ACCA TX ^UK Syllabus C. Chargable Gains For Individuals - Capital gains in the exam - Past Papers ^{1 / 1}

You should assume that today’s date is 15 December 2013.

Patrick and Emily Grant are a married couple. They have both always been resident in the United Kingdom (UK), being in the UK for more than 300 days each tax year up to and including the tax year 2012–13. However, following Patrick’s retirement, the couple decided to move overseas, purchasing an overseas property on 6 April 2013.

Patrick and Emily still have a house in the UK, and will stay there on the 105 days which they spend in the UK during the tax year 2013–14. Neither Patrick nor Emily works full-time, and neither of them will do any substantive work in the UK during the tax year 2013–14.

For the tax year 2013–14, Patrick will have taxable income of £7,200, and Emily will have taxable income of £46,400. During May 2013, Emily disposed of an investment, and the resultant chargeable gain fully utilised her annual exempt amount for the tax year 2013–14.

Patrick and Emily urgently need to raise £80,000 in order to renovate their overseas property, and have three alternative assets which can be sold. They would like to sell the asset which will provide them with the highest net of tax proceeds. The three alternatives are as follows:

Alternative 1 – Land
Patrick owns eight acres of land, and a neighbouring farmer has offered to buy this land for £92,000. Patrick originally purchased 14 acres of land on 2 May 2001 for £108,600 and he sold six acres of the land on 27 September 2006 for £37,800. The market value of the unsold eight acres of land as at 27 September 2006 was £52,700. The land has never been used for business purposes.

Alternative 2 – Unquoted shares
Emily owns 8,000 £1 ordinary shares in Shore Ltd, an unquoted trading company with a share capital of 100,000 £1 ordinary shares. Shore Ltd’s shares have recently been selling for £13·00 per share, but Emily will have to sell at £11·50 per share given that she needs a quick sale. The sale will be to an unconnected person. Emily subscribed for her shares in Shore Ltd at par on 1 June 2005, and she has been a director of the company since that date.

Alternative 3 – Quoted shares
Patrick and Emily jointly own 32,000 £1 ordinary shares in Beach plc, a quoted trading company. The shares are currently quoted on the Stock Exchange at £2·88. Patrick and Emily originally purchased 54,000 shares in Beach plc on 23 May 2003 for £75,600, but they had sold 22,000 shares on 17 November 2011 for £44,440.

The shareholding is less than 1% of Beach plc’s issued share capital, and neither Patrick nor Emily has ever been an employee or a director of the company.

Required:
(b) Assuming that the disposal is made during January 2014, advise Patrick and Emily Grant as to which of the three alternative disposals will result in the highest net proceeds after taking account of capital gains tax.

Notes:
1. For each of the three alternative disposals, your answer should be supported by a calculation of the capital gains tax due for the tax year 2013–14.

2. You are not expected to consider any possible tax planning. (12 marks)

Mick Stone disposed of the following assets during the tax year 2013–14:

(1) On 19 May 2013, Mick sold a freehold warehouse for £522,000. The warehouse was purchased on 6 August 2001 for £258,000, and was extended at a cost of £99,000 during April 2003. In January 2007, the floor of the warehouse was damaged by flooding and had to be replaced at a cost of £63,000. The warehouse was sold because it was surplus to the business’s requirements as a result of Mick purchasing a newly built warehouse during 2012. Both warehouses have always been used for business purposes in a wholesale business run by Mick as a sole trader.

(2) On 12 August 2013, Mick sold an acre of land for £81,700. He had originally purchased five acres of land on 19 May 1998 for £167,400. The market value of the unsold four acres of land as at 12 August 2013 was £268,000. The land has never been used for business purposes.

(3) On 24 September 2013, Mick sold 700,000 £1 ordinary shares in Rolling Ltd, an unquoted trading company, for £3,675,000. He had originally purchased 500,000 shares in Rolling Ltd on 2 June 2005 for £960,000. On 1 December 2010, Rolling Ltd made a 3 for 2 bonus issue. Mick has been a director of Rolling Ltd since 1 January 2005.

(4) On 19 January 2014, Mick made a gift of his entire holding of 24,000 £1 ordinary shares in Sugar plc, a quoted investment company, to his son, Keith. On that date the shares were quoted on the Stock Exchange at £6·98–£7·10, with recorded bargains of £6·85, £6·90, £7·00 and £7·05. The shares had been purchased on 8 May 2008 for £76,800. Mick’s shareholding was less than 1% of Sugar plc’s issued share capital, and he has never been an employee or a director of the company.

Required:
(a) Assuming that no reliefs are available, calculate the chargeable gain arising from each of Mick Stone’s asset disposals during the tax year 2013–14.

Note: You are not required to calculate the taxable gains or the amount of tax payable. (9 marks)

On 10 June 2012, Delroy made a gift of 25,000 £1 ordinary shares in Dub Ltd, an unquoted trading company, to his son, Grant. The market value of the shares on that date was £240,000. Delroy had subscribed for the 25,000 shares in Dub Ltd at par on 1 July 2002. Delroy and Grant have elected to hold over the gain as a gift of a business asset.

Grant sold the 25,000 shares in Dub Ltd on 18 September 2012 for £240,000.

Dub Ltd has a share capital of 100,000 £1 ordinary shares. Delroy was the sales director of the company from its incorporation on 1 July 2002 until 10 June 2012. Grant has never been an employee or a director of Dub Ltd.

For the tax year 2012–13 Delroy and Grant are both higher rate taxpayers. Neither of them has made any other disposals of assets during the year.

Required:
(i) Calculate Grant’s capital gains tax liability for the tax year 2012–13. (3 marks)

(ii) Explain why it would have been beneficial for capital gains tax purposes if Delroy had instead sold the 25,000 shares in Dub Ltd himself for £240,000 on 10 June 2012, and then gifted the cash proceeds to Grant. (2 marks)

On 23 August 2007, Pere Jones made a gift of a house valued at £420,000 to his son, Phil Jones. This was a wedding gift when Phil got married.

Pere Jones
Pere died on 20 March 2013 aged 76, at which time his estate was valued at £880,000. Under the terms of his will, Pere divided his estate equally between his wife and his son, Phil. Pere had not made any gifts during his lifetime except for the gift of the house to Phil.

The nil rate band for the tax year 2007–08 is £300,000.

Phil Jones
Phil is aged 48. The house which he received as a wedding gift from Pere, his father, was always let out unfurnished until it was sold on 5 April 2013. The following income and outgoings relate to the property for the tax year 2012–13:

Phil has no other income or outgoings for the tax year 2012–13.

Required:
(b) Calculate Phil Jones’ income tax and capital gains tax liabilities for the tax year 2012–13. (7 marks)

The only chargeable asset of Sophia Wong’s business is goodwill and this is valued at £150,000. The goodwill has a nil cost.

Sophia will not make any other disposals during the tax year 2011–12. She has unused capital losses of £39,400 brought forward from the tax year 2010–11.

Required:
(i) State the capital gains tax consequences for the tax year 2011–12 if Sophia Wong transfers her business to a new limited company on 6 April 2011 in exchange for ordinary shares; (2 marks)

(ii) Explain why it would be beneficial if the consideration for the transfer of Sophia Wong’s business instead consisted of £50,000 in cash and £100,000 in £1 ordinary shares. (2 marks)