ii.Business property and agricultural property relief

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Question 5a

Adam would like advice on the capital gains tax and inheritance tax implications of being given Eastwick Farm by his mother, Sabrina, and on recent changes in tax law which affect his investment planning.

Sabrina:
– Is UK resident and domiciled.
– Has made one previous lifetime gift of £350,000 into a discretionary trust for her grandchildren on 1 September 2017.
– Inherited Eastwick Farm from her husband, Sam, on his death on 1 July 2016.
– Has managed the farm since this date.

Sam:
– Owned and farmed Eastwick Farm for many years prior to his death on 1 July 2016.
– Had made lifetime gifts which used the whole of his nil rate band for inheritance tax purposes.

Sabrina – proposal to gift Eastwick Farm to Adam:
– Sabrina plans to retire from running the farm on 31 December 2017.
– She has been informed by a financial adviser that she could gift the farm to Adam when she retires without paying any capital gains tax or inheritance tax.
– She has decided to gift the farm to Adam on 1 January 2018.

Eastwick Farm – valuation of land and buildings:

1 July 2016 1 January 2018 (estimated)
£ £
Agricultural value 385,000 396,000
Market value 502,000 544,000

Adam:
– Is UK resident and domiciled.
– Is 42 years old.
– Is an additional rate taxpayer, with adjusted income (for the purpose of calculating Adam’s annual allowance for pension contributions) of £200,000 per year, which he expects to continue for the foreseeable future.
– Uses his annual exempt amount for capital gains tax purposes each year.
– Is in full-time employment and will lease Eastwick Farm to a tenant farmer.

Adam – investments:
– Adam has regularly contributed £40,000 into a personal pension scheme to use his annual allowance.
– Adam has invested the maximum amount each year in an individual savings account (ISA).

Adam – thoughts on investments:
– ‘I have been advised that my annual allowance for pension contributions was reduced to £15,000 for the tax year 2016/17, so I have incurred an additional tax charge. Please can you explain this reduction in my annual allowance?’
– ‘Is there now any point in investing in either a cash or a stocks and shares ISA as savings income and dividends are now exempt from tax anyway up to £5,000 per year?

Required:
(a) (i) Explain the capital gains tax and inheritance tax implications for Sabrina of the planned gift of Eastwick Farm to Adam on 1 January 2018, and the reasons why the financial adviser has determined that neither tax may be payable by her as a consequence of this gift.

Note: Detailed calculations are NOT required for this part. (3 marks)

(ii) Explain, with supporting calculations, Adam’s potential capital gains tax liability on a future sale of Eastwick Farm and the inheritance tax implications for him of being gifted the farm by Sabrina on 1 January 2018 if, as he intends, he leases the farm to a tenant farmer, and Sabrina dies before 1 January 2025. (11 marks)

Sample
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Question 3b i

Your client, Eric, requires advice on the inheritance tax reliefs available in respect of assets in his estate at death.

Malaga plc shares:
– Malaga plc is a quoted trading company with 200,000 issued shares.
– 80% of Malaga plc’s chargeable assets have always been chargeable business assets.
– Eric was given 12,000 shares in Malaga plc by his sister on 1 April 2010, when they were valued at £126,000.
– Eric’s sister had purchased the shares for £96,000 on 1 March 2009.
– Gift relief was claimed in respect of the gift of the shares to Eric on 1 April 2010.
– Eric paid the inheritance tax arising in respect of this gift following his sister’s death on 1 September 2011.
– Eric has never worked for Malaga plc.
– Eric sold 6,000 shares in Malaga plc on 1 March 2015.

Assets owned by Eric and a previous lifetime gift:
– Eric owns farmland in the UK, which has been leased to a tenant farmer for the last ten years.
– The farmland has a market value of £420,000 and an agricultural value of £340,000.
– Eric’s other assets, excluding the remaining Malaga plc shares, are valued at £408,000.
– Eric has made only one previous lifetime gift, of £60,000 cash to his son Zak on 1 July 2009.

Required:
(b) (i) On the assumption that Eric dies on 31 March 2016, advise on the availability and effect (if any), of agricultural property relief, business property relief in respect of the farmland and the retained shares in Malaga plc.

Note: You are not required to prepare calculations for this part of the question. (6 marks)

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Question 1b ii

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.

Value Cost
£ £
Goodwill 1,300,000 Nil
Inventory and receivables 30,000 30,000
Equipment (no item to be sold for more than cost) 150,000 200,000
Total 1,480,000

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:

£
On 1 March 2014 3
On 1 August 2014 4
On 1 June 2015 5

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.
(ii) Farina. (7 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)

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Question 2b ii

Your manager has had a meeting with Brad, a client of your firm. Extracts from your manager’s meeting notes together with an email from your manager are set out below.

Extracts from meeting notes


Personal details
Brad is 69 years old. He is married to Laura and they have a daughter, Dani, who is 38 years old.

Brad had lived in the UK for the whole of his life until he moved with his wife to the country of Keirinia on 1 January 2010. He returned to live permanently in the UK on 30 April 2013. Whilst living in Keirinia, Brad was non-UK resident and non-ordinarily resident. He is now resident and ordinarily resident in the UK. He has always been domiciled in the UK. Brad has significant investment income and has been a higher rate taxpayer for many years.

Capital gains
Whilst living in the country of Keirinia, Brad sold various assets as set out below. He has not made any other disposals since 5 April 2009.

Asset Date of sale Proceeds Date of purchase Cost
£ £
Quoted shares 1 February 2010 18,900 1 October 2008 14,000
Painting 1 June 2012 36,000 1 May 2008 15,000
Antique bed 1 March 2013 9,400 1 March 2010 7,300
Motor car 1 April 2013 11,000 1 February 2009 8,500

I explained that, although Brad was non-UK resident and non-ordinarily resident whilst living in Keirinia, these disposals may still be subject to UK capital gains tax because he will be regarded as only temporarily non-UK resident. There is no capital gains tax in the country of Keirinia.

Inheritance tax planning
Brad’s estate is worth approximately £5 million. He has not made any lifetime gifts and, in his will, he intends to leave half of his estate to his daughter, Dani, and the other half to his wife, Laura. I pointed out that it may be advantageous to make a lifetime gift to Dani. Brad agreed to consider giving Dani 1,500 of his shares in Omnium Ltd and has asked for a general summary of the inheritance tax advantages of making lifetime gifts to individuals.

Omnium Ltd is an unquoted manufacturing company which also owns a number of investment properties. Brad was given his shares in the company by his wife on 1 January 2009. The ownership of the share capital of Omnium Ltd is set out below.

Shares
Laura (Brad’s wife) 4,500
Brad 3,000
Vic (Laura’s brother) 1,500
Christine (friend of Laura) 1,000
–––––––
10,000
–––––––
The current estimated value of a share in Omnium Ltd is set out below.
Shareholding Value per share
£
Up to 25% 190
26% to 50% 205
51% to 60% 240
61% to 74% 255
75% to 80% 290
More than 80% 300

Email from your manager


In preparation for my next meeting with Brad, please prepare the following:

(b) Inheritance tax

(ii) In respect of the possible gift of 1,500 shares in Omnium Ltd to Dani:

– a calculation of the fall in value of Brad’s estate which will result from the gift;

– a detailed explanation of whether or not business property relief would be available in respect of the gift and, on the assumption that it would be available, the manner in which it would be calculated;

– a brief statement of any other tax issues arising from the gift, which will need to be considered at a later date.

Tax manager


Required:
(b) Inheritance tax.

(ii) In respect of the possible gift of 1,500 shares in Omnium Ltd to Dani. (10 marks)

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