May 2001 ATII Paper IIB

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7. Cheap Gems Ltd is a small privately owned company that operates a number ofdiscount jewellery shops. The shareholders of the company are currently:£1 Ordinary SharesBert Diamond 100Jasmine Diamond (Bert’s wife) 50Charles Sapphire 20Roger Ruby 30200With the exception of Roger Ruby, all of the shareholders obtained their shares bysubscription on incorporation of the company in 1994. Roger acquired his shares inOctober 1997 for £5,000 from a departing shareholder. A mutual decision has beenmade that it would best if he left the company. As he is 60 and entitled to someretirement relief, his accountant has advised that he should sell his shares to someoneother than the company so that he can realise a capital gain (a repurchase of shares bythe company would be treated as an income distribution as he has owned the sharesfor less than five years).As none of the other shareholders wants to buy Roger’s shares, it is proposed that thecompany establishes a UK resident employee benefit trust to purchase his sharesusing contributions from the company. The consideration for the purchase is marketvalue which can be taken to be £70,000. The trust will then hold the shares andtransfer them to selected employees of the company at a later date.You are required to:1) Discuss whether there is a transfer of value on the creation of theemployee benefit trust; (8)2) Explain the Income Tax and Capital Gains Tax implications for theemployees and the employee benefit trust if:(a)(b)shares are transferred to an employee at no cost at a time when theirmarket value is £90,000;an employee exercises an option to purchase shares from the trustat £45,000 at a time when their market value is £90,000.Your explanation should include the base cost that would apply on a futuredisposal of the shares by the employee. (8)3) In the context of company law explain ‘financial assistance’ by a companyto acquire its own shares. (4)Total (20)S/May 2001/5 6
8. You have just had a meeting with your client, William Walton. William is now 78 and inpoor health. His current Will simply leaves his entire estate to his wife, Mary. He hasasked for your assistance in determining how he should deal with his assets taxefficiently.His estate currently comprises:1) The marital home, which is in his sole name and is worth £380,000;2) Quoted shares and securities, which currently have a value of £180,000 andwhich cost £55,000 in 1999;3) Sundry antiques that he has collected with a combined value of £35,000 andindividual values not exceeding £5,000.He has not made any previous lifetime transfers.Mary is 75 and currently in reasonable health. Mary’s estate is limited to a holding ofshares in her brother’s unquoted trading company, which is currently worth £125,000,plus cash of £3,000 in an ISA.William and Mary have two children:1) Henry who is currently married to Ann, but is seeking a divorce;2) Victoria, who is happily married to Albert and who is expecting her first childshortly.On the assumption that William will predecease Mary, you are required tosuggest an estate planning strategy to minimise the capital taxes payable. Thisshould include an analysis of the taxes payable if nothing is done and also as aresult of your proposed strategy. (20)S/May 2001/5 7
Page 3 and 4: 3. On 1 May 1998, James Stuart (age
Page 5: 5. The Senior Partner in your firm

May 2001 ATII Paper IIB

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