ACCA ATX ^UK Syllabus A3. Inheritance Tax - IHT liability on the death estate - Past Papers ^{3 / 7}

Your manager has had a meeting with Wanda, a client of your firm. Extracts from the memorandum prepared by your manager following the meeting, together with an email detailing the work he requires you to do, are set out below.

Extracts from the memorandum prepared by your manager – dated 3 December 2018

Wanda has not been employed since 31 December 2012 and has not received any taxable income since that date.

Roth is employed and earns a gross salary of £90,000 per year. This salary is his only source of income. Wanda and Roth have not made any chargeable disposals for the purposes of capital gains tax and will not make any in the tax year 2019/20.

Wanda’s inheritances and gift from her parents
On 1 February 2013, Wanda’s father, Pavel, died. He left £160,000 to Wanda and the residue of his estate to his wife, Lucy (Wanda’s mother). The residue of Pavel’s estate was valued at £720,000 and included the family home.

Pavel had not made any gifts during his life.
On 1 April 2013, Lucy gave Wanda £180,000 in cash. This was the only lifetime gift Lucy made.

On 1 November 2018, Lucy died. Wanda inherited the whole of Lucy’s estate, which was valued at £850,000. The estate consisted of the family home (valued at £340,000), together with furniture, cash and quoted shares (valued in total at £510,000).

Wanda’s new business – KS
Wanda intends to begin trading on 1 April 2019. The business will be operated either:
– by Wanda and Roth in partnership; or
– by a limited company owned 70% by Wanda and 30% by Roth.
The turnover of the business for the year ending 31 March 2020 is expected to be £48,000.

Budgeted profitability of KS
In its first year of trading the business will make either a small profit or, possibly, a loss (of no more than £20,000).

However, once the business is fully operational, it is budgeted to make a tax adjusted trading profit of £100,000 per year. This figure is before deducting any salaries paid to Wanda and Roth.

The manner in which the profits will be extracted from the business depends on whether the business is operated as a partnership or as a limited company. The two alternatives are summarised below.

In addition to advising her on the tax cost of the alternative business structures, Wanda has asked us to advise her on the relief available in respect of the possible trading loss in the first year of trading and on the choice of 31 March as the accounting date where the business is operated as a partnership.

Income tax refund
Wanda has received an unexpected refund of income tax from HM Revenue and Customs (HMRC) in respect of the tax year 2011/12.

Email from your manager – dated 4 December 2018

Please prepare the following notes and calculations for use in a meeting with Wanda.

(a) Wanda’s post-tax inheritance from Lucy
Calculate the amount which Wanda will inherit from Lucy after any inheritance tax has been paid.

Tax manager

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)

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

Eric:
– Is UK resident and domiciled.
– Is a higher rate taxpayer.
– Is in ill health and is expected to die within the next few months.

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:
(ii) Explain, with the aid of calculations, the impact on the inheritance tax liability arising on Eric’s death if Eric does not die until 1 August 2016. (3 marks)

Your manager has had a meeting with Jonny who is establishing a new business. An extract from an email from your manager, a schedule and a computation are set out below.

Extract from the email from your manager
Jonny was born in 1968. His new business will begin trading on 1 November 2015. Jonny will use an inheritance he received following the death of his mother to finance this new venture. We have been asked to advise Jonny on his business and his inheritance. Some of the work has already been done; I want you to complete it.

Please prepare a memorandum for Jonny's client file addressing the following issues:

(b) Jonny's inheritance from his mother

Jonny's mother died on 31 July 2015. She left the whole of her estate, with the exception of a gift to charity, to Jonny. I attach a computation of the inheritance tax due; this was prepared by a junior member of staff and has not yet been reviewed. I can confirm, however, that all of the arithmetic, dates and valuations are correct. In addition, there were no other lifetime gifts, and none of the assets qualified for business property relief.

I want you to review the computation and identify any errors. You should explain each of the errors you find and calculate the value of the inheritance which Jonny will receive after inheritance tax has been paid.

Tax manager