SQE 1 - Tax Practice question

A business owner started to trade on 1 January 2020 and immediately registered for VAT. In the quarter to 31 March 2020 the business owner had the following transactions. All figures exclude VAT.

• Standard-rated sales of £38,000, zero-rated sales of £3,000.

• Standard-rated purchases of goods of £20,000.

• Purchase of a car for £15,000, which the business owner uses 30% of the time for private purposes.

• Standard-rated expenses of £200 spent on a staff party and £200 servicing costs for the business owner's car.

What is the amount of VAT payable by the business owner to Her Majesty's Revenue and Customs for the quarter to 31 March 2020?

A£3,532

B£4,132

C£2,632

D£3,232

E£3,560

(A) £3,532. To determine the business owner's VAT liability for the quarter ended 31 March 2020, we take 20% of his standard rated sales of £38,000, for a total of £7,600. We then subtract 20% of his purchases of goods and the costs of the staff party (since all figures exclude VAT), for a total of £4,040. Lastly, we subtract 20% of the business use portion of the car (£200 x 20% x 70%), for a total of £28. Therefore, his total VAT liability is £3,532.

An investor made the following chargeable gains and allowable losses for the tax year 2020/21:

• Gain of £4,300 on the sale of a painting which the investor sold for £12,000

• Gain of £5,000 on the sale of an antique vase which the investor sold for £10,000

• Capital loss of £6,000 on the sale of a diamond brooch

The investor did not carry forward any losses from previous years.

How much loss will the investor have to carry forward to the tax year 2021/22?

A£0

B£9,000

C£4,000

D£13,000£

E£10,000

(A) £0. If a taxpayer's capital losses exceed the taxpayer's capital gains in a year, the capital losses may be carried forward to future years to offset capital gains in those years. To calculate capital gains or losses, we add up the gains for the year (£4,300 + £5,000 = £9,300) and subtract out the losses for the year (£9,300 - £6,000 = £3,300). (Note that the painting and vase are nonwasting chattels; because each was sold in excess of the £6,000 exemption threshold, the gain is a chargeable gain.) We then subtract out the £12,300 annual deduction (£3,300 - £12,300 = -£9,000). Since the result is a negative number, there is no loss to carry forward. (B) is incorrect because the unused annual exemption does not get carried forward as a loss; rather, it simply disappears. (C) is incorrect because the order is important: current year losses must be set off against the gains for the year before subtracting the annual deduction. Thus, the £4,000 loss cannot be carried forward even though the gains for the year are less than the annual exemption. (D) is incorrect for the same reason: it relies on deducting the annual exemption first and carrying forward both the unused part of the exemption and the loss for the year. (E) does not appear to be related to any number calculable from the facts

In March 1990, a sole trader purchased an office for £641,300 to use within his business. The sole trader incorporated the business in March 2021, transferring all the assets to a company in return wholly for shares. At this time, the building had a market value of £1,250,400. The sole trader made no other disposals of chargeable assets during 2020/21. The sole trader has taxable income of £33,130 in 2020/21 after deduction of his personal allowance.

What is the sole trader's capital gains tax liability for 2020/21?

A£60,910

B£121,383

C£59,680

D£118,923

E£0

(E) £0. On the incorporation of a sole trade business, incorporation relief is available to defer all of the gain where the incorporation is wholly for shares. The gain defers until the shares are sold in the future.

A brother and sister ran a successful clothing company. When the brother passed away, he left all his assets to his sister. When the sister died, she left the entire clothing company, worth £10 million, to her three children. The estate also included a warehouse worth £600,000, which was owned jointly by the brother and sister (and solely by the sister after the brother's passing). It was used by the company. The nil rate band is £325,000.

What is the net chargeable estate for UK inheritance tax?

AThere is no net chargeable estate.

B£110,000

C£275,000

D£4,650,000

E£4,950,000

(A) There is no net chargeable estate. One hundred percent relief is available for a business or interest in a business. Therefore, the £10 million business is not subject to inheritance tax. Fifty percent relief is available for land, buildings, or machinery owned by the deceased but used in a business in which they were either a partner or controlling shareholder. Therefore, the building qualifies for 50% relief. As the building is worth £600,000 and half of that (£300,000) is under the nil rate band, there is no chargeable estate

A daughter sold a necklace for £56,000 in January 2021, incurring auctioneer's fees of £1,000. The daughter had inherited the necklace from her mother on her mother's death in May 2007 when it was worth £20,000. The mother had bought the necklace for £5,000 in January 1993. The daughter made no other disposals of chargeable assets during 2020/21. She had taxable income of £60,000 in 2020/21. The daughter had already used her annual exempt amount for the year.

What is the daughter's chargeable capital gain for this transaction?

A£35,000

B£49,000

C£50,000

D£55,000

E£56,000

(A) £35,000. When an asset is inherited, the cost of that asset going forward will be the probate value. Therefore, the chargeable gain on the necklace is the sale price of £56,000 minus the auctioneer's fees of £1,000, minus the probate value on the mother's death of £20,000, which equals £35,000.

About six years ago, to earn extra income, a woman began assembling high-end gaming computers in her garage. Over time, her reputation and her business grew. Recently, she sold the business, making a £500,000 gain.

In the year of the sale, the woman had employment income of £100,000.

The capital gains tax allowance in the relevant year was £12,300. The personal allowance was £12,500. The higher and additional rate thresholds were, respectively, £37,501 and £150,001.

What is the woman's capital gains tax liability?

A£0

B£48,770

C£50,000

D£97,540

E£100,000

(B) £48,770. Ordinarily, to calculate capital gains tax, we would subtract the annual exempt amount from the chargeable gain to arrive at the taxable gain (£500,000 - £12,300 = £487,700 taxable gain). We then would apply a 10% rate to the amount of the taxable gain that is still within the taxpayer's basic rate band above the taxpayer's other income and apply a 20% rate to amounts in excess of the basic rate band. However, we would not do that here because Business Asset Disposal Relief (formerly called Entrepreneurs Relief) is available when all or part of a trading business carried on by a sole trader or a partnership for at least two years is disposed of. Here, the woman sold a business that she carried on for six years. Under the relief, a 10% rate applies to the taxable capital gain. Thus, the woman would owe (£500,000 - £12,300) x 10%; that is, £487,700 x 10%, which equals £48,770.

A man died in late January 2022.In August 2021, he paid his niece's school fees of £6,000 as he had done regularly for six years.In October 2021, he gave his nephew £20,000 as a wedding present.In early January 2022, shortly before his death, he gave a registered charity £50,000.The man had made no significant disposals of his assets before the August 2021 gift.

What amount is chargeable to inheritance tax in respect of the three disposals the man made before his death?

A£13,000

B£19,000

C£20,000

D£26,000

E£76,000

(A) £13,000. Some lifetime transfers are chargeable to inheritance tax ('IHT'), some are exempt, and some are potentially exempt. Normal expenditures out of income are not chargeable to IHT. Since the facts indicate the man regularly paid his niece's school fees for six years, it would fall within this exception to IHT. Gifts to charity also are not chargeable to IHT, so the January 2022 gift is exempt as well. That leaves only the £20,000 wedding present. Wedding gifts from someone other than the couple to each other, their parents, or their grandparents are exempt up to £1,000. Since the gift here was £20,000, that leaves £19,000 to be dealt with. A non-exempt gift from an individual to another individual is potentially exempt from IHT. To be exempt, the donor must live seven years beyond when the gift was made. Here, the man died within a year of giving his nephew the gift. Thus, the exemption fails. However, not all of the £19,000 is chargeable because of the annual exemption. Each year, a person can deduct the first £3,000 of gifts under the annual deduction, along with any portion of the £3,000 annual deduction that was not used in the previous year. Here, the facts indicate that the man made no other gifts, so two annual exemptions (£6,000) can be applied to the gift, leaving only £13,000 chargeable to IHT.

A woman's only source of income is money paid to her in the form of dividends on shares her husband left her when he died. In 2020/21 the woman had taxable dividend income (after deduction of all applicable allowances) of £88,500. The applicable 2020/21 dividend rates are 7.5% up to £37,500 and 32.5% for amounts between £37,501 and £150,000.

What is the woman's income tax liability for 2020/21?

A£32,825

B£19,237.50

C££19,387.50

D£6,637.50

E£28,762.50

(B) £19,237.50. As indicated in the facts of this question, dividend income is taxed at different rates depending upon the tax band into which the dividend income falls. However, everyone also is entitled to a dividend allowance of £2,000, which effectively is a nil rate band applicable to the first £2,000 of dividends regardless of the band into which the dividends otherwise would fall. Since this is a nil rate band, the £2,000 is still treated as using up the part of the band into which the income fell. Since the woman here had no other sources of income, the first £2,000 of her income will be taxed at naught, leaving the remaining £35,500 of the basic rate band to be taxed at 7.5% (£35,500 x .075 = £2,662.50). The rest of her dividend income (£88,500 - £37,500 = £51,000) will be taxed at the 32.5% higher rate (£51,000 x .325 = £16,575). So her tax burden is £19,237.50 (£2.662.50 + £16,575 = £19,237.50).

A television celebrity has an estate worth £3,000,000. He is thinking about bequeathing some of his assets to charity. The nil rate band in the relevant tax year is £325,000.

What is the minimum amount the celebrity must bequeath to a charity to qualify for a reduced inheritance tax rate?

A£600,000

B£535,000

C£300,000

D£267,500

E£1,337,500

(D) £267,500. To qualify for the reduced inheritance tax rate, at least 10% of the net chargeable estate needs to be left to charity. The net chargeable estate is £2,675,000, after the deduction of the nil rate band. 10% of this equals £267,500.

A start-up company began trading on 1 January. At the end of the year, to the directors' great surprise, the business had done much better than expected. Their monthly turnover for each month on their first year of trading was £8,000.

Under the historic test rule, by what date must the company have notified HMRC of their liability to register for VAT?

A1 January of the current tax year.

B1 October of the current tax year.

C30 November of the current tax year.

D30 December of the current tax year.

E30 January of the following tax year.

(D) Under the historic test, a business must determine whether the turnover for the past 12 months exceeds £85,000. This would happen at the end of the 11th month (30 November), when the turnover for the last 12 months would reach £88,000. The business's obligation is then to notify HMRC within 30 days, which would be 30 December.

When completing his self-assessment tax return, a taxpayer accidentally recorded his trading income as £22,100 rather than £32,100.

What is the maximum penalty payable by the taxpayer assuming he has no other income?

A£0

B£2,000

C£300

D£10,000

E£600

E) £600. As this is a careless error, the maximum penalty HMRC could impose is 30% of the lost tax revenue. As the taxpayer is a basic rate taxpayer, the lost tax revenue is 20% x £10,000. HMRC would use their discretion and in some instances where it is a genuine mistake this could be lessened to 15% or even 0%. Had this been deliberate the penalty could potentially be as much as 100% of the lost tax revenue.

A man and woman are married. The husband is a stay-at-home dad whilst the wife works as a teacher, earning £32,000. The personal allowance is £12,500 for the relevant tax year.

What is the couple's tax liability?

A£1,400

B£3,900

C£1,680

D£1,660

E£3,650

(E) £3,650. As the woman is a basic rate taxpayer, she can make use of 10% of her spouse's personal allowance (£1,250), which would save her £250 in taxes. Normally, her tax bill would have been: Taxable income = £32,000 - £12,500 = £19,500, taxed at 20% = £3,900. But with the 10% of her husband's unused allowance transferred, she can reduce her tax bill to £3,650.

A man died on 20 December 2019 and left an estate worth £2,200,000 to his friend. The man's main residence, valued at £600,000, was included in the total value of the estate. The man did not make any lifetime gifts.

The residence nil rate band for 19/20 was £150,000, and the regular nil rate band was £325,000.

What amount of the man's estate is chargeable to tax?

A£1,725,000

B£1,125,000

C£1,825,000

D£1,775,000

E£1,875,000

(E) £1,875,000. To calculate the amount of the estate chargeable to tax, we reduce the amount of the estate by the nil rate band (£2,200,000 - £325,000 = £1,875,000). The estate cannot be further reduced by the residence nil rate band because that is applicable only if the recipient of the estate is closely related to the decedent, such as a lineal descendant. Here, the man's entire estate was left to his friend.

A real estate developer has purchased:

• A brand-new commercial building

• A 2-year-old commercial building

• A 10-year-old commercial building

• A residential property

On which of these purchases will the developer suffer VAT?

AOnly the three commercial buildings.Only the three commercial buildings.

BAll of the buildings.All of the buildings.

COnly the brand-new and two-year-old commercial buildings.O

DOnly the 10-year-old commercial building.

EOnly the residential property.

C) Commercial buildings that are less than three years old are a standard-rated supply and therefore VAT of 20% will be suffered on the purchase of these. Commercial buildings that are more than three years old (with no option to tax) and residential properties are exempt supplies and therefore no VAT will be suffered.

A partnership has recently disposed of an office building. The office building was owned jointly by all the partners. The office building was sold to a property developer.

Who is liable to pay any capital gains tax due on the disposal of the office building?

AThe partnership only.

BAll of the partners jointly.

CThe property developer only.

DAll of the partners individually, based on their share of the gain.

ENo tax would be due.

(D) All of the partners individually, based on their share of the gain. The partnership is not taxable in its own right; rather it is an amalgamation of individuals effectively taxed as sole traders. Neither are partners taxed jointly. Every individual is liable to capital gains tax independently. As the asset is owned by all the partners, each partner must declare his or her share of any gain on their own self-assessment return.

Two spouses each owned 50% of a wedding planning company. Each was a director and officer of the company. The couple recently sold the company to a large conglomerate for a total net gain of £12 million. The applicable capital gains tax allowance is £12,300. Business asset disposal relief is limited to £1 million on qualified gains.

How much of the gains can be taxed at the reduced rate of 10%?

A£11,975,400

B£12 million

C£0

D£1,975,400

E£2 million

(E) £2 million. Business asset disposal relief can be claimed as to gains of up to £1 million by an individual who holds at least 5% ownership of a company in which they are either an employee or an officer. Because each spouse here was an officer of the company, each is eligible to claim £1 million business asset disposal relief to reduce tax on that part of their gain to 10%. As each spouse's total gain is far in excess of the £1 million, their annual capital gains allowance will be applied to the gain after applying the full amount of business asset disposal relief, making (D) incorrect.

A company has an accounting period that ends June 30. In the year ended 30 June 2020, a company had a tax adjusted trading profit of £800,200 and property income of £45,000. It also realised a chargeable capital gain of £25,000 and a capital loss of £80,000.

In the prior year, the company made a tax adjusted trading profit of £520,000 and chargeable capital gains of £9,000.

How much, if any, of the capital loss arising in the year ended 30 June 2020 may be carried forward to the year ended 30 June 2021?

A£67,300

B£80,000

C£0

D£55,000

E£46,000

(D) £55,000. Companies must offset their capital losses against their chargeable gains in the same year, and excess losses must be carried forward to be used against future chargeable gains. Capital losses cannot be carried back and cannot be used against any other type of income. Neither is the annual exemption against capital gains available to companies. Thus, we deduct the £80,000 capital loss from the 2020 tax year gain of £25,000, which leaves a negative £55,000 (loss) to be carried forward into the 2021 tax year. We ignore the trading profit (so (C) is incorrect), and the capital gain made in the year before (so (E) is incorrect).

Three partners (A, B, and C) are in a partnership together. They have prepared accounts for the year ended 31 March 2021 and generated a tax adjusted trade profit of £180,000. They have agreed to distribute only £100,000 of these profits. The partnership agreement specifies that Partner C shall receive a salary of £20,000 and that the balance should be allocated to A, B, and C in the profit share ratio of 5:3:2, respectively.

What is Partner C's share of the partnership profits?

A£36,000

B£20,000

C£56,000

D£40,000

E£52,000

(E) £52,000. First, it should be noted that it does not matter that the partners have agreed to distribute only £100,000 of their £180,000 profit. For tax purposes, a partnership's entire annual profit must be allocated among the partners. Thus, the partners must allocate the entire £180,000 profit. Partner C receives a salary of £20,000 from the tax adjusted total profit, leaving £160,000 to be distributed. The remaining £160,000 is divided 5:3:2 among the three partners, so Partner C receives their £20,000 plus 2/10ths of £160,000 (£32,000).

A company has the following income and gains for its year ended 31 March 2021.

• £210,000 trade profit

• Interest of £15,000

• Dividends of £10,000

• Capital gain of £10,000

It also has a capital loss brought forward from the prior year end of £30,000.

What are the company's total taxable profits?

A£225,000

B£215,000

C£235,000

D£205,000

E£210,000

(A) £225,000. Companies pay tax on taxable total profits, which is the sum of income from all sources (except dividends-companies usually don't owe taxes on dividends) and net gains (gains less capital losses). Capital losses can be brought forward from previous years to offset capital gains, but they cannot be used to offset any other type of income. If capital losses exceed capital gains, the excess can be carried forward to offset capital gains in future years. Thus, the previous year's capital loss can be used to offset the current year's £10,000 capital gain and the remaining £20,000 of capital loss will be carried into the future. So, that leaves the company's trade profits of £210,000 and its interest income of £15,000 to be taxed. £210,000 + £15,000 = £225,000.

Question

A UK-resident trading company made various disposals during the year ended 31 March 2021, resulting in the following:

• Loss of £5,900 on the sale of two cars used in the business; each car cost and was sold for more than £6,000

• Gain of £12,000 on the sale of government stock

• Gain of £86,000 on the sale of an investment property

What is the net chargeable gain to include in the company's corporation tax computation for the year ended 31 March 2021 and the loss to carry forward?

ANet gains of £92,100 and £0 capital loss carrying forward.

BGain of £86,000 and £5,900 loss carrying forward.

CGain of £98,000 and £5,900 loss carrying forward

DGain of £86,000 and £0 capital loss carrying forward.

ENet gains of £6,100 and £0 capital loss carrying forward.

(D) Gain of £86,000 and £0 capital loss carrying forward. Exempt assets are the same for companies and individuals. Cars and government stock are exempt assets and therefore any gain is not taxable, and any loss is not allowable. Only the gain on the investment property is taxable.