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Jake

Memorandum for Client Files

To, The Tax Files

From, Tax Senior

Date: 1 January 2024

Client: Jake

Subject: Multiple Tax Affairs

(a) Becoming tax advisers to Jake

It is important to contact Jake's previous tax adviser, in order to know the reason of their not continuing
service of Jake. If it was just an administrative reason then our firm can accept Jake's engagement. However
if any ethical concern exist then our firm may not accept Jake's tax engagement.

Further our firm will also want to know any other ethical concern which previous tax adviser want to bring in
knowlede of our firm before we accept Jake's tax engagement. Those ethical concern may affect our firm's
decision to accept the engagement.

Contacting previous tax adviser is an important requirement for accepting new engagement. And if Jake will
not permit it then our firm may not accept this tax engagement.

Our firm should obtain documents relating to Jake's nationality and residency in order to veify that the client
to whom services are being provided is not involved in any illegal acts.

Further documents in relation to Jake's source of income will also be required in order to verify that any
illegal incomes are not involved.

(b) New unincorporated business

(i) Insurance proceeds available for investment in the business

If Jake will reinvest the insurance proceeds of Vol Building in construction of Yak Building, then gain of Vol
building arising due to insurance proceeds can be deferred as insurance proceeds are being reinvested in 12
months of their reciept.

Insurance proceeds received were £380,000 whereas amount reinvested in Yak Building is £335,000. As
Partial proceeds are reinvested therefore part of the gain will be deferred and partially it will be chargeable.
Gain chargeable will be lower of gain and cash in hand amount. Rest of the gain will be deferred against base
cost of Yak Building, and it will get chargeable when Yak Building will be disposed later on.

Cash in hand after reinvestment is £380,000 - £335,000 = £45,000 whereas gain amount is £130,000. Lower
of gain and cash in hand will be chargeable now, which means chargeable gain will be £45,000 and
remaining gain of £130,000 - £45,000 = £85,000 will be deferred against base cost of Yak Building. On
chargeable gain of £45,000 tax will be:

Chargeable gain £45,000

Annual
(£6,000)
Exemption
Taxable gain £39,000

Capital gain tax Total income £30,000

Personal allowance (£12,570)

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Taxable income £17,430

Basic rate band £37,700
Remaining Basic rate
£20,270
band
£20,270 X 10% £2,027
(£39,000 -
£3,746
£20,270) X 20%
Total CGT £5,773

Post-tax insurance proceeds which will be available, after the construction of the Yak Building, for
investment in the new business will be

Insuracne proceed £380,000

Tax (£5,773)
Post tax proceed £374,227
Construction cost of Yak Building (£335,000)
Post tax insurance proceed after construction
£39,227
of Yak Building

(ii) Tax deductions in respect of the expenditure to be incurred

Jake will be able to claim allowed expense in relation to cost he is incurring in visiting potential customers in
first year of his trade. These outflows are incurred before start of business therefore it will be treated as pre
trading expenses. As they are within 7 years of start of business, therefore they will be treated as incurred on
first day of business.

Cost of travelling to potential customers will be an allowed expense from trading P&L if that cost of
travelling is exclusively for business purpose. However it is to note that cost of customer entertainment is not
an allowed expense from trading P&L.

Yak Building will be completed on 1 February 2024, whereas business will start from 1 May 2024. It will
also be a pre trading outflow, and as it is within 7 years of start of business therefore this outflow will be
assumed to occur on first day of business. Included in construction cost of Yak Building is £75,000 in respect
of electrical systems, heating systems and other integral features, these outflows will qualify for capital
allowances. It will be covered through Annual investment allowance and as a result entire amount of £75,000
will become an allowed expense in capital allowance pool.

Further remaining cost of Yak Building of £335,000 - £75,000 = £260,000, will qualify for structure building
allowance. Allowed expense will be available on it at rate of 3% per year. In year ended 30 April 2025,
allowed expense will be £260,000 X 3% = £7,800.

Purchase of Car on 1 May 2024, will qualify for capital allowances in year ended 30 April 2025. No Annual
investment allowance is available on cars. As Car is not a zero CO2 emission car, therefore it will either be
relieved in Main pool OR Special rate pool. If CO2 emission rate is less than 50 grams per kilometre then it
will be relieved in main pool and its rate of allowance will be 18% per year. If CO2 emission rate is more
than 50 grams per kilometre then it will be classified in special rate pool and rate of allowance will be 6% per
year. Further capital allowance will be available on 65% portion only as 65% percent use of car will be for
business and 35% use is for private purpose.

(iii) Alternative plan for the use of the Yak Building

If opt to tax election is not made, then input tax recoverable will be:

In this case Jake will only recover input tax in relation to actual taxable use of building in year of purchase.
This taxable use is 70%. Input tax recoverable will be £67,000 X 70% = £46,900. This will be recovered in
year ended 30 April 2025.

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Same taxable use will continue for next three years (after year of purchase). No adjustment will be required
for input tax amount.

However after four years from purchase date when taxable use will increase to 100%, Jake will be able to
recover additional input tax every year for 6 years till 30 April 2034. Additional input tax recovery every year
will be [£67,000 / 10 years X (100% - 70%)] = £2,010. Total input tax recovery in 6 years will be £2,010 X 6
years = £12,060.

In case of no opt to tax election total input tax recovered is £46,900 + £12,060 = £58,960.

If opt to tax election is made then input tax recoverable will be:

In this case 100% of input tax will be recovered and actual taxable use will be ignored. Renting out 30%
portion which is an exempt use, will be ignored in this situation as opt to tax election is made. Whole of input
tax will be recovered in year of purchase of £67,000 in year ended 30 April 2025. No adjustment will be
required for change in taxable use.

Additional input tax recoverable due to opt to tax election

Additional input tax recovered due to opt to tax election is £67,000 - £58,960 = £8,040.

(c) Sale of shares in POL Ltd

Jake’s potential liability to inheritance tax (IHT) at the time of the sale of the shares and on the
subsequent death of his aunt.

There will be no IHT implications at the time of sale of shares, as no IHT on sale transaction.

At the time of death of Jake's Aunt, IHT will arise as PET will get chargeable for death tax as his Aunt will
die within 7 years of gift. If Jake will sell shares before death of his Aunt then in that case BPR will get
withdrawn. In this case value of transfer after any available annual exemption will get subject to IHT for
death tax purpose.

However if shares are sold after death of Aunt, then BPR will not be withdrawn. BPR was available on gift of
shares of POL Limited on 88% portion of transfer as 12% of the assets of POL Limited consisted of excepted
assets. In this case 12% value of transfer less any available annual exemptions will get subject to IHT for
death tax purpose.

Annual exemption and Nil rate band will not be available against gift of shares to Jake on 1 October 2021, as
both of these will be used against gift done by his Aunt to Jake's sister on 1 September 2021, which worth
£360,000. Rate of death tax will be 40%.

Taper relief will be available for death tax purpose if Jake's Aunt will live for atleast 3 years after the gift date
of 1 October 2021. Taper relief will be 20% if Jake's aunt dies after 1 October 2024. For every extra year she
lives, Taper relief will increase by 20% per year.

Chargeable gain resulting from the sale of POL Limited shares

Dispsoal proceed £470,000

Cost of shares will be equal to market value of shares when Jake received it
through gift. However it will be reduced by claim of Gift relief made at that
time.

Cost (£307,500) Market value at time of £420,000

gift
Gift relief claimed at
(£112,500)
time of gift
Base cost of shares £307,500

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Chargeable gain £162,500

Business Asset disposal relief will not be available on sale of POL Limited shares as Jake has never been an
employee of POL Limited.

No Rollover relief on disposal of shares as shares are not a qualifying asset for Rollover relief.

Any IHT payable by Jake on death of Jake's Aunt on this gift of shares, will be deductable from Capital gain
while calculating gain on dispsoal.

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Rabo

(a) In relation to Rabo Ltd’s sale of the freehold factory:

− Calculate the after-tax proceeds; and

− Explain how the base cost of this factory is calculated.

Disposal proceed £395,000 Disposal date is 1 April 2024

Base Cost (£302,000) Note 1
Indexation allowance will not be available as purchase is of after 31
Chargeable gain £93,000
December 2017

Corporation tax on
Chargeable gain
£50,000 - £30,000 = Rabo Limited will already have trading profit of £30,000 in year
£3,800
£20,000 X 19% ended 31 December 2024.
£93,000 - £20,000 =
£19,345
£73,000 X 26.5%
Total corporation tax on
£23,145
gain

Post tax proceeds will be

Disposal proceed £395,000
Tax (£23,145)
Post tax proceeds £371,855

Note 1: Freehold factory was originally acquired by Rabo Limited through an intra group transfer on 1
September 2020. It should be originally transferred at its cost of Morada Limited as it was an intra group
transfer for tax purposes. Cost of Morada Limited was £266,000. However on 31 December 2023, when
Morada Limited disposed off shares of Rabo Limited, a degrouping charge must have arisen on this freehold
factory as Rabo Limited owned this intra group transfer asset at the date of leaving group and it was wihtin 6
years of intra group transfer. Due to degrouping charge this freehold factory must have already been assesed
till the market value on intra group transfer date of £302,000. Therefore when Rabo Limited will sell this
factory later on Market value of intra group transfer date will be used as a base cost.

(b) (i) Explain the maximum possible amount of Rabo Ltd’s trading loss for the year ending 31 December
2023 which can be transferred to Morada Ltd

Rabo Limited and Morada Limited had been part of 75% group during the year ended 31 December 2023 for
part of the year, as Morada Limited owned 100% shares of Rabo Limited. However 75% group loss relief
will be restricted on the date agreement to sell Rabo Limited was signed by Morada Limited. This date was
31 October 2023. This means that group loss relief will be available for 10 months only during the year
ended 31 December 2023. Maximum amount of trading loss which Rabo Limited can transfer to Morada
Limited will be lower of:

Rabo Limited's trading loss for 10 months = £72,000 / 12 months X 10 months = £60,000
Morada Limited's total income for 10 months = £883,000 / 12 months X 10 months = £735,833.

Maximum amount of loss relief will be of £60,000.

(b) (ii) Explain the tax consequences for Rabo Ltd of using some, or all of the loss itself, and explain any
potential issues associated with such a course of action.

If Rabo Limited will keep some or all of the loss amount for relief against its own incomes then a potential
issues that Rabo Limited may not have suffecient income in future years to use the loss amount. Rabo

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Limited will no more be part of any group after disposal by Morada Limtied, therefore if it will not be able to
use loss on its own then relief will get delayed till it gets profits in future period. Further past years of Rabo
Limited show that it donot have suffecient income of its own to use the loss amount.

Due to change in ownership of Rabo Limited as Morada Limited has disposed off its share capital to Nali,
another risk exist to loss relief is that if within 5 years of change in ownership there will be major change in
activity of Rabo Limited then its losses will get restricted and they will not be able to be relieved in post
acquisition period. Loss amount of pre acquisition period will get restricted due to this restriction.

(c) Explain with supporting calculations:

− The rollover relief and capital allowances which may be claimed as a result of the planned capital
acquisitions on 1 June 2024; and

− The total corporation tax savings which these will give rise to in the year ending 31 December 2024.

Purchase of second hand warehouse on 1 June 2024 will qualify for Rollover relief as it is a Land and
Building which is a qualifying asset for Rollover relief. Further reinvestment is done within qualifying
period, as factory was sold on 1 April 2024, whereas reinvestment is being done on 1 June 2024 which is
within 36 months of disposal date.

Disposal proceed of factory was £395,000, whereas amount reinvested in warehouse is £312,000. It is a
situation of partial reinvestment, therefore part of the gain will be deferred and partially it will be chargeable
now. Gain chargeable now will be lower of Gain and Cash in hand amount. Gain on disposal of factory was
£93,000, whereas cash in hand after reinvestment is £395,000 - £312,000 = £83,000. Lower of will be
chargeable now, which will be cash in hand of £83,000. Remaining gain of £93,000 - £83,000 = £10,000 will
be deferred.

Purchase of second hand warehouse will not qualify for capital allowances as it is not a plant and machinery.
Further structure building allowance will also not be available as it was constructed in 2010, and there is no
SBA on constructions before 2018.

Purchase of delievery vans will qualify for Capital allowances as purchase of plant and machinery. There will
be no rollover relief as it is not a fixed plant and machinery. Purchase of delievery vans had a total cost of
£35,000 X 5 vans = £175,000. This will qualify for capital allowance immediately as it will be covered by
Annual investment allowance. It will become an allowed expense in year of purchase.

Due to planned investments Rabo Limited will be able to defer its gain by £10,000 and it will also be able to
claim a capital allowance deduction of £175,000. In total its taxable profits will reduce by £185,000.
Assuming that Rabo Limited will have suffecient income to claim the allowed expense of purchase of
delievery Vans total corporation tax saving will be:

£50,000 X 19% = 9,500

£185,000 - £50,000 = £135,000 X26.5% = £35,775

Total corporation tax saving will be £45,275.

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Pinto

(a) Assuming that Pinto does not satisfy any of the automatic tests in relation to tax residence, explain
whether or not he will be resident in the UK for tax purposes in the tax year 2023/24.

If Automatic tests of residency will not be satisfied by Pinto, then his UK residency status for tax year
2023/24 will be determined through evaluation of his UK ties. As Pinto has been previously resident in
evaluation of tax year 2023/24 therefore considering his planned number of days in UK in 2023/24 which are
105 days (20 December 2023 to 5 April 2024), he need to satisfy atleast 2 UK ties in order to become UK
resident. Pinto will be considered as previously resident in UK as he had been resident for atleast one year in
previous three tax years. His evaluation of UK ties will be

Close family member UK residency tie is not satisfied as none of the close family member (spouse OR
childeren of less than 18 years of age) are resident in UK
Accomodation tie is satisfied as accomodation is available to Pinto of his sister. This accomodation is
available for more than 90 days to Pinto
Work tie is not satisfied as Pinto will work for less than 40 days in UK in tax year 2023/24
Days in UK ties will also not be satisfied as Pinto will not spend atleast 90 days in UK in either of the
previous two tax years
Comparative days tie will also not be satisfied as his days in UK will not be greater than any other
country. He will only live for 105 days in UK, which means greater days will be in country of Vicia

Considering the above evaluation, Pinto will only satisfy one UK tie in tax year 2023/24, therefore he will be
considered as non UK resident in tax year 2023/24.

(b) Explain, by reference to Pinto’s tax residence status, why the sale of his house in the UK on 30 April 2022
will have been subject to UK capital gains tax, and calculate the chargeable gain arising. You should include
an explanation of any relief(s) available.

Pinto sold the UK house on 30 April 2022, which is tax year of 2022/23, in which he was a non UK resident.
This disposal will be subject to UK CGT as it was a residential proeprty disposal, and residential properties
are subject to UK CGT for non UK residents if disposed off after 6 April 2015.

Chargeable gain on disposal £47,000 This amount was excess of proceeds over cost
Private residence relief (£43,867) Note 1.
Chargeable gain £3,133

Note 1: Private residence relief will be available on disposal of this UK residential property. However period
of occupation (exempt periods) will only be permitted if in relevant tax year Pinto was UK resident OR
atleast spent 90 days in that property in that particular tax year. Last 9 months exemption will be available on
property. Evaluation of period of ownership will be

Total ownership period was 1 May 2017 to 30 April 2022 (60 months).
Actual period of occupation was from 1 May 2017 to 30 April 2021 (48 months). In this actual period
of occupation Pinto was UK resident also in those tax years except month of April 2021, which lies in
tax year of 2021/22, when Pinto was non UK resident and he also didn't spend 90 days in the property
in tax year 2021/22. Exempt period from this actual period of occupation will be from 1 May 2017 to 5
April 2021 (47 months)
Further absence period from 1 May 2021 to 30 April 2022, will only qualify for last 9 months
exemption before disposal. Other reliefs of deemed period of occupation will not be available as there
was no actual period of occupation after absence period. Further letting relief will also not be available
as property was not occupied by Pinto partially.
Total exempt months are 47 months plus 9 months = 56 months
PRR = £47,000 / 60 months X 56 months = £43,867

(c) Calculate Pinto’s property income, after all taxes, in respect of his house in Vicia for the tax year 2024/25.

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Pinto's property income from

£8,375
house in Vicia
£8,375 X 16% = £1,340. As rental income is of Vicia therefore
Vician Tax (£1,340)
Vician tax of rental income of 16% will be applicable on it
As Pinto is UK resident in tax year 2024/25, therefore UK tax
UK tax on rental income from
(£0) will also arise on this overseas income. UK tax is shown in
Vicia
Working 1.
Pinto's property income
£7,035
after all taxes

Working 1: UK tax of Pinto will be:

UK tax with overseas rental income UK tax without overseas rental income
Non
Dividend
Saving
UK salary £10,000 Non
Dividend
UK Dividends £2,500 Saving
Overseas rental income £8,375 UK Salary £10,000
Total incomes £18,375 £2,500 UK Dividends £2,500
Personal allowance (£12,570) Total Income £10,000 £2,500
Taxable income £5,805 £2,500 Personal allowance (£10,000) (£2,500)
Taxable income £0 £0
Tax
Non Saving £5,805 X 20% £1,161
No UK tax as taxable income is £0
Dividend (£2,500 - £1,000) X
£131
8.75%
UK tax £1,292

Due to Overseas rental income, incremental UK tax created is of £1,292. However from this UK tax created,
Double taxation relief will be available at lower of:

UK tax on overseas income £1,292

Overseas tax £1,340

Double taxation relief will be of £1,292 and it will offset entire of the UK tax amount of £1,292. This means
that there will be no UK tax on this overseas income.

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