Problem
You should assume that today's date is 15 February 2019.
You are a trainee chartered certified accountant dealing with the tax affairs of Dembe and her husband Kato.
Personal pension contribution
Dembe is self-employed and her trading profit for the year ended 31 December 2018 is £130,000. She will not have any other income or outgoings for the tax year 2018-19.
Dembe is planning to make a personal pension contribution of £32,000 (net) before 5 April 2019, and would like to know the amount of income tax and national insurance contributions (NICs) which she will save as a result of making the pension contribution.
Sale of residential property
During March 2019, Dembe is going to sell a residential property and this will result in a chargeable gain of £67,000 she makes the disposal.
Dembe wants to know whether it would be beneficial to transfer the property to Kato, her husband, as a no gain/no loss transfer prior to it being sold during March 2019. The transfer from Dembe to Kato will cost £2,000 in additional legal fees, and this cost will reduce the chargeable gain to £65,000 if the disposal is made by Kato.
Dembe has already made other disposals during the tax year 2018-19 which have utilised her annual exempt amount.
Kato, however, has not yet made any disposals.
Kato's taxable income for the tax year 2018-19 is £18,150.
Inheritance tax
Dembe, who knows nothing about inheritance tax (IHT), is concerned about the amount of IHT which will be payable when she and Kato die. The couple's combined chargeable estate is valued at £880,000 for IHT purposes. The estate includes a main residence valued at £360,000.
Under the terms of their wills, Dembe and Kato have initially left their entire estates to each other. Then when the second of them dies, the total estate of £880,000 will be left to the couple's children.
The couple are not sure whether to change the terms of their wills so that assets worth £325,000 are left to their children when the first of them dies.
Neither Dembe nor Kato have made any lifetime gifts.
Task
1. Calculate the reduction in Dembe's income tax liability and NICs for the tax year 2018-19 if she makes the personal pension contribution of £32,000 (net) before 5 April 2019. Note: You are not expected to prepare full tax computations.
2. Calculate the couple's overall saving for the tax year 2018-19, after taking account of the additional legal fees of £2,000, if the residential property is transferred to Kato and sold by him, rather than the property being sold by Dembe.
3. Calculate the amount of IHT payable, if any, were Dembe and Kato to both die in the near future, and explain whether or not it might be beneficial to leave assets worth £325,000 to their children when the first of them dies.