November 2016 Examination PAPER 1 Personal Taxation Part II Suggested Answers
1. An adviser Adviser s address Joe Joe s address [ ] November 2016 (Presentation 1) Dear Joe Your property sale If no action is taken the whole of the capital gain realised on the disposal of the London flat will be subject to Capital Gains Tax (CGT). The gain will be calculated as the difference between the sale proceeds and the acquisition cost and will be taxed at 28% after deduction of any available annual exempt amount. The flat is not exempt from CGT as it is only a gain arising on your principal private residence (PPR) that is exempt. In the absence of an election, your PPR is determined as a matter of fact and, clearly, this is your Cheltenham property. There is, however, the option, within two years of the acquisition of a second property, to make an election that one or other of your properties should be treated as your PPR as long as you actually use the chosen property as a residence. The purchase of your current Cheltenham home in February 2015 is, for these purposes, the acquisition of a second property ; you are therefore still within time to make a PPR election. The election can be backdated to the date of the acquisition of your current Cheltenham property and will have the following tax consequences: The element of the gain arising on your London flat from February 2015 to the date of sale will benefit from PPR relief and be exempt from CGT (1) The gain arising on the London flat during the period for which it was let will be exempt from tax to the extent that it does not exceed the lower of: o 40,000, and o The gain that is exempt by reason of PPR relief Milton s property sales The gain accruing on the let residential property after 5 April 2015 will be subject to CGT on disposal. The gain can be calculated in two ways: By default, a value as at 5 April 2015 would need to be obtained and the gain would be the difference between the disposal proceeds and that value. (1) Alternatively, and on election by Milton, the gain for the whole period of ownership can be calculated as disposal proceeds less acquisition cost and the post-5 April 2015 portion worked out on a straight line time apportionment basis. (1) The gain will be subject to tax at 28% after deduction of any available annual exempt amount. The gain arising on the sale of the shop premises will not be subject to Capital Gains Tax as it is not a residential property.
The loss arising on the vacant property will be an allowable loss that could be relieved against his other capital gains. The allowable loss can be calculated as described above via the default and elected route but, in addition, there is the possibility to elect for the allowable loss to be calculated as the difference between the sale proceeds and the acquisition cost. This does not require any apportionment to identify just the post-5 April 2015 loss. This last method would appear to be beneficial in this case. Please do not hesitate to contact me if you have any queries. Yours sincerely, An Adviser (Max 15 marks)
2. Tax computation Property income (W1) Bank interest Dividends Deductible payment 5,600 x 100/80 12,800 x 100/90 14% x 450,000, limited to 50,000 Non-savings Interest Dividends Total income 94,938 7,000 14,222 94,938 7,000 14,222 (50,000) - - Net income 44,938 7,000 14,222 Personal (10,600) - - allowance Taxable income 34,338 7,000 14,222 55,560 31,785 @ 20% 6,357 2,553 @ 40% 1,021 34,338 (1) 7,000 @ 40% 2,800 14,222 @ 32.5% 4,622 55,560 Income tax liability 14,800 Less: tax deducted at source: Interest (1,400) Dividends (1,422) Income tax payable 11,978
W1 - Property income Ederle Lawrence Olmstead Total [ 4,500 x 2] 124,500 161,700 + [ 125,000 x (50-(8-1))/50] (1) + [ 1,000 x 8] Rental income 2,500 x 12 30,000 1,800 x 4 7,200 Mortgage interest (15,000) (½ - for this & (1,909) (14,000) (30,909) Olmstead) Agent s fees (1) (1,500) (360) (1,250) (3,110) Building (1,985) 11/12 x (1,146) (3,473) (6,604) insurance 1,250 [1/12 x 1,818] + [11/12 x 2,000] Central heating Repair projects Double glazing Council Tax (2,650) (½ - for this & Olmstead) Gas & electricity (1,200) Wear & tear 10% x ( 30,000 2,650 1,200) [1/12 x 3,182] + [11/12 x 3,500] - - - - - - - - (2,615) 10% x ( 7,200 4/11 x 1,000 Nil ) (2,500) - (2,500) (1,000) (250) (684) 10% x ( 124,500 3,100) (3,100) (6,750) (12,140) (1) - (1,450) (15,439) 5,050 (649) 90,537 94,938 (Max 18 marks) 2) The four items that comprise title of registered land are: Title plan Property register Proprietorship register Charges register Scots Law alternative: The difference between a register of deeds and a register of title is that: Under a register of deeds, whilst registration of the deed is a prerequisite of becoming owner, it does not guarantee ownership because ownership derives from the deed rather than the entry in the registry. (1) Under a register of title, ownership flows from the register, not the deed. Once a person is listed on the register as owner, he is owner. (1)
3. 1) The principal issues are: Who is the client The period of the engagement Scope of services Fees Limitation of liability Agreement of the engagement required in writing each 2) Edith Edith s subscription for SEIS shares enables her to claim a tax reducer of up to 50% of 90,000 i.e. 45,000. However, this tax reducer cannot be greater than her tax liability for the 2015/16 tax year. The investment also enables her to claim that a part of the 20,000 gain made is exempt from tax. The exempt part is 50% of the available SEIS expenditure. The available SEIS expenditure is the lower of: The gain 20,000 The SEIS investment - 90,000 The amount claimed As the annual exempt amount will permanently exempt 11,100 from Capital Gains Tax, Edith would ideally claim the available SEIS expenditure to be 17,800 thereby exempting the remaining 8,900 (i.e. 20,000 11,100) of the gain. (Max 5 marks) 3) Mabel Mabel s sale of the Stark Ltd shares within three years of acquisition results in a claw-back of the income tax relief given in 2014/15. The claw-back is calculated as the disposal proceeds multiplied by the rate of relief originally given i.e. 25% x 12,000 = 3,000 (1). The 100,000 capital gain that was deferred in 2014/15 will become chargeable in 2015/16 as a result of the sale of the EIS shares, giving rise to a potential tax charge of up to 28,000. The capital loss on the sale of the EIS shares of 88,000 is restricted by the 22,000 net income tax relief received ( 25,000 less the 3,000 clawed-back) so that there is a relievable loss of 66,000. This loss can be relieved against other capital gains of this or future years, including the 100,000 gain that has come back into charge, or could be relieved against Mabel s income of the current or preceding year. (Max 7 marks)
4. For Edna to be automatically non-uk resident for 2015/16 by reason of working full time overseas she needs to: 1. Work abroad for an average of at least 35 hours per week over the tax year we are told that she does this. 2. Be present in the UK for fewer than 91 days in the tax year. A day of presence is a day on which she is in the UK at midnight at the end of the day. 3. Work in the UK for fewer than 31 days in the tax year. A day of work is a day on which she does more than 3 hours work in the UK. Edna s days of presence and work are as follows: 1-30 June 2015 Count day of arrival but not departure Fridays Weekend Monday following the weekend 1 31 October 2015 Count day of arrival but not departure Weekdays* Present in the UK 29 30 Work days in the UK 4 2 1 21 29 Jan 1 Feb 2016 3 4 62 32 Therefore she will not be considered to be automatically non-uk resident for 2015/16 by reason of working full time overseas as she has spent more than 31 days working in the UK. * The day on which she worked only three hours is excluded as it needs more than three hours of work to be classed as a work day. (Max 7 marks) Rex s ties are as follows: Wife a tie Hotel stays not a tie No work not a tie More time in UK than elsewhere not a tie as this test is only relevant for leavers Present 104 days in 2014/15 a tie With 2 ties Rex was able to spend 120 days in the UK before he would have become UK resident.