NHERITANCE AXES

Advance Taxation

Tutor : Owais Mirchawala

Inheritance Taxes
Practice Question No. 1:
A person gifted following asset:
- A car worth 700,000 to a trust on 1st January 2022.
- A house worth 300,000 to his son on 1st September
2024.
He died on November 2025. Calculate Inheritance Tax?
Practice Question No. 2:
A person made following gifts:
- A house worth 900,000 to trust on 1 January 2021.
- A farm worth 300,000 to his daughter on 1 January 2023
- A car worth 200,000 to trust on 1 0ct 2023.
He died on 1 Jan 2026. Calculate Inheritance Tax?
Practice Question No. 3:
A person made following gifts:
- A car worth 300,000 to her daughter on 1 March 2013.
- A car worth 200,000 to trust on 1 January 2016.
- A house worth 700,000 to trust on 1 November 2019
(Lifetime tax was paid donee)
- A car worth 100,000 to son on 1 January 2020
He died on 1 January 2026. Calculate Inheritance tax.
Practice Question No. 4:
A person made following gifts:
- Gift to trust worth 150,000 on 1st February 2014 (Lifetime
tax was paid by donee)
- Gift to son worth 300,000 on December 2018.
- Gift to trust worth 346,000 on January 2020.
- Gift to daughter worth 300,000 on August 2022.
He died in January 2026. Calculate Inheritance tax.
Practice Question No. 5:
Ahmed died on 15.01.2026 and at the date of death he owned:
- Free hold property, valued at £100,000
- Lease hold property, valued at £40,000 with an outstanding
mortgage of £15,000
- 10,000 shares in a quoted company. Closing price for 15.01.26 was
192 - 198 pence per share with bargains during the day of 193,
195 and 197
- A motor car purchased on 1.1.21 for £12,000 and valued at £7,500
at the time of death
- A loan of £15,000 due to him by his brother
- Bank deposit of £25,000
- Ahmed owed £1,000 on his credit card and £1,500 of gambling
debts.
- His funeral expense amounts to £2,500.
Ahmed left free hold and leasehold properties to his son, while the
remaining assets are to be given to his wife.
During his life Ahmed had given the following life time gifts. (He paid the
IHT where applicable)
- £200,000 cash to a trust on 1.5.2014
- Free hold property valued at £180,000 on 1.12.2016 to his son
- £220,000 cash to a trust on 1.3.2020
Calculate IHT payable.
Practice Question No. 6:
Mr. D made following gifts during his life
- Gift to Trust worth 250,000 on 1.1.16
- Gift to Son worth 3'0,000 on 15.1.17
- Gift to trust worth 95,000 on 20.1.2023
- Gift to daughter worth 39,000 on 18.12.2023
He died on 20.1.2026, having following death estate:
- Free hold property, valued at £200,000
- 12,000 shares in a quoted company. Closing price for 20.01.2026
was 190 - 194 pence per share with bargains during the day of
189, 196 and 199
- Cash balance of 28,000
- Car worth 82,000
- Leasehold property worth 99,000
- Painting worth 34,000
- Payable to Bank of 92,000
- Gambling debt of 22,000
Mr. D left free hold and leasehold properties to his son, while the
remaining assets are to be given to his wife. Calculate IHT payable.
Practice Question No. 7:
Mr. J died in November 2026 and at the date of death he owned:
- Car worth £60,000
- 30,000 Mutual fund units having lowest bid price of £2
- Plot of Land worth £90,000
- Cash and bank balance of £65,000
- 10,000 shares in company Z having Quotations of £3 to £3.5 and
Bargains of £3, £3.1 and £3.9
- Loan payable of £40,000
- Funeral expenses of £2,000

Mr. J gave Car and Plot of Land to his wife and rest of the assets to
Son
During his life Mr. J had given the following life time gifts. (He paid the
IHT where applicable)
- £170,000 cash to a trust in September 2016
- Car worth £95,000 to Son in December 2018
- £250,000 cash to a trust in January 2023
Calculate IHT payable.
Practice Question No. 8:
Mr. B died in January 2025 having death estate of 700,000. He has made a
CLT of 400,000 in May 2021. Mrs. B died in December 2019 having death
estate of 300,000, out of which she gave 50,000 to son and rest to Mr. B.
Calculate IHT for Mr. B.
Practice Question No. 9:
Mr. K died in June 2027 having death estate of 450,000. He has made a
gift to trust of 350,000 in July 2024. Mrs. K died in February 2021
having death estate of 260,000, out of which she gave 30,000 to
daughter and rest to Mr. K.
Calculate IHT for Mr. K.
Practice Question No. 10: Practice Question No. 11:
Mr. A died in February 2026 having a Death Estate of 700,000. In this Death Mr. D died on 10th May 2026 having a death estate of 590,000. In
Estate it includes his house of 250,000 which he gave to his son and the included his main residence worth 200,000. Entire of his death estate
rest of the death estate was given to daughter. He has made CLT of was given to his son.
150,000 in November 2022.
Compute IHT on death estate if he has made one CLT of 92,000 on
Compute IHT on Death Estate. 15th February 2023.
 I
Practice Question No. 12: wh
=-
Mr K's
whole NRB was un-used as

to
he his
wife
entire DE which
gave
was

=
,

Mr. K died on 15th February 2021 having party Further

exempt transfer
- -
- - -- . no other

death estate of 400,000 which included a

- -

Death tax
payable
-
=> - > was
-

main residence of 150,000. He gave whole

= -

-
-
-
-
-

of the death estate toO

wife. Later on 20th
-

= residence worth
June 2025O
- &
W2 Mr It main 150 000

gave
-
- - -
.
-
- ,

-
Mrs. K died having death estate
- - -
-
-
=
-
-

to Musk on his death

. This means
of 790,000 which include main residence That residence NRD of 150
=>
-
-
- -> , 000 was
worth 200,000. She gave her entire death .
transferred
-
also
-
2
- - - >
-

estate to her son. NRB restricted

= -

- Residence was to

Compute IHT on death of⑧

at death Mr K value
of
150 000
Mrs K
, as .

residence
- - -
-

main 150
of
was ,
000
.

INT death mrs K

of
on .

~
-

Death Estate - 790

,000

Rate Band Musk 325

g
-

Nil ,000

Transfer (Wi
NRB 325
of
-
,
000

Total NRB 650 0 0 0

,

Last T
transfers) S
-

years Chargeable
Available NRB 650 ,
000

175
,0 0 0 + 150 000
Residence 175 325
,000
-

NRB ,000
=

of
Mrs K
,

.
-value main residence 200
of RNRB
000

Residence
,

NRB I 150
Mr 000
restricted
of Total will be
. ,
-

, 000
25
to 200 ,
000

Total NRB 850

, 000

Tax 790 000

=
, x0 %
=I
PAGE 145
PAGE 146
 PAGE 147

Required:
Prepare the notes for use in a meeting with Wanda as requested in the email from your manager. The following
marks are available:
(a) Wanda’s post-tax inheritance from Lucy. (6 marks)

(b) Voluntary registration for value added tax (VAT). (4 marks)

(c) Choice of business structure.

(i) Income tax and corporation tax payable. (11 marks)
(ii) Other matters. (5 marks)

(d) Income tax refund. (5 marks)

Professional marks will be awarded for the approach taken to problem solving, the clarity of the explanations and
calculations, the effectiveness with which the information is communicated, and the overall presentation and style
of the notes. (4 marks)

(35 marks)
Practice Question No. 13 Practice Question No. 14
Mr. N died in May 2026 having a Death Estate of 830,000 out of which Mr. A died in May 2026 having a Death Estate of 750,000 out of
he gave 95,000 to his wife and 75,000 to charity. He has made CLT of which he gave 60,000 to his wife and 55,000 to charity. He has
295,000 in June 2022. Compute IHT on Death Estate. made CLT of 250,000 in June 2021. Compute IHT on Death Estate
and advice.
 gifted
Residence Cada
ada
NRB is available
N as

Residence E500 to
Main
Raymer
000

g Death
,

(daughter) through
Death Estate 1 ,
000 000
,
Estate.

(60 000)
Exempt Party transfer charity
-
-
,

Reduced
Chargeable DE 940
. 000 ~

Taxable
Rate
DE
evaluation
545 00
-

at time Charitable donation 60

Available NRB
of
Death 220
, 000 Add Back
Existing 00
- ·
= : ,

-
Residence NRB (ND 175 ,
000 -

Add Back : Residence NRB 175

. 000

Total NRB 395 Base line 780 000

for DE , 000 amount ,

Tax = 395
, 000 X 0 %
N2
- O -
10 %
of Base line amount = 180 000
, x 10%= 78 ,
000

545
, 000 40 %
600d
v
-

DE
=

laxable X 218 Actual

=
= ,
000 -
Donation

910 218 donation

Dejecitdonation
000 ,
000 18 , 000
,

As actual is less than 10 % Base

of
-

line reduced
Saving in IHT
if
additional donation
of
18 ,
000
therefore rate will not be

is done available
.

O
TEX 395
,000 X 0% -

(545, 000 -
18
, 000 X 36 %
=
=
189 720 ,

189 720 ,

Reduction in IHT additional donation to

if
-

18
charity is made
of
,
000
,
will be :

189 720
218 000
28280
- =
, ,
- -
-
-

-
- -
-
-
-
- - -

- -

O
- - -

-
- -
-
-
-

-
-

- -
-
-
-
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e
Practice Question No. 15 Practice Question No. 16 ✓
Mr. J gifted an asset to his son on 1st July 2021 when its value was Mr. J gifted an asset to his son on 1st May 2020 when its value was 200,000.
450,000. Mr. J died on 1st September 2025 when the value of that Mr. J died on 30th June 2025 when the value of that asset was 125,000. Mr.
asset was 320,000. Mr. J has a death estate of 730,000. Calculate J has a death estate of 500,000. Calculate total IHT.
total IHT.
PAGE 128
 Pedro

Gift of holiday cottage by

Marina to Pedro

will be
regarded as a
Gift with Reservation
transaction because Marina continued to use
&

the asset
rent-free even
after making its

lifetime gift to Pedro

.

assessed
INT this
gift of cottage
-
on was

on
higher of :

If treated as
lifetime gift
made
a

to Pedro on 4 March 2011

If treated death
.
gift through death
2 as a

estate Marina assessed on

of ,

date 8 June
of
2021.

INT 4
if
treated as
lifetime gift on March
-

2011 will be because at time

zero 1
g
regarded
PET
gift
it be
lifetime
will as
on

there tax Further

lifetime
which is no .
as

death

jetimiwHavea
was

after
gift
.

However taxed
if through Death estate will
-

death estate
result in IHT as is
subject
to Death tax .

This was the reason Pedro was required

IHT
to
pay giftGWRof cottage by Marina
on
,
because it was a transaction
having
greater IHT
if
taxed
through Death estate.
Practice Question No. 17: Practice Question No. 18:
Mr. B died in June 2026 having Death Estate of 450,000. This death Mr. K died in September 2026 having Death Estate of
estate includes an asset inherited from his father worth 60,000 (MV 270,000. This death estate includes an asset inherited from
at time of his fathers death) in May 2023. His Father had total death his mother worth 25,000 (MV on date of his mother's death)
estate of 900,000 on which he paid IHT of 120,000. Mr. B has made in May 2012. His Mother had total death estate of 300,000 on
one CLT of 200,000 in 2024. Compute IHT on his death estate of which she paid IHT of 30,000. Mr. K has made one CLT of
Mr. B. 220,000 in 2024. Compute IHT on his death estate of Mr.
K.
Practice Question 19:
Mr. A gifted shares of two companies to his son on 1 July 2023.
- 10,000 shares of Company X, an unquoted company worth
£350,000.
- 70,000 shares of Company Y a quoted company worth
£700,000.
His son disposed off shares of Company Y on 1st November 2025.
Mr. A had originally purchased shares of both companies on 1st
January 2012. Total shares of the company Y were 100,000. Mr. A
died on 1st August 2026.
Calculate IHT on his death.
Practice Question 20: Practice Question No. 21

Mr. J disposed off 12,000 shares of an unquoted company for £402,000 on Mr. A gifted 40,000 shares in ABC ltd an unquoted trading company to
1st July 2028. He was given these shares by his father on 15th February her niece on her marriage on 1st May 2026 when they worth
2025 when they were worth £392,000. His father purchased these shares on £180,000. Mr. A had owned the share since 2015. On gift date ABC
1st August 2019. Total shares of company were 900,000. ltd owned assets worth 500,000 which included investment property
of £50,000. Mr. A had made no other life time gift. Explain IHT
Calculate IHT on death of his father which occurred on 1st May 2029. implications on this gift of shares.

Practice Question No. 22

Mr. A gifted shares of an unquoted company worth £40,000 to his
Son. Company owned Business asset worth £70,000 and Excepted
asset £30,000. Compute PET value
 Practice Question No. 23: Practice Question No. 24:
Agricultural Property Relief (APR)
= -
O
Mr. A has transferred shares of an unquoted company worth £300,000 to
- - -
-
- Mr. J has transferred shares worth £500,000 in an unquoted farming
>-
his son. Value of assets owned by company include Farm and land worth - =
- - *

assets
gift of agricultural
-
APR is available on - ~ -
= -- - company to his son. Value of company’s farm and land is £800,000
£450,000 and Other assets worth 150,000. Agriculture value of land is - - -

-
-
-

-
-
>
-
-
- - which includes Agriculture value of £600,000, Other Business assets
at death
. £400,000. Other assets include investments of 50,000.
during
--

either
-

life OR time
of worth £250,000 and investment assets worth £90,000.
- = -
-
-
-
-
-
- -
-
-
--

Compute value of PET. 800 000 250 000 + 90 000

asset
=
+
value
agricultural
APR 100 %
of Compute value of PET.
is
, , ,

on an
- .

-
- -
1140 000 ,

available used
-

asset
APR
if agricultural
is
-
-
is

used value 500 000

of transfer
business OR
in
for personal purpose OR
- 300, 000 value
of transfer
-

000
=

property is let out APR 400 (200 000)

. APR 600 000 (263 157)
if
. -
= 300
, 000 X
, -

= 500 000
,
x ,
,

450
, 000 + 150 000
, 1 , 140 000 ,

· For APR it is
necessary that donor must own - BPR =
300
, 000 x 600 000
,
- 400
. 000 -
50 ,
000
(75,000) -

BPR =
500 000 , x 1140 000
,
-
600
,000 -
90 000
, (197 368)
.

atleast donor himself 600 000

if
the 1140 000
propertyfor years
a ,
,

25
, 000
doing agriculture , 475
is 39

Annual Exemption current (3000) Annual Exerception (3000)

year
Current
year
-
- -

For APR
ownership requirement increases to last (300d last
year
(3000
years year
-

donor has let out the PET 19 PET 33 475

if property. , 000 ,

APR
agricultural property
available
is
only I
-

on

Agricultural
APR
of transfer
= value x value

Rest Total assets

of the APR same value
BPR &
rules
of of
- are

transfer relief
successive

Combined This is used when

ownership of spouse
formula farming
a

Withdrawl
of BPR business is
gifted .

asset situation
Changing Donor must have control
farming
-
in

business at time .
of gift
=> -00 x 3%
100 :

·
200 000
-
-

⑧
-
-
-

- -
- - -

- - -

①
- -
- -

- -
-

-
-

- -
------

-
&
-

O
- -
-

- -
- - -
- -
-

#
-

-
-
-
- -
-
-

-
- - -
-
-
-

-
- - - -

= =>
Practice Question No. 25
Sara owns two antique chairs which are part of a set of six. Her
husband owns another three, and her daughter owns one.
Sara gifts one chair to her son.
The values of the chairs on that date are as follows:
Number of Chairs Value of Set of chairs
1 chair £5,000
2 chairs £15,000
3 chairs £25,000
4 chairs £40,000
5 chairs £60,000
6 chairs £90,000

Calculate the transfer of value relating to the gift of one chair for
IHT purposes.
Practice Question No. 26 Practice Question No. 27

Ordinary shares in Monsoon Ltd, an unquoted trading company, with James gave his son 6,000 ordinary shares in Simons Ltd, an unquoted
an issued share capital of 100 shares of £1 each, are held as follows. trading company.

% of shares (before the gift) The company’s share capital immediately before the transfer comprised
Fredrik 40 20,000 ordinary shares held as follows:
Maja – his wife 35 Number
Ebba – his daughter 10 James 8,000
Mikael – his son 15 His wife 2,000
100 His Brother 5,000
His Sister 3,000
Fredrik gave 5% of his shares to his daughter. His Father 2,000
20,000
The value of the shares on the date of the gift was as follows:
The agreed values for the shares at the time of the gift were:
£
100% 150,000 Holding £
75% 105,000 75% or more 10
70% 80,000 50.01% to 74.99% 8
50% exactly 7
Compute the value of the gift to the daughter for IHT purposes 30% to 49.99% 6
before exemptions and reliefs 10% to 29.99% 4
Under 10% 3

Calculate the transfer of value relating to the gift of shares for IHT
purposes.
 PAGE 132

-
-

=
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T
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~
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shares
Gift
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 PAGE 133

[
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- - - - - - - -

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Before - After
Emma 35
. 000 ,000
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Husband 19
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= - -
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x 100 :
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 PAGE 193

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PAGE 194
Practice Question No. 28:
Mr. K died in 2026 having following death estate
• UK house worth 600,000
• Overseas Land 60,000 on which transaction cost of 600
and overseas tax of 18,000 is payable.
Compute Tax on Death Estate.
Practice Question No. 29:
Mr. D died in January 2027 having following death estate
• UK Land worth 250,000
• Overseas House worth 120,000 on which transaction cost of
8,000 and overseas tax of 35,000 is payable.
Compute Tax on Death Estate
 PAGE 115

2 Your manager has had a meeting with Freya, a client of your firm. She has sent you the memorandum she prepared
following the meeting and an email detailing the work you are required to do.
Memorandum extract from your manager: dated 7 September 2020.

Background
Freya has been domiciled and resident in the UK more than 30 years and has not spent any significant periods of
time overseas. She started trading as an unincorporated business in 2012 and has always prepared accounts to
31 May each year. Freya’s business is her only source of income.
Sale of Freya’s business
Freya has received an offer of £2,300,000 from an unconnected party for all of the assets of her business. If
the offer is accepted, her only chargeable assets for capital gains tax purposes will be goodwill and her business
premises. The aggregate chargeable gains arising in respect of these assets will be £850,000. However, once she
is no longer working full time, Freya intends to live in the country of Benida and has asked us to consider whether
she would save UK tax if she were to delay the sale of her business until after she has left the UK.
I agreed to advise Freya on the following strategy:
31 October 2020 Freya will sell all of the assets of her business to FIM Ltd, a UK resident limited company, in
exchange for ordinary shares worth £2,300,000. Freya will own the whole of the ordinary
share capital of FIM Ltd.
5 April 2021 Freya and her family will move to Benida.
30 April 2021 Freya will sell the whole of the ordinary share capital of FIM Ltd for cash proceeds.
Freya’s ideal scenario
Freya would like to live in Benida for no more than three years. She would buy a home there and would also retain
her home in the UK. Freya would stay in her UK home for 55 days in each tax year, of which 25 would be working
days. She would spend the rest of her time in Benida. Freya does not intend to carry out any work in Benida. Freya’s
husband and children would remain in Benida throughout the three-year period and would not be resident in the
UK.
Unincorporated business – financial information
– A single set of accounts will be prepared for the 17-month period ending 31 October 2020. The budgeted tax
adjusted profit for this period, before deduction of capital allowances, is £94,000.
– The tax written down values as at 31 May 2019 were: main pool – zero, car with private use – £8,700.
– On 1 September 2019, Freya purchased plant and machinery for use in her business costing £4,200.
– On 31 October 2020, the plant and machinery used in her business (excluding the motor car) will have a
market value on that date of £6,300. Every item will be sold for less than its cost.
– Freya will withdraw a motor car from the business on 30 September 2020. The car has always been used 65%
for business purposes and will have a market value of £11,100, which is less than the car’s original cost.
– Freya and FIM Ltd will submit a succession election to HM Revenue and Customs (HMRC).
– There are unrelieved overlap profits from the commencement of the business of £31,400.
Land in Benida
Freya’s father, Alvaro, moved to the UK (and became UK resident) on 6 April 2006. He is domiciled in Benida and
has owned a plot of land there for many years. He is considering giving this land to Freya within the next 12 months.
I agreed to advise Freya on whether or not such a gift could result in an inheritance tax (IHT) liability for her.
Alvaro is not well and is unlikely to live for a further seven years; we should therefore assume all future potentially
exempt transfers will become chargeable to IHT.
Because Alvaro makes regular, substantial lifetime gifts of assets situated in the UK, we should also assume there
will be no nil rate band or annual exemptions available in respect of a gift of this land.

10
 PAGE 116

Email extract from your manager: dated 8 September 2020.

Additional information in respect of the country of Benida

– There is no capital gains tax (CGT) in Benida.
– There is no double tax treaty between the UK and Benida.
Please carry out the following work:
(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. Explain the rate of CGT which would be charged.
The annual exempt amount WILL NOT be available to Freya, and she will be a higher rate taxpayer in the
tax year of sale.
– Explain the CGT implications of the proposed sale of Freya’s business to FIM Ltd in exchange for shares
worth £2,300,000. I can confirm that all of the conditions necessary for incorporation relief to apply to
this transaction will be satisfied and that no election will be made to disapply this relief.
– On the assumption Freya lives in Benida for three years from 5 April 2021 in accordance with her ideal
scenario, explain her UK residence status for those three tax years.
I have done some preliminary work on Freya’s residence status and can confirm that Freya will be neither
automatically non-UK resident nor automatically UK resident whilst she is living in Benida.
– 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.

(b) Liability to income tax and class 4 national insurance contributions (NIC)
On the assumption Freya sells her business to FIM Ltd on 31 October 2020, calculate her liability to income
tax and class 4 NIC for her final tax year of trading.
I can confirm that Freya will not receive any taxable income from FIM Ltd.

(c) Land in Benida

Explain whether or not a gift of the land by Alvaro to Freya at some time in the next 12 months could result in
a UK inheritance tax (IHT) liability.

Tax manager

Required:
Carry out the work required as requested in the email from your manager. The following marks are available:
(a) Sale of business. (13 marks)

(b) Liability to income tax and class 4 national insurance contributions (NIC). (8 marks)

(c) Land in Benida. (4 marks)

(25 marks)

11 [P.T.O.
Practice Question No. 30

Aline was a wealthy client of yours. Her estate value is £900,000 and she had made no
lifetime gifts.

By her will she left the following gifts:

• Holiday cottage £180,000 to her son. Aline had never lived in the cottage.
• Legacies of £110,000 each in cash to her two daughters.
• Residue to her civil partner.

Compute the gross chargeable estate value, the IHT payable and the amount of residue
which will pass to Aline’s civil partner.
4 Kesme and Soba, a married couple, require advice on Kesme’s taxable income and rent-a-room relief, the capital gain
on a future sale of the family home, and the assets which will be received by Soba under Kesme’s will.
Kesme:
– Was born on 1 June 1940.
– Is UK resident and UK domiciled.
– Is married to Soba.
– Has not made any lifetime gifts for the purposes of inheritance tax.
Soba:
– Is UK resident but non-UK domiciled.
– Has elected to be treated as UK domiciled for the purposes of inheritance tax.
Kesme’s income for the tax year 2013/14:
– State retirement pension of £7,900 (gross).
– A pension from a former employer of £24,100 (gross).
– Rental income in respect of furnished rooms in the family home.
– Interest in respect of 8% loan stock in Ramen plc.
Rental income in respect of furnished rooms in the family home:
– Kesme and Soba purchased the family home on 1 July 1990 and have lived there since that date.
– Three furnished rooms have been rented out to an individual tenant since 6 April 2013.
– The tenant does not share Kesme and Soba’s living accommodation or take meals with them.
– The three rooms represent 30% of the property.
– The annual rent is £14,400 and there are allowable expenses of £1,600 per year.
8% loan stock in Ramen plc:
– Kesme purchased £18,000 of 8% loan stock on 1 May 2007.
– Interest is payable on 31 May and 30 November annually.
– Kesme sold the 8% loan stock on 30 September 2013 cum interest.
Kesme’s estate and his will:
– Kesme’s share of the family home, a plot of land and chattels are worth £1,280,000 in total.
– The plot of land is worth £370,000 and is situated in the UK.
– Kesme has left the plot of land to his daughter.
– Kesme has left the residue of his estate to his wife, Soba.

Required:
(a) Explain the availability and operation of rent-a-room relief in relation to Kesme and calculate his taxable
income for the tax year 2013/14 on the assumption that the relief is claimed. (8 marks)

(b) Explain the effect of renting out the furnished rooms on the amount of the taxable capital gain on a future
sale of the family home. (6 marks)

(c) Explain the implications of the election made by Soba to be treated as UK domiciled for the purposes of
inheritance tax, and calculate the value of the residue of the estate which she would receive under Kesme’s
will if he were to die on 6 June 2014. (6 marks)

(20 marks)

11 [P.T.O.
PAGE 122
PAGE 123
PAGE 167
 PAGE 112

Section A – BOTH questions are compulsory and MUST be attempted

1 Your manager has received an email from Lamar. Lamar is the managing director and majority shareholder in REP
Ltd. Lamar and REP Ltd are clients of your firm. Your manager has forwarded the email to you together with an email
detailing the work you are required to do.
Email extract from Lamar: dated 7 September 2020

Potential investment in JAY Ltd

We are in discussion with the management of CRO Ltd regarding the establishment of a new company, JAY Ltd. If
it proceeds, JAY Ltd will commence trading on 1 April 2021 and carry on its business activities in the country of
Garia, where it will manufacture computer components.
CRO Ltd is proposing that REP Ltd would own 30% of the ordinary share capital of JAY Ltd with CRO Ltd owning the
remaining 70%. However, we regard this potential investment as somewhat risky, such that if we decide to proceed,
we may prefer to own just 20% of JAY Ltd rather than 30%.
JAY Ltd is expected to be profitable in the year ending 31 March 2022. However, there is the possibility that it will
be loss making in either that year or in future years.
JAY Ltd’s tax adjusted trading profit for the year ending 31 March 2022 is budgeted to be £135,000, all of which
will relate to its activities in Garia. JAY Ltd will have no other source of taxable income and will not make any
chargeable gains during this year.
We have not been involved in a joint venture like this before and we have no experience of carrying on a business
outside the UK. We would appreciate your advice on the following three extracts from the documentation provided
to us by CRO Ltd:
(i) ‘It has not yet been determined whether JAY Ltd will be resident in the UK or in Garia. If JAY Ltd is resident in
the UK, it will be considered to be carrying on its business through a permanent establishment in Garia.’
(ii) ‘If JAY Ltd is resident in the UK, we will consider making an election to exempt its overseas trading profits from
UK tax.’
(iii) ‘We have been advised that if JAY Ltd is resident in Garia, this will not result in a charge under the controlled
foreign company (CFC) rules.’
Purchase of investment property
We are considering the purchase by REP Ltd of a new, unused commercial building for £200,000 plus 20% value
added tax (VAT). REP Ltd would then grant a 20-year lease of this building to a retailer. Will REP Ltd be able to
recover the VAT charged by the vendor on the sale of this building?
Proposed gift of shares to trust
I established a discretionary trust for the benefit of my nieces and nephews on 1 August 2010.
On 1 November 2020, I am planning to give 20,000 of my shares in REP Ltd to this trust. After I have made the
gift, I will still own 60,000 shares (60% of the company). You have already advised me that these shares are not
relevant business property for the purposes of business property relief, due to the investment activities of REP Ltd.
Accordingly, I am aware that the gift on 1 November 2020 may result in an inheritance tax (IHT) liability. If I decide
to make the gift, I will pay any IHT due.
I have made the following gifts in the past:
£
1 August 2010 Cash to trustees on the creation of the trust 120,000
1 February 2016 Cash to brother 35,000
1 May 2016 Additional cash to trustees 170,000
1 July 2020 Cash to sister 45,000
None of these gifts has resulted in an IHT liability.

7 [P.T.O.
 PAGE 113

Email extract from your manager: dated 8 September 2020.

Please prepare notes for use at a meeting with Lamar.

I want you to lead the meeting. You should therefore set out the notes in a manner which will make it easy for you
to refer to them during the meeting.
The notes should cover the following matters:
(a) Knowledge obtained from advising other clients
We have a number of existing clients which trade from permanent establishments situated overseas, and a few
years ago we had a client with a presence in the country of Garia.
Set out the points you will make in order to explain the extent to which REP Ltd can benefit from the knowledge
we have gained from advising these other clients.

(b) Investment in JAY Ltd

Additional Information
– REP Ltd and CRO Ltd are UK resident companies which prepare accounts to 31 March each year.
– Business profits generated in Garia are subject to 13% business tax in that country.
– There is no double tax treaty between the UK and Garia.
(i) Residency of JAY Ltd
Explanations of the 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; and
– the relief available to REP Ltd if JAY Ltd’s business in Garia were to make a trading loss.
Before you start, take some time to identify the different possibilities which need to be addressed,
recognising that we do not yet know what percentage of JAY Ltd will be owned by REP Ltd.
(ii) Election to exempt the profits of JAY Ltd’s overseas permanent establishment from UK tax
List the implications of JAY Ltd making this election.
(iii) Controlled foreign company (CFC) rules
I can confirm that a CFC charge will not arise if JAY Ltd is resident in Garia. However, I want to provide
Lamar with an explanation of the purpose of the CFC rules and the charge which can be levied under
them.

(c) Purchase of investment property

Explain the matters which Lamar should be aware of in relation to REP Ltd recovering the value added tax (VAT)
which would be incurred on the purchase of the investment property.
There is no need to consider partial exemption or the capital goods scheme.

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

A calculation of the inheritance tax (IHT) which would be payable by Lamar if he were to give 20,000 shares
in REP Ltd to the trust on 1 November 2020 as planned. Your calculation should indicate the availability or
otherwise of all relevant annual exemptions.
Where relevant, you should use the following values for a single ordinary share in REP Ltd:
Shareholding Up to 25% 26% to 50% 51% to 74% 75% or more
Value per share £8 £11 £17 £24
Lamar currently owns 80% of the ordinary share capital of REP Ltd. The remaining shares in the company are
owned by individuals who have no connection with Lamar.
Tax manager

8
 PAGE 114

Required:
Prepare the meeting notes as requested in the email from your manager. The following marks are available:
(a) Knowledge obtained from advising other clients. (5 marks)

(b) Investment in JAY Ltd.

(i) Residency of JAY Ltd. (9 marks)
(ii) Election to exempt the profits of JAY Ltd’s overseas permanent establishment from UK tax. (3 marks)
(iii) Controlled foreign company (CFC) rules. (3 marks)

(c) Purchase of investment property. (5 marks)

(d) Proposed gift of shares to trust on 1 November 2020. (6 marks)

Professional marks will be awarded for the approach taken to planning the content, the clarity of the explanations
and calculations, the effectiveness with which the information is communicated, and the overall presentation and
style of the notes. (4 marks)

(35 marks)

9 [P.T.O.
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OWAIS MIRCHAWALA Page 158

OWAIS MIRCHAWALA - ACCA & ICAEW

FACULTY OF ACCA, ICAEW & O/A LEVELS
 Page 159

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OWAIS MIRCHAWALA - ACCA & ICAEW

FACULTY OF ACCA, ICAEW & O/A LEVELS
OWAIS MIRCHAWALA Page 160

OWAIS MIRCHAWALA - ACCA & ICAEW

FACULTY OF ACCA, ICAEW & O/A LEVELS
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