R03 - Please Help!

Hi all - new member here!

Glad I have found this as have been going mad trying to find somewhere to ask a question. I am nearing my R03 exam and have used third party resources that have the answers to their mock exam questions. However, I am attempting the CII's own paper which does not have answer explanations. If possible, would anyone please be able to shed any light on the process for the following two questions - everytime I do them i get a different answer!

  1. On Brian’s death in August 2019, his estate was valued at £820,000. He owned no property. He
    bequeathed £40,000 to a registered charity and split the balance before tax equally between his
    registered civil partner and his brother. Assuming he made no lifetime transfers, what will the
    Inheritance Tax liability be?
    A. £22,750
    B. £23,400
    C. £26,000
    D. £34,000

and

Genevieve, aged 67, has self-employed earnings of £100,000 per year and savings income of
£10,000 per year. What is her Income Tax liability for the tax year 2019/2020?
A. £27,500
B. £31,500
C. £33,300
D. £33,500

Huge, huge thanks in advance!

Jack

Comments

  • JumanjiJumanji Member
    edited August 11
    1. points to consider:

    no property - no RNRB
    £40k to charity
    registered civil partner

    so £820k-£40k = 780k
    780k divided by the 2 recipients = 390k

    Civil partner have the same rights as marriage so no tax

    so just the brother's £390k to be taxed after nil rate band and taking in the above points. tax at 40% because 40k is not 10% of estate. So the answer is C £26k

  • I think the 2nd question is £33,300

    Using an online calculator I entered £110,000 with an additional £500 allowance for the savings interest. I stand to be corrected though!

  • > @arongunningham said:
    > I think the 2nd question is £33,300
    >
    > Using an online calculator I entered £110,000 with an additional £500 allowance for the savings interest. I stand to be corrected though!

    Thank you for this! If I may, how would you work this out in an exam situation? Do you add them together then take the £500 off giving a total of £109,500? This would then mean she loses some of her allowance wouldn't it, which changes the answer!
  • > @Jumanji said:
    > * points to consider:
    >
    > no property - no RNRB
    > £40k to charity
    > registered civil partner
    >
    > so £820k-£40k = 780k
    > 780k divided by the 2 recipients = 390k
    >
    > Civil partner have the same rights as marriage so no tax
    >
    > so just the brother's £390k to be taxed after nil rate band and taking in the above points. tax at 40% because 40k is not 10% of estate. So the answer is C £26k

    Thank you! So the charity payment comes off first, then the remainder is split.

    I was taking the NRB from the 780k, then dividing by two and times by 40%. But the NRB can only be taken off of taxable amounts can't it. Which makes sense.

    So, to get this right...

    Charity payments off first, then spouse nil rate, then take the NRB off of the taxable remainder?
  • I actually think the answer to 38 is B.

    The 36% IHT rate applies as the Net estate (after the spousal exemption and the NRB on the brothers half) is £65,000.

    The donation was £40,000 which is way clear of the net taxable estate. So it's £65,000 x 0.36 isn't it?
  • If the answer to the income tax question is £33,300, I highly doubt you'll be asked this in RO3 because there's a couple of elements you would need to manage to get the answer

    1) you need to know that savings income will have an extra £500 allowance
    2) you need to know that savings income adds to earned income and you will breach the £100k barrier for reducing personal allowance.

    So using the calculator i found that £8009, is the revised personal allowance and then work out the tax in the normal way on the remaining £101,991

    https://listentotaxman.com/ go here to play with the numbers

  • This income tax one was on the CII website specimen paper, tying myself in knots here.

    Currently doing it like this hit clearly missing a step somewhere:

    £100,000 + £10,000 = £110,000

    £10,000 over the PA threshold so therefore £5,000 off the PA. Means she has £7,500 left of the allowance at 0%.

    £30,000 therefore at 20%. = £6000
    £62,500 therefore at 40%. = £25,000

    £10,000 but £500 at 0%.
    £9,500 therefore at 40% = £3,800.

    £6,000 + £25,000 + £3,800 = £34,800 of tax payable.

    Where am I going wrong here?!?!
  • You need to tax more at the basic rate i believe, this should still be £7,500 total tax and less at higher rate which gets you to the 33,300 answer. That band doesn't change it is still £37,500 *20%. £55,000 at 40% is 22000, and 9,500 at 40% as well.

    £7,500 + £22,000 + £3,800 = £33,300

    Hope this helps.

  • Thanks for this Jamie.

    Not sure if I've been spending too many hours looking at these and just being thick but with her being £10,000 over the £100,000 limit, doesn't that bring her total PA down to £7,500?

    In which case the first £7,500 is tax free. Therefore £30,000 takes her to the end of the basic rate.

    I see how you've got that answer but why is she charged 20% on the whole £37,500? Shouldn't it be just 20% on £30,000 as the first £7,500 is at 0%?
  • @jadud92 said:
    Thanks for this Jamie.

    Not sure if I've been spending too many hours looking at these and just being thick but with her being £10,000 over the £100,000 limit, doesn't that bring her total PA down to £7,500?

    In which case the first £7,500 is tax free. Therefore £30,000 takes her to the end of the basic rate.

    I see how you've got that answer but why is she charged 20% on the whole £37,500? Shouldn't it be just 20% on £30,000 as the first £7,500 is at 0%?

    Jack,
    The Personal Allowance is not part of the basic rate band.
    PA reduced by £5,000 (£10,000 over £100,000 threshold divided by 2). This gives PA of £7,500
    For 2019/20 Basic Rate Band is £37,500.
    For SE earnigns of £100,000 you have
    PA of £7,500 @ 0%
    Basic Rate of £37,500 @ 20%
    Balance of £55,000 @ 40%
    Savings Inc
    £500 @ 00%
    £9,500 @ 40%
    Total tax = £33,300

    Although for 2020/21 this from Pru will help:
    https://www.pruadviser.co.uk/tools-calculators/tax-relief-modeller/?utm_term=les_TRM_nonsupp&utm_campaign=Weekly email&utm_content=email&utm_source=Act-On+Software&utm_medium=email&cm_mmc=Act-On Software--email--The%20tax%20relief%20modeller%20is%20back%21-_-Use%20tax%20relief%20modeller%20%5Cu2192

  • Jamie_BarnesJamie_Barnes Member
    edited August 12

    Thanks for answering Richard, beat me to it. Hope that helps Jack.

    Also another way to look at it is the basic rate band goes to 50k, if the PA is reduced by 5k just reduce the basic rate band by 5k as well so you have 0-7,500, 7,500 - 42,500 (still 37,500), and above that taxed at 40% which is where the 60% tax trap comes in.

  • richardgoughrichardgough Member
    edited August 12

    @Jumanji said:
    38. points to consider:

    no property - no RNRB
    £40k to charity
    registered civil partner

    so £820k-£40k = 780k
    780k divided by the 2 recipients = 390k

    Civil partner have the same rights as marriage so no tax

    so just the brother's £390k to be taxed after nil rate band and taking in the above points. tax at 40% because 40k is not 10% of estate. So the answer is C £26k

    @Jumanji
    I believe your IHT calculation is not correct.

    Refer to HMRC worked example at https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm45010

  • @richardgough said:

    @jadud92 said:
    Thanks for this Jamie.

    Not sure if I've been spending too many hours looking at these and just being thick but with her being £10,000 over the £100,000 limit, doesn't that bring her total PA down to £7,500?

    In which case the first £7,500 is tax free. Therefore £30,000 takes her to the end of the basic rate.

    I see how you've got that answer but why is she charged 20% on the whole £37,500? Shouldn't it be just 20% on £30,000 as the first £7,500 is at 0%?

    Jack,
    The Personal Allowance is not part of the basic rate band.
    PA reduced by £5,000 (£10,000 over £100,000 threshold divided by 2). This gives PA of £7,500
    For 2019/20 Basic Rate Band is £37,500.
    For SE earnigns of £100,000 you have
    PA of £7,500 @ 0%
    Basic Rate of £37,500 @ 20%
    Balance of £55,000 @ 40%
    Savings Inc
    £500 @ 00%
    £9,500 @ 40%
    Total tax = £33,300

    Although for 2020/21 this from Pru will help:
    https://www.pruadviser.co.uk/tools-calculators/tax-relief-modeller/?utm_term=les_TRM_nonsupp&utm_campaign=Weekly email&utm_content=email&utm_source=Act-On+Software&utm_medium=email&cm_mmc=Act-On Software--email--The%20tax%20relief%20modeller%20is%20back%21-_-Use%20tax%20relief%20modeller%20%5Cu2192

    @richardgough @Jamie_Barnes , thank you both. I seem to have been taking the PA of the basic rate band, hence why I wasn't charging enough tax and got the wrong answer.

    Was troubling me for ages there and went down a rabbit hole! I think at one point I even tried grossing up the savings income to see if that did the trick. This makes sense now, thank you both!

  • As i say, i think it would be quite harsh to give you a question where you need to consider the savings rules AND the reducing PA , it'll usually be one or the other at this level.

    plus you definitely wont forget it now :)

  • I would say the first one is B

    £820,000 -£40,000 = £780,000 the divide this by 2 = 390,000

    civil partner won't get taxed anything so just leaves the one half.

    minus the lifetime allowance of £325,000

    £390,000 - £325,000 = £65,000

    then because £40,000 is more than 10% of this the tax is 36%

    £65,000 x 36% = £23,400

  • @JenEC14 said:
    I would say the first one is B

    £820,000 -£40,000 = £780,000 the divide this by 2 = 390,000

    civil partner won't get taxed anything so just leaves the one half.

    minus the lifetime allowance of £325,000

    £390,000 - £325,000 = £65,000

    then because £40,000 is more than 10% of this the tax is 36%

    £65,000 x 36% = £23,400

    Hi @JenEC14

    Just thought it would be helpful to point out that your answer is correct, but your methodology isn’t, which could lead to wring answer in different cases.
    There is an ‘add back’ step required before assessing if the 10% threshold has been met.

    Refer to HMRC worked example at https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm45010

  • @richardgough, so it needs adding back. ie £65,000 + £40,000 = £105,000.

    In this case it still covers the 10% net estate requirement but of course had value before adding back been much higher (or the donation to charity been, say £6,000 in this case) then the 10% would not qualify therefore generating a wrong answer?

  • @jadud92 said:
    @richardgough, so it needs adding back. ie £65,000 + £40,000 = £105,000.
    In this case it still covers the 10% net estate requirement but of course had value before adding back been much higher (or the donation to charity been, say £6,000 in this case) then the 10% would not qualify therefore generating a wrong answer?

    Yes, add back to get to £105,000 on which you base your 10% donation requirement.

    You do the calc to get to the net taxable estate - in this case £65,000.

    You then need to add back the charity deduction used at outset - giving £105,000. It is 10% of this figure which gives you the assessment for meeting the 36% tax rate requirement, not 10% of £65,000.

    So, let's say the net figure was £65,000, but charity donation was £7,000 - If you did no add back then it would appear that the 10% requirement had been met. But, adding back the £7,000 gives £72,000 in which case the 10% requirement is not met giving a tax rate of 40%.

  • That makes sense!

    @richardgough, if I may trouble you once more for another question. Exam in a couple of days and I thought I had these all under control - starting to panic now!

    Jessica, a higher-rate taxpayer, bought an equity unit trust two years ago for £60,000, which is
    currently valued at £108,000. In the tax year 2019/2020, she has already sold some gilts, making a
    loss of £5,000 and she is wanting to encash some of the trust’s units, but only sufficient to maximise
    use of this year’s Capital Gains Tax exemption. What total value of units should she be advised to
    sell?
    A. £12,000
    B. £17,000
    C. £27,000
    D. £32,000

    Cannot, for the life of me, figure this one out!

  • @jadud92
    First off you need to establish what is the client‘s CGT free amount for 2019/20 based on data in the question.
    I've DM you with my phone number - call me and we can chat it through.

  • @jadud92 , let us know how you got on with R03! I have it booked for the 31st of this month.

  • For those following this thread and unsure of the answer to the CGT Q, it is £27,000.

    The loss on the gilt is irrelevant for CGT purposes (Gilts are not subject to CGT so losses cannot be offset against other gains).
    Gain on total investment is £48,000.
    Available allowance is £12,000 (25% of total gain)
    Therefore, sell 25% of total holding - £108,000 x 25% = £27,000
    QED

  • Just going over some last minute questions with the BTS app.

    Corporation tax payment - 9 months and 1 day after the end of the accounting period...

    I would have that down as being due on Jan 31, 2019.

    Nine months being Jan 30, plus the one day.

    BTS have the answer down as Feb 1, am I missing something here?

    Jack
  • Full calendar months from end of April is end of Jan.
    Plus 1 date = 1st Feb.

  • @jadud92 said:
    That makes sense!

    @richardgough, if I may trouble you once more for another question. Exam in a couple of days and I thought I had these all under control - starting to panic now!

    Jessica, a higher-rate taxpayer, bought an equity unit trust two years ago for £60,000, which is
    currently valued at £108,000. In the tax year 2019/2020, she has already sold some gilts, making a
    loss of £5,000 and she is wanting to encash some of the trust’s units, but only sufficient to maximise
    use of this year’s Capital Gains Tax exemption. What total value of units should she be advised to
    sell?
    A. £12,000
    B. £17,000
    C. £27,000
    D. £32,000

    Cannot, for the life of me, figure this one out!

    (Assuming this is based on 2019/20 tax-year and there have been no realised gains).

    The Unit Trust has made a gain of £48,000.
    The CGT allowance is £12,000.

    This means that the overall net gain will be £48,000 on selling 100% of the portfolio.

    The CGT allowance is equivalent to 25% of the gain (12000/48000=25%)

    The answer is then C as we can sell down 25% of the market value (£108,000*25%=£27,000).

    Hope that helps.

  • Big thanks to all of you who have contributed help to these questions - I passed R03 today!
  • Congratulations!

  • @jadud92 That's fantastic news. Well done.

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