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Question Number 1: REP Limited

Meeting Notes

Client: REP Limited and Lamar

Subject: Tax planning in relation to REP Limited investment in Jay Limited, Purchase of investment property
and gift of shares by Lamar

Year end: 31 March 2022

Date: 8 September 2020

(a) Knowledge obtained from advising other clients.

REP Limited has not done any investments in joint ventures in overseas, so our knowledge of Garia's
taxation and regulations can be helpful for them. Our firm can use knowledge and experience gained from
past clients, as far as it donot breach confidentiality of client specific information.

Our firm has dealt with clients in past having overseas permenant establishments, and also had a client with a
PE in Garia. This apprantly gives our firm professional competence to deal with REP Limited investment in
Jay Limited as it will also have a permenant establishment in Garia.

Our firm can use its general knowledge in relation to tax environment of Garia, while providing service to
REP Limited. Experience gained and knowledge obtained is not subject to rules of confidentiality under code
of Ethics.

However our firm should note that we cannot use client specific information of our previous clients while
advising REP Limited. It will be breach of Code of ethics.

Rules of confidentiality apply even after the client has been provided services. Our firm cannot use client
specific business information even if those clients are now ex clients.

(b) Investment in JAY Ltd

(i) Residency of JAY Ltd.

Relevance of the country of residency of JAY Ltd in relation to the amount of corporation tax payable in the
UK and Garia in respect of its profits:

If JAY Limited is UK Resident

If JAY Limited is a UK Resident company, then it will have to pay UK tax on its worldwide profits. Profits
earned by its permenant establishment in Garia will be subject to UK tax. However it will get doubled
taxation relief on tax already paid in Garia.

Profits earned by JAY Limited £135,000

UK Tax at 19% £135,000 X 19% £25,650
Lower of:

UK Tax on overseas profits

Double Taxation relief £135,000 X 19% = £25,650 (£17,550)
Overseas tax = £135,000 X
13% = £17,550

Tax Payable £8,100

This means that Jay Limited has to pay UK tax of £8,100 and Garian tax of £135,000 X 13% = £17,550.
Total tax will be 25,650.
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If JAY Limited is not a UK Resident Company

If JAY Limited is resident in Garia, and it is not a UK resident company, then it will have to Garian tax only.
No UK tax is payable on Overseas company's profits earned in overseas. In this case total tax will be
£135,000 X 13% = £17,550. It is to note that there will be no tax on dividends received from JAY Limtied

Relevance of the country of residency of JAY Ltd in relation to the relief available to REP Ltd if JAY Ltd’s
business in Garia were to make a trading loss

If JAY Limited is a UK resident Company

If JAY Limited is a UK resident company, then REP Limtied can claim loss relief on losses of JAY Limited
in relation to operations in Garia. However shareholding percentage need to be consdiered. If REP limited
owns 30% shares and CRO Limited owns 70% shares, then loss relief can be claimed through consortium
concept. In this case REP Limited will be able to claim loss relief on 30% of JAY Limited losses.

However if REP Limited will own 20% shares and CRO Limited will own 80% shares, in this case no
consortium will be formed and REP Limited will not be able to claim any loss relief because CRO Limited
will form its own 75% group with JAY Limited.

If JAY Limited is not a UK resident Company

If JAY Limited is not a UK resident company, then there will be no loss relief available for REP Limited in
relation to JAY Limited losses. If consortium company is overseas it cannot surrender losses to UK.

(ii) Election to exempt the profits of JAY Ltd’s overseas permanent establishment from UK tax.

If JAY Limited will make an election to exempt its overseas permenant establishment from UK tax then

there will be no UK tax on its overseas permenant establishment profits.

Further loss relief will also not be available in UK.
There will be no UK capital allowances on overseas brach assets.
This election is irrevocable and
It will apply on all overseas branches which are present and which will be formed in future.

(iii) Controlled foreign company (CFC) rules.

Purpose of CFC rules is to tax profits which are diverted away from UK in order to save UK tax. Controlled
Foriegn company is one which is resident in overseas and it is controlled by UK residents. If it is diverting
UK profits in order to avoid UK tax, then CFC charge will apply on UK resident shareholders. CFC charge
applies on UK resident shareholders which are a company and own 25% or more shares.

(c) Purchase of investment property.

Investment property purchased is a commercial property and it is new. It will be in stadard rated category for
3 years. After that it will convert in to exempt category. After 3 years it will be possible to revert it back to
standard rated category if election of opt to tax is done. Through this election land and building converted to
exempt category after 3 years of construction is reverted to standard rated category.

Election of opt to tax can be reversed in first six months of election, and after that it becomes binding for 20
years.

REP Limited will be able to recover VAT paid on purchase of building as currently building is standard rated.
It has to charge VAT on rent currently as it is in standard rated category. However once building converts to
exempt category then there will be no VAT on rent unless election of opt to tax is done.

(d) Proposed gift of shares to trust on 1 November 2020.

Gift of shares to trust on 1

November 2020 - Fiscal year of
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20/21
Value before gift £1,920,000 80,000 shares X £24
Value after gift (£1,020,000) 60,000 shares X £17
Value of transfer £900,000  
Annual Exemption - Current year -
(£0) Used against gift made in July 2020
20/21
Annual Exemption - Previous year
(£0) Used against gift made in July 2020
- 19/20
Chargeable Lifetime transfer
£900,000
(CLT)

Nil Rate Band of 20/21 £325,000

Chargeable transfers for lifetime taxes only include
CLTs. CLT between November 2020 and November
2013 (7 years range), includes gift to trust of £170,000
made in May 2016 (16/17).

Value of transfer £170,000

Annual
Last 7 year chargeable transfers (£167,000) Exemption - (£3,000)
current year 16/17
Annual
Exemption - already used against gift
(£0)
previous year made in February 2016
15/16
CLT  £167,000
Available NRB £158,000

Lifetime tax
£158,000 X 0% £0
(£900,000 - £158,000) X 25% £185,000
Total Inheritance tax £185,000

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5/15/22, 4:22 PM

Question Number 2: Freya

(a) Sale of business.

Calculate the CGT which would be payable by Freya on the sale of her business if she does not
incorporate her business but simply sells all of her business assets for £2,300,000 on 31 October 2020 to
an unconnected purchaser.

If Freya will sell her business to an unconnected purchaser without incorporating it, then Business asset
Disposal relief will be available. Due to BADR, rate of CGT will be 10%. Freya has owned this business for
more than 2 years and she is selling her ongoing business therefore BADR will be available. CGT on sale of
business will be £850,000 X 10% = £85,000.

Explain the CGT implications of the proposed sale of Freya’s business to FIM Ltd in exchange for
shares worth £2,300,000.

Considering that conditions of Incorporation relief are satisfied, proposed sale of business by Freya to FIM
Ltd in exchange of shares will not result in any chargeable gain. Gain on sale of business will be deffered
against base cost of shares received from FIM Limited. 

Market value of shares received from FIM Ltd £2,300,000

Chargeable gain on sale of business (£850,000)
Base cost of shares of FIM Ltd £1,450,00

Freya's UK residence status for three tax years starting from 5 April 2021 - 2021/22, 2022/23 &
2023/24

Considering that automatic UK Residency and automatic non UK residency is no applicable on Freya, her
UK residency status will be determined through UK Ties.

1. Close family members residency in UK Tie is not satisfied for Freya because her husband and
childeren are not UK resident during the three year period
2. Accomodation Tie of Freya is satisfied because she will own continue to own her accomodation in UK
for more than 91 days in a fiscal year and she will also live for more than one night in it. She will own
accomodation for all three fiscal years and she will spent 55 days in each fiscal year in it.
3. Work tie will not be satisfied for Freya as she will only work for 25 days in UK in each fiscal year,
which is less that required limit of 40 days atleast.
4. Freya will live for 55 days in each fiscal year during these three years. Days in UK tie require atleast
90 days residence in UK in current fiscal year OR in any of previous 2 fiscal years. Considering this
Freya's tie of days in UK will be satisfied in 2021/22 and in 2022/23 as in previous 2 fiscal years her
90 days will be satisfied. In 2023/24 her 90 days tie will not be satisfied.
5. Comparative days tie will not be satisfied for Freya as she will spend less time in UK as compared to
Benida.

Considering the Ties, Freya has satisfied 2 ties in 2021/22 and in 2022/23. In 2023/24 she has only satisfied
one tie.

As Freya plans to live only 55 days in UK and she was previously resident she atleast needs 3 UK ties to
become UK resident. She will be a non UK resident in all of the three tax years.

On the assumption that Freya is non-UK resident for the tax year 2021/22, explain any changes which
would need to be made to Freya’s ideal scenario in respect of her time in Benida in order for there to
be no UK CGT on the sale of her shares in FIM Ltd

If Freya is a non UK resident in the tax year 2021/22, her sale of shares of FIM Ltd on 30 April 2021 (21/22)
will lie in a fiscal year when she is non UK resident. Normally sale of assets in non residency period is not
subject to UK CGT. However in case of Freya sale of these shares will be subject to UK CGT when she will
regain UK residency as she will be subject to Temproary absence rules.
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These shares were acquired when she was a UK resident and she will sell them after becoming non
UK resident
Freya had been UK resident for more than 4 fiscal years in last 7 years as she had been resident in UK
for last 30 years
Her absence period from UK is just 3 years, which is less than 5 years.

If Freya wants that her sale of shares in FIM Ltd do not get subject to UK CGT, she has to complete atleast 5
years of non residency. She should come back to UK after at least 5 years, so that rules of temproary absence
do not apply on her. 

(b) Liability to income tax and class 4 national insurance contributions (NIC)

Trading Profit before capital

£94,000
allowances
Plant and Machinery will be transferred to FIM Ltd through
succession election. This means that transfer will be at
written down value, therefore no capital allowance
adjustment will be required.

In relation to Motor car, adjustment will be required as it

Capital Allowance £1,560 will be withdrawn from business.

Balance in pool £8,700

Disposal of Car (£11,100)
Balancing charge (£2,400)
Business use is 65% (£1,560)
Overlapping Profits (£31,400)
Revised Trading Profit £64,160

Non
Income tax  
Saving
Trading Income £64,160
Personal allowance (£12,570)
Taxable income £51,590

£37,700 X 20% £7,540

(£51,590 - £37,700) X 40% £5,556
Total income tax £13,096

Class 4 NIC
Trading income = £64,160
£9,568 X 0% £0
(£50,270 - £9,568) X 9% £3,663
(£64,160 - £50,270) X 2% £278
Total Class 4 NIC £3,941

(c) Land in Benida.

Alvaro is currently domiciled in Benida, therefore he will be subject to UK IHT on gift of UK assets only. He
is planning to gift Land to Freya which is located in Benida. In normal circumstances it should not be subject
to UK IHT as it is not a UK asset.

Alvaro is resident in UK since 6 April 2006. He need to consider his deemed domicile status as he will be a
long term resident of UK on 6 April 2021, when his 15 years of residency in UK will be completed. At that

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time he will be considered as deemed UK domicile. 

Once he will become deemed UK domicile holder, his worldwide assets will be subject to UK IHT. If Alvaro
gifts Land to Freya before 6 April 2021 then it will not be subject to UK IHT, however after that UK IHT
will apply on gift.

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5/15/22, 6:56 PM

Question Number 3: Dorian and Taupe Limited

(a) Explain why Taupe Ltd is classed as a close company.

A comapny is regarded as close company if it is controlled by

1. Five OR fewer shareholder OR

2. Any number of directors

Control means ownership of 50% plus shareholding.

In case of Taupe Limited Directors of the company own 30% (Dorian owns 5% and other five directors owns
25%). Dorian's Father Basil holding will be considered with Dorian as he is associate of Dorian. If
shareholding of Basil is also added with Dorian, then total shareholding of directors will increase to 53% (as
Basil owns 23% shares).

Considering this Taupe Limited is a close company as it is controlled by Directors.

(b) Explain, with supporting calculations, the tax implications for both Dorian and Taupe Ltd, if Dorian
repays the £7,500 loan on 30 April 2022 rather than on 30 June 2022.

For Dorian this loan has no implications, as its balance is less than £10,000 therefore no loan benefit arises
on it.

For Taupe Limited a notional tax of 32.5% must have been paid when they gave loan to Dorian. When
Dorian will repay the loan to Taupe Limited, HMRC will return the notional tax to Taupe Limited after 9
months of its year end.

If Dorian will repay loan on 30 April 2022, then it will be on year end of Taupe Limited and Taupe Limited
will get refund of notional tax on 9 months after 30 April 2022. 

However if Dorian will repay loan on 30 June 2022, then refund will be processed 9 months after year end of
30 April 2023.

(c) Explain, with supporting calculations, which of the two alternatives for providing assistance with travel
costs, will produce the lower overall cost for Dorian.

Alternative 1

In this alternative Dorian will get an interest free loan of £4,800. This loan is individually below loan benefit
threshold of £10,000. However Dorian also has an existing loan of £7,500, which was also below loan
threshold. Due to this new loan of £4,800, Dorian will exceed the loan benefit threshold of £10,000 as his
total loan balance will now become £12,300. This will make his total loan chargeable for loan benefit.

Loan benefit will be of £12,300 X (2% - 0%) = £246. It will create income tax of £246 X 40% = £98. Dorian
will not be required to pay NIC on loan benefit, as loan benefit is a non cash benefit and only class 1 A
employer NIC is payable on it.

When Taupe Limited will write off this loan on 5 April 2022, it will become a dividend income for Dorian.
On dividend income, income tax will be (£4,800 - £2,000) X 32.5% = £910

Total cost for Dorian in alternative 1 will be £246 + £910 = £1,156

Alternative 2

In alternative 2, Taupe Limite will pay £3,600 cash to Dorian for his travelling from home to work. This
amount will be a chargeable benefit as travelling from home to work is not an official travelling. This £3,600
will be subject to Income tax and Class 1 Employee NIC. Considering Dorian's existing salary of £78,000,

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his income tax will be at 40% and class 1 employee NIC will be at 2%. Income tax and class 1 Employee
NIC will be £3,600 X (40% + 2%) = £1,512.

Parking benefit given to Dorian will be an exempt benefit.

Total cost of Dorian in this case will be 

Parking cost is removed, as now Taupe Limited

Total cost incurred by Dorian excluding
£3,900 will arrange parking for Dorian directly from a
Parking cost. £5,220 - £1,320
third party.
Amount paid by Taupe Limited to Dorian (£3,600)
Income tax and NIC payable £1,512
Net cost for Dorian in Alternative 2 £1,812

(d) State, with reasons, the due date for filing Taupe Ltd’s corporation tax return for the year ended 30 April
2019, and the implications for Taupe Ltd in respect of filing it late.

Due date for filing corporation tax return for the year ended 30 April 2019 will be 30 April 2020, that is
within 12 months of year end.

Taupe Limited filed return on 29 August 2020, which was 4 months late than normal due date of 30 April
2020. It will create a penalty of £200 as it is late by more than 3 months.

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5/16/22, 7:22 PM TestReach

Question Number 4: Amelia

(a)(i) State the reliefs available to Amelia in respect of her trading loss of the year ending 31 December 2020, on the
assumption that Amelia does not wish to carry forward any of the loss.

Amelia can offset its total income of current year of 2020/21. She can also offsent her total income of last 12 months which
will be 2019/20. She can also offsent Capital gains 2020/21 and 2019/20 after offsetting total incomes of those relevant
years. 

(a)(ii) Explain, with supporting calculations, how much tax would be saved for each of the reliefs identified in requirement
(a)(i).

Income tax return 2019/20 2020/21

Trading Income 30,000 0 (loss of 14,000)
Property Income 11,600 0
Interest Income 6,000 6,000
Total Income 47,600 6,000

Capital Gains Tax return 2019/20 2020/21

0 (11,000
Disposal of Painting 0
loss)
UK rental property (residential
0 45,000
property)
Shares in Swartz Ltd 0 28,000
Total chargeable gain 0 73,000

Loss Memo
Trading Loss 2020/21 14,000

Option Number 1

Amelia can offsent her trading loss of 14,000 against her current year total income of 2020/21 of 6,000. This will give zero
tax saving as this amount would already be covered through personal allowance.

Remaining loss of 14,000 - 6,000 = 8,000 will be carried back against last 12 months total income of 2019/20. This will
give saving at rate 20% because total income of 2019/20 of 47,600 will fall to basic rate band once personal allowance is
adjusted against it (47,600 - 12,570 = 35,030). Tax saving will be 8,000 X 20% = 1,600

Total tax saving in option 1 is 1,600.

Option Number 2

Amelia can directly carry back her loss to previous 12 months and offset her total income of 2019/20. This will give her
relief on complete loss of 14,000 at basic rate band, because total income of 2019/20 of 47,600 will fall to basic rate band
once personal allowance is adjusted against it (47,600 - 12,570 = 35,030). Tax saving will be 14,000 X 20% = 2,800

Total tax saving in option 2 is 2,800.

Option Number 3

In this option Amelia will offset her current year total income of 2020/21 of 6,000 and will then go against current year
capital gains. Current year total income offset of 6,000 will give zero tax relief as it was already covered through personal
allowance.

Remaining loss of 14,000 - 6,000 = 8,000 will be utilized against capital gains. Total chargeable gains were 73,000.
However if brough forward capital loss is adjusted against it, remaining capital gains were 73,000 - 11,000 = 62,000. After
adjusting annual exemption of 12,300 we can identify that capital gains of 62,000 - 12,300 = 49,700 were at higher rate
tax.

Loss will be adjusted against residential property gain which will give relief at 28%. Capital loss of 8,000 will give relief of
2,240

Total tax saving in option 3 is 2,240.

(b) Explain, with supporting calculations, the capital gains tax and income tax implications for Amelia of the proposed sale
of Warehouse 1, and the acquisition of Warehouse 2 and the forklift truck.

Proposed sale of Warehouse 1

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5/16/22, 7:22 PM TestReach
Business use portion - 3/4
Non Business use portion - 1/4

Disposal proceed = 118,000 X 3/4 88,500 Disposal proceed = 118,000 X 1/4 29,500
Cost = 86,000 X 3/4 (64,500) Cost = 86,000 X 1/4 (21,500)
Chargeable gain 24,000 Chargeable gain 8,000
Rollover relief - Balancing Figure. (18,500)

Chargeable now. Lower of:

1. Gain 24,000 5,500

2. Cash in hand: 88,500 - 83,000 =
5,500

Warehouse 1 was used for business and non business purpose both. Rollover relief will only be available on Business use
portion. Three fourth of the warehouse 1 was used for business purpsose as remaining was let out.

Amelia sold warehouse 1 on 1 May 2021, and she reinvested proceeds in warehouse 2 on 1 March 2021. She will qualify
for Rollover relief as she disposed warehouse 1 which is a qualifying asset for Rollover relief, and then she reinvested
proceeds in another qualifying asset which is warehouse 2. Both of them are qualifying assets because they are land and
building which qualify for Rollover relief. Further she reinvested in qualifying period as her reinvestment lies within 12
months before the disposal date. 

Whole reinvestment of warehouse 2 will qualify for Rollover relief as Amelia will use whole of it in business.

Forklift truck purchased for 23,000 will qualify for Capital allowances as it is a movable plant and machinery. Annual
investment allowance will cover its value and it will get 100% capital allowance. 

Lastly against reinvestment made in Forklift truck, Amelia can claim holdover relief for remaining of business use portion
gain of warehouse 1. However it is necassary that business use of Forklift truck should be started.

(c) Explain why Amelia can apply to voluntarily deregister for value added tax (VAT) purposes on 31 December 2020, from
what date her VAT registration would be cancelled, and the immediate consequences for her of deregistering.

Amelia can apply for dergistration from VAT on 31 December 2020, as her forecasted taxable supplies of next 12 months
are 79,000, which is below deregistration limit of 83,000.

She will be deregisted from same date that is 31 December 2020.

Amelia has to pay VAT on all standard rated supplies in her business on that date according to their market value. If this
VAT payable is less than 1,000 then it will be waived.

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