ACCA ATX ^UK Syllabus A2. Chargeable gains - Transferring a business to a company - Past Papers ^{4 / 4}

Your manager has been advising a client, Waverley, on his plans to sell his business. An email from your manager setting out the current situation are set out below:
Email from your manager – dated 8 September 2016

Unincorporated business
Waverley will cease trading as a sole trader on 15 January 2017 when he sells his unincorporated business to Roller Ltd.
Roller Ltd will be wholly-owned by Waverley.

The tax adjusted trading profits of the business (actual and budgeted) up to the date of cessation are: 
Year ended 30 June 2016                   £125,400
Period ended 15 January 2017             £72,150

The assets of the unincorporated business are expected to be worth £540,000 on 15 January 2017. They will be sold at market value to Roller Ltd in exchange for 270,000 £1 ordinary shares in the company. This will result in chargeable gains, before incorporation relief, of £160,000 on the business premises and £30,000 in respect of goodwill. 
The shares in Roller Ltd will be sold for £600,000 at some point during the six months following Waverley's emigration to Surferia on 5 April 2017.

Please carry out the following work:

(a) Unincorporated business
- State the basis period for 2016/17, the final tax year of trading, and calculate the taxable trading profits for that year, noting any further information required in order to finalise this figure. 
- State the conditions which must be satisfied in order for incorporation relief to be available on the sale of the unincorporated business to Roller Ltd. 
- Prepare calculations in order to conclude whether or not it will be advantageous for Waverley to disclaim incorporation relief on the sale of the unincorporated business to Roller Ltd.

To do this you will need to calculate Waverley's total capital gains tax liability, in the UK and in the country of Surferia, in respect of both the sale of the unincorporated business to Roller Ltd in the tax year 2016/17 and the sale of the Roller Ltd shares in the tax year 2017/18. In respect of the sale of the Roller Ltd shares, you should consider two possible situations: first where Waverley is resident only in the UK at the time of the sale; and second where he is resident only in Surferia at the time of the sale. You should not consider the rules concerning individuals who are temporarily non-UK resident. You should assume that Waverley will be a higher rate taxpayer in the tax years 2016/17 and 2017/18 (if UK resident) and that he realises sufficient additional chargeable gains every year to use his annual exempt amount.

Tax manager

Required: Carry out the work requested in the email from your manager. 
The following marks are available: 
(a) Unincorporated business.    (12 marks)

Your manager has had a meeting with Farina and Lauda, potential new clients, who are partners in the FL Partnership.
The memorandum recording the matters discussed, together with an email from your manager, is set out below.

Memorandum

To           The files
From      Tax manager
Date       5 December 2013
Subject   FL Partnership

Background

Farina and Lauda began trading as the FL Partnership on 1 May 2008. Accounts have always been prepared to 31 March each year. They are each entitled to 50% of the revenue profits and capital profits of the business.

On 1 March 2014, the whole of the FL Partnership business will be sold as a going concern to JH plc, a quoted trading company. The consideration for the sale will be a mixture of cash and shares. Capital gains tax relief on the transfer of a business to a company (incorporation relief) will be available in respect of the sale.

Farina and Lauda will both pay income tax at the additional rate in the tax year 2013/14 and anticipate continuing to do so in future years. They are very wealthy individuals, who use their capital gains tax annual exempt amounts every year. Both of them are resident, ordinarily resident and domiciled in the UK.

The sale of the business on 1 March 2014
The assets of the FL Partnership business have been valued as set out below. All of the equipment qualified for capital allowances.

The total value of the consideration will be equal to the value of the assets sold. Farina and Lauda will each receive consideration of £740,000; £140,000 in cash and 200,000 shares in JH plc. Following the purchase of the FL Partnership, JH plc will have an issued share capital of 8,400,000 shares.

Future transactions

Farina:
On 1 August 2014, Farina will make a gift of 15,000 of her shares in JH plc to the trustees of a discretionary (relevant property) trust for the benefit of her nieces and nephews. Farina will pay any inheritance tax liability in respect of this gift. The trustees will transfer the shares to the beneficiaries over the life of the trust.

Lauda:
On 1 June 2015, Lauda will give 40,000 of her shares in JH plc to her son.
For the purposes of giving our advice, the value of a share in JH plc can be assumed to be:

Email from your manager

I want you to prepare a memorandum for the client file in respect of the following:

(i) Capital allowances
A DETAILED explanation of the calculation of the capital allowances of the FL Partnership for its final trading period ending with the sale of its equipment to JH plc for £150,000 on 1 March 2014.

(ii) Farina
BRIEF explanations of:
(1) The manner in which any inheritance tax payable by Farina in her lifetime in respect of the gift of the shares to the trustees of the discretionary (relevant property) trust will be calculated and the date on which the tax would be payable.

(2) The availability of capital gains tax gift relief in respect of the transfer of the shares to the trustees of the discretionary (relevant property) trust and the subsequent transfers of shares from the trustees to the beneficiaries.

(iii) Lauda
A review of whether or not Lauda should disclaim incorporation relief.

The review should encompass the sale of the FL Partnership business, the gift of the shares to Lauda’s son and the effect of incorporation relief on the base cost of the remaining shares owned by Lauda, as she intends to sell all of her shares in JH plc in the next few years.

It is important that you include a summary of your calculations and a statement of the key issues for me to discuss with Lauda. You should also include BRIEF explanations of the amount of incorporation relief available, the availability of any additional or alternative reliefs, and the date(s) on which any capital gains tax will be payable.

Tax manager

Required: 
(b) Prepare the memorandum requested in the email from your manager. The following marks are available.
(iii) Lauda. (14 marks)

Note: Ignore value added tax (VAT).
Professional marks will be awarded in part (b) for the overall presentation of the memorandum, the provision of relevant advice and the effectiveness with which the information is communicated. (4 marks)