Tax Flashcards
A plumber has trade profits of £85,000 for 2020/21 tax year. During the year, the plumber also obtained a £150,000 loan. He used the proceeds of the loan to pay an inheritance tax liability as a result of the recent death of his great aunt (for whom the plumber was sole beneficiary). Interest payments on this loan amount to £3,500 during tax year 2020/21. The personal allowance for the 2021 tax year is £12,500.
What is the plumber’s income tax liability?
£20,100
Feedback:
(D) £20,100. The plumber has only non-savings income in the amount of £85,000. He is entitled to qualifying loan interest relief for the £3,500 interest paid on the loan taken out to pay the IHT liability. This leaves the electrician with net income of £81,500. From this, we subtract the £12,500 personal allowance, leaving £69,000. The first £37,500 will be at the basic rate of 20% (£37,500 x 20% = £7,500), and the remaining £31,500 will be taxed at 40% (£31,500 x 40% = £12,600). Adding the two amounts together (£7,500 + £12,600) we arrive at £20,100.
A woman made a number of gifts during the tax year 2019/20:
- On 15 September 2019, she gave £3,500 to her son on the occasion of his marriage.
- On 17 January 2020, she gave £400 to her daughter.
- On 14 February 2020, she gave a classic Ferrari car valued at £700,000 to a discretionary trust.
- On 31 March 2020, she gave unquoted company shares valued at £60,000 to her husband, Neil.
The woman had already made a gift which used up all of the annual exemption she had available.
Which of the woman’s lifetime gifts are exempt transfers for inheritance tax?
The wedding gift to the son and the gift of shares to her husband.
Feedback:
(C) A lifetime transfer up to £5,000 given from a parent to their child on the occasion of the child’s marriage is exempt, so the gift of £3,500 to the woman’s son is exempt. And gifts to spouses are totally exempt unless the recipient spouse is not UK domiciled (in which case only the first £325,000 is exempt). (A) is incorrect because the gift of the Ferrari to the trust is a chargeable lifetime transfer and is therefore not exempt (cars are not an exempt asset for inheritance tax). (B) is incorrect for the same reason and because the gift to the woman’s daughter is not exempt. There is a small gift exemption that applies to gifts of £250 or less, but the gift here was £400 and so was not exempt. (D) is incorrect for that reason as well. (E) is incorrect because the wedding gift is also exempt.
A mechanic who is trading as a sole proprietor has sold the property he was using as his business premises for £300,000. It was purchased five years ago for £200,000. The mechanic used the proceeds of the sale to buy a more suitable building for his business. This building was purchased for £350,000. The annual capital gains tax allowance is £12,300.
What is the mechanic’s taxable capital gains based on these transactions?
£0, as he has bought a replacement asset.
Feedback:
(A) £0, as he has bought a replacement asset. Gain from the sale of property used for business is exempt from capital gains tax if a replacement asset with a value that is equal to or greater than the disposed property is bought within one year before or three years after the disposition. Thus, (D) and (E) are incorrect. (B) is incorrect, as there is no blanket exemption for business-related properties. (C) is incorrect, as there is no capital gains tax exemption or reduction based on how long the asset was held before disposal.
A solicitor makes £120,000 per year. Her husband works as a teaching assistant, earning £10,000. The couple also have a son who lives with them and makes £20,000 per year, working as a painter- decorator. The personal allowance for income tax is £12,500.
To whom, if anyone, may the husband transfer any unused portion of his personal allowance?
The husband cannot transfer his unused portion of his personal allowance to his wife or to his son.
Feedback:
(E) The husband cannot transfer any unused portion of his personal allowance to his wife or to his son. Unused personal allowances can be transferred between spouses only if both spouses are basic rate taxpayers. With an income of £120,000 per year, the wife is a higher-rate taxpayer and therefore ineligible to receive the unused allowance. (C) and (D) are false, as there is no provision for transfers of allowances between parents and children.
A real estate developer has purchased:
* A brand-new commercial building
* A 2-year-old commercial building
* A 10-year-old commercial building
* A residential property
On which of these purchases will the developer suffer VAT?
Only the brand-new and two-year-old commercial buildings.
Feedback:
(C) Commercial buildings that are less than three years old are a standard-rated supply and therefore VAT of 20% will be suffered on the purchase of these. Commercial buildings that are more than three years old (with no option to tax) and residential properties are exempt supplies and therefore no VAT will be suffered.
A partnership has recently disposed of an office building. The office building was owned jointly by all the partners. The office building was sold to a property developer.
Who is liable to pay any capital gains tax due on the disposal of the office building?
All of the partners individually, based on their share of the gain.
Feedback:
(D) All of the partners individually, based on their share of the gain. The partnership is not taxable in its own right; rather it is an amalgamation of individuals effectively taxed as sole traders. Neither are partners taxed jointly. Every individual is liable to capital gains tax independently. As the asset is owned by all the partners, each partner must declare his or her share of any gain on their own self-assessment return.
A man died on 8 December 2019, having made a lifetime cash gift of £500,000 to a trust on 16 October 2018. The man paid the inheritance tax arising from this gift.
Who will be responsible for paying the additional inheritance tax arising from the gift made to the trust as a result of the man’s death, and when will this be due?
It will be paid by the trustees and due on the 30 June 2020.
Feedback:
(B) The tax will be paid by the trustees and due on the 30 June 2020. Inheritance tax payable on lifetime gifts as a result of death is always paid by the recipient of the gift. The extra tax is due six months after the end of the month of death.
A brother and sister ran a successful clothing company. When the brother passed away, he left all his assets to his sister. When the sister died, she left the entire clothing company, worth £10 million, to her three children. The estate also included a warehouse worth £600,000, which was owned jointly by the brother and sister (and solely by the sister after the brother’s passing). It was used by the company. The nil rate band is £325,000.
What is the net chargeable estate for UK inheritance tax?
There is no net chargeable estate.
Feedback:
(A) There is no net chargeable estate. One hundred percent relief is available for a business or interest in a business. Therefore, the £10 million business is not subject to inheritance tax. Fifty percent relief is available for land, buildings, or machinery owned by the deceased but used in a business in which they were either a partner or controlling shareholder. Therefore, the building qualifies for 50% relief. As the building is worth £600,000 and half of that (£300,000) is under the nil rate band, there is no chargeable estate.
A woman died on 20 December 2020, leaving her estate to her son. The woman’s son is independently wealthy and, as such, wishes the assets to pass directly to his children.
By which date must the woman’s son make a variation of the will if it is to be effective for both inheritance tax and capital gains tax?
20 December 2022
Feedback:
(B) 20 December 2022. The variation must be made within two years of the deceased’s death.
A daughter sold a necklace for £56,000 in January 2021, incurring auctioneer’s fees of £1,000. The daughter had inherited the necklace from her mother on her mother’s death in May 2007 when it was worth £20,000. The mother had bought the necklace for £5,000 in January 1993. The daughter made no other disposals of chargeable assets during 2020/21. She had taxable income of £60,000 in 2020/21. The daughter had already used her annual exempt amount for the year.
What is the daughter’s chargeable capital gain for this transaction?
£35,000
Feedback:
(A) £35,000. When an asset is inherited, the cost of that asset going forward will be the probate value. Therefore, the chargeable gain on the necklace is the sale price of £56,000 minus the auctioneer’s fees of £1,000, minus the probate value on the mother’s death of £20,000, which equals £35,000.
A man is a sole trader who is looking for ways to limit his tax liabilities.
Which of the following actions by the man would be considered permissible tax avoidance rather than prohibited tax evasion?
Deliberately postponing the sale of some shares from 5 April until 6 April so that he can use the following year’s annual exempt amount to reduce his capital gains tax.
Feedback:
(C) Deliberately postponing the sale of some shares from 5 April until 6 April so that the following year’s annual exempt amount may be used to reduce capital gains tax is an example of legitimate tax planning, so it is tax avoidance, not tax evasion. The others are all examples of tax evasion.
