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To determine the net value of Aunt June's estate, begin by totaling her assets: £250,000 (apartment) + £100,000 (investments) = £350,000. The life insurance payout of £50,000 is not included in the estate valuation for inheritance tax purposes since it goes directly to a named beneficiary. Next, subtract the liabilities: £350,000 – £150,000 (remaining mortgage) – £20,000 (unpaid medical bills) – £10,000 (funeral costs) = £170,000. Therefore, the correct net value of June's estate for inheritance tax purposes is £170,000.

To calculate the net value of Thomas’s estate for the purpose of inheritance tax, first, we must add together the values of the rental property, vintage cars, and stock portfolio, which total £700,000. Next, we subtract Thomas’s outstanding debts and funeral expenses, which total £60,000 (£50,000 + £10,000). Therefore, the net value of Thomas’s estate is £640,000 (£700,000 – £60,000), making option E correct. This net value is used to assess the inheritance tax liability.

Olivia’s total gain from the disposal of the land is calculated by subtracting the allowable expenditure from the sale proceeds. The allowable expenditure includes the initial purchase price (£100,000) plus legal expenses (£5,000), agent fees (£2,000), and landscaping costs (£10,000), totaling £117,000. The sale proceeds are £150,000, so the total chargeable gain is £150,000 – £117,000 = £33,000. Since Olivia has already used her annual exemption and the Capital Gains Tax rate applicable is 20%, her Capital Gains Tax liability is 20% of £33,000, which does not require the calculation of the exact tax amount in monetary terms for the answer but is understood to be 20% of the chargeable gain.

Option C is correct. For tax purposes, dividends received by shareholders are first subject to the annual dividend allowance, which is £500 for the 2024/25 tax year. This portion of the dividend is tax-free. Any dividend income received above this allowance is taxed at the respective dividend tax rate depending on the taxpayer’s income tax band. Therefore, the first £500 of John’s dividend is tax-free, and the remaining £9,500 will be taxed at the higher dividend tax rate. For completeness, for a higher rate taxpayer, the dividend tax rate was 33.75% for the amount exceeding the allowance.

Executors of an estate must submit Form IHT400 where inheritance tax is payable and Form IHT205 where inheritance tax is not payable – i.e. where the estate is ‘excepted’ from inheritance tax. Bertie’s estate qualifies as a ‘small’ excepted estate: the total value of his estate (that is, £200,000), plus any specified transfers and specified exempt transfers (i.e. one specified transfer of £50,000) reaches a sum of £250,000. This is well below the nil rate band of £325,000. Bertie’s estate is therefore an ‘excepted estate’ on which no inheritance tax is payable. His executor should complete and submit IHT205 as part of the application for a grant of probate.

Identify the Sources of Income.

a. Partnership Profits: The woman’s share of partnership profits: £38,000
b. Profit from Sale of Pet Shop: £10,000 profit made on 6 April 2023

Note: The profit from the sale of the pet shop is considered a capital gain, not income.

Therefore, it is subject to Capital Gains Tax, not Income Tax, and is excluded from the Income Tax calculation.

Deduct Allowable Expenses

a. Loan Interest: The woman took out a loan of £10,000 at an annual interest rate of 10% to purchase her partnership share.
b. Annual loan interest: £10,000 × 10% = £1,000

This loan interest is allowable as a deduction against her total income because it’s a “qualifying loan interest” used to invest in a partnership.

Calculate Net Income

a. Total Income: £38,000 (Partnership profits)

b. Less: Allowable Deductions: £1,000 (Loan interest)

Net Income: £38,000 – £1,000 = £37,000

Apply Personal Allowance

a. Personal Allowance for 2023/24: £12,570
b. Taxable Income: £37,000 – £12,570 = £24,430

Calculate Income Tax Liability

a. Basic Rate Band: £0 – £37,700 at 20%

Since her entire taxable income of £24,430 falls within the basic rate band, the tax is calculated at 20%.

b. Income Tax Liability: £24,430 × 20% = £4,886

Conclusion

a. Total Income Tax Liability: £4,886

This matches Option A, confirming it is the correct answer.

The general rule is that the executors are liable to pay income tax on any income generated by the estate during the administration period. An exception to this general rule is where the executors take out a bank loan to pay inheritance tax in order to obtain the grant of representation. In this scenario, they are entitled to apply estate income towards paying interest on such a bank loan and this payment is exempt from income tax. Priya’s executors took out a bank loan to pay inheritance tax and the interest on this loan stands at £10,000. As the estate income is also £10,000, all of this may be applied to pay this interest. This is exempt from income tax and so there will be no income remaining on which income tax will be chargeable.

The correct answer is A. To calculate Monica’s capital gain, you subtract the original purchase price and any allowable subsequent expenditure from the sale price. Therefore, Monica’s capital gain is calculated as follows: £30,000 (sale price) – £5,000 (original purchase price) – £2,000 (marketing costs) = £23,000. This £23,000 represents Monica’s capital gain after allowable deductions are considered.

Let us go through these and explain.

A. This is wrong. The amount of £1,000 represents only the firm’s professional charges, excluding VAT and disbursements. Under the Solicitors Regulation Authority (SRA) Accounts Rules, the firm is entitled to transfer from the client account to the business account not just the fees for professional services but also any VAT charged and disbursements incurred, provided that a bill has been delivered to the client. Therefore, transferring only £1,000 does not account for the full amount properly due to the firm.

B. This is wrong. The figure £1,273 appears to be the sum of the professional charges (£1,000) and the paid disbursement (probate fee of £273), excluding VAT and the unpaid disbursement. While the firm has already paid the probate fee from its business account and is entitled to reimbursement, this amount does not include the VAT on professional charges (£200) and the unpaid disbursement (£100). According to the SRA Accounts Rules, the firm can transfer the total amount invoiced to the client once a bill has been rendered, including VAT and both paid and unpaid disbursements that have been incurred and for which the firm is liable.

C. This is wrong. The amount of £1,200 combines the professional charges (£1,000) and VAT (£200) but excludes both the paid disbursement (£273) and the unpaid disbursement (£100). This means the firm would not be reimbursed for the probate fee already paid or account for the valuation fee invoice it has received. As per the SRA Accounts Rules, the firm can transfer sums for disbursements that have been paid or incurred and billed to the client. Therefore, transferring only £1,200 does not reflect the maximum amount permissible.

D. This is wrong. The amount of £1,300 seems to account for the professional charges (£1,000), VAT (£200), and the unpaid disbursement (£100), but excludes the paid disbursement (£273). The firm has already paid the probate fee from its business account and is entitled to reimbursement. Excluding this amount means the firm would not recover the funds already advanced on behalf of the client. Under the SRA Accounts Rules, the firm can transfer the full amount billed, including all disbursements.

E. This is correct. The total amount billed to the executors is £1,573, comprising professional charges (£1,000), VAT (£200), the paid disbursement (probate fee of £273), and the unpaid disbursement (valuation fee of £100). According to Rule 4.3 of the SRA Accounts Rules, once a firm has delivered a bill of costs to the client, it may transfer funds from the client account to the business account to settle the amounts due, including professional fees, VAT, and disbursements that have been incurred and billed, whether paid or unpaid. Since the firm has received an invoice for the valuation fee (creating a liability) and has already paid the probate fee, both disbursements can be included in the transfer. Therefore, the maximum amount the firm can transfer to its business bank account is £1,573.