King, a wealthy client of your firm with a significant property portfolio, requires advice on the sale of some unquoted shares and on the capital gains tax and inheritance tax implications of transferring assets to a trust and to his two children.
– Is resident and domiciled in the UK.
– Is an additional rate taxpayer.
– Has used his capital gains tax annual exempt amount for the tax year 2015/16.
– Has made one previous lifetime gift of £25,000 to his daughter, Florentyna, on 1 June 2014.
– It should be assumed that King will die on 1 May 2017.
– King’s daughter, Florentyna, is 34 years old and has two young children.
– Florentyna will have income from part-time employment of £10,000 in the tax year 2015/16. This is her only source of taxable income.
– King’s son, Axel, is 40 years old and has an 18-year-old daughter, who is a university student.
– On 1 September 2015, King will sell some of his shares in Wye Ltd.
– On 1 October 2015, King will put a cottage he owns in Newtown and the after-tax cash proceeds from the sale of the shares in Wye Ltd into an interest in possession trust for Florentyna and her children.
– On 1 March 2016, King will gift his share of a flat in Unicity to Axel.
Sale of shares in Wye Ltd:
– Wye Ltd is an unquoted investment company.
– King acquired 5,000 shares in Wye Ltd on 1 June 2002 at a cost of £5 each.
– These shares will be worth £45 each on 1 September 2015.
– King will sell sufficient shares to generate after-tax proceeds of £30,000.
Cottage in Newtown:
– This property is wholly owned by King.
– It is expected to have a value of £315,000 on 1 October 2015.
Creation of the interest in possession trust:
– King will pay any inheritance tax arising as a result of the gifts made to the trust.
– Florentyna will be the life tenant and her two young children will be the remaindermen of the trust.
– Florentyna will live in the cottage in Newtown and the trustees will invest the cash in quoted shares which will generate annual dividends of £3,000.
Flat in Unicity:
– The flat in Unicity is jointly owned by King and his wife, Joy, in the proportions: King 75% and Joy 25%.
– King and Joy have recently signed a contract with Axel’s daughter to rent the flat to her for three years starting on 1 September 2015.
– The rental agreement is on a commercial basis.
– King has obtained the following expected valuations for the flat as at 1 March 2016:
|With vacant possession||Without vacant possession|
|Value of a 25% share||60,000||40,000|
|Value of a 75% share||220,000||160,000|
|Value of the whole property||340,000||250,000|
(a) Calculate the minimum number of shares in Wye Ltd which King must sell to generate after-tax proceeds of £30,000. (3 marks)