1. Tax efficient savings and investments
You work at a local firm of accountants and have been given the following case. Sasha is an employee of MTB Limited. During the year to 511 April 2021, she received taxable earnings of £110,000.
She pays 4% of her earnings into her employer’s occupational pension scheme and her employer matches this. During 2020/21 Alisha also received bank interest of £900 and dividends of £6,000. Sasha has no other investments.
Sasha has paid net personal pension contributions as follows: Year to 5th April 2018 Nil (Not a member of a scheme) Year to 5th April 2019 Nil (Not a member of a scheme) Year to 5th April 2020 £34,000 Year to 5th April 2021 £32,000
a) Calculate Sasha’s income tax liability for the year to 5th April 2021.
Sasha is married to Steve and they have a son aged 12. Steve has recently been made redundant and received a substantial redundancy payment. Sasha and Steve are both UK residents.
b) Draft a note to your manager, examining any possible tax planning strategies that they may wish to consider when investing these funds.
Sasha has mentioned that Steve owns a property in France but has never declared the rent received as they believe it is not taxable in the UK.
c) Briefly comment on this point and explain what action should be taken by you as Sasha and Steve’s accountant.
d) Explain how 1-01112C would determine the penalty on any unpaid tax when a source of income has been omitted from a tax return.
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2. Choice of trading style
Simon intends to start a new business from 6 April 2020 providing consultancy advice on large high-value projects and anticipates that his profit for the year to 5 April 2021 will be £108,000. He is unsure as to whether to trade as a sole trader or set up a limited company. Simon has suggested that he would like his 19-year-old daughter, Beth, to own 4% of the business. Beth is a full-time student and does not work in the business.
a) Prepare a brief note explaining why a limited company route may be most appropriate for Simon, ignoring any taxation issues.
b) Calculate Simon’s income tax, corporation tax and national insurance liabilities for 2020/21 if i. He trades as a sole trader ii. He establishes a limited company and is paid a salary of,It £5,000 per annum with the balance of all available after fax profits distributed as a dividend to him (Ignore any shares for his daughter). Clearly show the after tax and NIC position for both options and advise which is the most tax efficient?
c) Explain the possible tax advantages and disadvantages if Simon’s daughter owns 4% of the business.
d) Simon is considering transferring his car Into the business. Simon expects that 40% of his annual mileage will be for private purposes. Explain how this will impact his income tax position under each trading option.
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3. Inheritance tax
Alice died on 1621December 2020. On death, her estate was as follows:
Alice had been married for 22 years when in May 2011, her husband Peter died. Peter had left his entire estate to Alice.
In October 2012, Alice gifted £150,000 to her grandson and in May 2016 made a gift of £350,000 into a trust, with Alice paying any IHT liability on the gift. Alice made no other lifetime gifts.
At the time of her death, Alice had outstanding household bills of £500 and the costs of her funeral amounted to £5,000. Alice’s last will and testament leaves her entire estate to her daughter, Jenny.
a) Calculate the IHT liability arising on the gift In October 2012 and the value of the transfer.
b) Calculate the IHT liability arising on the gift in May 2016 and the value of the transfer.
c) Calculate the IHT nil rate band available and the IHT liability arising following Alice’s death on each of her lifetime gifts and her estate on death.
d) Jenny has substantial wealth before inheriting her mother’s estate. Prepare a note to advise any action that Jenny can take to pass on her Inheritance to her children In an IHT efficient way.
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