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)