M XIV Flashcards
On 1 January 2021, a landlord sold an office building, making a taxable gain of £195,000 after applying the annual allowance. The landlord made no other disposals of chargeable assets during 2020/21. She had taxable income of £26,500 in 2020/21 after deduction of her personal allowance. The applicable capital gains tax rate is 10% for amounts within the basic rate band (up to £37,500) and 20% for amounts exceeding £37,500.
What is the landlord’s capital gains tax liability for 2020/21?
£35,440
£35,250
£39,000
£37,900
£41,540
(D) £37,900. To calculate capital gains tax, we apply the 10% rate to any amount remaining of the taxpayer’s basic rate band. The basic rate band is up to £37,500 under our facts. To determine how much of that band is left, we subtract the landlord’s non-capital gains income (£26,500) from that top of the basic rate band (that is, £37,500 - £26,500), which leaves £11,000. Therefore, the first £11,000 of the capital gain will be taxed at 10% (£11,000 x 10% = £1,100). That leaves £184,000 to be taxed at 20%. (£184,000 x 20% = £36,800). Adding the two together, we arrive at £37,900.
A woman purchased a house in London as her principal private residence on 1 April 2008. The woman lived in the house until 1 April 2014, when she went to work in Scotland for her employer. She returned to London on 1 June 2018. However, on her return, the woman went to live with her daughter and the house remained empty until it was sold on 31 August 2020.
How many months of ownership are exempt from capital gains tax under principal private residence relief?
149
81
129
68
72
(B) 81. The woman actually lived in the house for six years, April 2008 until April 2014, which is 72 months. The last nine months of ownership will always be exempt provided that the taxpayer occupied the property as their home at some time. The woman does not qualify for the absence due to working elsewhere counting as occupation for up to four years nor for the absence for any reason counting for up to three years, as she did not reoccupy the home when she returned from Scotland.
A sole trader prepared accounts for the year to 31 December 2020. The tax written down value of the trader’s main pool business assets on 1 January 2020 was £18,000. The main pool allowance is 18%. On 15 January 2020, the sole trader purchased a new electric motor car costing £12,260. It is used solely for business purposes by the trader. (The first-year allowance is available on new electric cars.)
What are the maximum capital allowances the trader may claim for the year ended 31 December 2020?
£12,260
£30,260
£13,340
£15,500
£18,000
(D) £15,500. The 18% per annum writing down allowance should be applied to the balance on the main pool (£18,000 x 18% = £3,240), and the 100% first year allowance is available on the new electric motor car, £12,260 x 100% = £12,260. So, in total: £3,240 + £12,260 = £15,500.
An investment adviser has recently started a freelance lecturing business and has been told that by choosing a non-5 April-year-end some profits will be taxed twice, known as overlap profits. She has heard that relief could be obtained for these overlap profits.
Which of the following best states options available to the investment adviser for relieving the tax on overlap profits?
The adviser may carry forward or carry back the profits to set them off against other trade profits.
The adviser may either carry the profits back to offset them against prior trade profits or recover tax paid on the overlap profit at cessation of trade.
The adviser may recover the tax paid on overlap profits only if she changes her accounting date to a month nearer to 5 April.
The adviser may carry the tax forward as an expense against trade profits in a later year or obtain relief at cessation of the business.
The adviser may obtain relief for overlap tax at cessation of the business or if she changes her accounting date to a month nearer to 5 April.
(E) Relief from tax on overlap profits is available only at cessation or if the taxpayer changes her accounting date to a month nearer to 5 April (for example, if the adviser has a December year end, she would need to change it to a January, February, or March year end to be eligible).
A company has the following sources of income for the year ended 31 December 2020:
Trade profits-£500,000
Interest income-£10,000
Dividends-£20,000
Gains-£50,000
What is the corporation tax payable by the company for the year ended 31 December 2020?
£104,500
£110,700
£106,400
£110,200
£103,150
(C) £106,400. Companies pay corporation tax at 19% on their taxable total profits including chargeable gains. Companies do not usually pay tax on dividend income because it usually is exempt. Neither do companies pay capital gains tax on their gains or get a deduction for the annual capital gains exemption. Thus, (£500,000 + £10,000 + £50,000) x 19% = £106,400.
A company started to trade on 1 May 2020 and prepared its first set of accounts to 31 December 2020.
On which date must the company submit a corporation tax return in respect of the period to 31 December 2020?
31 December 2021
31 December 2020
1 October 2021
31 January 2022
31 January 2021
(A) 31 December 2021. Corporation tax returns are always submitted 12 months after the end of the period of account, whereas the corporation tax liability must be paid 9 months and 1 day after the end of the period of account.
A bakery shop owner has been a VAT-registered trader for a number of years. She recently purchased various items for use in her trade:
- Van accessories
- Fixed partitions for use in her office
- A motorcycle for business deliveries
- Entertaining costs of UK business customers
- A computer for use in the office
For which of the above items may the owner NOT recover the input VAT?
The van accessories.
The fixed partitions.
The motorcycle.
Client entertaining costs.
The computer.
D) VAT cannot be recovered on business entertaining, cars, or on any private proportion of other expenses.
A mechanic working as a sole trader has annual business turnover of £45,000. His business assets, such as his garage and equipment, are valued at £100,000. He would like to register for VAT, so that he can claim back VAT on his expenses, such as car parts.
Can the mechanic register for VAT?
No, as he is a sole trader.
Yes, as his business assets exceed £100,000.
No, as his turnover is less than £85,000.
No, as his business assets do not exceed £250,000.
Yes, he can voluntarily register for VAT regardless of his turnover or assets.
(E) Yes, he can voluntarily register for VAT regardless of his turnover or assets. Businesses are open to voluntarily register for VAT regardless of turnover or assets. Therefore, none of the other choices is correct. VAT registration is mandatory for businesses with annual turnover above £85,000, regardless of the business structure (limited company, PLC, partnership, or sole trader).
A shopkeeper is granted a 40-year lease on a shop on 1st January 2019. The premium payable is £200,000, annual rent payments are £4,800, and the net present value of the rent payable is £100,000. Assume the applicable stamp duty land tax (‘SDLT’) rates at the time the lease was entered were:
0% to £150,000
2% £150,001 to £5 million
What is the SDLT payable by the shopkeeper on the grant of the lease?
£0
£1,000
£1,096
£3,000
£4,840
B) £1,000. SDLT is due on both the premium and the present value of the lease, although these are calculated separately and not as a lump sum. Thus, the SDLT on the premium is 2% on the amounts above £150,000. As the premium was £200,000, £50,000 would be taxed at 2% = £1,000. We use the net present value of the lease payments to calculate tax on them (rather than the total actual lease payments). The net present value of the lease payments was £100,000. As that entire amount falls within the 0% band, no tax is owed on the lease payments. Thus, only £1,000 SDLT is owed.
A sole trader makes up accounts to 30 June each year. He ceased trading on 28 February 2021. His final tax adjusted profits for the year ended 30 June 2020 is £18,000 and for the 8-month period ended 28 February 2021 is £10,000. He has overlap profits from commencement of £3,000.
What are the sole trader’s trade profits for 2020/21?
£25,000
£7,000
£15,000
£28,000
£31,000
(A) £25,000. The sole trader ceased to trade on 28 February 2021 and so his closing tax year is 2020/21. In the closing tax year, any accounting profits that end in that year are assessable less any overlap profits brought forward from commencement of trade. Therefore, the sole trader will be assessed on trade profits of £18,000 + £10,000 – £3,000, which equals £25,000
In her will a woman appointed two trustees to hold her residuary estate on trust for her children. The trust fund includes a holding of 50% of the shares in a family company. One of the trustees holds 10% of the shares in the same company. The trustee is appointed to be a director of the company by a 75% majority vote and is paid £5,000 in director’s fees.
Which of the following best describes the position of the trustee in relation to the director’s fees?
The trustee must hold the fees on trust for the beneficiaries.
The trustee may keep the fees.
The trustee must decline to accept the fees.
The trustee may keep the fees provided that any adult beneficiaries consent.
The trustee may keep the fees provided the other trustee consents.
(A) The trustee must hold the director’s fees on trust for the beneficiaries. The general rule is that a trustee may not profit from their position, and that a trustee holds any profit received as a result of their trusteeship on trust for the beneficiaries. The rule does not apply where the profit would have been received regardless of the trusteeship. Here, the trustee was appointed as director by a 75% vote. Because the trust fund holds 50% of the shares, the trustee would not have been appointed director without the votes attached to the trust shares. This means that he cannot retain the director’s fees and must hold the fees on trust. (B) is incorrect because the trustee may not keep the fees, as explained above. (C) is incorrect because, where the rule applies, a trustee is not required to decline a profit but holds it on trust for the beneficiaries. (D) and (E) are incorrect because the consent of the beneficiaries or co-trustees is irrelevant to whether a trustee may keep remuneration.
On 1 January 2021, a woman sold a freehold property for £400,000 that she had acquired for £180,000. In the previous year, on 1 June 2020, the woman had bought a freehold property for £360,000. Both properties were used for trading purposes. The woman is a higher rate taxpayer and so pays a capital gains tax at 20%. The annual exempt amount for the tax year was £12,300.
What is the woman’s capital gain tax liability for tax year 2020/21?
£0
£4,000
£8,000
£2,770
£5,540
(E) £5,540. Replacement business asset relief (also known as roll-over relief) applies here. When a person disposes of qualifying business assets (such as land, buildings, and plant and machinery) and reinvests the proceeds in other qualifying business assets within one year before or three years after the sale, relief from the gain is available to the extent the proceeds were reinvested. Here, the woman had realised a £220,000 gain on 1 January 2021 from the sale of her trading property. But she had purchased other trading property on 1 June, 2020, which is within the year before the sale. However, as the sale proceeds have not been fully reinvested, some of the gain cannot be deferred: £400,000 – £360,000 = £40,000. After deducting the annual exemption (£40,000 - £12,300 = £27,700), CGT will be payable at 20% (£27,700 x 20% = £5,540). Note that business asset disposal relief is not available on a disposal of an asset in isolation. The gain that can be deferred, £180,000 (£220,000 – £40,000), will be deducted from the cost of the replacement asset going forward.
A trust was established in 2014, a clause of which provided that “the investment powers under the Trustee Act 2000 shall apply to this trust”. The trustees do not feel able to make a decision between two investment options, so they take advice from a financial adviser. The advice was poor, and the trust suffered a loss of £32,000.
Are the trustees liable for this loss?
Yes, because the trustees should have made the investment decision themselves.
Yes, if the trustees should have known the advice was poor.
Yes, because trustees are liable for all trust losses.
No, if the trustees reasonably believed the financial adviser was qualified to give proper advice by reason of the adviser’s ability and practical experience.
No, because the financial adviser is liable for the loss.
(D) The trustees are not liable for the loss if they reasonably believed the financial adviser was qualified to give proper advice by reason of the adviser’s ability and practical experience. Trustees are under a statutory obligation to take proper advice before making an investment decision. Proper advice is the advice of a person the trustees reasonably believe to be qualified to give it by reason of their ability and practical experience. If the trustees obtain proper advice, then their duty is discharged, and the trustees will not be liable for a loss. (A) is incorrect because trustees have a duty to obtain and consider proper advice before exercising any power of investment except when the trustees reasonably conclude that in all the circumstances it is unnecessary and inappropriate. (B) is incorrect because the standard is not whether the trustees should have known the advice was poor; rather, the trustees must obtain and consider proper advice from a person reasonably believed to be qualified to give it. (C) is incorrect because trustees are not liable for trust losses from investments if they comply with the requirements of the duty to invest. (E) is incorrect because the financial adviser is not liable for the loss.
A sole trader made a trade loss in tax year 2020/21 of £40,000. In the same year, she had property income from a portfolio of investment residential properties of £10,000 and realised a gain of £60,000 from the sale of on of these investment properties.
The sole trader had trade profits in the prior year of £20,000 and is predicted to generate future trade profits of £20,000 per annum.
Can the 2020/21 trade loss of £40,000 be offset against the 2020/21 gains of £60,000?
No, because trade losses cannot be used to relieve capital gains.
Yes, but the trader would need to use it against the property income in the same year, ignoring the personal allowance, before using what remains against the gain.
No, because a trade loss can only be carried forward and set against future trade profits.
Yes, and there is no requirement to use it against the property income first, as this is covered by the personal allowance.
Yes, but the trader would need to use it against the trade profits and property income in the prior year and current year, and only what remains could then be used to relieve the gain.
(B) Yes, but the trader would need to use it against the property income in the same year, ignoring the personal allowance, before using what remains against the gain. A sole trader who has generated a trade loss may use this trade loss against any gains but only after they have made a claim against income in the same tax year. The sole trader would need to relieve the 2020/21 property income of £10,000 (wasting the tax-free allowance) and then the remaining £30,000 of trade loss could be offset against the 2020/21 gains of £60,000.
£30,000 of trade loss could be offset against the 2020/21 gains of £60,000.
During his lifetime, a man made the following gifts into a discretionary trust:
- £160,000 on 10 July 2006
- £230,000 on 20 May 2014
- £295,000 on 24 December 2020
The above amounts are the chargeable amounts after exemptions. The trustees agreed to pay the tax in all cases, except for the gift on 24 December 2020.
The nil rate bands were as follows:
2006/07 £300,000
2014/15 £325,000
2020/21 £325,000
Calculate the lifetime inheritance tax payable as a result of the gift on 24 December 2020.
£73,750 £0 £50,000 £40,000 £59,000
C) When determining the lifetime inheritance tax payable on a chargeable lifetime transfer (such as gifts to most trusts), we need to take into account other CLTs made by the donor in the previous seven years, because IHT is a cumulative tax. Here, we would not take into account the 2006 gift because it was made more than seven years before the 24 December 2020 gift. But we would add the gross amount of the 20 May 2014 gift (including any tax paid by the donor but not by the trustees). £230,000 (2014 gift) + £295,000 (2020 gift) = £525,000. From this, we subtract the nil rate band applicable to the current gift (£325,000), leaving £200,000 subject to tax. As the trustees are not paying this tax, it must be paid by the donor. Because of that, we use the grossed-up rate of 25%. 25% of £200,000 = £50,000.
A trustee is the trustee of two separate trust funds. One day he realises that his personal bank current account has a balance of zero. He takes £2,000, in breach of trust, from the first trust and deposits the amount in his personal account. The trustee then takes £3,000, in breach of trust, from the second trust and deposits the amount in his account, creating a balance of £5,000. The trustee then removed £3,000 from his account and purchased a holiday. The sum of £2,000 remains in the account. The beneficiaries of the two trusts make a proprietary claim to the remaining sum.
If the beneficiaries agree that the court should not follow the traditional rule, how should the remaining sum be divided?
£1,000 to each trust.
£2,000 to the first trust and nothing to the second trust.
Nothing to the first trust and £2,000 to the second trust.
£800 to the first trust and £1,200 to the second trust.
£1,200 to the first trust and £800 to the second trust.
(D) The first trust should receive £800, and the second trust should receive £1,200. If a trustee mixes funds of two trusts in a current account, the traditional rule is that the first money into the account is the first money out of the account. However, courts will instead divide the money proportionately if: (1) applying the first-in, first-out rule is contrary to the express or implied intention of the claimants, (2) it is impractical to apply the rule, or (3) applying the rule would cause injustice to the parties. Here, the beneficiaries agreed that the court should not apply the traditional rule, and so the court would divide the £2,000 proportionately. The payment of £3,000 for the trustee’s holiday would be treated in proportion to the money paid into the account from the two trusts. This would mean that the payment consisted of £1,200 from the first trust and £1,800 from the second trust, leaving the £2,000 remaining in the account to be shared £800 to the first trust and £1,200 to the second trust. Accordingly, (A), (B), (C), and (E) are incorrect. Note that (C) would be the result if the court applied the traditional first-in, first-out rule.
A trustee’s friend was having money troubles, so the trustee transferred trust funds into the name of his friend in breach of trust. The friend spent the money on general living expenses and paying down credit card debt. The trust beneficiaries wish to bring a personal claim in equity against the trustee’s friend.
What must the beneficiaries establish to hold the friend personally liable in equity?
The friend had sufficient knowledge as to make it unconscionable for him to retain the funds.
The friend facilitated the breach of trust.
The friend acquired the trust funds for value and without notice of the trust.
The friend was aware of the breach of trust.
The friend did not act as an honest person would in the circumstances.
(A) The beneficiaries must establish that the friend had sufficient knowledge as to make it unconscionable for him to retain the funds. Unconscionability will be found if the recipient actually knew that the money was trust property or was suspicious about the source of the funds but failed to make such enquiries as a reasonable and honest person would have made. If a third party received trust money with the requisite degree of knowledge of the breach of trust, they will be treated in equity as if they were a constructive trustee. The recipient will be personally liable to the beneficiaries to make good the loss to the trust fund. (B) and (E) are incorrect because these are parts of the test for accessory liability. If a third party has facilitated a breach of trust, the third party is liable as if they were a trustee if their assistance was dishonest. Dishonesty is defined as conscious impropriety or not acting as an honest person would in the circumstances. (C) is incorrect because it is the test for bona fide purchasers. A third party who acquires the legal title to trust property for value and without notice of the trust takes the property free of the equitable interests of the beneficiaries. (D) is incorrect because a recipient may be liable even though they were not aware of the nature of the breach. It is sufficient that they were suspicious about the source of the funds but failed to make such enquiries as a reasonable and honest person would have made.
On 1 August 2020, a man sold a residential investment property realising a chargeable gain of £42,900. His taxable income was £18,030 for the tax year 2020/21. The annual exempt amount for the 2020/21 tax year is £12,300 and the tax rates for sales on residential property are 18% for any basic rate band available and 28% for any gains in excess of any available basic rate band. The basic rate band extends to £37,500.
What is the man’s capital gains tax liability for the tax year 2020/21 (to the nearest pound)?
£0
£4,173
£10,468
£6,621
£6,633
(D) £6,621. To calculate the man’s capital gains tax liability on the sale of residential property used wholly for investment, we subtract the annual exempt amount from the chargeable gain to arrive at the taxable gain (£42,900 - £12,300 = £30,600 taxable gain). We then would apply a 18% rate to the amount of the taxable gain that is still within the taxpayer’s basic rate band above the taxpayer’s other income and apply a 28% rate to amounts in excess of the basic rate band. The basic rate band is for income up to £37,500. The man’s other income for the year was £18,030, which means he has £19,470 left of his basic rate band (£37,500 - £18,030). Since his capital gain is more than that amount, the first £19,470 of the gain will be taxed at 18% and the amount of gain above that, £11,130 (£30,600 - £19,470), will be taxed at 28%. £19,470 x 18% = £3,505, and £11,130 x 28% = £3,116. £3,505 + 3,116 = £6,621. *IGNORE PERSONAL TAX ALLOWANCE
A woman died last month. Her valid will appointed her brother as executor, but the brother also died recently. The will leaves £20,000 to the woman’s daughter and the rest of the estate to her husband. Her husband took some initial steps in relation to the estate administration, but he is now seriously unwell and wishes the daughter to administer the estate instead.
Which of the following is the most accurate statement regarding this situation?
The husband is unable to renounce acting as administrator as he has intermeddled in the estate.
The daughter can obtain a grant of representation if she clears off the husband only.
The daughter can obtain a grant of representation if she clears off the brother only.
The daughter can obtain a grant of representation if she clears off both the brother and the husband.
The daughter does not have the right to apply for a grant of representation.
(D) The daughter can obtain a grant of representation if she clears off both the deceased brother and the husband. The woman left a valid will, but, due to the death of her brother, it fails to appoint an executor who can administer her estate. Consequently, the woman’s estate will be administered by an administrator under a grant of letters of administration with will annexed. The order of entitlement to a grant of letters of administration with will annexed is set out in rule 20 of the Non-Contentious Probate Rules (‘NCPR’). Under this rule, her husband, as the residuary beneficiary, will have the best entitlement to a grant of representation. However, as he does not wish to act, the daughter can apply for the grant, but she will need to clear off both the brother and the father and explain why they are not applying for the grant. This is because the brother, as the named executor, and the father, as the residuary beneficiary, have a better right to the grant than she does. (E) is therefore incorrect. (A) is incorrect. Anyone entitled to apply for a grant of letters of administration with will annexed can renounce, and this right is not lost by intermeddling in the estate. (B) and (C) are incorrect because the daughter must clear off every person who has a better right to the grant. Even though the brother is deceased, she must confirm that the named executor is not applying for a grant because he has died. She must also confirm that the father has renounced.
An executor is administering the estate of a woman who died recently. The woman had a son, currently aged 18, who has an interest in the estate contingent upon him reaching the age of 21. The executor will continue to hold the son’s interest (comprising a sum in a high interest bank account) on trust in the meantime. The will contains no provisions in relation to the holding of this sum.
The son has asked for all of the sum to be paid to him to assist with funding his university studies.
Which of the following best states the position of the executors in relation to this request?
The son is not entitled to receive any of this sum, as he has only a contingent interest.
The son is entitled to receive only half of the sum held for him now.
The executor cannot pay this sum to the son but is able to make a loan to him.
The executor can choose to pay this sum to the son now.
The executor is required to pay the sum to the son if he is able to demonstrate a need for this money.
(D) The executor can choose to pay the sum to the son now. This situation concerns the executor’s power to advance capital under section 32 Trustee Act 1925. As the will does not state otherwise, the executor has discretion to advance the sum held (the capital) to the son even though the son has a contingent interest. (A) is incorrect, as this power covers both vested and contingent interests. (B) is incorrect. There is no longer any limitation on the amount that can be advanced. (C) is incorrect because the capital can be paid to the son. (E) is incorrect. The executor has a wide discretion about whether to advance capital, and the son is not required to demonstrate a need for it.
