This document is a set of exam ready notes to be taken into the Business Planning: Taxation (BPT) ICAEW ACA Exam. They provide answers to all scenarios that could come up in the exam which can then be used in the open book exam and tailored to the specifics of the question. The answers discuss the ...
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This is a fantastic resource if you have a brain fart in the exam. These model answers will score highly even if you don't know what you are talking about.
However, the figures within the answers are not up-to-date so make sure you note down the correct figures. I also made a contents page which I found v useful.
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Contents
Scenario: Gifting business assets to connected person .................................................................................................. 3
Scenario: Gift with reservation of benefit (GWROB) ...................................................................................................... 4
Scenario: Leaving business in will .................................................................................................................................... 4
Scenario: Gift of Shares – Gift VS Trust Vs Will ............................................................................................................... 4
Scenario: Takeover with mixed consideration ................................................................................................................ 6
Scenario: Sole Trader vs Limited Company ..................................................................................................................... 8
Scenario: Remuneration via cash bonus vs. pension scheme......................................................................................... 9
Scenario: Pension contributions .................................................................................................................................... 10
Scenario: Termination Payments ................................................................................................................................... 10
Scenario: Share buy back from individual or corporate shareholder (Purchase of own shares – POOS) ................... 12
Scenario: Trade and Asset Sale with Individual s/h ...................................................................................................... 13
Scenario: Share Sale with individual s/h ....................................................................................................................... 15
Scenario: Trade and Asset Sale with corporate s/h ...................................................................................................... 16
Scenario: Share Sale with corporate s/h ....................................................................................................................... 17
Scenario: Purchase of co. by MBO: ................................................................................................................................ 19
Scenario: Alternative method – Hivedown: .................................................................................................................. 21
Scenario: Incorporation (of sole trader / partnership) (QB Q45) ................................................................................. 23
Scenario: Sale of unincorporated business to third party ............................................................................................ 26
Scenario: Sale of unincorporated business to a connected individual ......................................................................... 27
Scenario: Disincorporation (& Liquidation) ................................................................................................................... 29
Scenario: Sole Trader Ceasing to Trade ......................................................................................................................... 31
Scenario: Sale and Leaseback ......................................................................................................................................... 32
Scenario: Close companies with loans and benefits ..................................................................................................... 33
Scenario: Acquiring a new subsidiary ............................................................................................................................ 34
Scenario: Transfers of chargeable assets between groups ........................................................................................... 34
Scenario: Purchasing the shares vs trade and assets of an overseas company ........................................................... 35
Scenario: Incorporating a PE .......................................................................................................................................... 36
Scenario: Establishing an overseas subsidiary vs. overseas PE (and International Anti‐Avoidance) .......................... 37
Scenario: Value Transfer / Value Shifting Provision...................................................................................................... 40
Scenario: Company migrating from the UK ................................................................................................................... 40
Scenario: Setting up a discretionary trust ..................................................................................................................... 41
Scenario: Thin capitalisation .......................................................................................................................................... 42
SSE: .................................................................................................................................................................................. 42
Consortiums: ................................................................................................................................................................... 42
Depreciatory Transactions: ............................................................................................................................................ 43
Scenario: Patent Box ...................................................................................................................................................... 43
Scenario: HMRC Enquiry (O/S PE) .................................................................................................................................. 43
Group Relief Considerations: ......................................................................................................................................... 44
1
,Loss Relief Options for ST/Partnerships: ....................................................................................................................... 47
Annual Tax on Enveloped Dwellings (ATED): ................................................................................................................ 48
Scenario: Sale of O/S Property in O/S Currency ............................................................................................................ 48
Scenario: Housing benefits ............................................................................................................................................. 51
Scenario: Personal Service Companies .......................................................................................................................... 51
Scenario: Managed Service Companies ......................................................................................................................... 52
Scenario: Disposal of leases (Lease assignment) ........................................................................................................... 53
Scenario: IFAs and IFRA RoR .......................................................................................................................................... 53
Scenario Buildings – VAT, SDLT, RoR: ............................................................................................................................ 54
Overseas aspects of personal taxation: ......................................................................................................................... 56
Corporation Tax by Instalments ..................................................................................................................................... 57
Period of account longer than 12 months: .................................................................................................................... 58
Ethics ............................................................................................................................................................................... 59
USEFUL QUESTIONS ........................................................................................................................................................ 61
2
,Scenario: Gifting business assets to connected person E.g. unincorporated business from sole trader to son or shares
Capital Gains Tax – consider available CGT reliefs:
o Disposal of assets at market value (even if actual sale proceeds are less, deemed to receive MV)
o Gain arises ‐ can be reduced by AEA £12,300
o No gains on plant & machinery <£6,000 (small chattels exemption) & no gains on inventory (trading income)
o Goodwill always chargeable asset for unincorporated. [Calculate the tax payable].
o If the asset being disposed of originally had rollover relief claimed against it, deferred gain would crystallise
on the gift ‐ But a joint election for holdover relief for gifts can be made.
Gift Relief: Joint election needed within 4 years after end of tax year of gift
o Joint election must be made
o Whole gain deferred if no proceeds or if actual proceeds received are less than original cost of assets
o If MV is paid in full by recipient, then gift relief is not eligible (consider if BADR will be)
o If received proceeds, part of gain is deferred
o Gain = actual proceeds received – original cost = tax immediately and balance deferred
o Deferred gain reduces base cost for donee = higher gain in future
o Cost for donee = (MV cost @ date of gift – deferred gain)
o Gift relief upon gifting of shares of unquoted personal trading co. restricted if co. holds cash and investments
o CBA / CA restriction
BADR: Claim within 12 months from 31 Jan following tax year of disposal. Tax at 10%
o All or part of trading business carried on by an individual and ownership period at least two years
o Lifetime limit = £1 million
o If gift relief already claimed (must claim first) then CGT charge is reduced
o If gift relief is not claimed, BADR applies to full gain = higher CGT charge but donee benefits from the full
base cost of the asset so lower gain on future disposal. [Calculate the tax payable].
Inheritance Tax: CONSIDER IF GIVING BUSINESS AWAY BECAUSE ILL. BRING THIS INTO SCENARIO.
o Disposal of business = potential liability to IHT (transfer value is MV of business as whole – consideration)
o Undervalue of sale of shares = PET
o At transfer = PET = no tax payable in donor’s lifetime
o If donor dies within 7 years of PET date = IHT charge on death for value transferred @40%
o Reduced by unused annual allowance (3,000) and NRB (325,000)
o Taper relief available if donor survives at least 3 years from date of gift
o If whole business or interest in a business, BPR 100%, if asset used in business and owed 2 years, BPR 50%.
o If asset disposed prior to death, BPR clawed back and PET brought back into charge on death. However, a
replacement business property can be treated as the original property if the original property was sold
before death and the whole consideration received was used to acquire the replacement property within 3
years of disposal.
o If CLT arises (e.g. gifting shares to a trust) then IHT charge is due as well as CGT for share disposal
o Gift relief available on creation of trust, with no restrictions.
Capital allowances:
o No balancing allowance or charges if joint election made for transfer of P+M to be transferred at TWDV if
they are connected persons.
o Succession election must be made within 2 years of the date from which the succession takes effect.
VAT:
o If a property included in the business disposal, check if capital goods scheme applied
o Remainder of adjustment period for CGS will transfer to donee (no sale adjustment needed)
o If sold with a tenant in situ and will continue to be used in trade, then TOGC will apply
3
, o TOGC = outside scope of VAT so no adjustment on sale needed
Stamp Duty:
o SDLT is chargeable on the consideration received (if no consideration, then no ST)
o If no option to tax on building, SDLT charged on VAT inclusive amount of sale proceeds
Scenario: Gift with reservation of benefit (GWROB)
Scenario: House is gifted to son in an attempt to reduce future inheritance tax liability. Parent still intends to live in
the house.
o Possession and enjoyment of the asset is not bona fide assumed by recipient (son)
o Does not meet definition of “virtually to the entire exclusion of the transferor”
o If parent pays full market rent for occupation, GWROB will be avoided. Payment of rent therefore advisable.
o Treatment of GWROB:
o (1) asset treated as PET/CLT as normal when gift is made
o (2) asset also treated as part of the death estate
o Whichever of (1) or (2) results in the higher IHT is actually payable.
Scenario: Leaving business in will
o No CGT on assets transferred on death and no IHT due to 100% BPR / APR
o Donee receives assets at probate value = MV @ inheritance
o = higher base cost for future disposals = lower CGT charge (tax uplift)
Scenario: Gift of Shares – Gift VS Trust Vs Will
Gift
IHT
Treated as PET for IHT purposes
Value of PET is the diminution in value for the donor (consider related property rules for value of shareholdings)
If the shares are in an unquoted trading company and have been held for at least two years, BPR will be available
at 100% to reduce the PET to nil.
If you were to die within 7 years and the recipient no longer owns the shares:
o the BPR will be clawed back which will bring the PET back into charge at 40% IHT.
o The value will be reduced by the remaining NRB (£325,000) after deducting any gross chargeable
transfers in the last 7 years.
o Taper relief would apply if you died after 3 years which reduces the amount chargeable to IHT. The relief
increases from 20% to 80% as you live closer to 7 years.
If you were to die within 7 years, and the recipient still owned the shares:
o BPR will still apply and therefore it is effectively still exempt. IHT reduced by taper relief if donor survives
3+ years
CGT
Gift to a connected person therefore proceeds are deemed to be market value.
Gift is a chargeable disposal therefore within the scope of CGT. Taxed at 10%/20%.
Calc gain = market value – cost – (A/E)
Gift relief is available if less no proceeds transferred:
o Joint election within 4 years of end of tax year of gift
o Gain deferred by reduction of base cost of shares for donee meaning later gain and CGT higher
o Gift relief restricted if business owns non‐business assets (investment properties):
Calc restricted relief = gift relief * (CBA/CA)
Gift relief also available if less than market value consideration transferred:
o Calc profit = actual consideration – cost
o Calc gift relief = gain – profit
Gift relief is the value of the PET
BADR may also apply if FTTW met. CGT at 10% subject to £1m lifetime allowance.
4
, TAX PLANNING: If recipient is not a working s/h recommend to not elect for gift relief if BADR claim can be made
on gift as gain only taxed at 10%, while the future gain will be taxed at 10%/20% due to no BADR claim.
Trust:
IHT
Treated as CLT for IHT purposes therefore immediately chargeable to IHT.
NO BPR on shares in trust.
AE (CY and PY ‐ £3,000) and NRB (£325,000 – reduced by gross chargeable transfers in last 7 years) can be used
to reduce value
Tax payable at the time of transfer at 20% (trustee) or 25% (donor)
If donor dies within 7 years, PET will become chargeable. IHT reduced by taper relief if donor survives 3+ years
An exit charge of 30%*20%*(n/40) to an assumed transfer of the initial value of all assets in the trust will arise
where assets in a trust pass to the beneficiary. N = number of quarters passed since trust set up.
A principal charge of 30%*20% would apply on the Trust every 10 years or when the assets leave the trust, on
the value of the trust at that date. This is to claw any lost IHT as you may live more than 7 years.
CGT
Gift to a connected person therefore proceeds are deemed to be market value.
Gift is a chargeable disposal therefore within the scope of CGT. Taxed at 10%/20%.
As the gift is immediately chargeable to IHT, gift relief is available for the purposes of CGT.
See further gift relief and BADR considerations above.
Will:
Will form part of the death estate
Any excess value (above NRB) of death estate taxed at 40%.
If donor inherited the shares in the first place, QSR possibly available. This applies where there are two charges
to IHT within 5 years.
o Tax paid on first transfer x (net transfer/gross transfer) x relevant percentage
o Reduces IHT payable on death estate
Scenario: Capital Tax Planning
Cash
‐ Make small cash gifts of up to £250 per recipient per tax year to use the small gifts relief exemption
Small Chattels
‐ CGT: Could make gifts of assets cost and MV <£6,000 as will be exempt from CGT under small chattels exemption.
Will be a PET for IHT so not immediately chargeable.
‐ CGT: Could make gifts that will realise a chargeable gain of less than CGT annual exemption of 12,300. Will be a PET
for IHT so not immediately chargeable.
‐ IHT: Can also make gifts each tax year of up to £3,000 to make use of IHT annual exemption.
Unquoted Trading Company Shares
‐ CGT: If lifetime gift can make joint election to claim gift relief (4 years after end of tax year) therefore gain is
deferred and no CGT due.
‐ IHT: PET for IHT purposes so no not immediately chargeable plus BPR. If doner dies within 7 years so that PET
becomes chargeable, business property relief (100%) available so not IHT. However, if shares sold on before death,
BPR clawed back and PET within charge of IHT.
House
‐ CGT: Jif lifetime gift can make joint election to claim gift relief (4 years after end of tax year) therefore gain is
deferred and no CGT due.
‐ IHT: Private residence relief (PRR) available on gift of house which will partially
5
, Scenario: Takeover with mixed consideration
o Reorganization of company’s share capital = new shares treated as having been acquired for same cost and
same date as original shares
o When there is mixed consideration, there will be a part disposal for CGT purposes
o Cost of original shares is apportioned to consideration received
o When apportioning cost, do not apply indexation allowance
Cash consideration
o Receipt of cash will give rise to gain – immediately taxable
o For individual – gain taxed under CGT at 10%/20%, but BADR may apply if individual meets FTTW. If BADR
met gain taxed at 10% (lifetime allowance of £1m).
o For company – gain taxed under CT at 19%, but SSE may apply if parent meets TT6 and subsidiary meets TT.
If SSE applies, gain or loss exempt.
Deferred cash
o Amount payable by instalments – single disposal under normal gains rules for cash.
o Future contingent payment but known – single disposal where future proceeds included in total proceeds at
time of sale. If contingency not met, the computation may subsequently be amended.
o Future contingent payment but unknown – called a chose in action. There may be two disposals:
Disposal of asset: calc gain = cash proceeds + PV chose in action – cost
Disposal of chose in asset: Calc gain = proceeds – PV chose in action at earlier asset disposal
For individual: loss arising on sale of chose in action can be carried back and offset against
original gain.
Shares consideration
o Paper for paper rules automatically apply
oNo gain arises
oIgnore MV of new shares. Base cost of new shares is the original cost apportioned (but no IA included)
o“New shares stand in the shoes of the old shares”
oTax neutral transaction
oGain arises later when shares disposed of
oCalc gain = Consideration at final sale – apportioned cost
o Can disapply paper for paper takeover rules (good if individual s/h where BADR applies)
o Gain arises as normal as MV of shares – apportioned cost
o Base cost of shares for future disposal would then be MV of shares rather than apportioned cost
o If SSE applies, SSE takes priority over paper for paper.
Loan Stock consideration
o If loan stock is received and is a QCB, gain arises on takeover date but is deferred = crystallizes on sale of loan
stock
o Calc deferred gain = MV @ takeover – apportioned cost – IA (NOT ROUNDED)
o QCB sale itself is not taxable – exempt from CGT. QCB conditions:
Sterling demominated
Non‐convertible
Loan stock representing a normal commercial loan
Interest upon which is neither excessive nor dependent on business performance
o If gain deferred, consider whether BADR will apply or not (for individual).
o If an election is made not to defer the gain on the QCBs, the whole gain will be taxable at the time of the
takeover, and BADR (if applicable) could be claimed to reduce the CGT due
o When loan stock repaid or sold:
o Deferred gain crystallises
o [For individuals] gain on loan note is exempt
o [For companies] gain on loan note is NTLR = consideration at final sale – MV @ takeover
6
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