Your manager has had a meeting with Maia, a client of your firm. Extracts from the memorandum prepared by your manager following the meeting and an email from her detailing the work she requires you to do are set out below.
Extracts from the memorandum prepared by your manager – dated 3 June 2019
Maia is 63 years old and has significant personal wealth. She has taxable income of approximately £120,000 each year, much of which she is able to save. She uses her capital gains tax annual exempt amount and her inheritance tax annual exemption every year. She is resident and domiciled in the UK.
Maia has agreed to provide financial assistance to her nephew, Josh.
Josh – financial position
Josh recently left university and, on 6 April 2019, he started working for NL Ltd, an unquoted company. He earns an annual gross salary of £25,200. Since 6 April 2019, NL Ltd has provided Josh with the use of a mobile telephone (market value of £650) and a home cinema system (market value of £1,700).
On 1 June 2019, NL Ltd issued 200 £1 ordinary shares to Josh. This share issue was not made as part of an approved share scheme. Josh paid £300 for these shares, which had a market value of £2,100 at that time. The shares are not readily convertible assets and Josh is not permitted to sell them until 1 April 2023.
Josh currently receives dividend income of £420 each year. He is resident and domiciled in the UK.
Josh estimates that from 6 April 2019 he needs £2,500 per month to pay his rent and living expenses. Maia has asked us to calculate how much cash Josh will need for the tax years 2019/20 and 2020/21, over and above his post-tax income from all sources.
Providing financial assistance to Josh – alternative strategies
Maia is considering three alternative strategies to provide financial assistance to Josh.
(ii) Gift of shares in Far Ltd on 1 July 2019
These shares are worth £420,000. They represent the whole of Maia’s shareholding in the company and constitute 14% of the company’s issued ordinary share capital.
Maia’s father gave the shares to Maia on 1 November 2018 when they were worth £375,000. That gift resulted in a chargeable gain of £225,000 of which £140,000 was held over via a gift relief claim.
Far Ltd is an unquoted trading company. It owns chargeable non-business assets which represent 16% of its total chargeable assets.
Extract from the email from your manager – dated 4 June 2019
Please prepare a memorandum for the client files consisting of the work set out below.
(b) Providing financial assistance to Josh – alternative strategies
In respect of each of the three alternative strategies set out in my memorandum, explain:
– The increase in Josh’s post-tax income for the 21-month period ending 5 April 2021.
You should ONLY consider the post-tax income to be received by Josh in relation to strategies (i) and (iii) and NOT strategy (ii).
There is no need to consider the capital values of any of the strategies as, in the short term, Josh will not realise any of this value.
– The capital gains tax liabilities FOR MAIA ONLY on the assumption that those reliefs which are available will be claimed.
– The inheritance tax implications for Maia and Josh including consideration of the availability of business property relief.
As I noted in my memorandum, I do not know whether the investment property qualifies as furnished holiday accommodation or not. You should explain the liabilities for both possibilities regarding this property. You SHOULD NOT provide a definition of furnished holiday accommodation.
Prepare the memorandum as requested in the email from your manager. The following marks are available:
(b) Providing financial assistance to Josh – alternative strategies.
(ii) Gift of shares in Far Ltd. (7 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 memorandum. (4 marks)