(ii) State when the inheritance tax (IHT) calculated in (i) would be payable and by whom. (2 marks)
(b) Calculate the corporation tax (CT) liabilities for Alantech Ltd, Boron Ltd and Bubble Ltd for the year ending
31 December 2004 on the assumption that loss reliefs are taken as early as possible. (9 marks)
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(c) Without changing the advice you have given in (b), or varying the terms of Luke’s will, explain how Mabel
could further reduce her eventual inheritance tax liability and quantify the tax saving that could be made.
(3 marks)
The increase in the retail prices index from April 1984 to April 1998 is 84%.
You should assume that the rates and allowances for the tax year 2005/06 will continue to apply for the
foreseeable future.
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(b) (i) Advise Benny of the income tax implications of the grant and exercise of the share options in Summer
Glow plc on the assumption that the share price on 1 September 2007 and on the day he exercises the
options is £3·35 per share. Explain why the share option scheme is not free from risk by reference to
the rules of the scheme and the circumstances surrounding the company. (4 marks)
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(c) Advise Alan on the proposed disposal of the shares in Mobile Ltd. Your answer should include calculations
of the potential capital gain, and explain any options available to Alan to reduce this tax liability. (7 marks)
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(ii) List the additional information required in order to calculate the employment income benefit in respect
of the provision of the furnished flat for 2007/08 and advise Benny of the potential income tax
implications of requesting a more centrally located flat in accordance with the company’s offer.
(4 marks)
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6 Assume today’s date is 16 April 2005.
Henry, aged 48, is the managing director of Happy Home Ltd, an unquoted UK company specialising in interior
design. He is wealthy in his own right and is married to Helen, who is 45 years old. They have two children – Stephen,
who is 19, and Sally who is 17.
As part of his salary, Henry was given 3,000 shares in Happy Home Ltd with an option to acquire a further 10,000
shares. The options were granted on 15 July 2003, shortly after the company started trading, and were not part of
an approved share option scheme. The free shares were given to Henry on the same day.
The exercise price of the share options was set at the then market value of £1·00 per share. The options are not
capable of being exercised after 10 years from the date of grant. The company has been successful, and the current
value of the shares is now £14·00 per share. Another shareholder has offered to buy the shares at their market value,
so Henry exercised his share options on 14 April 2005 and will sell the shares next week, on 20 April 2005.
With the company growing in size, Henry wishes to recruit high quality staff, but the company lacks the funds to pay
them in cash. Henry believes that giving new employees the chance to buy shares in the company would help recruit
staff, as they could share in the growth in value of Happy Home Ltd. Henry has heard that there is a particular share
scheme that is suitable for small, fast growing companies. He would like to obtain further information on how such
a scheme would work.
Henry has accumulated substantial assets over the years. The family house is owned jointly with Helen, and is worth
£650,000. Henry has a £250,000 mortgage on the house. In addition, Henry has liquid assets worth £340,000
and Helen has shares in quoted companies currently worth £125,000. Henry has no forms of insurance, and believes
he should make sure that his wealth and family are protected. He is keen to find out what options he should be
considering.
Required:
(a) (i) State how the gift of the 3,000 shares in Happy Home Ltd was taxed. (1 mark)
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(c) Assuming that she will survive until July 2009, advise on the lifetime inheritance tax (IHT) planning
measures that could be undertaken by Debbie, quantifying the savings that can be made. (7 marks)
For this question you should assume that the rates and allowances for 2004/05 apply throughout.
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3 On 1 January 2007 Dovedale Ltd, a company with no subsidiaries, intends to purchase 65% of the ordinary share
capital of Hira Ltd from Belgrove Ltd. Belgrove Ltd currently owns 100% of the share capital of Hira Ltd and has no
other subsidiaries. All three companies have their head offices in the UK and are UK resident.
Hira Ltd had trading losses brought forward, as at 1 April 2006, of £18,600 and no income or gains against which
to offset losses in the year ended 31 March 2006. In the year ending 31 March 2007 the company expects to make
further tax adjusted trading losses of £55,000 before deduction of capital allowances, and to have no other income
or gains. The tax written down value of Hira Ltd’s plant and machinery as at 31 March 2006 was £96,000 and
there will be no fixed asset additions or disposals in the year ending 31 March 2007. In the year ending 31 March
2008 a small tax adjusted trading loss is anticipated. Hira Ltd will surrender the maximum possible trading losses
to Belgrove Ltd and Dovedale Ltd.
The tax adjusted trading profit of Dovedale Ltd for the year ending 31 March 2007 is expected to be £875,000 and
to continue at this level in the future. The profits chargeable to corporation tax of Belgrove Ltd are expected to be
£38,000 for the year ending 31 March 2007 and to increase in the future.
On 1 February 2007 Dovedale Ltd will sell a small office building to Hira Ltd for its market value of £234,000.
Dovedale Ltd purchased the building in March 2005 for £210,000. In October 2004 Dovedale Ltd sold a factory
for £277,450 making a capital gain of £84,217. A claim was made to roll over the gain on the sale of the factory
against the acquisition cost of the office building.
On 1 April 2007 Dovedale Ltd intends to acquire the whole of the ordinary share capital of Atapo Inc, an unquoted
company resident in the country of Morovia. Atapo Inc sells components to Dovedale Ltd as well as to other
companies in Morovia and around the world.
It is estimated that Atapo Inc will make a profit before tax of £160,000 in the year ending 31 March 2008 and will
pay a dividend to Dovedale Ltd of £105,000. It can be assumed that Atapo Inc’s taxable profits are equal to its profit
before tax. The rate of corporation tax in Morovia is 9%. There is a withholding tax of 3% on dividends paid to
non-Morovian resident shareholders. There is no double tax agreement between the UK and Morovia.
Required:
(a) Advise Belgrove Ltd of any capital gains that may arise as a result of the sale of the shares in Hira Ltd. You
are not required to calculate any capital gains in this part of the question. (4 marks)
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(ii) Set out the information required by Jane in connection with the administration of the company’s tax
affairs and identify any penalties that may already be payable. (3 marks)
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(b) Explain by reference to Hira Ltd’s loss position why it may be beneficial for it not to claim any capital
allowances for the year ending 31 March 2007. Support your explanation with relevant calculations.
(6 marks)