SQE1 · FLK1 · Free samples
Business Law and Practice — free SQE1 sample questions
116 free, worked single-best-answer questions for Business Law and Practice, shown in the official SRA SBAQ format with the correct answer and a cited rationale. Drill the full bank in timed practice once you’ve worked through these.
Question 1
A company incorporated three years ago has model articles and an issued share capital of 10,000 ordinary shares of £1 each. The company now wishes to issue 5,000 new ordinary shares to an investor. The existing shareholders have statutory pre-emption rights. The directors propose to disapply these pre-emption rights for this allotment only. What resolution is required to disapply the statutory pre-emption rights?
- A.An ordinary resolution of the shareholders.
- B.A special resolution of the shareholders.✓ correct
- C.A written resolution signed by 75% of shareholders.
- D.A board resolution passed by a majority of directors.
- E.A special resolution of the shareholders holding at least 90% of the shares.
Why B is correct
Section 571 Companies Act 2006 permits disapplication of pre-emption rights under ss.561-563, but only by special resolution (or provision in the articles, which the model articles do not contain). The resolution must be recommended by the directors and specify the maximum number of shares. Option A is the strongest distractor, confusing the ordinary resolution needed for general allotment authority under s.551 with the special resolution needed for pre-emption disapplication. Both are typically sought together but have different thresholds.
Question 2
A company is being incorporated to operate a software consultancy. The two founders wish to be the initial shareholders and directors. They want the company to have authorized share capital of £100,000 divided into 100,000 ordinary shares of £1 each, with 10,000 shares issued initially at incorporation, each subscriber taking 5,000 shares. The incorporation agent advises on the application for registration. What is the correct position regarding authorized share capital?
- A.The company must specify authorized share capital of £100,000 in its application for registration.
- B.The company must specify authorized share capital in its articles of association.
- C.The company need not specify authorized share capital, as this concept was abolished by the Companies Act 2006.✓ correct
- D.The company must specify authorized share capital in a shareholders' agreement.
- E.The company must specify authorized share capital by passing an ordinary resolution at the first general meeting.
Why C is correct
The Companies Act 2006 abolished the concept of authorized share capital for companies formed under the Act (s.542). Companies formed under CA 2006 need only state the initial share capital and number of shares taken by each subscriber in the statement of capital (s.10). Option A is the strongest distractor, reflecting the pre-2006 position under Companies Act 1985. The modern regime focuses on issued share capital only, streamlining incorporation requirements and removing an outdated restriction on directors' powers.
Question 3
A private company limited by shares has issued 1,000 ordinary shares of £1 each, all fully paid. The company wishes to reduce its share capital by canceling 200 shares held by a departing member and repaying £200. The company is solvent and has distributable reserves of £50,000. The directors have resolved to proceed with the reduction. The articles permit capital reductions. What procedure must the company follow to effect this reduction?
- A.Pass an ordinary resolution and file form SH19 at Companies House.
- B.Pass a special resolution supported by a solvency statement and file the required documents at Companies House.✓ correct
- C.Pass a special resolution and obtain court approval under section 641 Companies Act 2006.
- D.Pass a special resolution, obtain creditor consent, and apply for court confirmation.
- E.Pass an ordinary resolution supported by a solvency statement from the auditors.
Why B is correct
Sections 641-644 Companies Act 2006 permit a private company to reduce capital by special resolution supported by a solvency statement from all directors (s.642), without court approval. The statement and resolution must be registered at Companies House within 15 days. Option C is the strongest distractor, reflecting the traditional court-based procedure under s.645-651, which remains available but is not mandatory for private companies using the solvency statement route introduced in 2008.
Question 4
A trading company has net assets of £80,000 and accumulated realized profits of £30,000. The company has no accumulated realized losses. The directors wish to pay a dividend of £25,000 to shareholders. The company's most recent annual accounts show the accumulated profits figure. The articles are unamended model articles. Can the company lawfully pay the proposed dividend?
- A.Yes, because the dividend does not exceed the company's net assets.
- B.Yes, because the dividend does not exceed accumulated realized profits.✓ correct
- C.No, because dividends can only be paid from current year profits.
- D.No, because the dividend would exceed 50% of net assets.
- E.No, because the company must retain at least £10,000 in distributable reserves.
Why B is correct
Section 830 Companies Act 2006 provides that a distribution can only be made out of profits available for distribution, defined in s.830(2) as accumulated realized profits less accumulated realized losses. Here, the company has £30,000 accumulated realized profits with no realized losses, so a £25,000 dividend is lawful. Option A is the strongest distractor but confuses the net assets test (relevant for public companies under s.831) with the general rule for private companies. Aveling Barford Ltd v Perion Ltd [1989] BCLC 626 confirms the s.830 test.
Question 5
A sole trader operates a successful bakery and wishes to incorporate the business. She consults a solicitor about the capital gains tax position on transferring the business premises, which she owns personally, to the new company. The premises have a current market value of £400,000 and a base cost of £150,000. She has used the premises exclusively for the bakery business throughout her ownership. She intends to transfer the entire bakery business as a going concern to the company in exchange solely for shares in that company. What is the most accurate advice regarding capital gains tax relief on the transfer of the premises to the company?
- A.Incorporation relief under sections 162–162B TCGA 1992 will automatically defer the entire gain on the premises, provided the whole business is transferred as a going concern in exchange wholly or partly for shares.✓ correct
- B.Business Asset Disposal Relief under section 169H TCGA 1992 will reduce the CGT rate to 10% on the gain arising on the transfer of the premises to the company.
- C.Rollover relief under sections 152–159 TCGA 1992 will defer the gain on the premises if the company acquires replacement qualifying business assets within the permitted period.
- D.Gift relief under section 165 TCGA 1992 will defer the gain on the premises because the transfer is of an asset used in the transferor's trade, even though the transferee is a company rather than an individual.
- E.No relief is available to defer or reduce the gain; the transfer is treated as a disposal at market value under section 17 TCGA 1992 and CGT is payable in full at normal rates.
Why A is correct
## Correct Answer: A — Incorporation Relief (ss. 162–162B TCGA 1992) ### Why A is correct Incorporation relief under **sections 162–162B TCGA 1992** applies where a person transfers a **business as a going concern**, together with the **whole of the assets** of that business (or the whole of those assets other than cash), to a company **wholly or partly in exchange for shares** issued by the company. Where those conditions are met, the gain on **all** qualifying assets — including land and buildings used in the business — is **automatically deferred** by rolling it into the base cost of the shares received. There is **no statutory exclusion of land and buildings** from incorporation relief; the original question's rationale on this point was wrong. The key conditions are: (i) transfer of the whole business as a going concern; (ii) transfer of all business assets (other than cash); and (iii) consideration consisting wholly or partly of shares. On the facts, all three conditions are satisfied, so the entire gain of £250,000 (£400,000 − £150,000) is deferred. ### Why the other options are wrong **B — Business Asset Disposal Relief (BADR):** BADR under s. 169H TCGA 1992 reduces the CGT rate to **10%** (up to the lifetime limit, now £1 million following Finance Act 2020). However, BADR does not apply to the transfer of assets to a company on incorporation in this way; it applies to qualifying disposals such as the disposal of the whole or part of a business, or of shares. A transfer of assets to a company in exchange for shares is not a disposal of the business by the individual for BADR purposes in the same event — and in any event BADR does not *defer* the gain, it merely reduces the rate. It is therefore not the best available relief here. **C — Rollover relief (ss. 152–159 TCGA 1992):** Business asset rollover relief applies where a trader disposes of a qualifying asset and **reinvests the proceeds in replacement qualifying assets**. On incorporation, the sole trader is not reinvesting proceeds in replacement assets; she is receiving shares. Rollover relief is therefore unavailable on these facts. **D — Gift relief (s. 165 TCGA 1992):** Gift relief is available on gifts (or sales at undervalue) of assets used in a trade. However, s. 165(2) provides that gift relief is **not available** where the donee is a **company** — it is restricted to gifts to individuals and certain trustees. A transfer to the new company therefore cannot attract s. 165 relief. **E — No relief available:** This is incorrect. Incorporation relief under ss. 162–162B is squarely available on the facts and automatically defers the gain. ### Key authority - TCGA 1992, ss. 162–162B (incorporation relief) - TCGA 1992, s. 165(2) (gift relief — exclusion of companies as donees) - TCGA 1992, ss. 152–159 (rollover relief) - TCGA 1992, s. 169H (Business Asset Disposal Relief) - *Ramsay v HMRC* [2013] UKUT 226 (TC) (scope of incorporation relief)