Income tax case study answers

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Following on from our case study posted last week, we now attach the answers to the income tax calculation below. As you can see from the scenario, the client is planning on selling his shareholding in order to fund his business interests. What would be the CGT considerations to account for in such a scenario? Something to discuss!

Client meeting 1 June 2014

Mike Yearly, aged 58 is a director of a private company that manufactures high quality carpets. He is paid a director’s fee as a lump sum of £67,000 for the current tax year. Mike is single and without any dependents.

Later on in the current tax year, he will have the opportunity to buy out the shareholding of one of his fellow directors and so become a shareholder as well, and to do so requires a lump sum of £300,000. It is his intention to raise the necessary monies through a combination of disposing of his share portfolio and investment bond, with the balance of the monies required coming from a loan of £150,000 with loan interest chargeable in this tax year of £2,500.

Mike is a member of his employer’s contracted in Group Pension Plan and is paying a regular monthly contribution of £600 net into the scheme. He has cash on deposit totalling £40,000 which pays interest once a year and he has received £1,600 of net interest for the current tax year.

His portfolio of shares totalling £155,000 will pay out net dividends totalling £4,950 for the current tax year. He inherited the portfolio in June 1980 from his late father with a then value of £40,000. Its value on 31st March 1982 was £42,500. The portfolio has remained unchanged by Mike as he has no interest in such matters and has not used his 2014/15 CGT allowance.

He also has Equity ISAs totalling £50,000 managed by a firm of stockbrokers which will have paid out a net dividend totalling £1,200 for the current tax year.

The surrender value of his investment bond is £85,000 having invested £50,000 in it in May 2007. He has taken no withdrawals or income from the bond.

Calculate, showing all your workings:

Mike’s income tax liability and income tax payable for the tax year 2014/15 assuming that he proceeds with the purchase of the additional shareholding.

Answer:

Non savings £ Savings interest £ Savings Dividends £ Chargeable event gains £ TOTAL£
Director’s fee 67,000 67,000
Bank interest £1,600 / 0.8 2,000 2,000
Dividends £4,950 / 0.9 5,500 5,500
Chargeable event gain on the bond£85,000 – £50,000 / 7 5,000 5,000
Less deductions:
Business loan interest (2,500) (2,500)

Total 64,500 2,000 5,500 5,000 77,000

Less personal allowance (10,000) (10,000)

Taxable income 54,500 2,000 5,500 5,000 67,000

Tax payable:
Basic rate band of £31,865 extended by (£600 / 0.8 x 12) = £40,865
Non savings:
£40,865 x 20% £8,173 £8,173
£13,635 x 40% £5,454 £5,454
Savings interest
£2,000 x 40% £800 £800
Dividends
£5,500 x 32.5% £1,788 £1,788
Chargeable event gain
£5,000 x 40% x 7 £14,000 £14,000
Tax liability £13,627 £800 £1,788 £14,000 £30,215

Tax at source
Savings interest £(400) £(400)
Dividends £(550) £(550)
Tax paid at source from bond £(7,000) £(7,000)

Tax due £13,627 £400 £1,238 £7,000 £22,265

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