 rates, both of you will have the same capital gains as follows: Sales Proceeds 800,000 Purchase price 200,000 Capital gain 600,000 ====== Divisible equally 300,000 Less: PPR relief at 9 /15 (190,000) Lettings relief (40,000) Chargeable gain before annual exemption 70,000 Annual exemption (11,000) Gain liable to CGT 59,000 ====== Capital gains tax at 28% - each 16,520 ====== The tax would be payable by 31 January following the end of the tax year in which the sale takes place. Corner House Corner House has been your main residence since you bought it, so would normally qualify for PPR relief on the whole gain. However, if you sell the garden separately, you could trigger a capital gain on this part of the property. PPR relief extends to the gardens of the property if they are within the permitted area, which automatically includes gardens of up to hectare. If you sell the house before selling the garden however, the remaining garden ceases to be part of your main residence and you will trigger a capital gain when you sell it. To avoid this, you must sell the garden before or at the same time as the house. Any gain should then be covered by PPR relief with no tax being due. Please do not hesitate to contact me if you have any further questions. Yours sincerely Tax Manager 15

16 CIOT MARKING GUIDE TOPIC MARKS Presentation 1 London Flat No gain no loss on gift 1 John s PPR relief backdated to November 2000 gain same for both 1 Deemed occupation whilst abroad any length 1 If no other residence qualifies during absence 1 Not required to move back in employment elsewhere 1 Final 18 months qualify for PPR 1 Lettings relief available 1 Restrictions on amount of lettings relief 1 Calculate correct amount of PPR relief as 9 years/114 months 1 Calculation of gain incl PPR and letting relief 1 Corner House PPR normally available on whole gain 1 Gardens within permitted area 1 Sale of house first garden no longer qualifies for PPR 1 Must sell house and garden together or garden first for no cgt 1 TOTAL 15 16

17 Question 5 1) Mrs Summer s Income Tax computation 2014/15 Employment income (W1) 144,400 Employment benefits and expenses (W2) 6,258 Share income (W3) 17,000 Interest (W4) 2,750 Dividend income (W5) 9,722 Trust income (W6) 5,454 Foreign income (W7) 2, ,584 Less personal allowance (W8) (0) Taxable income 187,584 (1/2) Tax payable Non-savings income 20% 6,373 Less tax reducers: Non-savings income 40% 47,254 Non-savings income 45% 10,963 Savings income (W4) 45% 1,575 Dividend income (W5) 37.5% 3,645 69,810 (1) EIS relief (W9) (600) Income tax charged after allowances and reliefs 69,210 Less tax deducted at source: 10% tax credit on dividend income (972) Income tax due after dividend tax credits 68,238 PAYE deducted (62,000) Tax deducted from interest (550) Trust income (2,455) Tax due for 2014/15 3,233 (1) 17

18 Note 1 The Premium Bond prizes are exempt from tax. (1/2) Workings (W1) Employment income Salary 145,000 Less: Payroll giving 50 x 12 (600) (1/2) (W2) Employment benefits and expenses The business mobile phone is an exempt benefit s.319 ITEPA 2003 (1/2) Expense allowance 3,500 Less: Business travel (wholly, exclusively and necessarily incurred) (2,200) 144,400 Taxable 1,300 (1) Note client entertainment is not a WE&N expense for tax purposes. Living accommodation The taxable benefit is the higher of: Rent paid by employer 32,000 / 5 = 6,400 x 7/12 = 3,733 Plus: 175 x 7 = 1,225 Total = 4,958 (1) Annual value = 6,000 x 7/12 = 3,500 (1/2) Taxable benefit is therefore the rent paid by employer 4,958 Total taxable benefits 6,258 (W3) Share related income May 2014 Restricted MV 3 x 5,000 = 15,000 Less: Amount paid for the shares (10,000) Amount subject to income tax: 5,000 (1) 18

19 February 2015 Percentage of the initial unrestricted MV taxed on acquisition: ( 3/ 5) x 100 = 60%. (1/2) Therefore the charge on the lifting of the restriction is: (5,000 x 6) x 40% = 12,000 (1) Total share related income 17,000 (W4) Interest Unit trust interest 2,200 x 100/80 2,750 (1/2) (W5) Dividend income Net taxable dividends 8,750 x 100/90 9,722 (1/2) Dividends from an EIS company are taxable. (W6) Trust income Discretionary trust 3,000 x 100/55 5,454 (1/2) Taxable as non-savings income. (W7) Foreign income As non-reporting funds, the disposal of the first offshore fund at a profit is subject to income tax and not capital gains tax. (1/2) For the second holding, an offshore fund sold at a loss remains a capital loss, irrespective of whether it is reporting or not. (1/2) As the fund only invested in interest bearing assets, the dividend is taxable as interest and therefore is not grossed up for a notional basic rate tax credit. (1/2) Total foreign income: 1, = 2,000 (W8) Personal allowance Adjusted net income is significantly greater than ( 100,000 plus 10,000 x 2 =) 120,000, therefore no personal allowance available for 2014/15. (1/2) (W9) EIS relief EIS relief 2,000 x 30% 600 (1/2) 19

20 2) NIC Mrs Summer s salary is subject to Class 1 NIC primary. (1/2) The taxable element of the expense allowance is also treated as salary and is subject to Class 1 NIC primary. (1/2) Socan Ltd is not a quoted company, whilst it is 100% owned by a quoted company, the shares are not deemed to be readily convertible assets. Therefore, the share related income is not subject to Class 1 NIC primary. (1) The living accommodation benefit is reportable on a form P11D and subject to Class 1A NIC only, there is no NIC payable by Mrs Summer. (1/2) The provision of a mobile phone is an exempt benefit and no NIC is payable. (1/2) 3) Gift to charity A cash donation extends the basic rate band by the grossed up donation ( 40,000 x 100/80 = 50,000). This would mean more income being taxed at 20%. (1/2). It would also be possible to carry back the donation and claim it on Mrs Summers 2014/15 tax return if the donation is made before she has submitted the return. This would give her a cash flow benefit rather than waiting until she submits her 2015/16 tax return. (1/2) Shares in an unlisted company would not attract any tax relief, so it would not be sensible for Mrs Summer to transfer the shares in Tostan Ltd. (1/2) If she transferred the shares in Quoteen plc, it will be the market value of the shares at the date of transfer that is the relevant amount for income tax purposes. (1/2) This is a pound for pound deduction against income in the tax year the donation is made and there is no option to carry back the donation. (1/2) If she were to gift the Quoteen plc shares to charity, there would be a second benefit. Qualifying shares donated to charity are exempt from capital gains tax. As they are standing at a gain above the annual exemption, this would save the CGT at 28% that would be due if the shares were sold instead and the cash donated. (1/2) I would recommend Mrs Summer transfers the shares in Quoteen plc to charity. She would save tax at her highest marginal rate (37.5% and 45%) as it would be a deduction from her income in 2015/16. The maximum rate of tax saving she would receive on a cash donation would be (45% - 20%=) 25%. The disposal would also be exempt from CGT. (1) 20

21 CIOT MARKING GUIDE TOPIC MARKS 1) Calculation of taxable income Calculation of income tax before reliefs and deductions 1 Calculation of income tax payable 1 Premium bond winnings exempt from income tax Deducting payroll giving from salary Business mobile phone exempt benefit Calculation of balance of expense allowance that is taxable 1 Calculation of rent paid by employer 1 Calculation of annual value for the property Calculation of amount subject to income tax for shares received in May Calculation of the relevant percentage of the initial unrestricted market value Calculation of amount subject to income tax when the restriction is lifted 1 Unit trust income Dividend income Trust income Offshore fund disposal at a profit subject to income tax not capital gains tax Offshore fund disposal at a loss is a capital loss Dividend from offshore fund taxable as interest No personal allowance available Calculation of EIS relief 2) Salary subject to Class 1 NIC primary Taxable element of expense allowance subject to Class 1 NIC primary Share related income not subject to Class 1 NIC primary as not RCAs 1 Living accommodation subject to Class 1A NIC Business mobile phone exempt 21

22 3) Gift aid donation extends basic rate band Possible carry back of donation Unlisted shares would not get gift aid if donated Market value of shares at date transferred Pound for pound deduction at date of gift Quoted shares would be exempt for CGT Advise quoted shares to be transferred due to highest tax benefit 1 TOTAL 20 22

23 Question 6 Technical note re IT and CGT implications for Mr Hill Based on the information provided, we need to consider the anti-avoidance provisions contained within Part 13, Chapter 3 ITA 2007 on Transactions in Land. Specifically, s.756(3) outlines the conditions under which, if any are applicable, a disposal of a UK property would be treated as subject to IT not CGT. (1) Looking at the client s letter, he will fall into part (a) of s.756(3) ITA with regard to the property purchased in October This states "(a) the land is acquired with the sole or main object of realising a gain from disposing of all or part of the land". (1) As he has clearly stated, he has acquired the property with the main aim to refurbish it and sell it for a profit. He falls foul of what is commonly known as the profit "motive" test. (1) Therefore, any gain on disposal is treated as income and will be to be subject to IT not CGT. (1) The gain to be taxed will be calculated under the CGT rules. (1) What he has paid for the property, plus any qualifying capital expenditure, will form his base cost. Looking at the capital expenditure he has incurred, the legal and surveyors fees clearly qualify, as will the entire costs of the refurbishment. (1) It appears highly likely the price he has paid for the property reflects the current run down state it is in. The works do not appear to be a like for like replacement, but a complete renovation. This means all the costs will be deemed to be capital and none of them can be separated out as being revenue in nature, due to the works forming an improvement. (1) If the client does end up letting out the property out for a short period, any mortgage interest incurred should be allowable to set against the rental income as a revenue expense. This is on the basis it can be shown to be wholly and exclusively for the purposes of the trade. (1) The client states it will be a small mortgage, I have assumed borrowings will not exceed the capital account on the balance sheet. Mortgage interest would not be allowable in calculating a capital gain. (1/2) Overall, any rental profit made will be subject to IT in the normal manner. (1/2) It should be noted that under s.756(3), even if the property is let out for a short period, it will not alter the tax treatment on sale. Any profit will still be subject to IT. It will not matter if the delay in selling takes significantly longer than anticipated, say several years rather than a few months, any gain will still be subject to IT. This is due to the profit motive at the outset. (1) If the client goes on to purchase further properties with the intention of keeping them to let out and provide an income stream, he will not be caught by these anti-avoidance provisions. (1) If he does need to sell any of the properties in the future to meet expenses, the gain would be subject to CGT not IT. This is because the sole or main aim was not to make a profit, rather to provide an additional income stream. (1) However, the motive test is deemed to be an objective one and if the intention changes, for example planning permission is obtained to develop any of the properties, HMRC would seek to apply s.756 on any gain arising after the development intention. (1) The gain in the period prior to the development intention will not be charged under s.756. This would be computed on a just and reasonable basis. (1/2) It is possible to make an application for clearance to HMRC that a disposal does not fall within the IT rules in s.756. (1/2) The client will have a UK rental business and any profits and losses in the year from each property will be offset against each other. If there is a loss overall, this can be carried forward and set against the first available profits from the same trade. (1) 23

24 CIOT MARKING GUIDE TOPIC MARKS Consider anti-avoidance provisions Transactions in Land 1 Property purchased May 2014 is caught by the anti-avoidance 1 Profit motive test failed 1 Gain will be subject to IT not CGT 1 Gain to be taxed as income will be calculated under the CGT rules 1 Expenses that form base cost 1 Renovation works are an improvement therefore all capital costs 1 Mortgage interest allowable against rent if property let out 1 Mortgage interest not allowable in calculating capital gain Any rental profit subject to IT Gain will still be subject to IT even if property let out, due to motive test 1 Properties purchased for letting not subject to anti-avoidance 1 Any future sales would be subject to CGT not IT 1 Change of intention would trigger anti-avoidance from that date 1 Gain would be apportioned on a just and reasonable basis Application for clearance is possible UK rental business losses could be carried forward 1 TOTAL 15 24