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4 Assume today’s date is 15 May 2005.

In March 1999, Bob was made redundant from his job as a furniture salesman. He decided to travel round the world,

and did so, returning to the UK in May 2001. Bob then decided to set up his own business selling furniture. He

started trading on 1 October 2001. After some initial success, the business made losses as Bob tried to win more

customers. However, he was eventually successful, and the business subsequently made profits.

The results for Bob’s business were as follows:

Period Schedule D Case I

Trading Profits/(losses)

￡

1 October 2001 – 30 April 2002 13,500

1 May 2002 – 30 April 2003 (18,000)

1 May 2003 – 30 April 2004 28,000

Bob required funds to help start his business, so he raised money in three ways:

(1) Bob is a keen cricket fan, and in the 1990s, he collected many books on cricket players. To raise money, Bob

started selling books from his collection. These had risen considerably in value and sold for between ￡150 and

￡300 per book. None of the books forms part of a set. Bob created an internet website to advertise the books.

Bob has not declared this income, as he believes that the proceeds from selling the books are non-taxable.

(2) He disposed of two paintings and an antique silver coffee set at auction on 1 December 2004, realising

chargeable gains totalling ￡23,720.

(3) Bob took a part time job in a furniture store on 1 January 2003. His annual salary has remained at ￡12,600

per year since he started this employment.

Bob has 5,000 shares in Willis Ltd, an unquoted trading company based in the UK. He subscribed for these shares

in August 2000, paying ￡3 per share. On 1 December 2004, Bob received a letter informing him that the company

had gone into receivership. As a result, his shares were almost worthless. The receivers dealing with the company

estimated that on the liquidation of the company, he would receive no more than 10p per share for his shareholding.

He has not yet received any money.

Required:

(a) Write a letter to Bob advising him on whether or not he is correct in believing that his book sales are nontaxable.

Your advice should include reference to the badges of trade and their application to this case.

(9 marks)

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(a) Evidence of trading[Client address][Own address][Date]Dear Bob,I note that you have been selling some books in order to raise some extra income. While you believe that the sums are nottaxable, I believe that there may be a risk of the book sales being

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(ii) Briefly outline the tax consequences for Henry if the types of protection identified in (i) were to be

provided for him by Happy Home Ltd compared to providing them for himself. You are not required to

discuss the corporation tax (CT) consequences for Happy Home Ltd. (4 marks)

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(ii) Provision of protection: company or individualIf any of the policies are taken out and paid for by Henry personally, then there will be no tax relief on the premiums,but neither will there normally be any tax payable on the proceeds or benefits recei

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(ii) State, giving reasons, the tax reliefs in relation to inheritance tax (IHT) and capital gains tax (CGT) which

would be available to Alasdair if he acquires the warehouse and leases it to Gallus & Co, rather than to

an unconnected tenant. (4 marks)

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(ii) Apart from the fact that Alasdair can keep an eye on his tenant, the main advantages are twofold:IHT: If the firm are the tenants, the property will be land and buildings used in a business carried on by a partnershipin which the donor is a partner.

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(c) State any reliefs Bob could claim regarding the fall in value of his shares in Willis Ltd, and describe how the

operation of any such reliefs could reduce Bob’s taxable income. (4 marks)

Relevant retail price index figures are:

September 1990 129·3

April 1998 162·6

December 2004 189·9

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(c) Claims for capital lossesWhere the value of shares (a chargeable asset) has become negligible (defined as <5% of the original cost), a claim can bemade to treat the asset as though it was sold and then immediately reacquired for its current market

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(ii) State when the inheritance tax (IHT) calculated in (i) would be payable and by whom. (2 marks)

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(ii) Inheritance tax administrationThe tax on Debbie’s estate (personalty and realty) would be paid by the personal representatives, usually an executor.Inheritance tax is due six months from the end of the month in which death occurred (31 December 2005)

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(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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(b) Schedule D Case I calculationThe three companies form. a group for both group relief and capital gains purposes as all shareholdings pass the 75%ownership test. The calculation of the corporation tax liabilities is as follows:

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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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(c) Further adviceMabel should consider delaying one of the gifts until after 1 May 2007 such that it is made more than seven years after thegift to the discretionary trust. Both PETs would then be covered by the nil rate band resulting in a saving of inh

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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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(b) (i) The share optionsThere are no income tax implications on the grant of the share options.In the tax year in which Benny exercises the options and acquires the shares, the excess of the market value of theshares over the price paid, i.e. ￡11,500 ((￡

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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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However, an exemption from corporation tax exists for any gain arising when a trading company (or member of a tradinggroup) sells the whole or any part of a substantial shareholding in another trading company.A substantial shareholding is one where the in

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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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(ii) The flatThe following additional information is required in order to calculate the employment income benefit in respect of theflat.– The flat’s annual value.– The cost of any improvements made to the flat prior to 6 April 2007.– The cost of power, wa

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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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(a) (i) Gift of sharesShares, which are given free or sold at less than market value, are charged to income tax on the difference between themarket value and the amount paid (if any) for the shares. Henry was given 3,000 shares with a market value of ￡1 a

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