You received a schedule from Lucee,  a new client of your firm. The schedule from your manager detailing the work he requires you to do are set out below.

Schedule from Lucee – dated 4 September 2018

I am resident and domiciled in the UK. My husband, David, moved to the UK in January 2013 and we married in

June 2014. David is resident in the UK but domiciled in the country of Riviera. I have a 16-year-old son, Oder, who is resident and domiciled in the UK.

My father’s London house

My father died on 1 June 2018 and I inherited his London house. The house had a value for probate purposes of £390,000, but is now worth £450,000. My father purchased the house for £130,000 in 1984. I intend to sell

the house as soon as possible.

Investment plan in respect of the proceeds from the sale of the London house I plan to invest the £450,000 proceeds as follows:

– £300,000, purchase of UK shares; and

– £150,000, cash deposit in the UK.

Alternative investment plan

It has been suggested to me by a friend (who is a tax adviser) that I should consider an alternative investment plan, which would result in a lower income tax liability for me and my family.

Under my friend’s suggestion I would give £150,000 of the sales proceeds from the London house to David, leaving me with £300,000. We would then each invest two-thirds of our respective funds in shares with the remaining third left on cash deposit.

I would like to know what the income tax saving would be if I followed my friend’s advice rather than my original plan.

Gift to Oder

I am also considering making a cash gift to Oder of £20,000 out of my existing funds (i.e. not from the proceeds from the sale of the London house). Oder would place this amount on cash deposit.

Our annual income

I set out below our current annual income

The bank interest and dividends are in respect of cash deposits and shares all of which are held within ISAs. We invest the maximum possible amount into ISAs on 1 May each year.

Oder has no income. None of us have made any previous chargeable gains.

Lucee David

                                                                           £                 £

                                                                  Annual                income

Employment income                           170,000                18,000

Bank interest (within ISA)                        1,500                  1,200

Dividends (within ISA)                              2,500                  1,800

Tax-efficient investments

I have considered investing in enterprise investment scheme (EIS) shares but have not done so due to the high level of risk involved. However, I understand that venture capital trusts (VCTs) have a lower level of risk.

Please let me have a comparison of the income tax implications of these two forms of investment on the assumption that I will invest £50,000 in the tax year 2018/19. I do not know for how long I will want to hold these shares.

Thank you

Lucee

Email from your manager – dated 4 September 2018

Please prepare notes for me to use in a meeting with Lucee. The notes should cover the following:

(a) Minimising income tax on investment income

When carrying out this work you should assume:

1. The shares purchased will yield a 4% return per annum and the cash deposits will yield a 1% return per annum.

2. The whole of the £450,000 will be available to invest, i.e. Lucee will pay any capital gains tax due in respect of the sale of the London house out of her existing funds.

3. None of the investments will consist of either enterprise investment scheme (EIS) shares or venture capital trust (VCT) shares.

– Calculations of the income tax saving which would be achieved in a complete tax year if Lucee were to follow her friend’s advice and give £150,000 of the proceeds from the sale of the London house to David in accordance with the alternative investment plan.

To do this efficiently, you should just calculate the additional tax payable by Lucee and David on the income generated by the inherited funds, rather than preparing complete income tax computations.

To save you some time, I have already calculated that if Lucee invested the whole of the £450,000 herself, she would incur an additional income tax liability in respect of the bank interest and dividend income for a complete tax year of £3,342.

– It seems to me that the total income tax liability of Lucee and David could be reduced further whilst still retaining the fundamentals of Lucee’s alternative investment plan. Lucee would still give David £150,000 but,

rather than each of them investing 2/3 of their funds in shares and leaving the remainder on cash deposit, the total investment of £300,000 in shares and £150,000 in cash deposits would be split between them in a different way.

Set out the factors which are relevant to obtaining a more income tax-efficient split of the total investment.

You should only consider the income tax positions of Lucee and David and the nature of the proposed investments. I do not require you to produce calculations of any potential tax savings.

– The matters to be considered in relation to income tax in respect of the proposed gift of £20,000 to Oder.

(b) Gift to David

– By reference to David’s domicile status, explain why Lucee’s proposed gift of £150,000 to David could result

in an inheritance tax liability and how this potential liability might be avoided.

You should note that Lucee gave David a half interest in her home on 1 August 2014. The value of this gift was £600,000.

– Calculations in order to show the capital gains tax saving which would be achieved if Lucee were to give

David a one-third interest in the London house prior to its sale (as opposed to cash of £150,000 following its sale).

(c) Tax-efficient investments

– A comparison of the income tax implications for Lucee of investing £50,000 in either EIS shares or VCT shares as requested.

1A. CALCULATE THE INHERITANCE TAX IMPLICATIONS FOR LUCEE's GIFT OF €150,000.

AS PER UK TAX LAWS 2018