8/12/25, 3:48 PM
iAssess Examiner
Chloe and Tyler
(a) Becoming tax advisers to Chloe
Email to Manager
To, Tax Manger
From, Tax Senior
Client: Chloe
Subject: Ethical issues in relation to acceptance of Chloe's engagement
Date: 1 August 2025
Fundamental principle of Objectivity
Objectivity requires that professional accountants should act in an unbiased and neuteral way
dealing with their clients. They should not be under any undue influence or situations of conflict of
interest which may affect their unbiased judgement.
Fundamental principle of confidentiality
Confidentiality requires ACCA members to ensure that while dealing with any client they donot
disclose any client specific confidential information to others without explicit permission of the
client OR when it is permitted by the law.
Potential threats and safeguards in relation to objectivity
If our firm will accept engagement of Chloe then concerns on objectivity may arise as our firm is
also dealing with Chloe's employer JDV Limited as its tax adviser. There may be situations when
conflict of interest may arise and our firm may not be able to maintan its objectivity. Situations
when an advise is favourable to Chloe but not favourable to JDV Limited may create situations of
conflict of interest.
In order to deal with issue of objectivity our firm should first disclose to both clients about this
potential threat. Secondly our firm should use seprate teams for Chloe and for JDV Limited in order
to ensure that conflict of interest donot arise within a team itself.
Potential threats and safeguards in relation to Confidentiality
If our firm will accept Chloe as a tax client then our firm will have access of Confidential data of
both of its clients, Chloe and JDV Limited. Since Chloe and JDV Limited are in employer and
employee relation their interests may conflict and situations may arise when confidentiality breach
may happen when advising one of the client.
In order to deal with issue of confidentiality seprate teams with strict controls can be effective in
order to ensure that confidential information of one client donot passes to another.
(b) Chloe’s personal tax affairs
Notes for the Meeting
To, The client files
From, Tax Supervisor
Date: 1 August 2025
Client: Chloe
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Subject: Chloe's personal tax affairs
(i) Tax residence
Automatic UK Residency requirement of living 183 days in UK in a tax year will not be satisfied for
Chloe in tax year 2025/26.
However another requirement of 365 days residency in UK such that some days lie in current tax
year and an individual has arrived due to work situation. Chloe has arrived in UK and has joined a
3 years employment contract and 156 days lie in tax year of 2025/26. She will be considered as
automatic UK resident under this requirement.
Further Chloe will also be subject to split year rules in tax year 2025/26. She has arrived to UK on
1 November 2025 and joined a full time employment under a 3 years contract. This satisfies split
year requirement of employment of atleast 12 months.
Under split year rules Chloe will become UK resident from the date she arrived to UK i.e. from 1
November 2025.
(ii) Chargeable gains
Chloe's absence from UK will be regarded as temproary absence period as she was UK resident for
more than 4 years out of last 7 years before leaving UK residency on 1 July 2023, as she has
always lived in UK before it. Further she will regain her UK residency within 5 years of leaving it on
1 July 2023 as she plans to retun on 1 November 2025. Due to temproary absence period rules
any disposal assets made by Chloe during non residency period of assets which she purchased
when she was originally resident, will be subject to UK tax in the tax year when she regains UK
residency.
Potrait painting was purchased on 1 October 2024 and it was sold on 1 June 2025. Both of these
dates lie in non residency period. As purchase and sale both was done in non UK residency period
therefore it will not be subject to UK tax.
There will be no UK tax on disposal of vintage car as vehciles are exempt from UK CGT rules.
Landscape painting was purchased on 1 October 2024, when Chloe was non UK resident. One
planned disposal date of it is 1 August 2025, when Chloe is still non UK resident. In this case there
will be no UK CGT on it as both purchase and sale lie in non UK residency period. In this case her
post tax proceed will be £39,000.
However if sale of Landscape painting is delayed up till May 2026, then its sale will lie in a period
when Chloe is a UK resident. Chloe is UK resident since 1 November 2025. In this case UK CGT will
be payable on sale of Landscape painting in tax year 2026/27 as sale date is 1 May 2026. UK CGT
on it will be
Disposal proceed
£51,000
Cost
(£24,000)
Chargeable gain
£27,000
Annual Exemption
(£3,000)
Taxable gain
£24,000
UK CGT : £24,000 X
20%
£4,800
Post tax proceed in this case will be £51,000 - £4,800 = £46,200.
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For landscape painting sale on 1 May 2026 will generate greater post tax proceed, therefore it is
better to delay its sale.
(iii) Employment contract
Financial Cost for Chloe
under each of the
alternative
If Chloe accept Cars from
JDV Limited
If Chloe accepts un
furnished house from JDV
Limited
Income tax on benefit
(Working 1)
£7,280
£13,997
Rental cost of House for Chloe
£14,000
£2,400 = £200 X 12 months
Rental cost of Cars
£0
£9,500
Total Cost for Chloe under
each alternative
£21,280
£25,897
If Chloe will accept cars from JDV Limited then she will have to pay rental cost of house as then
she will rent house from open market. However if she will accept house from JDV Limited then she
will have to pay reduced rent of £200 per month to JDV Limited as stated in the proposal from JDV
Limited.
In contrast if Chloe will accept house from JDV Limited then she will have to pay rental cost for
cars and that will cost her £9,500.
IT IS BENEFICIAL FOR CHLOE TO ACCEPT CARS AS IT WILL RESULT IN LOWER TOTAL
FINANCIAL COST.
Working 1
Whatever alternative Chloe will accept it will have income tax implications as both of them are
chargeable non cash benefits. Income tax implications will be:
Income tax implication
If Chloe accept Cars from
JDV Limited
If Chloe accepts un
furnished house from JDV
Limited
Existing salary of Chloe
£78,000
£78,000
Car Benefit = £10,400
+ £7,800
£18,200
£0
Accommodation benefit
(Working 2)
£0
£30,662
Total income
£96,200
£108,662
Personal allowance
(£12,570)
(£8,239) Working 3
Taxable income
£83,630
£100,423
£37,700 X 20%
£7,540
£7,540
(£83,630 - £37,700) X 40%
£18,372
Income tax
(£100,423 - £37,700) X 40%
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£25,089
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Total income tax
£25,912
£32,629
Income tax on salary
(£18,632)
(£18,632)
Income tax on benefit
£7,280
£13,997
Working 2
Accommodation benefit will be:
1. Basic Charge equal to annual value of the house = £10,000. As house is purcahsed by
employer so there is no actual rent paid by employer
2. Additional charge: £1,100,000 - £75,000 = £1,025,000 X 2.25% = £23,062
Total accommodation benefit wil be £10,000 add £23,062 less usage contribution paid by Chloe of
£200 per month which will be £2,400 for a year. Accommodation benefit will be £30,662
Working 3
Personal allowance will be diminished as income exceeds £100,000. Excess is of £108,662 £100,000 = £8,662. Personal allowance will diminish by £8,662 / 2 X 1 = £4,331. Remaining
Personal allowance will be £12,570 - £4,331 = £8239
Company Share option plan
Belief of Chloe that sale of shares acquired under Company share option plan will not result in any
tax implication on sale is wrong. Even though shares acquired are under tax advantaged company
share option plan, but still on disposal capital gain tax will arise. In approved share option plans on
grant date and on excercist date there is no tax if plan complies with all of the conditions.
At the time of sale on 1 June 2029 capital gain tax will be assesed by deducting cost of the shares
which will be excercise price for Chloe, which is 1400 shares X £17 = £23,800 , from the disposal
proceed of 1 June 2029. This will give rise to chargeable gain, from which annual exemption
of £3,000 will be deducted to arrive at taxable gain. According to tax bands it will be tax, which
will be a higher rate of tax of 20%, considering existing salary of Chloe.
(c) Tyrel’s new unincorporated business
Memorandum for Client Files
To, The files
From, Tax Supervisor
Client: Tyrel
Subject: Tyrel's unincorporated business tax issues
Date: 1 August 2025
(i) Registration for the purposes of value added tax (VAT)
VAT registration will not be compulsory for Tyrel as his business annual budgeted revenue is
of £60,000 which represents standard rated supplies. As sale of taxable supplies is less than
mandatory registration threshold of £90,000 therefore registration will not be madatory.
Registration can be done voluntarily as Tyrel is dealing in taxable supplies. His business is of
standard rated supplies and they are part of taxable supplies.
If Tyrel will get his business registered for VAT voluntarily then from input tax perspective he will
be able to recover VAT paid on his taxable supply purchases. This will include VAT paid on standard
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rate raw materials or services purchased by the business. This will apply for VAT payments after
registration date.
Further he will also be able to recover VAT of pre registration period. Any VAT paid on goods can be
recovered of previous 4 years period if those goods were related to the business and they exist on
registration date. In relation to services VAT paid in six months prior to registration can be
recovered if services were related to business.
In relation to output tax, once Tyrel will get his business registered he will have to charge VAT on
his sales which are wholly standard rated. This will make his goods expensive for non business
customers as they will not be registered for VAT and they will not be able to recover VAT charged
on them by Tyrel. Small businesses who are also not charged for VAT will face same issue. And
they may switch to other non VAT registered supplier. However those small businesses which are
registered for VAT will be able to recover VAT charged on them by Tyrel on sales.
(ii) Tax-allowable expenses
Product design cost will be an allowed expense for Tyrel from trading P&L as this expense was
done for business purpose. It was done 5 years prior to start of business, however still it will be
allowed expense in first year trade starting from 1 December 2025. Pre trading expenses are
allowed expenses in first year of trade if incurred within 7 years prior to start of business.
Travelling cost to be incurred by Tyrel in December 2025 to visit the customers and to explain
product to them will be considered as a normal business expense. It is related to business and is
not disallowed by tax department. It will be an allowed expense from trading P&L in the year
starting from December 2025.
Lunch cost incurred on customers will not be an allowed expense from trading P&L as it will be
consdiered as customer entertainment expense. And these are specifically disallowed by tax
department.
Gift of knife along with engraving of Tyrel's business to customers, will be an allowed expense from
trading P&L if value of the gift made to each customer is less than £50 per customer. This value
needs to be confirmed that what was the actual cost of each knife gifted along with engraving on
it.
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8/10/25, 4:00 PM
iAssess Examiner
Cloke Limited
(a) Calculate, with supporting explanations, the increase in Cloke Ltd’s corporation tax liability for
the year ending 31 March 2025 as a result of selling the warehouse and the shares in Sett Ltd, as
proposed.
Sale of warehouse
Disposal proceed
£255,000
Cost
(£192,000)
Note
1
Reversal on structure
building allowance
£15,300
Note
2
Chargeable gain
£78,300
Note 1: Cloke Limited acquired this warehouse from Sett Limited which is part of its capital gains
group, as Cloke Limited owns more than 75% shares in Sett Limited. Intra group transfers within
group are done at cost plus indexation allowance.
Note 2: Cloke Limtied acquired this asset as a result of intra group transfer at its original cost,
therefore it must have continued the same SBA which was being claimed by Sett Limited. Whole
SBA claimed by the group till disposal date to unconnected party will be adjusted at the time of
disposal. No disposal adjustment arises at time of intra group transfer. SBA claimed from 1 April
2020 to 31 March 2025 will be £102,000 X 3% X 5 years = £15,300
Sale of shares in Sett Limited
Sale of shares in Sett Limited, by Cloke Limited will not give rise to any corporate tax implications
as this transaction will be exempted through substantial shareholding exemption. Cloke Limited
had more than 10% shares for a period of more than 12 months in last six years. Sale of shares by
Cloke Limited of Sett Limited will be a no gain / no loss transaction.
Increase in corporation tax liability
Corporation tax rate limits of Cloke Limited will be divided by 2 for the year ended 31 March 2025
as Sett Limited was with it throughout the tax year. Upper limit for corporation tax will reduce
from £250,000 to £125,000. Cloke Limited profit for year ended 31 March 2025 after adjusting
sale of warehouse and sale of shares of Sett Limited will be £130,000 + £78,300 = £208,300. This
exceeds the upper limit, therfore whole profits will be subject to corporate tax at main rate.
Increase in corproate tax liability will be of £78,300 X 25% = £19,575.
(b)(i) On the assumption that the overseas business is carried on by Cloke Ltd through a
permanent establishment (PE) in the country of Heddlia:
Calculate the total tax payable (in the UK and overseas) by Cloke Ltd for the year ending 31 March
2026.
UK Profits of Cloke
Limited
£145,000
Profits of overseas
branch
£30,000
Total profit
£175,000
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Profits of overseas branch or permanent establishment are
taxed as part of UK company as a normal profit
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Corporation tax on
profits
Note 1
£50,000 X 19%
£9,500
Alternative method (in exam show any one): £175,000 X
25% = £43,750. Marginal relief: (250,000 - 175,000) X
175,000 / 175,000 X 3/200 = £1,125. Final tax 43,750 1125 = £42,625
£175,000 - £50,000 =
£125,000 X 26.5%
£33,125
Total corporate tax
£42,625
Double taxation relief
(£6,600)
UK tax liability
£36,025
Note 2
Note 1: In the year ended 31 March 2026, there is no company in Cloke Limited's group, as Sett
Limited was sold in the year ended 31 March 2025. Upper limit for corporate tax rate will
be £250,000 and the lower limit will be £50,000. Profits of £175,000 lie between upper and lower
limit, therefore main rate of tax will be applied along with marginal relief.
Note 2: Double taxation relief as pofits of overseas operations were also taxed in Heddlia. Double
taxation relief will be at lower of:
Overseas tax: £30,000 X 22% = £6,600
UK tax on overseas profits: £30,000 X (£42,625 / £175,000) = £7,307
(b)(ii) On the assumption that the overseas business is carried on by a wholly owned subsidiary of
Cloke Ltd, incorporated in Heddlia:
Explain the UK corporation tax implications of this strategy for both Cloke Ltd and the subsidiary
company. Your answer should include an explanation of the corporation tax consequences for
Cloke Ltd of the receipt of dividends from the subsidiary company.
If overseas business is operated under structure of subsidary, then its profits will not become part
of Cloke Limited corporate tax return, as it will be a seprate entity.
Taxation of overseas subsidary will depend on its residency status. As it will be an overseas
company with operations also in overseas, therefore it will not be UK resident. It will not have any
UK tax implications on its profits.
Dividends received from overseas subsidary will not be subject to any UK corporate tax as dividend
income is an exempt income for corporate tax purpose.
However subsidary will divide corporate tax limits of Cloke Limited even if it is an overseas
subsidary. Corporate tax rate limit will be divided by two as there will be two companies in group,
Cloke Limited and this overseas subsidary.
Upper limit will be become £250,000 / 2 = £125,000 and lower limit will become £50,000 / 2
= £25,000. Now profits of Cloke Limited of its UK based operations of £145,000 will exceed the
upper limit. In this case its entire profits will be subject to main rate of corporate tax of 25% and
there will be no marginal relief available on it.
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8/10/25, 12:27 PM
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Adal and Cikta
(a) Calculate, with supporting explanations, which of the two potential gifts from Adal to
Cikta will produce the greater net annual income tax saving for the couple.
If UK investment property is gifted then yearly rental income of £15,000 will shift from Adal to
Cikta. This will generate income tax reduction for Adal of £15,000 X 40% = £6,000. Adal is a
higher rate tax payer therefore his rate of tax on rental income was 40%. Cikta will have to pay
income tax on this rental income at 20% rate as she is a basic rate tax payer. This will create
income tax of £15,000 X 20% = £3,000. Net income tax reduction for the couple in this situation
will be £6,000 - £3,000 = £3,000.
If Adal will gift shares of Bovec limited to Cikta then in that case yearly dividend income
of £12,000 will shift from Adal to Cikta. In this case Adal's income tax liability will reduce
by £12,000 X 33.75% = £4,050. Cikta's dividend income will increase by £12,000 and her income
tax on it will be £12,000 - £500 = £11,500 X 8.75% = £1,006. Cikta is a basic rate tax payer
therefore here rate of dividend income tax is lower and since she donot have any other dividend
income therefore she has 0% band also available of £500. Income tax reduction for the couple in
this case will be £4,050 - £1,006 = £3,043.
From income tax reduction purpose for the couple it is better that shares of Bovec limited are
transferred as it will save greater income tax.
(b) On the assumption that Adal gifts his shares in Bovec Ltd:
(i) Explain why gift holdover relief will be available for the purposes of capital gains tax
(CGT);
Gift holdover relief will be available on gift of shares of Bovec Limited by Adal to Cikta as both of
the following conditions are satisfied
1. Shares of Bovec limited are of an unquoted trading company
2. Donee that is Cikta is UK resident individual
(ii) Explain, with supporting calculations, the impact of making a gift holdover relief
claim on the chargeable gains which will be realised by both Adal and Cikta.
On gift of shares from Adal to Cikta a chargeable gain will arise of £404,000 - £386,000
= £18,000.
On this chargeable gain gift holdover relief can be claimed on chargeable business asset portion of
Bovec Limited. Gift holdover relief will be of £18,000 X £3.8 million / £3.8 million + £0.4 million
= £16,286.
Remaining chargeable gain will become chargeable now on Adal £18,000 - £16,286 = £1,714. Adal
will have to assess Capital gain tax on it in year of gift.
Gain deferred through gift holdover relief will reduce base cost of these shares for Cikta. As a
result when Cikta will sell these shares her lower base cost will increase her future capital gain tax.
Gain deferred through gift holdover relief which will reduce here base cost by £16,286.
(c) On the assumption that Adal dies before 6 April 2032:
(i) Explain the availability of business property relief in respect of the gift of his shares
in Bovec Ltd
Gift of shares done by Adal to Cikta will qualify for Business property relief at the time of gift on 6
April 2025, as these shares are of unquoted company and Adal has owned these shares for more
than 2 years. Adal has acquired these shares initiall on 1 March 2023.
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Business property relief will be available on business use portion assets of Bovac Limited. Business
property relief will be of £404,000 X £4.1 million / £4.5 million = £368,089.
If Adal will die before 6 April 2032, then this gift will be become chargeable for IHT for death tax
purpose, as death will be within 7 years of gift.
Cikta plas to sell these shares on 1 March 2027. If Cikta will sell it before the death of Adal and
donot invest it in alternative qualifying business then business property relief will be withdrawn for
death tax purpose.
This means that if Adal dies after 1 March 2027, which is after proposed sale date of Cikta then in
that case BPR will be withdrawn as Cikta will not have ownership of these shares on death of Adal.
However if Adal dies before 1 March 2027 then BPR will not get withdrawn as in that case Citka will
have ownership of shares on Adal's death.
(ii) Explain the specific circumstances in which the maximum inheritance tax liability
would arise in respect of this gift, and calculate the amount of this liability.
Maximum IHT which can arise on this gift of shares of Bovac Limited depends on following factors
BPR on this gift gets withdrawn. This will happen if Adal dies after Cikta have sold these
shares on 1 March 2027. If Adal dies after 1 March 2027 then BPR of £368,089 will be
withdrawn as Cikta will not have these shares in her ownership on death of Donor (Adal)
Previous chargeable transfer of £108,000 of July 2022 also gets chargeable for IHT and it
uses up the Nil rate band of this gift of 2025. Previous chargeable transfer will be chargeable
for IHT if Adal dies before July 2029 that is within 7 years of that gift.
Taper relief will be 0% if Adal dies within 3 years of gift that is before 6 April 2028. In that
case there will be 0% Taper relief.
This means that maximum IHT may arise on this gift if Adal dies between 1 March 2027 to 6 April
2028.
Maximum IHT on this gift will be £404,000 - £3,000 - £3,000 = £398,000. Annual exemption of
two years is available as no gift in tax year of 6 April 2025 and before it.
Death tax on it will be £398,000 - (£325,000 - £108,000) = £181,000 X 40% = £72,400.
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