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ACCA

Paper P6
Advanced Taxation
Revision Mock Examination
December 2015
Question Paper

Time Allowed 15 minutes Reading and planning


3 hours Writing

This paper is divided into two sections:


Section A BOTH questions are compulsory and MUST be
attempted
Section B TWO questions ONLY to be attempted
Tax rates and allowances are on pages 36.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper
may be annotated. You must NOT write in your answer
booklet until instructed by the supervisor.
Interactive World Wide Ltd, September 2015
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without the prior written
permission of Interactive World Wide Ltd.

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Tax rates and allowances given in P6 to be used for the
June 2015 and December 2015 exams
SUPPLEMENTARY INSTRUCTIONS
1. You should assume that the tax rates and allowances for the tax year
2014/15 and for the financial year to 31 March 2015 will continue to
apply for the foreseeable future unless you are instructed otherwise.
2. Calculations and workings need only be made to the nearest .
3. All apportionments should be made to the nearest month.
4. All workings should be shown.

Income tax
2014/15 Normal rates Dividend rates
% %
Basic rate 1 to 31,865 20 10
Higher rate 31,866 to 150,000 40 32.5
Additional rate 150,001 and above 45 37.5
A starting rate of 10% applies to savings income where it falls within the first
2,880 of taxable income.

Personal allowances

Born on or after 6 April 1948 10,000
Born between 6 April 1938 and 5 April 1948 10,500
Born before 6 April 1938 10,660
Income limit
Personal allowance 100,000
Personal allowance (born before 6 April 1948) 27,000

Car benefit percentages


The base level of CO2 emissions is 95 grams per kilometre.
The percentage rates applying to petrol cars with CO2 emissions up to this level
are:
%
75 grams per kilometre or less 5
7694 grams per kilometre 11
95 grams per kilometre 12
Car fuel benefit
The base level figure for calculating the car fuel benefit is 21,700.

Authorised mileage allowance payments (AMAP)


First 10,000 business miles 45p per mile
Any miles in excess of 10,000 25p per mile

Pension scheme limits


Annual allowance 2014/15 40,000
Annual allowance to 2013/14 50,000
Lifetime allowance 1,250,000

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The maximum contribution that can qualify for tax relief without any earnings is
3,600.

New individual savings accounts (NISAs)


New individual savings accounts the investment limit 15,000

Child benefit income tax charge


Where income is between 50,000 and 60,000, the charge is 1% of the amount of
child benefit received for every 100 of income over 50,000.

Residence: number of ties needed to be UK resident

Days in UK Previously UK resident Not previously UK resident


Less than 16 days Automatically not UK Automatically not UK resident
resident
16 to 45 Resident if 4 UK ties Automatically not UK resident
46 to 90 Resident if 3 UK ties Resident if 4 UK ties
91 to 120 Resident if 2 UK ties Resident if 3 UK ties
121 to 182 Resident if 1 UK tie Resident if 2 UK ties
183 days Automatically UK resident Automatically UK resident

Capital allowances
Plant and machinery
Main pool 18%
Special rate pool 8%
Motor cars
CO2 emissions up to 95 grams per kilometre 100%
CO2 emissions between 96 and 130 grams per kilometre 18%
CO2 emissions over 130 grams per kilometre 8%
Annual investment allowance
First 500,000 of expenditure 100%
Enhanced capital allowances (ECA) 100%

Corporation tax
Financial year 2011 2012 2013 2014
Small profits rate 20% 20% 20% 20%
Main rate 26% 24% 23% 21%
Lower limit () 300,000 300,000 300,000 300,000
Upper limit () 1,500,000 1,500,000 1,500,000 1,500,000
Standard fraction 3/200 1/100 3/400 1/400

Marginal relief
(U A) N/A Standard fraction

Patent box deduction


Net patent profit x 70% x [(MR-10%)]/MR
Where MR is the main rate of corporation tax

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Value added tax
Registration limit 81,000
Deregistration limit 79,000
Standard rate 20%

Inheritance tax: nil rate bands and tax rates


Rate of tax on excess over nil rate band
- Lifetime rate 20%
- Death rate 40%
6 April 2014 to 5 April 2015 325,000
6 April 2013 to 5 April 2014 325,000
6 April 2012 to 5 April 2013 325,000
6 April 2011 to 5 April 2012 325,000
6 April 2010 to 5 April 2011 325,000
6 April 2009 to 5 April 2010 325,000
6 April 2008 to 5 April 2009 312,000
6 April 2007 to 5 April 2008 300,000
6 April 2006 to 5 April 2007 285,000
6 April 2005 to 5 April 2006 275,000
6 April 2004 to 5 April 2005 263,000
6 April 2003 to 5 April 2004 255,000
6 April 2002 to 5 April 2003 250,000
6 April 2001 to 5 April 2002 242,000
6 April 2000 to 5 April 2001 234,000
Taper relief % Reduction
Years before death
Over 3 years up to 4 years 20
Over 4 years up to 5 years 40
Over 5 years up to 6 years 60
Over 6 years up to 7 years 80
Over 7 years 100

Rates of interest
Official rate of interest 3.25%
Rate of late payment interest 3%
Rate of repayment interest 0.5%

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Stamp duty land tax
150,000 or less (1) Nil
150,001 - 250,000 1%
250,001 - 500,000 3%
500,001 - 1,000,000 4%
1,000,001 - 2,000,000 or more (2) 5%
2,000,001+ (2) 7%
(1) For residential property, the nil rate is restricted to 125,000.
(2) The 5% and 7% rates only apply to residential properties only.

Stamp Duty
Shares 0.5%

Capital gains tax



Annual exempt amount for individuals 11,000
Annual exempt amount for a trustee 5,500
Rate of tax
Lower rate 18%
Higher rate 28%

Entrepreneurs relief
Lifetime limit 10,000,000
Rate of tax 10%

National Insurance (not contracted out rates)


Class 1 Employee
1 to 7,956 per year Nil
7,957 to 41,865 per year 12%
41,866 and above per year 2%
Class 1 Employer
1 to 7,956 per year Nil
7,957 and above per year 13.8%
Employment allowance 2,000
Class 1A 13.8%
Class 2 2.75 per week
Small earnings exemption 5,885
Class 4
1 to 7,956 per year Nil
7,957 to 41,865 per year 9%
41,866 and above per year 2%

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Section A BOTH questions are compulsory and MUST be
attempted

1 Your manager has had a meeting with Glen and Sunny, potential new clients,
who are both shareholders of Sparkle Ltd. 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 May 2015
Subject: Glen, Sunny and Sparkle Ltd
Background
Glen and his brother Sunny have each owned 50% of the shares in Sparkle
Ltd since it was incorporated on 1 April 2012. Accounts have always been
prepared to 31 March each year. Each year Glen and Sunny each received
a salary of 36,000 and dividends of 12,600 from Sparkle Ltd until 31
March 2015.
The business was always profitable but recently has been declining and so
they have decided to trade as a partnership from the 1 April 2015. The
whole of the Sparkle Ltd business was sold as a going concern to Glen and
Sunny. They want to know whether a significant tax cost will arise on
disincorporation and whether they should be aware of any reliefs available
on the transfer of the business.
Glens other income and capital gains
In addition to annual property business income of 15,000. In December
2014 he disposed of some quoted shares (all minority holdings) and
realised a chargeable gain of 33,000 before deducting the annual exempt
amount.
The sale of the business on 1 April 2015
The assets of the Sparkle Ltd business have been valued as set out below.
All of the equipment qualified for capital allowances.

Cost Market value Indexation Tax written


1 April 2015 allowance down value

Freehold 15,000 75,000 4,000


shop

Goodwill Nil 20,000

Equipment 40,000 5,000 800

The profits and losses of the partnership will be shared 80% to Glen and
20% to Sunny, after allocating an annual salary of 15,000 to Sunny.

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Future results of the business
Initially the business is expected to make a loss but will then become
profitable. The figures given below are before capital allowances.
Period to 31 December 2015 a loss of 84,200
Year ended 31 December 2016 a profit of 25,000
Sunny
On 1 August 2015, Sunny will make a gift half of his shares in Glitz Ltd an
investment company to the trustees of a discretionary (relevant property)
trust for the benefit of his nieces and nephews. Sunny owned 60% of the
shares In Glitz Ltd, and 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.
The remaining shares in Glitz Ltd are held as follows:
Sunnys wife Susan 25%
Sunnys father 10%
Unconnected persons 5%
The current values of the Gliz Ltd shares have been agreed by HMRC as
follows:
% holding
95% 925,000
85% 765,000
80% 645,000
55% 290,000
30% 100,000

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 including a calculation of the capital
allowances of the Sparkle Ltd business for the final trading period
ending with the sale of its equipment for 5,000 on 31 March 2015.
(ii) Transfer of the business to Glen and Sunny
BRIEF explanations of:
- the advantage of running the business as a partnership instead
of a company.
- the availability or non-availability of disincorporation relief on the
transfer of Sparkle Ltds business to Glen and Sunny.
- The tax implications for Sparkle Ltd, if disincorporation relief is
not claimed, compared with the situation where it is claimed.
Your answer should include a calculation of the tax cost if
disincorporation relief is not claimed and the time limit for
making the necessary election.

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- The taxable trading profits and losses of the first two tax years
for Glen on the assumption they run their business as
partnership from 1 April 2015.
- An explanation of the possible ways that Glen can relieve his
share of the trading loss and on the assumption he relieves it as
early as possible calculate the tax he will save.
(iii) VAT
- In respect of the transfer of Sparkle Ltds business to Glen and
Sunny, a brief explanation of whether VAT be charged by
Sparkle Ltd on the sale of the assets.
(iv) Sunny
Please provide an explanation of:
- The manner in which any inheritance tax payable by Sunny on
his gift of the shares to the discretionary trust will be calculated
and the date on which the tax would be payable.
- The availability of capital gains tax gift relief in respect of the
transfer of the shares to the trustees of the discretionary trust
and the subsequent transfers of shares from the trustees to the
beneficiaries.
Tax Manager

Required:
(a) It is anticipated that Glen and Sunny will require some highly
sophisticated and specialised tax planning work in the future.
Prepare a summary of the information which would be required,
together with any action(s) which should be taken by the firm
before it agrees to become the tax advisers to Glen and Sunny.
(5 marks)
(b) Prepare the memorandum requested in the email from your
manager. The following marks are available.
(i) Capital allowances (3 marks)
(ii) Transfer of the business (17 marks)
(iii) The VAT implications (2 marks)
(iv) Sunny (5 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.
(3 marks)
(35 marks)

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2 Extracts from emails from your manager and the client Frankie, together with
information obtained from client files are set out below.
Email from your manager:

Please write a memorandum addressing the matters raised by Frankie


whilst taking into account the following instructions and additional
information.
(i) Budgeted results for the year ended 30 June 2015
Last week, Frankie and I prepared a budget for the Solar Ltd group for
the year ended 30 June 2015. These figures do not take into account
the additional information provided by Frankie as set out in his email
below. Results for the year ended 30 June 2015 are as follows:
Solar Ltd Panels Ltd Blocks Ltd

Trading profit
(before adjustments) 135,900 7,300 558,000

Chargeable gain (calculation


prepared by Frankie) (see his
email below) 69,705 0 0
I have not had the chance to look at Frankies calculation of the
chargeable gain in detail, please review it with care, give a brief
explanation of any errors and make any amendments necessary.
Please remember to consider rollover relief.
Calculate the corporation tax liabilities based on the above
figures after adjusting for the information provided by Frankie in
his email below. (Ignore the losses made by Systems Ltd for this
at the moment). Assume that any beneficial elections to reduce
the corporation tax liability of the group are made. I note from
the files that no election to exempt the profits of the overseas
branch has been made, so include an explanation for Frankie
why such an election might be beneficial.
(ii) Purchase of Systems Ltd
Solar Ltd acquired 85% of the shares in Systems Ltd a UK resident
company on 1 November 2014 for 130,000. This company has a
capital loss brought forward of 20,000, and a trading loss brought
forward of 65,000. It expects to make a trading loss of 240,000 in
the year ended 31 August 2015 but has no other sources of income.
Calculate the stamp duty payable.
Explain the alternative ways in which the companys trading
losses can be relieved. I want some precise detail here so please
try to consider all of the possibilities and any anti-avoidance
legislation that may restrict the use of the losses. Your answer
should include an evaluation of the tax saving from each option
and a recommendation as to how the loss should be relieved,
assuming it is not carried forward.

10 w w w . s t ud yi nt e r a c t i ve . o r g
(iii) Investment in Terrestrial Inc.
Solar Ltd intends to initially purchase 15% of the ordinary share
capital of Terrestrial Inc on 1 December 2015 but may increase this
investment in the future. Terrestrial Inc. is a profitable trading
company resident in the country of Halven, where the rate of
corporation tax is 12%. Please provide the following information:
The effect on the corporation tax liability of the group if this
investment is made. Remember to consider whether Terrestrial
Inc. will be considered as a controlled foreign company now or in
the future.
A brief note as to whether it may be sensible for Solar Ltd to
reduce the prices charged to Terrestrial Inc in order to reduce
the corporation tax paid in the UK.

Email from Frankie

Budgeted results for year ended 30 June 2015


Following on from our discussion of the subsidiaries budgeted profits for the
year ending 30 June 2015, I have now identified some additional
information.
During the year ended 30 June 2015, Solar Ltd incurred capital expenditure
of 25,900 on manufacturing equipment. Blocks Ltd purchased new offices
for use in their trade costing 420,000.
Most of the finance for this additional expenditure will be borrowed but as a
result of Solar Ltd selling Abbey building for 460,000 on 14 April 2015, I
am hoping to use the after tax sales proceeds towards this additional
expenditure, in order to reduce gearing. The building was purchased on 1
January 2004 for 255,000. I have prepared the calculation of the
chargeable gain as set out below but my knowledge is a bit rusty, please
can you check that it has been calculated correctly.
Chargeable gain on the disposal of Abbey building:
Sale proceeds 460,000
Less: Cost (255,000)
_______
205,000
Less: Indexation allowance (0.409 255,000) (104,295)
_______
100,705
Less: Capital loss b/f (available on acquisition of Systems Ltd) (20,000)
_______
80,705
Less: Annual exempt amount (11,000)
_______
Chargeable gain 69,705
_______
Purchase of Systems Ltd
Systems Ltd is a UK resident company. The scale of its activities in the last
few years has been very small and it has made tax adjusted trading and
capital losses. Now that Solar Ltd has purchased the shares in Systems Ltd
we plan to return the company to profitability and hope to use these losses
in order to reduce the total corporation tax liability of the group.

ww w. stu dyi n t e ra cti v e . or g 11


Extract from the client file

Solar Ltd Panels Ltd Blocks Ltd

Resident UK UK UK

Conducts its trade UK UK 20% in UK and


80% in Galactic

Shareholders Frankie Solar Ltd Solar Ltd


(100%) (100%) (100%)

Corporation tax in Galactic 19%


There is no double taxation agreement between the UK and Galactic.

Required:
Prepare the memorandum requested in the email from your manager.
The following marks are available.
(i) The budgeted results for the year ended 30 June 2015. (9 marks)
The relevant indexation factor:
January 2004 to April 2015 0.409
(ii) Purchase of Systems Ltd. (13 marks)
(iii) Investment in Terrestrial Inc (3 marks)
(25 marks)

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3 Tricia is the financial director and a shareholder of Anomaly Ltd she has been
in dispute with the other shareholders over plans to expand the companys
product portfolio. Tricia wants advice regarding the sale of her shares back to
the company. She also needs help with completing the VAT return once the
company becomes a partially exempt supplier.
Tricia has managed to get a new job and wants to know how much better off
she is going to be compared with her current job with Anomaly Ltd.
The following information has been obtained from client files and meetings
with the parties involved.
Anomaly Ltd:
An unquoted UK resident trading company currently producing products
which are all standard rated for VAT purposes.
Share capital consists of 100,000 ordinary shares issued at 385 per
share in July 2007.
None of the other shareholders has any connection with Tricia.
Within the next few months the other shareholders plan to expand their
operations overseas and introduce production of an exempt-rated
product for sale in the UK.
The VAT position of the company
A summary of the budgeted results of the quarter to 31 December 2015 are
included below.
Three months ending
31 December 2015

Sales revenue standard rated (excluding VAT) 420,000


_______

Sales revenue exempt 34,500


_______

Input tax:
Attributable to taxable supplies 60,000
Attributable to exempt supplies 1,150
Non-attributable 1,600
_______
Total 62,750
_______
The purchase of own shares:
The company will purchase all of Tricias shares for 11 per share.
The transaction will take place at the end of 2015.
Tricia:
Purchased 6,000 shares in Anomaly Ltd for 4.20 per share on 1 June
2011.
Has no income in the tax year 2015/16 other than a salary of 9,500
from Anomaly Ltd.
Has chargeable gains in the tax year 2015/16 of 5,400.

ww w. stu dyi n t e ra cti v e . or g 13


Has houses in the UK and Spain and divides her time between them.
She currently spends the summer months of June August in Spain
each year.
New job with Accord Ltd
Has been offered a new job with Accord Ltd paying her a salary of
37,000
She will be provided with a four bedroom house which the company
bought for 240,000 in July 2005. Its current market value is 310,000
and its annual value is 6,060. The house has recently been furnished
at a cost of 12,000.
She will also be provided with a diesel-powered company car, the car
will be leased by Accord Ltd at a cost of 300 (including VAT) per
month. The car will have a CO2 emission of 157 grams per kilometre
and list price of 32,000. During the tax year Tricia will be required to
pay 2,400 towards the running costs and the company will pay for all
the fuel.
Accord Ltd also operates a tax advantaged Schedule 2 share incentive
plan and offers key employees the maximum number of shares under
the scheme.

Required:
(a) (i) Prepare detailed calculations to determine the most
beneficial tax treatment for the payment Tricia will receive
for her shares. (4 marks)
(ii) Identify the points that must be confirmed and any action
necessary in order for the capital treatment to apply to the
buy back of her shares. (3 marks)
(b) Advise the directors of Anomaly Ltd of the impact on their VAT
position of their proposed expansion plans; your answer should
include a calculation of the VAT payable in the quarter to 31
December 2015 based on their results. (6 marks)
(c) Determine the annual tax cost when Tricia starts working for
Accord Ltd, your answer should include an evaluation of how
much better off she will be compared with her current position
with Anomaly Ltd. Explain the income tax and capital gains tax
implications of receiving shares under a Schedule 2 share
incentive plan. (7 marks)
(20 marks)

14 w w w . s t ud yi nt e r a c t i ve . o r g
4 Polly and her daughter Molly require advice on several taxation matters. Polly
wants to know how much additional income tax she must pay in 2014/15 as a
result of the confusion about her residence position. Molly has recently
inherited some shares from her father and is either going to invest in a
personal pension scheme or shares in a start up company and wants to know
the most tax efficient investment.
From meetings held with the ladies and your files, you have obtained the
following information:
Polly
Born on 10 May 1952
Has one daughter Molly
Retired on 30 June 2013.
Is UK domiciled.
Has always lived in the UK but has always spent her vacations in
Kantana.
Her husband Brian died on 14 May 2013. They used to spend
approximately 100 days each year in Kantana as they have homes in
the UK and Kantana.
She decided to emigrate to Kantana on 1 August 2014 but intends to
visit her daughter Molly who lives in the UK for approximately two
months, June and July, each year.
Made an error on her tax return in 2014/15 - it was assumed she was
not UK resident in that year but it now appears that she was.
Pollys income each year
Receives annual UK pension income of 24,000, dividends from shares
in companies quoted on the UK stock exchange of 4,500 and interest
on a UK building society account of 3,200.
Lets her UK house to holiday makers whilst she is overseas, receiving
annual net income after deducting agents fees of 48,500.
Has a number of properties in Kantana which are let to holidaymakers.
She had rental income of 40,000 before deducting foreign tax, of which
3,000 was transferred to her UK bank account during 2014/15.
Molly
Born on 16 May 1972.
Has always lived in the UK and is UK resident and domiciled.
Employed in the UK on an annual salary of 125,000.
Inherited 375,000 shares in Micro plc from her father on 14 May 2013
when the shares were quoted at 1.84 - 1.96 and the highest and
lowest marked bargains were 1.80 and 1.92. The shares in Micro plc
were taken over by Macro plc on 1 December 2014. Molly received two
ordinary shares and one preference shares in Macro plc for each share
she owned in Micro plc worth 1.50 and 1 each respectively. The
takeover was for bona fide commercial reasons and not for tax
avoidance.

ww w. stu dyi n t e ra cti v e . or g 15


Has used her annual exempt amount for 2015/16.
On 30 June 2015, when the market value of the Macro plc ordinary
shares was 4.75 each, she sold sufficient ordinary shares in Macro plc
to give her after tax sales proceeds of 30,000.
Two alternative investments:
In the tax year 2015/16 Polly will either
Subscribe 30,000 for shares in a seed enterprise investment scheme;
or
Make a payment of 30,000 to a registered personal pension fund.
Kantana
Has no double tax agreement with the UK.
Deducts withholding tax at 10% on all overseas income.

Required:
(a) Explain why Polly should be treated as UK resident in 2014/15.
(4 marks)
(b) Calculate the additional income tax Polly must pay in 2014/15 as
a result of correcting the error in relation to her residence
position.
You are not required to consider any interest or penalties which may
arise. (5 marks)
(c) Calculate the number of shares in Macro plc that Molly must sell
in order to generate after tax sales proceeds of 30,000.
(3 marks)
(d) What is the effect of the two alternative investments on Mollys
income tax liability in 2015/16, your answer should include an
explanation of a capital gains tax advantage of investing in the
SEIS shares rather than the personal pension scheme which
might affect the investment decision. (8 marks)
(20 marks)

16 w w w . s t ud yi nt e r a c t i ve . o r g
5 Gayle has been in business since 1 January 2002. On 31 December 2015
Gayle intends to transfer the business to either her brother Hamish or his
company, Haggis Ltd. Gayle has asked for some capital gains and inheritance
tax advice regarding the transfer, and Hamish has asked for some information
regarding potential relief for Haggis Ltd for expenditure on research and
goodwill. The following information has been gathered from the client files.
Business transfer
Option 1 would be for Gayle to gift the business to Hamish.
Option 2 would be for Haggis Ltd to purchase the business from Gayle
for the full market value of 266,000 at 31 December 2015.
The market value of the assets at 31 December 2015 are forecast as
follows:

Goodwill 90,000
Freehold property (1) 86,000
Freehold property (2) 48,000
Net current assets 42,000
_______
266,000
_______

The goodwill has a nil cost. Freehold property (1) was purchased on 1 January
2002 and cost 44,000. This property has always been used for business
purposes. Freehold property (2) was purchased on 15 September 2006 for
35,000 and has never been used by Gayle for business purposes.
Gayle
Annual taxable income 50,000.
Capital losses brought forward 8,000.
Hamish
Sole shareholder of Haggis Ltd, a large company for R&D purposes, with
no associated companies.
Intends starting a research project on 1 January 2016, with forecast
costs of 20,000.
Forecast profits for the year ended 31 December 2016 are 500,000.
This is calculated with no account being taken of the research costs.
Will adopt a policy of amortising goodwill over a 15 year expected life.

ww w. stu dyi n t e ra cti v e . or g 17


Required:
(a) Advise Gayle as to the potential capital gains tax consequences if
the business is:
(i) Gifted to Hamish on 31 December 2015;
(ii) Sold to Haggis Ltd on 31 December 2015 for market value.
Your answer should include a calculation of any capital gains tax
arising under each alternative and you should assume that any
relevant elections are made to reduce or defer the tax liability
arising. (8 marks)
(b) Explain whether business property relief would be available,
both now and in the future assuming the business is gifted to
Hamish in accordance with option 1. (4 marks)
(c) Calculate the corporation tax relief available to Haggis Ltd for:
(i) The proposed research expenditure of 20,000. (6 marks)
(ii) The goodwill purchased as part of the business if option 1 is
followed. (2 marks)
(20 marks)

18 w w w . s t ud yi nt e r a c t i ve . o r g

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