Monday 1 December 2008
Section A – BOTH questions are compulsory and MUST be attempted
1 You have received the following memorandum from your manager.
To Tax senior
From Tax manager
Date 28 November 2008
Subject Maria Copenhagen and Nucleus Resources
I spoke to Maria Copenhagen this morning. We arranged to meet on Thursday 4 December to discuss the following
Maria is planning a major expansion of her business, Nucleus Resources. I attach a schedule, prepared by Maria,
showing the budgeted income and expenditure of the business for a full year. Maria wants to know how much
additional after tax income the expansion of the business will create depending on whether she employs the two
additional employees or uses a sub-contractor, Quantum Ltd.
In October 2006 Niels, Maria’s husband, received a gift of shares with a value of £170,000 from his uncle. The
shares are quoted on the Heisenbergia Stock Exchange. The uncle died in November 2008 and Maria wants to
know whether there will be any UK inheritance tax in respect of the gift. The uncle had been living in the country
of Heisenbergia since moving there from the UK in 1988 and had made substantial gifts to other close relatives in
2005 and 2006. Inheritance tax of £30,600 has been charged in Heisenbergia in respect of the gift to Niels.
According to Maria, Niels is considering transferring the shares to a trust for the benefit of their two sons.
Please prepare the following:
(a) In respect of Nucleus Resources:
Calculations of the additional annual after tax income that would be generated by the expansion of the business
under the two alternatives i.e. the recruitment of the additional employees and the use of the sub-contractor.
You should check to see if Maria is currently a higher rate taxpayer. If she is, you can simply deduct tax and
national insurance at the marginal rates from the additional profits.
Don’t worry about the precise timing of the capital allowances in respect of the car, just spread their effect
equally. Also, watch out for the VAT implications of the expansion; there is bound to be an effect on the
recoverability of input tax due to the business being partially exempt.
(b) In respect of the quoted shares:
(i) A list of the issues to be considered in order to determine whether or not the gift from the uncle is within
the scope of UK inheritance tax and the treatment of any inheritance tax suffered in the country of
(ii) A brief outline of the tax implications of transferring the shares to the trust and the taxation of the trust
income paid to the beneficiaries. The shares are currently worth £210,000.
(iii) Notes on the extent to which it is professionally acceptable for me to discuss issues relating to the shares
I want to be able to use the calculations and notes in my meeting with Maria (or in a subsequent meeting with
Niels) and I may not have much time to study them beforehand so please make sure that they are clear, concise
and that I can find my way around them easily.