Urgent question to any IFA's out there!! Please help.

Dorset82

Hello, I have an exam question I'm really struggling to understand and I wondered if anyone could give me an answer and explanation?

The question is:

Jessica, a higher-rate taxpayer, bought an equity unit trust two years ago for £60,000, which is currently valued at £103,600. In this tax year, she has already sold some gilts, making a loss of £5,000 and she is wanting to encash some of the trusts units, but only sufficient to maximise use of this years capital gains tax exemption. What total value of units should she be advised to sell?

A. £10,000
B. £15,900
C. £25,900
D. £30,900


Now I know that gilts are CGT exempt, therefore the loss cannot be factored in. But I dont get how the answer is worked out? I put down A (£10,900) however this was incorrect.

Any help would be HUGELY appreciated!

Edit: this is for the 2013/14 tax year

innovate

I am not an IFA but the options all look wrong to me as the 2014-15 CGT allowance is £11,000.

Snakey

The AE is £10,900 (assuming you're working on 2013/14 figures) so it could only ever be that if the base cost was zero.

Work out the profit per unit. Then work out how many lots of that profit you would need to have in order to get to the AE.

p.s. I'm not an IFA.

Dorset82

Apologies, I forgot one vital piece of information. It is for the 2013/14 tax year. I will edit the question now.

Dorset82

Snakey wrote: »

The AE is £10,900 (assuming you're working on 2013/14 figures) so it could only ever be that if the base cost was zero.

Work out the profit per unit. Then work out how many lots of that profit you would need to have in order to get to the AE.

p.s. I'm not an IFA.

Thanks for your message Snakey, although the question doesnt say how many units were bought so no way of calculating that.

brendon

Work out the percentage increase in value: (103600 - 60000) / 60000 = 0.7266667.

Now, to calculate capital gains:

(103600 - 60000) / 60000 * X = 10900 where X is the pre-gain value.

Solve for X: X = 15000

Then, convert into value after the gain: 15000 * 103600 / 60000 = 25900.

(Ps. I'm not an IFA, either, but the calculation seems to work).

Snakey

Do it per pound, then and tell them how many pounds worth to sell.

Re-reading it, the question does say value of units, and that also ties in with the answer options.

Dorset82

brendon wrote: »

Work out the percentage increase in value: (103600 - 60000) / 60000 = 0.7266667.

Now, to calculate capital gains:

(103600 - 60000) / 60000 * X = 10900 where X is the pre-gain value.

Solve for X: X = 15000

Then, convert into value after the gain: 15000 * 103600 / 60000 = 25900.

(Ps. I'm not an IFA, either, but the calculation seems to work).

Thanks for the explanation, although I must be a bit slow... how did you work out the solve for X?

brendon

Dorset82 wrote: »

Thanks for the explanation, although I must be a bit slow... how did you work out the solve for X?

Well, the total capital gain made was 0.7266667 * X. We want to limit the capital gain to 10900. i.e 0.7266667 * X = 10900. Rearrange for X. Hence X = 10900 / 0.7266667 = 15000

Mattygroves2

As for any simple equation - transfer everything to the other side to leave X on it's own:

10900*60000/(103,600-60,000) = X

Your_Hero

Dorset82 wrote: »

Thanks for the explanation, although I must be a bit slow... how did you work out the solve for X?

Think of it this way.

£43,600 is the total gain. 43,600/103600 = 0.42085.

Put another way for every £1 of the current value, 42.085p represents the gain.

So for a capital gain of £10,900, the total encashments needs to be 10,900/0.42085 = £25,900

Does this make sense?