ACCA F6 Revision Mock Ans J11%28with Marks

ACCA

Paper F6

Taxation June 2011

Revision Mock – Answers

To gain maximum benefit, do not refer to these answers until you have completed the revision mock questions and submitted them for marking.

P A PER F6 ( UK ) : TAXATION (FA2010)

2 KAPLAN PU BL ISHING

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REVIS ION MOCK : AN SW ERS

KAPLAN PU BL ISH ING 3

1 SONIA SILVA

Key answer tips

This question is typical of question one in the F6 exam. It involves both self-employment and employment, and tests capital allowances, cessation of trade, employment benefits, property income, savings income and the calculation of income tax payable. This is a very broad coverage of the syllabus areas tested in question one, and therefore nothing is tested in great depth.

The key to answering this question well is time management to ensure you can cover all the parts of the question.

As there is quite a lot of information in this question, it is useful to annotate the information before starting to write, and then to tick off each item as you deal with it in your answer.

(a) Trading income assessment – 2010/11

Closing year - basis period 6.4.10 to 31.8.10 (£56,050 tax adjusted trading profit + £7,410 (W1) balancing charge) £63,460 –––––––

Tutorial note:

The profits for Sonia’s final period of trade have already been adjusted, but are before capital allowances. As Sonia had a balancing charge in her final capital allowance computation (see working 1), this figure is added to her final period profits.

The question states that Sonia has no overlap profits brought forward. This makes sense as Sonia has always prepared her accounts to 5 April, and this is the only accounting date which will not generate any overlap profits.



(b) Sonia Silva

Income tax computation − 2010/11

Total income

Other income

Savings Dividends

£ £ £ £ Salary (£5,750 × 7 months) 40,250 Car and fuel benefit (W2) 6,072 Loan benefit (below £5,000) Nil Mobile phone benefit Nil Car parking space benefit Nil Computer (W3) 145 –––––– Employment income 46,467 46,467 Trading income (part (a)) 63,460 63,460 Property income (W4) 250 250 Dividends (£12,600 × 100/90) 14,000 14,000 ISA interest Exempt Premium bond prize Exempt NS&I – EASA interest 3,353 3,353 ––––––– ––––––– –––––– –––––– Total / Net income 127,530 110,177 3,353 14,000 Less: PA (W5) (3,520) (3,520) ––––––– ––––––– –––––– –––––– Taxable income 124,010 106,657 3,353 14,000 ––––––– ––––––– –––––– –––––– Income tax Other income – basic rate band (W6) 59,020 × 20% 11,804 Other income – higher rate band 47,637 × 40% 19,055 –––––– 106,657 On savings income 3,353 × 40% 1,341 On dividend income 14,000 × 32.5% 4,550 –––––– 72,595 –––––– –––––– Income tax liability 36,750 Less: Tax credits

Dividends (10% × £14,000) (1,400)PAYE (7 × £1,150) (8,050)

–––––– Income tax payable 27,300 ––––––



Tutorial notes:

1. A loan provided by the employer which is below £5,000 all year is an exempt benefit.

2. The provision of one mobile phone per employee does not give rise to a taxable benefit, even if there is private use.

3. Car parking spaces at or near the employee’s place of work are an exempt benefit.

4. ISA interest and premium bond prizes are exempt from income tax.

5. National savings and investment bank interest is received gross.

Workings

(W1) Capital allowances computation

5 m/e 31 August 2010

General pool

Expensive cars (1) (2)

Business use

Total

£ £ £ 60% £ TWDV b/f 55,000 22,600 12,000Addition 11,200 –––––– 66,200Disposal proceeds (74,470) (19,500) (13,000) –––––– –––––– –––––– (8,270) 3,100 (1,000)Balancing charge 8,270 1,000 (9,270) –––––– –––––– Balancing allowance (3,100) × 60% 1,860 –––––– –––––– Net balancing charge on cessation (7,410) ––––––

Tutorial note:

1. In the final period of account on cessation of a trade, no AIA, FYA or WDA is available.

2. The private use of an asset by the assistant (i.e. an employee) is irrelevant to the capital allowance computation of the proprietor Sonia Silva.

3. Private use adjustments are applied to balancing allowances and charges in the same way as to WDAs.



(W2) Car and fuel benefit

CO2 emissions = 188 g/km, car and fuel available for 7 months %

Petrol 15 Plus: (185 − 130) × 1/5 11 ––– Appropriate percentage 26 ––– £ Car benefit (£22,500 × 26% × 7/12) 3,412 Less: Contributions (£10 × 7 months) (70) ––––– 3,342 Fuel benefit (£18,000 × 26% × 7/12) 2,730 ––––– Total benefits 6,072 –––––

Tutorial note:

Sonia's contribution towards the cost of private fuel is not relevant since she has not reimbursed her employer the full cost of private fuel consumed.

(W3) Computer

Benefit (£2,900 × 20% ×3/12) £145

––––

(W4) Property business income

Claiming rent-a-room relief

£

Gross rent receivable (£375 × 12) 4,500

Less: Rent a room relief (4,250)

–––––

Property business profits 250 ––––– Normal property assessment Gross rent receivable (as above) 4,500 Less: Expenses (195) ––––– 4,305 –––––

Sonia will opt for rent-a-room relief as it results in a lower taxable amount.



Tutorial note:

When the gross annual receipts are more that £4,250, an individual may choose to be assessed on:

(i) the excess over £4,250

(ii) the rental income receivable less allowable expenses.

(W5) Adjusted net income / PA

£ £ Basic PA 6,475 Total /Net Income 127,530 Less: Gross personal pension contribution (21,120) Gross Gift Aid donation (500) ––––––– 105,910 Less: Limit (100,000) ––––––– Excess 5,910 ––––––– Less: Reduction of allowance (50% × £5,910) (2,955) –––––– 3,520 ––––––

(W6) Extension of basic rate band

£ Basic rate band threshold 37,400 Plus: Personal pension contribution (gross) 21,120 Gift Aid donation (gross = £400 × 100/80)) 500 –––––– Extended basic rate band 59,020 ––––––



ACCA marking scheme Marks (a) Capital allowances – no WDA, AIA or FYA in period of cessation 0.5 Addition (no AIA) into general pool 0.5 Balancing charge on general pool 0.5 Balancing charge on Exp car 2 0.5 Balancing allowance on Exp car 1 1.0 Final period assessment 1.0 –––– 4.0 –––– (b) Salary 1.0 Appropriate percentage for car and fuel benefit 1.0 Car benefit – time apportioned 1.0 Deduct contribution towards car 0.5 Fuel benefit – time apportioned 1.0 No allowable deduction for contributions towards fuel 0.5 Loan benefit – exempt 0.5 Mobile phone benefit – exempt 0.5 Car parking – exempt 0.5 Computer benefit 1.0 Include trading income from part (a) 0.5 Property income – calculation claiming rent-a-room relief 1.5 Property income – showing rent-a-room relief beneficial 1.5 Dividends – grossed up 0.5 ISA interest – exempt 0.5 Premium bond – exempt 0.5 EASA interest 0.5 Adjusted net income 1.5 Personal allowance 2.0 Extended basic rate band 1.5 Tax on other income in basic rate band 0.5 Tax on other income at higher rate band 0.5 Tax on savings income 0.5 Tax on dividend income 0.5 Tax credit on dividend income 0.5 PAYE deduction 0.5 –––– 21.0 –––– Total 25.0 ––––



2 TOMTOM LTD

Key answer tips

This question is a classic, but detailed corporation tax question that needs an ordered approach to maximise the marks obtained. Each stage of the process is fairly straightforward with no particular difficulties, with the possible exception of the treatment of the lease payment.

The capital allowances need careful consideration however and as can be expected in such a question, the company is a marginal rate company so the tax calculation is therefore important.

The last parts are an independent section testing your VAT knowledge.

This part can be answered before part (a) and is a straightforward communication of rules and application to a small scenario. This should provide easy marks if you have learnt the rules. Remember that VAT will feature for at least 10 marks in each paper, and is usually easy to score highly on. Do not overlook this area in your revision!

(a) (i) Tomtom Ltd

Tax adjusted trading profit – year ended 31 March 2011 £ £ Profit before taxation 467,052 Trade debts (Note 1) 0 Non trade loan written off 3,000 Depreciation 120,256 Accountancy and audit (Note 2) 0 Legal fees – issue of share capital (Note 3) 11,040 Legal fees – new short lease (Note 4) 1,680 Gift to customers – sun visors (Note 5) 0 Gift to customers – food hampers (Note 5) 1,100 National charity – Not Gift Aid (Note 6) 1,600 Lease premium (Note 7) 80,000 Deduction of lease premium (W1) 3,840 Entertaining customers (Note 8) 10,108 Entertaining employees (Note 8) 0 Bank interest 19,920 Profit on disposal of building 200,000 Interest payable 0 Industrial buildings allowance (W2) Nil Plant and machinery (W3) 148,996 ––––––– ––––––– 695,836 372,756 (372,756) ––––––– –––––––– Tax adjusted trading profit 323,080 ––––––––



Key answer tips

In the adjustment to profits calculation it is important to list all the major items indicated in the question requirement, showing a zero (0) for expenditure that is allowable. This is because credit will be given for showing no adjustment where none is needed.

Lengthy explanations are not required where the requirement is just to ‘calculate’ the adjusted profits, rather than to explain them. The examiner prefers students not to use notes to the computation unless absolutely necessary.

Always show your workings if the figure you are adjusting for is not clear from the question.

Tutorial note:

1. Irrecoverable debts charged in accordance with Financial accounting guidelines by a company are allowable for tax purposes, as they will be specific in nature.

2. Accountancy and audit fees are allowable as incurred wholly and exclusively for the purposes of the trade.

3. The legal fees in connection with the issue of share capital are not allowable, being capital in nature.

4. The legal fees in connection with the renewal of a short lease (life of less than 50 years) are specifically allowable, however the costs relating to the setting up of a new lease are not allowable.

5. Gifts to customers are an allowable deduction if they cost less than £50 per recipient per year, are not of food, drink, tobacco, or vouchers exchangeable for goods, and carry a conspicuous advertisement for the company making the gift.

The sun visors cost £28 and carry an advertisement for the business, therefore they are allowable. However, the hampers contain food and cost more than £50 and are therefore not allowable.

6. A donation not made under the Gift Aid provisions is not allowable. Donations made under Gift Aid are allowable but are deducted from total profits in the taxable total profits computation, they are not an allowable deduction in the adjustment of profits either.

7. The cost of a lease is disallowable (capital), but there is relief for the ‘revenue’ element of the premium received spread over the life of the lease.

The revenue element is calculated using the P – (P × 2% × (n – 1)) formula and then divided by the life of the lease to calculate the annual deduction

8. The only exception to the non-deductibility of entertainment expenditure is when it is in respect of employees.



(ii) Tomtom Ltd

Corporation tax computation – 12 months CAP ended 31 March 2011 £ Tax adjusted trading profit (part (a) above) 323,080 Non-trading interest receivable (W4) 16,920 Chargeable gain (W5) Nil ––––––– Taxable total profits 340,000 ––––––– Corporation tax (W6) (£340,000 @ 28%) 95,200 Less: Marginal relief 7/400 × (£500,000 − £340,000) (2,800) ––––––– 92,400 ––––––– Workings

(W1) Lease premium

The proportion of the lease premium allowed as a deduction: £ Total 80,000 Less: 2% × (15 − 1) × £80,000 (22,400) –––––– Revenue cost 57,600 –––––– This is the taxable amount that Tomtom Ltd can deduct over the life of the lease. Annual deduction = (£57,600 ÷ 15 years) £3,840

(W2) Industrial buildings allowance

There no IBAs as the building has been sold during this CAP.

The company is not entitled to any allowances in the year of disposal.

(W3) Capital allowances computation

Tutorial note:

1. Capital allowances on new car purchases are now calculated based on the CO2 emissions of the car as follows:

CO2 emissions of < 111 g/km: eligible for a FYA of 100%. CO2 emissions of between 111 – 160 g/km: put in main pool, eligible for a WDA at 20%. CO2 emissions of > 160 g/km: put in special rate pool, eligible for a WDA at 10%.

The appropriate rates are given in the tax rates and allowances.



2. The maximum £100,000 AIA is available for the group of companies as a whole.

However, since neither of the other companies has made any capital additions during the period, you can assume that the full AIA will be allocated to Tomtom Ltd.

General Pool

Expensive car

Total allowances

£ £ £ £ 12 m/e 31.3.2011

TWDV b/f 149,300 13,500 Additions (with AIA ) Machinery 90,260 Computer 10,140 ––––––– 100,400 Less: AIA (max) (100,000) 100,000 ––––––– 400 Disposals (15,220) (5,500) ––––––– –––––– 134,480 8,000 Balancing allowance (8,000) 8,000 –––––– Less: WDA (20%) (26,896) 26,896 Additions (with FYA) Low emission car 14,100 Less: FYA (100%) (14,100) 14,100 ––––––– Nil ––––––– TWDV c/f 107,584 ––––––– Total allowances 148,996 –––––––

(W4) Non-trading interest receivable

£ Bank interest receivable 19,920 Less: Non-trade debt written off (3,000) –––––– 16,920 ––––––

Tutorial note:

The non-trade debt written off is not allowable against trading profits (part (a)), however it is an allowable deduction against interest income in part (b).



(W5) Chargeable gain

£ Disposal proceeds 350,000 Less: Acquisition cost (150,000) ––––––– Unindexed gain 200,000 Less: Indexation allowance (22,050) ––––––– Chargeable gain 177,950 –––––––

The gain can be rolled over against the acquisition cost of the office building acquired on 1.9.10.

There is no restriction to the amount of rollover relief.

All of the gain can be deferred as all of the proceeds received (£350,000) are reinvested on 1 September 2010.

The reinvestment takes place within the qualifying time period 1 January 2010 to 1 January 2014 (i.e. between one year before and three years after the date of disposal).

Therefore, no chargeable gain arises now in the chargeable accounting period to 31 March 2011.

Key answer tips

Even though it is clear that all of the sale proceeds are reinvested and therefore there will be no chargeable gain assessed in the year ended 31 March 2010, you need to calculate the chargeable gain and explain how much will be deferred, and why, to obtain the maximum marks available.

(W6) Corporation tax rate

There are three companies under common control.

Therefore the 'limits' applicable to each company are:

Lower limit: £300,000 × 1/3 = £100,000

Upper limit: £1,500,000 × 1/3 = £500,000

Taxable total profits = Augmented Profits = £340,000

Therefore the company is a marginal rate company.

Tutorial note:

Taxable total profits = Augmented profits as there are no dividends received by Tomtom Ltd from any other companies.



(b) Monthly payments on account of VAT

Key answer tips

Monthly payments on account under the annual accounting scheme are based on the VAT payable for the previous year. This first part of the question was only worth three marks and therefore it should be clear that detailed computations are not required and that the reason for the previous year information in the question is for the purposes of this part.

Calculations based on the current year position were not required until the next part of the question, which required a VAT return and should be an expected standard requirement.

• Each payment on account of VAT will be £1,836 (£18,360 × 10%), being 10% of the VAT payable for the previous year.

• Prontaprint Ltd will have made nine payments on account, and these will have been paid for the months of April to December 2011, being months 4 to 12 of the annual VAT return period.

(c) (i) VAT payable – year ended 31 December 2011 £ £

Output VAT Sales (£288,000 × 20%) 57,600 Motor car scale charge (£1,760 × 20/120) 293 Office equipment (£14,400 × 20%) 2,880 –––––– 60,773 Input VAT Purchases (£68,400 × 20%) 13,680 Expenses (Note 1) (£50,400 – £6,480 = £43,920 × 20%)

8,784

Machinery (£43,200 × 20%) 8,640 Impaired debt (Note 3) (£8,640 × 20%) 1,728 –––––– (32,832) –––––– VAT payable 27,941 ––––––

Tutorial note:

1. VAT is calculated using the rate of 20% because the period is the year ended 31 December 2011. The question specifically says there are no transactions in the first four days of the year and therefore the rate of 20% applies throughout. The examiner has said that he will not set a question requiring the use of different rates within one question.

2. Input VAT on business entertainment is not recoverable.

3. Input VAT cannot be recovered in respect of the motor car as this is not exclusively for business purposes.



4. Relief for the impaired debt is available because the claim is made more than six months from the time that payment was due, and the debt has been written off in the company’s books.

5. The tax is calculated as 20/120 for transactions quoted gross, however the use of 1/6 is also acceptable.

(ii) Annual VAT return

• Prontaprint Ltd made payments on account totalling £16,524 (£1,836 × 9), so a balancing payment of £11,417 (£27,941 – £16,524) would have been due with the annual VAT return.

• The annual VAT return, along with the balancing payment, would have been due by 28 February 2012, being two months after the end of the annual VAT period.

ACCA marking scheme Marks

(a) (i) No adjustment for trade debt charges 0.5 Non-trade debt adjustment 0.5 Depreciation adjustment 0.5 No adjustment for accountancy 0.5 Legal fees re share capital adjustment 0.5 Legal fees re-new short lease adjustment 0.5 No adjustment for sun visors 0.5 Food hamper adjustment 0.5 Adjustment for donation not under Gift Aid 0.5 Lease premium adjustment 0.5 Lease premium allowable deduction 2.0 Entertaining customers adjustment 0.5 No adjustment for entertaining employees 0.5 Bank interest deduction 0.5 Profit on disposal deduction 0.5 No adjustment for interest payable 0.5 No IBAs available 0.5 Additions qualifying for AIA 1.0 Maximum AIA given 0.5 Disposals – deduction of lower of sale proceeds and cost 0.5 Balancing allowance 0.5 Writing down allowance 0.5 FYA @ 100% 1.0 –––– 14.0 –––– (a) (ii) Tax adjusted trading profit – pick up figure from part (a) 0.5 Non-trade interest receivable 1.0 Chargeable gain in computation 0.5 Calculation of chargeable gain 1.0 Explanation of rollover relief 1.0 Corporation tax liability computation 1.5 Upper and lower limits – decision re-rate of tax 0.5 –––– 6.0 ––––



Marks (b) Payments on account 1.0 Months due 1.0 –––– 2.0 –––– (c) (i) Sales 0.5 Car – scale charge 1.0 Office Equipment 0.5 Purchases 0.5 Expenses 1.0 Motor car 1.0 Machinery 0.5 Irrecoverable debt 1.0 –––– 6.0 –––– (b) (ii) Balancing payment 1.0 Due date 1.0 –––– 2.0 –––– Total 30.0 ––––

3 JANET PLANET

Key answer tips

A typical capital gains tax question with several disposals including a disposal of shares and a part disposal.

Consideration of Entrepreneurs’ relief is required on each disposal, and remember that there is a need to keep the gains qualifying for relief separate from the non qualifying gains.

As the calculation of gains is now much simpler than it used to be, examination questions going forward are more likely to test knowledge of the reliefs in detail.

(a) Janet Planet

Capital gains tax – 2010/11

£ £ Gains qualifying for Entrepreneurs’ relief 26 April 2010 – Disposal of shares in Crate Ltd

Sale proceeds 94,600 Less: Cost (W) (63,500) –––––– Chargeable gain 31,100 ––––––



£ £ Gains not qualifying for Entrepreneurs’ relief 14 June 2010 – Painting Sale proceeds 142,000 Less: Cost (130,000)

–––––––– Chargeable gain (Note 2) 12,000

18 July 2010 – Investment property Sale proceeds 80,000 Less: Cost (100,000) –––––––– Allowable loss (20,000)

17 September 2010 – Office building Sale proceeds 280,000 Less: Cost (80,000) ––––––– Chargeable gain (Note 3) 200,000

14 November 2010 – Two apartment blocks Sale proceeds 140,000 Less: Deemed cost

£250,000 × 320,000££140,000

£140,000

+

(76,087)

––––––– Chargeable gain (Note 2) 63,913 ––––––– Total net chargeable gains 255,913 Less: Capital losses b/f (28,600) ––––––– 227,313 Less: Annual exemption (10,100) ––––––– Taxable gains not qualifying for Entrepreneurs’ relief 217,213 ––––––– Capital Gains tax: Gains qualifying for Entrepreneurs’ relief: £31,100 @ 10% 3,110

Other taxable gains: £217,213 @ 28% 60,820 ––––––– 63,930 ––––––– Due date of payment 31.1.2012

Notes on the availability of Entrepreneurs’ relief:

1. Entrepreneurs’ relief is available on the disposal of shares in a personal trading company by an employee of the company held for a minimum period of ownership.

As Janet has owned more than a 5% interest in the company for more than 12 months and she is an employee, she is eligible to claim the relief.



2. Entrepreneurs’ relief is available on business assets but not investment assets.

3. Entrepreneurs’ relief is not available on the disposal of individual assets out of a business. The whole business is required to be sold for the relief to be available.

Tutorial note:

1. The capital loss brought forward and the annual exemption are set against gains not qualifying for Entrepreneurs’ relief.

2. The gains qualifying for Entrepreneurs’ relief are deemed to utilise the basic rate band first.

Therefore the basic rate band remaining of £2,400 (£37,400 – £35,000 is set against gains qualifying for Entrepreneurs’ relief leaving the remaining gains to be taxed at 28%.

Working: Share pool – shares in Crate Ltd

Share pool Number Cost £ 26.5.95 Acquisition 6,000 24,000 24.10.03 Acquisition 5,000 27,500 22.3.09 Acquisition 2,000 12,000 –––––– –––––– 13,000 63,500 26.4.10 Disposal (13,000) (63,500) –––––– ––––––

ACCA marking scheme

Marks Share pool computation 1.0 Chargeable gain on shares 0.5 Entrepreneurs’ relief – explanation re-availability on shares 2.0 Chargeable gain on painting 0.5 Entrepreneurs’ relief – not available on investment assets 1.0 Allowable loss on investment property 0.5 Deduct current year loss from current year gains 0.5 Chargeable gain on office building 0.5 Entrepreneurs’ relief – not available on individual business assets 1.0 Deemed cost of disposal of apartments 2.0 Chargeable gain on apartments 0.5 Capital loss b/f deduction against non qualifying gains 0.5 Annual exemption deduction against non qualifying gains 0.5 Capital gains tax calculation 3.0 Due date of payment 1.0 Total

_____ 15.0 –––––



4 BUCK STAR

Key answer tips

This question is fairly straightforward, testing the calculations of additional tax liability from the viewpoint of the taxpayer as well the tax implication on the company and then making a choice between the two alternatives. The final part was on pensions implications.

Buck star is a higher rate taxpayer whose taxable income is already in excess of £45,000; therefore additional income tax is at the 40% rate and he also has earning above the class 1 NIC threshold.

(a) Additional director’s remuneration

• Buck’s additional income tax liability for 2010/11 will be £20,000 (£50,000 at 40%).

• The additional employee Class 1 NIC will be £500 (£50,000 at 1%).

Dividend

• Buck’s additional income tax liability for 2010/11 will be:

£ Dividends (£50,000 × 100/90) 55,556 –––––– £55,556 at 32·5% 18,056 Less: Tax credit (£55,556 at 10%) (5,556) –––––– 12,500 ––––––

• There will be no employee’s Class 1 NIC.

(b) Additional director’s remuneration

• The additional employer’s Class 1 NIC will be £6,400 (£50,000 at 12·8%).

• The corporation tax liability for the year ended 31 March 2011 will be £40,656 (£250,000 – £50,000 – £6,400 = £193,600 at 21%).

Dividend

• The corporation tax liability for the year ended 31 March 2011 will be £52,500 (£250,000 at 21%).

(c) Most beneficial option

Remuneration£

Dividend £

Additional income tax 20,000 12,500 Additional employee Class 1 NIC 500 – Additional employer Class 1 NIC 6,400 – Corporation tax 40,656 52,500 –––––– –––––– 67,556 65,000 –––––– ––––––

It is therefore beneficial for Buck to withdraw the £50,000 as a dividend since the overall tax liabilities will be £2,556 (£67,556 – £65,000) less.



(d) Tax implications of pension contributions

• Contributions to approved pension schemes are tax deductible, so Frothy-Coffee Ltd’s corporation tax liability for the year ended 31 March 2011 will be £42,000 (£250,000 – £50,000 = £200,000 at 21%).

• There are no tax implications for Buck, since employer pension contributions are not taxable benefits.

• Although Buck will not have immediate access to the £50,000, it will accumulate tax-free within the pension fund, and will increase the pension (and tax-free lump sum) that will be paid upon his retirement.

ACCA marking scheme Marks

(a) Directors Remuneration Income tax liability 1.5 Employee Class 1 NIC 1.0 Dividends Income tax liability 2.0 Employee class 1 NIC 0.5 _____

5.0 –––––

(b) Directors remuneration Employer class 1 NIC 1.0 Corporation tax liability 2.0 Dividends Corporation tax liability 1.0 _____

4.0 –––––

(c) Directors remuneration 1.0 Dividend 1.0 Conclusion 1.0 _____

3.0 –––––

(d) Corporation tax liability 1.0 Not a taxable benefit 1.0 Pension fund 1.0 _____

3.0 Total _____

15.0 –––––



5 BARBARA BALL

Key answer tips

This question covers lifetime and death tax on lifetime gifts. It is important to work through the answer in chronological order, dealing with the lifetime tax for each gift, and then the tax due as a result of her death.

Don’t forget to include the due dates and state who will pay the tax for some easy marks.

Lifetime tax on lifetime gifts

May 2005 Gift of shares to nephew – PET

£ Transfer of value 100,000 Less: Annual exemption – 2005/06 (3,000)

– 2004/05 b/f (3,000) –––––– PET 94,000 –––––– Lifetime IHT payable Nil ––––––

Tutorial note:

Note that as the gift is a PET, no lifetime IHT is payable, therefore the information in the question about the nil rate band in 2005/06 is not relevant.

Only the nil rate band at the date of death is required to calculate the tax on death.

June 2007 Gift into trust – CLT £

£ Transfer of value 323,200 Less: Annual exemption – 2007/08 (3,000)

– 2006/07 b/f (3,000) ––––––– Net chargeable amount 317,200 Nil rate band at date of gift – 2007/08 300,000 Less: GCTs in 7 years pre-gift (June 2000 – June 2007) (Note)

(Nil)

–––––– Nil rate band available (300,000) ––––––– Taxable amount 17,200 ––––––– Lifetime IHT payable (£17,200 × 25%) 4,300 ––––––– Due date of payment 30 April 2008Paid by Barbara

Gross chargeable transfer c/f (£317,200 + £4,300) £321,500 ––––––



Tutorial note:

When cumulating gross chargeable transfers in the previous seven years in lifetime calculations, always ignore PETs as they have not become chargeable to tax.

Since Barbara is paying the tax on the lifetime gift, the amount transferred to the trust is a net gift and the tax is chargeable at 25%.

The gross chargeable transfer carried forward is the net gift plus the lifetime tax paid.

July 2007 Gift to Nina – PET

£ Transfer of value 20,000 Less: Marriage exemption (5,000) Less: Annual exemption – already utilised Nil –––––– PET 15,000 –––––– Lifetime IHT payable Nil ––––––

Tutorial note:

The annual exemption is automatically offset against the first gift in the tax year, and is therefore not available against this gift.

August 2007 Gift of shares to Ella – PET

£ Diminution in value principle: Value of shares before gift = 60% holding (12,000 × £8) 96,000 Less: Value of shares after gift = 35% holding (7,000 × £6) (42,000) –––––– Transfer of value 54,000 Less: Annual exemption – already utilised Nil –––––– PET 54,000 –––––– Lifetime IHT payable Nil ––––––

Tutorial note:

The diminution in value principle applies to the gift of shares unquoted shares where a higher percentage shareholding has a higher value per share than a lower percentage shareholding.

The transfer of value is calculated as the difference between the value of the asset before and after the transfer.



Death tax on lifetime gifts

All of the gifts are within seven years of the date of death and therefore all become chargeable at death.

May 2005 Gift of shares to nephew – PET

£

£

Gross chargeable transfer (above) 94,000 Nil rate band at date of death 325,000 Less: GCTs in 7 years pre-gift (May 1998 – May 2005) (Nil) –––––– Nil rate band available (325,000) –––––– Taxable amount Nil –––––– IHT payable Nil –––––– June 2007 Gift of shares to trust – CLT

£

£

Gross chargeable transfer (above) 321,500 Nil rate band at date of death 325,000 Less: GCTs in 7 years pre-gift (June 2000 – June 2007) (94,000) –––––– Nil rate band available (231,000) ––––––– Taxable amount 90,500 ––––––– IHT (£90,500 × 40%) 36,200 Less: Taper relief (June 2007 to February 2011) (3 – 4 years) (20%)

(7,240)

–––––– 28,960 Less: Lifetime tax paid (4,300) –––––– IHT payable 24,660 –––––– Due date 31 August 2011Paid by Trustees

Tutorial note:

When cumulating gross chargeable transfers in the previous seven years in death calculations, ignore PETs if they have become completely exempt but include if they have become chargeable on death.

Death tax on lifetime gifts is always paid by the donee.



July 2007 Gift to Nina– PET £

£

Gross chargeable transfer 15,000 Nil rate band at date of death 325,000 Less: GCTs in 7 years pre-gift (July 2000 – July 2007) (415,500) ––––––– Nil rate band available (Nil) –––––– Taxable amount 15,000 –––––– IHT (£15,000 × 40%) 6,000 Less: Taper relief (July 2007 to February 2011) (3 – 4 years) (20%)

(1,200)

–––––– 4,800 Less: Lifetime tax paid (Nil) –––––– IHT payable 4,800 –––––– Due date 31 August 2011 Paid by Nina

Tutorial note:

When cumulating gross chargeable transfers in the previous seven years in death calculations, always include CLTs.

August 2007 Gift of shares to Ella – PET

£

£

Gross chargeable transfer 54,000 Nil rate band at date of death 325,000 Less: GCTs in 7 years pre-gift (July 2000 – July 2007) (430,500) ––––––– Nil rate band available (Nil) –––––– Taxable amount 54,000 –––––– £ IHT (£54,000 × 40%) 21,600 Less: Taper relief (August 2007 to February 2011) (3 – 4 years) (20%)

(4,320)

–––––– 17,280 Less: Lifetime tax paid (Nil) –––––– IHT payable 17,280 –––––– Due date 31 August 2011 Paid by Ella



ACCA marking scheme Marks Lifetime tax Gift to nephew – value of PET 0.5 – state no tax to pay on all PETs 0.5 Gift to trust – value of CLT – 2 × annual exemptions 0.5

– NRB available 1.0 – lifetime tax 0.5 – due date 0.5 – paid by 0.5 – gross transfer to c/f 0.5 Gift to Nina – value of PET – marriage exemption, no AEs available 1.0 Gift to Ella – transfer of value 1.0 – no AEs 0.5 Death tax: Gift to nephew – state no tax to pay, covered by NRB 1.0 Gift to trust – NRB available 0.5 – IHT payable 1.5 – due date for all death tax 0.5 – paid by 0.5 Gift to Nina – NRB available 0.5 – IHT payable 1.0 – paid by 0.5 Gift to Ella – NRB available 0.5 – IHT payable 1.0 – paid by 0.5 Total

_____ 15.0 –––––



Documents

ACCA F6 Revision Mock Ans J11%28with Marks