The Chartered Tax Adviser Examination November 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.
1. Blocks Group Ltd is the holding company of a privately owned trading group with subsidiaries in the UK and overseas. In February 2015, as part of a global restructuring, the board of Blocks Group Ltd put into administration Franks Ltd, one of its UK subsidiaries. This resulted in the redundancy of all of the staff of Franks Ltd. You have known the Finance Director of Blocks Group Ltd, Paul Johnson, for a number of years. He has been asked by several of Franks Ltd s ex-employees for an explanation of the tax treatment of the termination packages paid on the closure of the company on 28 February 2015. As a gesture of goodwill the company is willing to provide advice and he has asked your firm to provide him with a letter outlining the tax treatment of the following payments: All of the shop-floor workers received statutory redundancy payments. Half of the staff were made redundant in February 2015 and were paid a non-contractual payment in lieu of notice (PILON). The remaining half were asked to work their notice to facilitate the orderly closure of the factory for which they received a one-off payment of 2,000. Two of the Senior Management Team were also made redundant in February 2015. In their case the company exercised its contractual right to make a PILON. In addition they each received an ex-gratia payment of 40,000 paid half in February 2015 and half in May 2015. A number of the Management Team have, over time, been employed by Franks Ltd in both the UK and overseas. All staff were offered retraining support at a cost of 500 per head. The Managing Director of Franks Ltd was granted share options under a Company Share Option Plan in Blocks Group Ltd in 2008. He has agreed to surrender these options in return for a payment of 22,000. Paul s wife Sarah was the Human Resources (HR) Director of Franks Ltd. Her employment history with the company was as follows: June 1996 to June 2000 July 2000 to June 2001 July 2001 to June 2004 July 2004 to February 2015 Employed full-time overseas at the company s main research facility HR Manager based in Aberdeen Full-time employment in the Middle East UK HR Director based in Surrey Sarah s income in 2014/15 was as follows: Salary 84,000 Private medical insurance 1,800 Company car benefit 2,200 Accrued holiday pay 3,000 Contractual PILON 32,000 Statutory redundancy payment 4,500 Cash ex-gratia payment 55,000 As part of her termination package the company car was transferred to her at no cost. The list price of the car was 29,000 and the market value of the vehicle at the date of transfer was 16,000. You are required to: 1) Write to Paul Johnson explaining the personal Income Tax liabilities and employee National Insurance liabilities that will result from the above termination payments. (12) 2) Calculate Sarah s taxable income for 2014/15. (3) Total (15) Page 2 of 7
2. You are a Tax Manager with a firm of Chartered Accountants. Your clients, Bob Murray and his wife Alice, are both resident and domiciled in the UK. Bob was born in 1936 and Alice in 1934. In 2014/15 they had the following income: Bob Murray UK state pension 8,000 UK private pension (gross amount) 20,000 Foreign pension 10,000 Dividends from UK companies (net of tax credit) 1,350 Dividends from companies registered in Northland (gross) 2,000 Dividends from companies registered in Southland (gross) 5,000 The following foreign tax was deducted from overseas dividends before receipt: From Northland companies 600 From Southland companies 750 Bob made gift aid donations of 1,000 during the year. Tax of 3,600 was deducted at source under PAYE from the UK private pension. Bob owns less than 10% of the shares in the foreign companies he has invested in. No double taxation agreements are in place between the UK and either Northland or Southland. Bob s tax return for 2013/14, which was submitted on 2 January 2015, showed tax due for the year of 1,300 after tax deducted at source of 3,500. Alice Murray UK state pension 8,000 UK interest received 2,240 Alice made gift aid donations of 400 during the year. Bob expects to cash in a life policy in the next few months which will give rise to a large chargeable event gain and hence a substantial tax liability in the current tax year. A friend of his has told him about a new tax saving scheme currently being promoted by his accountant which he thinks would allow Bob to significantly reduce his tax liability. His friend assures him that the scheme complies with the tax legislation so cannot fail to save him tax. Bob wants to come to the office to discuss this tax saving scheme with your tax partner. You are required to: 1) Calculate the Income Tax payable by Bob Murray during 2016 and state when it will be due. (11) 2) Calculate the Income Tax payable or repayable by Alice Murray for 2014/15. (4) 3) Prepare brief notes for the tax partner outlining the GAAR legislation and how this could apply to Bob if he proceeds with the tax saving scheme. (5) Total (20) Page 3 of 7
3. X Ltd is a trading company producing high precision plastic mouldings. On 1 September 2014 the company was sold for 2,440,000 ( 2,000 per share) to a large German manufacturer. At the point of sale the shares of X Ltd were held as follows: 1 Ordinary shares Paul Jones 620 Mary Jones 350 Keith Part 50 Steve Light 200 Total 1,220 Paul and Mary have been married since January 2008; the other shareholders are unrelated. The share transaction history is as follows: Paul Jones Paul is the Managing Director and subscribed at par for his shares on the formation of the company in June 1978. June 1978 1,000 Subscription on formation of company April 1981 (150) Gift to Susan Jones (Paul s first wife) April 2006 150 Transfer from the estate of Susan Jones following her death in October 2005; she left her whole estate to Paul July 2008 (350) Gift to Mary Jones June 2009 (30) Transfer to Steve Light at 20 per share Balance 620 Mary Jones Mary was the Company Secretary until her resignation in May 2009. She acquired her shares as follows: July 2008 350 Gift from Paul Jones Mary has capital losses brought forward of 32,000. 8,000 of these losses arose on a gift of quoted shares to her sister. Keith Part Keith has been the company s Sales Manager since November 2004. He acquired his shares as follows: June 1999 30 Enterprise Investment Scheme subscription November 2004 20 Subscription at par on commencing employment Balance 50 Steve Light Steve joined X Ltd as the Technical Director in January 2009 and acquired his shares as follows: July 2008 20 Enterprise Investment Scheme subscription June 2009 30 Transfer from Paul Jones at 20 per share on exercise of unapproved share options 1 September 2014 150 Exercise of EMI share options Balance 200 Continued Page 4 of 7
3. Continuation The EMI share options were granted in June 2009 at an exercise price of 10 per share. HM Revenue & Customs have agreed that the values below represent both the restricted and unrestricted market value of shares in X Ltd. Where relevant, these values reflect any discount for minority holdings. Date Value per share June 1978 1 March 1982 12 June 1999 120 November 2004 230 October 2005 500 April 2006 600 July 2008 900 June 2009 1,000 Where appropriate capital gains have been held over on any gifts or transfers of shares. None of the shareholders made any other capital disposals during 2014/15 nor have they utilised any of their Entrepreneurs Relief entitlement in the past. They are all higher rate taxpayers. You are required to calculate the Capital Gains Tax liability arising for each shareholder on the sale of X Ltd. (15) 4. You are a Tax Manager at a firm of Chartered Accountants. You have just had a meeting with your clients, John and Sarah Parker who are both higher rate taxpayers. They own two properties which they are considering selling. They do not expect to have any other capital gains in the near future. They have given you the following information on the properties: London Flat Sarah bought her London flat in November 2000 for 200,000 and lived there alone until John moved in when they married in November 2003. He had previously been living in a rented flat. In November 2004 Sarah transferred the property into their joint names, when it was worth 220,000, just before they moved to New Zealand so Sarah could take up a temporary work placement with her employer. They remained in New Zealand until November 2008. Whilst they were away, Sarah s employer relocated to Yorkshire, 200 miles from London, and they did not return to their former home. The property has been continuously let since November 2004. It has recently been valued at 800,000. Corner House, Yorkshire On their return to the UK in November 2008, John and Sarah bought a new home in Yorkshire where they have lived ever since. The property has a good sized garden of about 0.25 hectare. A local developer has approached them with an attractive offer to purchase part of the garden for development next year. John and Sarah would not want to stay in the house with a smaller garden and have therefore spoken to an estate agent about selling the house with a smaller garden. They have been told it should sell very quickly. You are required to write a letter to John and Sarah Parker advising them in relation to Capital Gains Tax on their two properties. (15) Page 5 of 7
5. Your client, Mrs Summer, was employed throughout 2014/15 by Socan Ltd as the Sales Director. Socan Ltd is a 100% subsidiary of a large quoted company. She has provided you with the following information to help you to prepare her 2014/15 tax return: Mrs Summer received a salary from Socan Ltd of 145,000, from which PAYE of 62,000 was deducted. She was provided with a business mobile phone and received an expense allowance of 3,500. In the 2014/15 tax year she spent 2,200 on business travel, with the remaining 1,300 of the allowance split equally between entertaining UK and overseas suppliers. On 1 September 2014, Socan Ltd provided Mrs Summer with a flat close to the company's Head Office so that she can more easily attend meetings in the office which are often arranged at short notice and run late into the evening. The company took a five year lease on the flat, paying an up-front premium of 32,000, plus a monthly rent of 175. The annual value of the property is 6,000. In May 2014, Mrs Summer purchased 5,000 shares in Socan Ltd for 10,000. She cannot sell the shares for three years, which depressed their market value on purchase to 3 per share (although the unrestricted market value at that time was 5 per share). No elections were made. In February 2015, Socan Ltd lifted the restriction, at which time the unrestricted market value had increased to 6 per share. Mrs Summer received an interest distribution from a UK unit trust of 2,200 and net UK dividend income of 8,750. The dividends included 1,050 from a qualifying Enterprise Investment Scheme (EIS) company, in which she had subscribed for shares two years ago. She also received a distribution from a UK discretionary trust of 3,000 and Premium Bond prizes of 100 and 250. Mrs Summer sold holdings in two offshore funds. The first fund was a non-reporting fund that only invested in interest bearing assets. On 1 March 2015, she sold 100 units at a gain of 1,250. She had already received a dividend of 750 from this fund in November 2014. The second fund was also a non-reporting fund, but it only invested in equity funds. On 31 March 2015 she sold 500 units at a loss of 1,000. On 31 March 2015 she received an EIS certificate for a 2,000 investment in Ombatom Ltd, a qualifying EIS company. Mrs Summer gave 50 per month to a local charity under payroll giving. Mrs Summer is considering making a significant gift of 40,000 to charity before 5 April 2016. She has not decided whether to make a cash gift aid donation or to transfer the relevant number of shares from her existing shareholdings in either Quoteen plc (a listed company) or Tostan Ltd (an unlisted company), both of which currently have unrealised capital gains of 15,000. She expects her income in 2015/16 to be similar to that received in 2014/15. You are required to: 1) Calculate, with relevant explanations, Mrs Summer s Income Tax payable or repayable for 2014/15 taking advantage of any beneficial reliefs and allowances. (13) 2) Briefly explain the National Insurance implications for Mrs Summer with regard to her employment income and benefits received in the year. Calculations are NOT required. (3) 3) Briefly explain the tax consequences of the potential gift to charity in 2015/16 and recommend which of the potential gifts would be most suitable for Mrs Summer. Calculations are NOT required. (4) Total (20) Page 6 of 7
6. You are a Tax Manager in a firm of accountants and your client, Mr Hill, has sent you the following letter: Dear Alice In October 2015 I purchased a property which was run down and in need of complete refurbishment. I plan to engage a building firm to undertake the works, which will involve modernising the building to a high standard throughout to achieve the best possible sales price. A local agent has informed me that whilst doing these works should result in a substantial profit, properties are taking up to six months to sell. I may therefore let it out for a short period of time whilst it is on the market for sale. If I do end up having to let out the property for a short period, I will raise a small mortgage against it in the short term to help with my cash flow. I would not anticipate this will cost more than 5,000 in additional interest payments. I have also incurred legal fees of 2,000, plus surveyors fees of 800 on the purchase of the property. Once the property has been sold, I am keen to reinvest the proceeds by purchasing more properties. This time however, my aim will be to keep them to rent out to generate long-term income, given I do not have any significant pension provision in place. It could be that I need to sell one or two properties to meet any unexpected, significant capital expense in the future. In due course I would like to discuss what the tax implications will be for me if I do go ahead as planned. Yours sincerely Mr Hill You are required to write a technical briefing note for your Tax Partner explaining the potential application of the anti-avoidance provisions in Part 13, Chapter 3 ITA 2007. Calculations are NOT required and you should NOT discuss the badges of trade. (15) Page 7 of 7