Introduction
This essay examines the tax liabilities and business challenges faced by Maribel Vega, a sole trader operating a wedding planning business, within the context of the hypothetical tax rates and allowances for the tax year 2025/26 as provided. The analysis is structured around three key questions: firstly, calculating Maribel’s income tax liability and assessing whether the £40,000 she set aside is sufficient to cover her total tax obligations; secondly, evaluating the potential implications of bankruptcy proceedings on her personal assets and transactions; and thirdly, critically assessing whether operating as a limited company would have been more advantageous than her current sole trader status. Through a detailed application of tax law principles and insolvency regulations, supported by relevant academic and legal sources, this essay aims to provide a comprehensive understanding of Maribel’s situation while highlighting the broader implications of business structure choices.
Question One: Income Tax Liability and Sufficiency of Funds
Part (a): Memorandum to Supervisor
**Memorandum**
**To:** Mahira Taimoor
**From:** Trainee
**Date:** 14 February 2026
**Subject:** Maribel Vega’s Income Tax Liability for 2025/26
Dear Mahira,
I have calculated Maribel Vega’s income tax liability for the tax year 2025/26 based on the estimated figures provided. Maribel’s trading receipts from her wedding planning business are £160,000, with deductible expenses including £10,000 in rent, £2,500 in utility bills, and £11,500 in staff wages, totalling £24,000. Therefore, her taxable trading profit is £136,000 (£160,000 – £24,000).
Applying the personal allowance of £12,570, her taxable income becomes £123,430 (£136,000 – £12,570). Using the income tax bands for 2025/26, the tax calculation is as follows:
- Basic rate at 20% on income from £1 to £37,700: £7,540 (20% of £37,700).
- Higher rate at 40% on income from £37,701 to £123,430: £34,292 (40% of £85,730).
Thus, Maribel’s total income tax liability from trading income is £41,832 (£7,540 + £34,292).
Additionally, Maribel disposed of a painting for £80,000, with a base cost of £10,000 (value at inheritance) and incidental costs of disposal at £2,000. The chargeable gain is £68,000 (£80,000 – £10,000 – £2,000). After applying the annual exemption of £3,000, the taxable gain is £65,000. As her income falls within the higher rate band (£37,701–£125,140), the capital gains tax (CGT) rate of 24% applies, resulting in a CGT liability of £15,600 (24% of £65,000).
Combining both liabilities, Maribel’s total tax liability for 2025/26 is £57,432 (£41,832 + £15,600). She has made a payment on account of £2,000, reducing the outstanding tax to £55,432.
I trust this summary will assist in your meeting with Maribel. Please let me know if further clarification is required.
Yours sincerely,
Trainee
Part (b): Advice to Maribel on Sufficiency of Funds
Maribel has set aside £40,000 from the sale proceeds of the painting to cover her tax liabilities for 2025/26. However, as calculated above, her total tax liability amounts to £57,432, and after accounting for the £2,000 payment on account, she still owes £55,432. Clearly, the £40,000 is insufficient to cover her tax obligations, leaving a shortfall of £15,432. Therefore, it is advisable for Maribel to review her financial position and consider additional sources of funds or payment arrangements with HM Revenue & Customs (HMRC) to manage this deficit. Indeed, HMRC often provides options for instalment payments in cases of financial difficulty, which could mitigate immediate pressure (Gov.uk, 2023).
Question Two: Bankruptcy Implications
Part (a): Sale of Hampton Lodge
In the event of bankruptcy proceedings initiated by Oak Farm Floristry Ltd, the trustee in bankruptcy would have the power to realise Maribel’s assets to settle creditors’ claims under the Insolvency Act 1986. Hampton Lodge, valued at £500,000 with a £450,000 mortgage, leaving £50,000 in equity, is co-owned by Maribel and her wife, Carice. Typically, the trustee can apply to the court for an order to sell the property under section 335A of the Insolvency Act 1986, but must consider the interests of other occupants, including Carice and their daughter Ada, who is a wheelchair user. Courts often balance the creditor’s interests against the family’s needs, particularly regarding disability accommodations (Walker and Ward, 2019). Given Ada’s specific needs and the adaptations made to the property, a court may delay or refuse the sale if alternative accommodations cannot reasonably be secured. However, if Carice’s share is not protected by a formal agreement, the trustee might still pursue a sale, though the process could be protracted.
Part (b): Challenge to Loan Repayment under Section 340 Insolvency Act 1986
Under section 340 of the Insolvency Act 1986, a trustee in bankruptcy can challenge transactions at an undervalue or preferences made within a specified period before bankruptcy. Maribel repaid a £10,000 loan to her mother in September 2026 using proceeds from the sale of inherited jewellery. For this transaction to be challenged as a preference under section 340, it must have occurred within six months before the bankruptcy petition (or two years if the recipient is a connected person, such as a family member), and it must be shown that Maribel intended to put her mother in a better position than other creditors. Given that her mother is a connected person, the two-year look-back period applies, and the trustee could argue that repaying this personal loan while trade creditors like Oak Farm Floristry Ltd remained unpaid demonstrates preferential treatment. Unless Maribel can prove there was no intent to prefer, the trustee is likely to succeed in challenging this repayment, potentially requiring her mother to return the £10,000 to the bankruptcy estate (Keay and Walton, 2020).
Question Three: Sole Trader vs. Limited Company Structure
Critically evaluating Maribel’s business structure, operating as a sole trader exposes her to unlimited personal liability, as evidenced by the threat of bankruptcy proceedings from Oak Farm Floristry Ltd. As a sole trader, her personal assets, including Hampton Lodge, are at risk to satisfy business debts, a situation that could have been mitigated by incorporating as a limited company. A limited company provides a separate legal entity, generally restricting liability to the company’s assets, thus protecting personal property unless personal guarantees are provided (Hicks and Goo, 2016). However, setting up a limited company involves greater administrative burdens and costs, including compliance with Companies Act obligations, which might have been challenging for Maribel given her initial modest profits of £25,000 annually.
Furthermore, tax treatment differs; while sole traders benefit from personal allowances, limited companies face corporation tax (19%–25% in 2025/26 depending on profit levels), potentially reducing tax liabilities at higher profit margins through strategic director remuneration and dividend planning. However, Maribel’s sudden profit increase to £136,000 might not have been foreseeable, limiting the perceived need for incorporation earlier. Arguably, had she incorporated, the financial losses from the barn flooding and car accident could have been contained within the company, reducing personal financial strain. On balance, while incorporation offers protection, the practicality for a small, initially stable business like Maribel’s is debatable, highlighting that business structure decisions must align with foreseeable risks and growth trajectories.
Conclusion
In summary, Maribel Vega faces significant tax liabilities of £57,432 for 2025/26, exceeding the £40,000 she reserved by £15,432, necessitating urgent financial planning. Bankruptcy proceedings pose a real threat to her personal assets, though the sale of Hampton Lodge may be contested due to family circumstances, and the loan repayment to her mother is vulnerable to challenge under insolvency law. Critically, operating as a limited company could have offered liability protection, though practical constraints for small businesses must be acknowledged. These issues underline the importance of strategic business planning and legal advice in navigating tax and insolvency risks, with broader implications for sole traders regarding the balance between simplicity and personal exposure.
References
- Gov.uk. (2023) Pay your Self Assessment tax bill. HM Revenue & Customs.
- Hicks, A. and Goo, S.H. (2016) Cases and Materials on Company Law. Oxford University Press.
- Keay, A. and Walton, P. (2020) Insolvency Law: Corporate and Personal. Jordan Publishing.
- Walker, C. and Ward, D. (2019) Personal Insolvency Law in Practice. Sweet & Maxwell.
