November 2015 Examination

PAPER 1
Personal Taxation
Part I Suggested Solutions

1.
List price
Add: Accessories
Less: Capital contribution (maximum 5,000 (1/2))
Revised list price

45,000
7,500 (1/2)
(5,000) (1/2)
47,500

Roberts car is 175g/kg so the percentage to be applied is 12% + 1% for each g/kg above
95g/kg therefore 12% + 16% = 28% (1)
47,500 x 28% x 9/12 = 9,975 (1/2)
(3 marks)
2.
Proceeds
Add: withdrawals (less than 5%)
6 x 3% x 26,000
Less: Initial premium
Overall profit

32,000
4,680
(26,000)
10,680

(1/2)
(1)
(1/2)

(2 marks)
3.
a) Statutory redundancy pay
The statutory redundancy payment is initially subject to tax (1/2) however is rendered nontaxable by the application of, and consequent reduction in, the 30,000 limit (1/2).
b) Ex gratia payment
This payment is not treated as general earnings (1/2). It will be taxed as specific employment
income to the extent it exceeds 30,000 when aggregated with other termination payments
(1/2). The 30,000 limit is reduced by statutory redundancy payments to 27,400 (30,000 2,600) (1/2).
c) Holiday pay
This payment is made under Amys employment contract (1/2) and therefore is taxable as
general earnings (1/2).
d) Pension scheme
A payment into a registered pension scheme is exempt from Income Tax (1/2).
(4 marks)

4.

1)

The option was granted with an exercise price in excess of the market value at the
date of grant (1/2) this means that no Income Tax will arise on the exercise of the
option (1/2).

2)

On the sale of the shares, a capital gain will arise on the difference between the
disposal proceeds of 5 and the exercise price of 2.50 (1). Lucas will be able to
deduct the annual exempt amount from his chargeable gain (1/2). Capital Gains Tax
will be due at 28% (1/2).

3)

As there is more than a year between the grant of the option and the subsequent sale,
Lucas will be entitled to claim Entrepreneurs Relief on the gain on disposal of the
shares and will be taxed at 10% on any gain (1).

(4 marks)
5.

Sale of Sea View Cottage

Proceeds (1/2)
Less: Cost
Renovation costs
Repairs (income expense)
Chargeable gain

325,000
(78,000)
(32,000)
0
215,000

(1)

Grant of lease of Cliff Top Heights

Premium (1/2)
Less: Legal costs (1/2)

136,000
(2,750)

Less: Cost
200,000 x 136,000/(136,000 + 280,000) (1)
Chargeable gain

(65,385)
67,865

Chargeable gain (215,000 + 67,865)

Less: Annual exempt amount (1/2)
Taxable gain

282,865
(11,000)
271,865

(4 marks)
6.

12,500
181
1,444
(10,660)
3,465

Pension income (1/2)

Bank interest (145 x 100/80) (1/2)
Dividend (1,300 x 100/90) (1/2)
Less: Personal age allowance (1/2)
Net income

Tax thereon:
1,840 (12,500 10,660) @ 20%
181 @ 10%
1,444 @ 10%

(1)

Less: Married couples allowance 8,165 @ 10% (1 max)

Total tax liability

368
18
144
(530)
Nil

(4 marks)
7.

As Chase occupied the house as her main residence (1/2) she will be entitled to Principal
Private Residence relief in respect of any periods of actual occupation (1/2).
In addition, she will be able to claim relief for periods of deemed occupation (1/2) as she
occupied the property before (1/2) and after (1/2) her period of absence. Her period of
absence whilst she worked abroad (1/2) will qualify as a deemed period of occupation. There
is no time limit on the period of absence whilst working abroad (1/2).

Whilst she was travelling, this would qualify as a period of deemed occupation (1/2) as the
period of absence was less than three years for any reason. (1/2)
The last 18 months (1/2) will always be treated as deemed occupation as Chase lived in the
property at some point. (1/2)
The periods of actual and deemed occupation cover the whole period of ownership so Chase
will not pay CGT on the sale of the house. (1/2)
(Max 4 marks)
8.

The maximum contribution upon which an employee can receive tax relief is 100% of his
relevant earnings (1/2). Anybody can pay in up to 3,600 irrespective of their earnings (1/2).
Relevant earnings include employment income (1/2) and furnished holiday letting income.
(1/2) There is an annual allowance of 40,000 for 2014/15 (1/2) which effectively sets a limit
on the amount of contribution that can qualify for relief. This can be increased by carrying
forward any unused annual allowance from the previous three tax years (1/2).
(Max 3 marks)

9.

Henrys gift to Elizabeth

As Elizabeth had to use additional cash to purchase the property only part of the annual
rental amount will be subject to tax:

47,000 x (500,500/775,000)

30,353 (1 1/2)

Caterinas gift to Juan

268,000 x 3.25%
Less: Rent paid 325 x 12

8,710 (1/2)
(3,900) (1/2)

Notional income chargeable

4,810 (1/2)

Note: The 5,000 exemption does not apply as the rental value prior to the deduction of the
rent actually paid exceeds 5,000.
(3 marks)
10.

An individual will be subject to the remittance basis charge if:

They are non-UK domiciled (1/2);

They are aged 18 or over (1/2);
They have been resident in the UK for seven of the nine preceding tax years (1/2);
and
They claim the remittance basis of taxation (1/2).

An individual will have to pay a 30,000 (1/2) remittance basis charge in respect of the nonUK gains that are not remitted to the UK (1/2). This will increase to 50,000 (1/2) if the
individual has been in the UK for 12 out of the 14 preceding tax years (1/2).The charge is in
addition to any tax due on gains remitted to the UK. (1/2)
(Max 4 marks)

11.

There will be a withdrawal of relief if the individual disposes of their shares within five years
of acquisition (1/2) or if the Venture Capital Trust loses its HMRC approval within five years
of the subscription date (1/2).
The claw back of the relief will be equal to 30% of the sales proceeds (1/2). However, the
claw back cannot exceed the amount of the original relief (1/2). Where the trust loses its
HMRC approval, the claw back will be the relief originally obtained. (1/2)
(Max 2 marks)

12.
(a)
(b)
(c)
(d)

Salary above the lower earnings limit will be subject to class 1 employees NIC. (1/2)
Childcare vouchers are exempt up to relevant limit, depending on the tax payers
marginal rate of tax. (1/2) Any excess is subject to class 1 employees NIC. (1/2)
The shares will only be subject to class 1 employees NIC if they are readily convertible
assets. (1/2)
Mileage payments of less than 45p per mile (1/2) are not subject to employees NIC.
(1/2)

(3 marks)

November 2015 Examination

PAPER 1
Personal Taxation
Part II Suggested Solutions

1.
Gain/(loss)

Hayball Ltd
Share pool
Date
October 1985
May 2000
April 2005
June 2014

No
10,000
20,000
10,000

Cost

10,000
500,000
200,000

40,000
(10,000)
30,000

710,000
(177,500)
532,500

Proceeds
Less: Costs of disposal

5% x 250,000

Less: Cost
Gain

(1)

()

250,000
(12,500) ()
237,500
(177,500) ()
60,000

Purkiss plc
Proceeds
7.15 x 10,000
71,500
Less: Cost
(100,000)
Loss
Lower () of:
Quarter up
7.10 + (7.30 7.10) = 7.15 (1)
Average of highest and lowest marked bargains
(7.35 + 7.05)/2 = 7.20 (1)

()
()
(28,500)

Minnaar Ltd

Cash
Loan notes

Consideration

3,750,000 ()
3,150,000 ()
6,900,000

Base cost

(271,739) ()
(228,261) ()
(500,000)

Frozen gain released on redemption of half of the

loan notes in February 2015
Watch

3,478,261 ()
Frozen gain () = 2,921,739

50% x 2,921,739 ()

Exempt as a wasting chattel ()

Chairs
As the disposal of a set, the two transactions need to be viewed together ()
34,000 ()
Aggregate market value in September 2014
17,000 ()
Proportion applicable to the four chairs sold
(3,750) ()
Base cost of the four chairs
7,500 / 2
Gain

1,460,870

13,250

Painting
Proceeds
Cost

Probate value

Relievable against gain to same connected party,

James
Clogged loss to carry forward
Net gains
Annual exempt amount

10,000 ()
(30,000) ()
(20,000)
13,250

(13,250) (1)

6,750
4,970,631
(11,000) ()

Chargeable gains

4,959,631

Capital Gains Tax at 28% ()

1,388,697

(15 marks)

2.
1)

Pension
Rental income
Rent a room No. 3
Murray Street
Trust income
Bank interest
Cash dividend
Scrip dividend
Overseas dividend

(working 1)
(150 x 52) () 4,250 ()
10,000 () x
100/55 ()
260 x 100/80
1,575 x 100/90
1,260 x 100/90
950 x 100/95 ()
x 100/90 ()

Tax due:

32,490
15,913
48,403
325
4,261

31,865 () + (500 x 100/80) () =

@ 20%
@ 40%

6,498
6,365

@ 40%
@ 32.5%

130
1,385

Tax deducted

5,000
8,182

1,750 ()
1,400 ()

325
325

1,111
4,261
4,261

65
175
140
50 (overseas)
+ 111

32,490

(1)

14,378
(50) ()

Tax liability after DTR

Tax deducted at source:
PAYE on pension
Trust income
Bank interest
UK dividends (175 + 140)

14,328

Tax payable

Dividends

325 ()

Tax liability
Less: double tax relief

Overseas dividend

Savings

18,182

58,403
(10,000) ()
48,403

Personal allowance

Basic rate band =

Non-savings

25,000 ()
11,671 [7]
3,550

5,000
8,182
65
315

Clearly UK tax would be more, so all

deductible

(1)

111 ()
(13,673)
655

Working 1 - Property income

No.2 Nadal Avenue rent
Woodland

40,000 x 8/12
600 x 12

Insurance

1,500 () x 11/12
()

26,667 ()
7,200 ()

33,867

Water rates
Council Tax
Mortgage interest
Energy Saving
Allowance
Repair floorboards
Washing machine
Wear & tear allowance

Replacement washbasin
Leaf/wood clearance

(restricted)

10% x (26,667 ()
(750 x 8/11) (1,600
x 8/11)) (1)
(375 100)

1,375
750 ()
1,600 ()
13,500 ()
1,500 ()
350 ()
- .()
2,496

275 ()
350 ()
(22,196)
11,671

(17 marks)
2)
Lex situs is the law of the place where the land is situated ().
The lex situs always applies to determine:

How land is transferred ().

How security for a loan over land may validly be given ().
Proper law is the law of a particular jurisdiction which parties to a land contract choose to govern the
contract (). This is the law which the courts will use to determine disputes and remedies under the
contract ().
It is the proper law of contract that will govern any attempt to recover unpaid rent from the paintballing
club ().

(3 marks)

3.
Anne Adviser
Advisers Address

Phillip Fogg
104 Pall Mall
London
[...] November 2015

Top and tail (1)

Dear Phillip
Enterprise Investment Scheme (EIS)
Thank you for your letter dated [...].
The company in which you invested, Verne Ltd, has to meet a number of conditions for a successful
EIS claim to be made, namely:

It must be an unquoted () trading () company

Its trade must not be an excluded trade ()
It must have a permanent establishment in the UK ()
It must not be in financial difficulty ()
It must not be a 51% (or more) subsidiary of any other company ()
It must not have subsidiaries of which it owns less than 51% of the share capital ()
Its gross assets before the investment must not exceed 15m () and, after the investment,
16m ()
It must not have 250 employees or more. ()

The Income Tax relief available is 30% of the investment made (), up to a maximum of 1,000,000
(). The relief on your investment will therefore be 300,000. () You need to claim this relief by the
5th anniversary of the 31 January following the year of investment () i.e. in your case by 31 January
2021 ().
Contrary to your understanding, the capital gain realised on your disposal of the EIS shares will not be
subject to Capital Gains Tax as long as:

Your shares in Verne Ltd are sold more than three years after the date of issue (), and
You obtained EIS Income Tax relief on your subscription. ()

In addition, your investment in Verne Ltd may enable you to defer () the tax that you paid on the
disposal of your personal investment company () and thereby reclaim some of the tax that you paid
in relation to that gain ().
Any () capital gain can be deferred when an EIS investment is made in the period from 12 months
before () the gain arose to 36 months after (). As the gain on your personal investment company
was realised less than three years () before you invested in Verne Ltd, some of the gain can be
deferred.
The amount of the gain that can be deferred is the lower of the gain () and the amount of the EIS
investment (); in your case therefore, 1.2m () of the gain from the disposal of your personal
investment company, although you could specify a lower amount. ().
The deferred gain of 1.2m will be subject to Capital Gains Tax on a future chargeable event () for
example the disposal of your shares in the EIS company, Verne Ltd (). I trust that the above is of use
but please do not hesitate to contact me if you have any queries.
Yours sincerely,
Anne
(Max 15 marks)

4.
1)
The objectives of professional clearance are:
To ensure that the incoming adviser is fully aware of all the factors that may be relevant to client
acceptance and the effective handling of the clients tax affairs (1).
To ensure that the incoming adviser is fully aware of all factors that may have a bearing on
ensuring full disclosure of all relevant facts to HMRC (1).
To ensure the clients affairs are properly dealt with, on a timely basis, and that no filing
deadlines, time limits for claims, elections, notices of appeal and other similar matters are
missed in the transition period (1).
Any two of the above.
(Max 2 marks)
2)
To:

Mr Carroll

From:

A Supervisor

Date:

[...] November 2015

Re:

Tax return filing deadlines and penalties

( - Layout as email)

Dear Mr Carroll
Further to our recent phone conversation, I write to provide details of the penalties that can arise when
a tax return is submitted late.
A tax return should be filed by 31 October following the end of the tax year if it is filed as a paper return
() or by 31 January following the tax year if it is filed as an electronic return (). For 2013/14, these
filing dates are 31 October 2014 and 31 January 2015 respectively. () However, these dates are
replaced by three months after the date HMRC issued the return, if later. ()
If these deadlines are not met, the following penalties will apply:

A flat 100 penalty for filing late ()

10 per day penalty may be imposed after the return is 3 months late (); this penalty can be
applied for a maximum of 90 days ()
If more than 6 months late () a penalty of 5% of the liability to tax (), or 300 if more, will be
incurred
If more than 12 months late () a further penalty of 5% of the liability to tax, or 300 if more,
will be incurred ()
If more than 12 months late and there has been a deliberate withholding of information (), the
penalty can rise to 70% () of the liability to tax if there has been no concealment () and to
100% () if there has been concealment (). Both of these penalties can be reduced if there
is either prompted or unprompted disclosure to HM Revenue & Customs ().

I would recommend that you file the required return and pay the necessary tax as soon as possible ()
so as to minimise these penalties; we would be happy to assist you with this.
Kind regards,
A Supervisor
(Max 8 marks)