TAXATION_ CAPITAL GAINS_ EXAM QUESTIONS FA _ 2020 Exam Question 01 (June 2011) On 15 October 2020 Alphabet Ltd, an unquoted trading company, was taken over by XYZ plc. Prior to the takeover Alphabet Ltd’s share capital consisted of 100,000 £1 ordinary shares and under the terms of the takeover the shareholders received either cash of £6 per share or one £1 ordinary share in XYZ plc for each £1 ordinary share in Alphabet Ltd. The following information is available regarding the four shareholders of Alphabet Ltd: Aloi Aloi has been the managing director of Alphabet Ltd since the company’s incorporation on 1 January 2003, and she accepted XYZ plc’s cash alternative of £6 per share in respect of her shareholding of 60,000 £1 ordinary shares in Alphabet Ltd. Aloi had originally subscribed for 50,000 shares in Alphabet Ltd on 1 January 2003 at their par value, and purchased a further 10,000 shares on 20 May 2005 for £18,600. On 6 February 2021 Aloi sold an investment residential property, and this disposal resulted in a chargeable gain of £22,600. For the tax year 20/21, Aloi has taxable income of £60,000. Bon Bon has been the sales director of Alphabet Ltd since 1 February 2019, having not previously been an employee of the company. She accepted XYZ plc’s share alternative of one £1 ordinary share for each of her 25,000 £1 ordinary shares in Alphabet Ltd. Bon had purchased her shareholding on 1 February 2019 for £92,200. On 4 March 2021 Bon made a gift of 10,000 of her £1 ordinary shares in XYZ plc to her brother. On that date the shares were quoted on the Stock Exchange at £7·10–£7·18. There were no recorded bargains. Holdover relief is not available in respect of this disposal. For the tax year 20/21 Bon has taxable income of £55,000. Cherry Cherry has never been an employee or a director of Alphabet Ltd. She accepted XYZ plc’s cash alternative of £6 per share in respect of her shareholding of 12,000 £1 ordinary shares in Alphabet Ltd. Cherry had purchased her shareholding on 27 July 2007 for £23,900. For the tax year 20/21 Cherry has taxable income of £31,000, and during the year she contributed £3,400 (gross) into a personal pension scheme. Dinah Dinah has been an employee of Alphabet Ltd since 1 May 2004. She accepted XYZ plc’s share alternative of one £1 ordinary share for each of her 3,000 £1 ordinary shares in Alphabet Ltd. Dinah had purchased her shareholding on 20 June 2005 for £4,800. On 13 November 2020 Dinah sold 1,000 of her £1 ordinary shares in XYZ plc for £6,600. Dinah died on 5 April 2021, and her remaining 2,000 £1 ordinary shares in XYZ plc were inherited by her daughter. On that date these shares were valued at £15,600. For the tax year 20/21, she had taxable income of £12,000. Required: (a) State why Bon, Cherry and Dinah did not meet the qualifying conditions for Business asset disposal relief and investor relief as regards their shareholdings in Alphabet Ltd. (b) Calculate the CGT liabilities of Aloi, Bon, Cherry and Dinah for the tax year 20/21. https://www.facebook.com/QunberRazaOfficial/ Page 1 TAXATION_ CAPITAL GAINS_ EXAM QUESTIONS FA _ 2020 Exam Question 02 (December 2010) Lim Lam is the controlling shareholder and managing director of Mal-Mil Ltd, an unquoted trading company that provides support services to the oil industry. (1) On 13 August 2020 Lim made a gift of 5,000 £1 ordinary shares in Oily plc, a quoted trading company, to her sister. On that date the shares were quoted on the Stock Exchange at £7·40–£7·56. Lim had originally purchased 1,000 shares in Greasy plc on 8 July 2014 for £18,200. On 23 November 2014 Greasy plc was taken over by Oily plc. Lim received five £1 ordinary shares and two £1 preference shares in Oily plc for each £1 ordinary share held in Greasy plc. Immediately after the takeover each £1 ordinary share in Oily plc was quoted at £3·50 and each £1 preference share was quoted at £1·25. Business asset disposal and holdover relief are not available in respect of this. (2) On 22 March 2021 Lim sold 40,000 £1 ordinary shares in Mal-Mil Ltd for £280,000. She originally purchased 125,000 shares in the company on 8 June 2013 for £142,000, and had purchased a further 60,000 shares on 23 May 2015 for £117,000. Mal-Mil Ltd has a total share capital of 250,000 £1 ordinary shares. Lim has made no previous disposals eligible for Business asset disposal relief. Required: (a) Explain why Lim’s disposal of 40,000 shares in Mal-Mil Ltd on 22 March 2021 qualifies for business asset disposal relief. (b) Calculate Lim Lam’s CGT liability for the tax year 20/21 assuming his taxable income is £25,000 and state by when this should be paid. Exam Question 03 (March June 2019) You should assume that the tax allowances for the tax year 2020/21 applied in previous tax years. Hali and Goma are a married couple. Capital losses brought forward Hali had capital losses of £39,300 for the tax year 2018/19. He had chargeable gains of £15,700 for the tax year 2019/20. Goma had capital losses of £9,100 and chargeable gains of £6,900 for the tax year 2019/20. She did not have any capital losses for the tax year 2018/19. Ordinary shares in Lima Ltd On 24 July 2020, Hali sold 5,000 £1 ordinary shares in Lima Ltd, for £4·95 per share. Lima Ltd’s shares have recently been selling for £5·30 per share, but Hali sold them at the lower price because he needed a quick sale. Goma, Hali’s wife, had originally subscribed for 30,000 ordinary shares in Lima Ltd at their par value of £1 per share on 28 July 2007. On 18 August 2017, she gave 8,000 ordinary shares to Hali. On that date, the market value for 8,000 shares was £23,200. Hali and Goma will both dispose of their remaining shareholdings in Lima Ltd during the tax year 2020/21. However, they are unsure as to whether these disposals will qualify for Business asset disposal relief Antique table On 11 October 2020, an antique table owned by Hali was destroyed in a fire. The table had been purchased on 3 June 2009 for £44,000. Hali received insurance proceeds of £62,000 on 12 December 2020, and on 6 January 2021, he purchased a replacement antique table for £63,600. Hali will make a claim to roll over the gain arising from the receipt of the insurance proceeds. Disposals by Goma during the tax year 2020/21 Goma disposed of the following assets during the tax year 2020/21, all of which resulted in gains: (1) Qualifying corporate bonds sold for £38,300 (2) A motor car (suitable for private use) sold for £11,600 (3) An antique vase sold for £6,200 (4) A copyright (with an unexpired life of eight years when purchased) sold for £5,400 (5) Quoted shares held within an individual savings account (ISA) sold for £24,700 https://www.facebook.com/QunberRazaOfficial/ Page 2 TAXATION_ CAPITAL GAINS_ EXAM QUESTIONS FA _ 2020 3.1 What amount of unused capital losses do Hali and Goma have brought forward to the tax year 2020/21? Hali Goma A £23,600 £9,100 B £23,600 £2,200 C £35,900 £9,100 D £35,900 £2,200 3.2 What cost figure and what value per share (disposal value) will be used in calculating the chargeable gain on Hali’s sale of 5,000 ordinary shares in Lima Ltd? Cost figure Value per share A £5,000 £4·95 B £14,500 £4·95 C £14,500 £5·30 D £5,000 £5·30 3.3 In deciding whether Hali and Goma’s future disposals of their shareholdings in Lima Ltd will qualify for Business asset disposal relief, which one of the following statements is correct? A Hali and Goma must be directors of Lima Ltd B Lima Ltd must be a trading company C Hali and Goma must have shareholdings of at least 10% each in Lima Ltd D The qualifying conditions must be met for a period of three years prior to the date of disposal 3.4 What is the base cost of Hali’s replacement antique table for capital gains tax (CGT) purposes? A £62,000 B £63,600 C £45,600 D £44,000 3.5 How many of the five assets disposed of by Goma during the tax year 2020/21 are exempt assets for the purposes of capital gains tax (CGT)? A Three B Five C Two D Four EXAM QUESTION 04 (SPECIMEN EXAM – SEP 16) Delroy and Grant On 10 January 2021, 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 2005. 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 March 2021 for £240,000. Dub Ltd has a share capital of 100,000 £1 ordinary shares. Delroy was the director of the company from its incorporation on 1 July 2005 until 10 January 2021. Grant has never been an employee or a director of Dub Ltd. For the tax year 2020/21, Delroy and Grant are both higher rate taxpayers. They have each made other disposals of assets during the tax year 2020/21, and therefore they have both already utilised their annual exempt amount for this year. Marlon and Alvita On 28 March 2021, Marlon sold a house for £497,000, which he had owned individually. The house had been purchased on 22 October 2001 for £152,600. Throughout the period of ownership, the house was occupied by Marlon and his wife, Alvita, as their main residence. One-third of the house was always used exclusively for business purposes by the couple. Business asset disposal relief is not available in respect of this disposal. https://www.facebook.com/QunberRazaOfficial/ Page 3 TAXATION_ CAPITAL GAINS_ EXAM QUESTIONS FA _ 2020 For the tax year 2020/21, Marlon is a higher rate taxpayer, but Alvita did not have any taxable income. This will remain the case for the tax year 2020/21. Neither of them has made any other disposals of assets during the year. 4.1 What is Grant’s capital gains tax (CGT) liability for the tax year 2020/21 in respect of the disposal of the shares in Dub Ltd? £________________ 4.2 What would the CGT implications have been if Delroy had instead sold the 25,000 shares in Dub Ltd himself for £240,000 on 10 Jan 2021, and then gifted the cash proceeds to Grant? (1) Business asset disposal relief would have been available (2) The CGT liability would have been paid later (3) The cash gift would not have been a chargeable disposal (4) The cash gift would have qualified for holdover relief A 1 and 3 C 2 and 4 B 2 and 3 D 1 and 4 4.3 What is Marlon’s chargeable gain for the tax year 2020/21? A £229,600 C £114,800 B £0 D £344,400 4.4 What is the amount of CGT which could have been saved if Marlon had transferred 50% ownership of the house to Alvita prior to its disposal? £________________ 4.5 Why would it have been beneficial if Marlon had delayed the sale of the house until 6 April 21? A A lower rate of CGT would have been applicable B Two annual exempt amounts would have been available C Principal Private Residence relief would have been greater D The CGT liability would have been paid later Exam Question 5 (September 2016) Kitten is the controlling shareholder in Kat Ltd, an unquoted trading company. Kat Ltd Kat Ltd sold a freehold factory on 31 May 2020 for £364,000, which resulted in a chargeable gain of £120,700. The factory was purchased on 1 October 2003 for £138,600, and further capital improvements were immediately made at a cost of £23,400 during the month of purchase. Further improvements to the factory were made during the month of disposal. The relevant retail prices indexes (RPIs) are as follows: October 2003 182·6 Dec 2017 258·0 May 2020 260.1 Kat Ltd is unsure how to reinvest the proceeds from the sale of the factory. The company is considering either purchasing a freehold warehouse for £272,000, or acquiring a leasehold office building on a 40-year lease for a premium of £370,000. If either reinvestment is made, it will take place on 30 September 2021. All of the above buildings have been, or will be, used for the purposes of Kat Ltd’s trade. https://www.facebook.com/QunberRazaOfficial/ Page 4 TAXATION_ CAPITAL GAINS_ EXAM QUESTIONS FA _ 2020 Kitten Kitten sold 20,000 £1 ordinary shares in Kat Ltd on 5 October 2020, which resulted in a chargeable gain of £142,200. This disposal qualified for Business asset disposal relief. Kitten had originally subscribed for 90,000 shares in Kat Ltd on 7 July 2010 at their par value. On 22 September 2013, Kat Ltd made a 2 for 3 rights issue. Kitten took up her allocation under the rights issue in full, paying £6·40 for each new share issued. Kitten also sold an antique vase on 16 January 2021, which resulted in a chargeable gain of £27,900. For the tax year 2020/21, Kitten had taxable income of £12,000. 5.1 What amount of indexation allowance will have been deducted in calculating the chargeable gain of £120,700 on the disposal of Kat Ltd’s factory? A £47,304 C £66,906 B £40,471 D £57,242 5.2 If Kat Ltd decides to purchase the freehold warehouse and makes a claim to roll over the chargeable gain on the factory under the rollover relief rules, what will be the base cost of the warehouse for chargeable gains purposes? A £243,300 C £180,000 B £272,000 D £151,300 5.3 If Kat Ltd decides to acquire the leasehold office building and makes a claim to hold over the chargeable gain on the factory under the rollover relief rules, what is the latest date by which the held-over gain will crystallise? A Ten years from 31 May 2020 C 40 years from 30 September 2021 B The date when the office building is sold D Ten years from 30 September 2021 .4 What cost figure will have been used in calculating the chargeable gain on Kitten’s disposal of 20,000 ordinary shares in Kat Ltd? A £12,000 C £84,800 B £63,200 D £20,000 5.5 What is Kitten’s capital gains tax (CGT) liability for the tax year 2020/21? £___________________ https://www.facebook.com/QunberRazaOfficial/ Page 5
