07a and 07b. income tax and CGT Flashcards
what is a direct tax?
imposed by reference to a taxpayer’s circumstances
- Income tax;
- CGT;
- Corporation tax
what is an indirect tax?
imposed by reference to transactions
- VAT - chargeable by reference to the value of supplies of goods or services
what is an income receipt?
Money received on a regular basis
examples of an income receipt
- trading profits
- interest on savings
- rent payments received
what is an capital receipt?
money received from one-off transactions
examples of a capital receipt
- sale of a premises owned by the company
what is income expenditure?
Money spent as part of day-to-day trading
examples of income expenditure
- heating
- lighting
- rent paid out
- marketing
- stationery expenses
- staff wages
- general repairs
- insurance
- stock
what is capital expenditure?
money spent on:
- one-off transactions; or
- enhancing a capital asset (other than routine maintenance)
examples of capital expenditure
why is it necessary to make the distinction between income expenditure and capital expenditure?
because certain
income expenditure can be deducted from income receipts
AND
certain capital expenditure can be deducted from capital receipts and sometimes income receipts
income receipts -
(income expenditure)
= TRADING PROFITS
when can capital expenditure be deducted from capital receipts?
capital expenditure can only be deducted from the proceeds realised when a capital asset is disposed of.
when are capital allowances deducted?
when calculating trading profits (ie income)
what is tax relief?
deductions from the tax bill
what is the tax equivalent of depreciation in accounting?
capital allowances - spreading the cost of capital expenditure over a period of time
who does the tax year apply to?
individuals - 6 apr-5 apr
who does the financial year apply to?
companies - 1 apr-31 march
how do individuals and businesses pay tax?
HMRC via the self-assessment system
(individuals: tax year; companies: financial year)
how do companies pay tax?
corporation tax on:
- income profits
- chargeable gains
in each accounting period
what is the tax year?
6 April to 5 April
what is the financial year?
1 April to 31 March
what does it mean when income tax is deducted at source?
when someone else accounts for income tax to HMRC on the recipient’s behalf
what is an example of when income tax is deducted at source?
PAYE system, where an employer deducts income tax from an employee’s wage or salary, and accounts for it to HMRC (employee receives wage or salary net of income tax)
or
National Insurance Contributions (NICs) out of employment income
what is the Annual exemption:
For CGT, a tax allowance for individuals only available on an annual basis
what is the Annual investment allowance?
A special type of capital allowance
what are tax reliefs?
Certain payments which reduce an individual taxpayer’s total income eg interest on certain loans and pension contributions.
what is Business Asset Disposal Relief (BADR)?
A tax relief available to individuals in certain circumstances to reduce their chargeable gains. It was formally known as ‘Entrepreneurs’ Relief’ or ER.
what is a Capital allowance?
Tax allowances (ie deductions) for capital expenditure available to businesses (whether run by individuals or companies).
what is Capital gains tax (CGT)?
A tax paid by individuals on their taxable chargeable gains.
what is Corporation tax?
A tax paid by companies on their taxable total profit (TTP).
what is the Current year basis?
Income tax is charged on the current year basis.
ie. income earned in this current year (from 6 April 2023 to 5 April 2024) will be taxed in, and according to, the rates applicable to the tax year 2023/24
what is Dividend income?
A band of tax-free dividend income available to individuals for income tax purposes (6 Apr 2024 to 5 Apr 2025=£500)
what are Gross sums and net sums?
A gross sum is the total sum before tax is levied. A net sum is the amount left after tax has been paid/deducted.
what is Income tax?
A tax paid by individuals on their taxable income.
what is Indexation allowance?
A tax allowance (ie deduction) for indexation available to companies in calculating their chargeable (ie capital) gains. This allowance takes into account inflation based on the Retail Price Index (RPI), so that a company is not taxed on chargeable gains arising solely because of inflation. Indexation allowance was frozen on 31 December 2017 and cannot be claimed for any period commencing on or after 1 January 2018.
what is Investors’ Relief (IR)?
A tax relief available to individuals in certain circumstances to reduce their chargeable gains.
what is Net income?
Total Income less available tax relief.
what is Non-savings income?
Income which is not savings or dividend income such as salary
what is a Personal allowance?
A band of tax-free income for individuals
what is a Personal savings allowance?
A band of savings income available for basic and higher rate taxpayers which is taxed at the savings nil rate
what is Savings income?
Income from savings, such as interest
what is taxable income?
Net income less the personal allowance
what is Total income?
A taxpayer’s gross income from all sources before any deductions
what is the Taxable total profit (TTP)?
Taxable total profits, chargeable to corporation tax. The total of a company’s taxable income profits and chargeable gains.
what is VAT?
A tax collected by registered businesses chargeable on supplies of goods and services.
on or before what date is income tax payable?
on or before 31 January following the tax year in which the disposal occurs
summary of income tax calculation
what are the two main chargeable disposals?
- The sale of an asset; and
- The gift of an asset during the taxpayer’s lifetime.
what is a free uplift on death?
there is *no chargeable disposal on death - the PRs are deemed to acquire the estate at its then market value
what is a chargeable asset?
All forms of property, except when they are specifically excluded
what is excluded from chargeable assets?
- principal private residence
- cars for private use (incl. vintage cars)
- certain investments
- UK sterling and foreign currency held for your own or your family’s personal use.
what is a principal private residence (PPR)?
an individual can claim the benefit of this exemption from CGT if they have occupied the PPR as their only or main residence during the whole period of
ownership, though the individual also has a valuable exemption in respect of the last 18 months of ownership even if they were not in actual occupation. In cases where an individual owns
more than one home it is a question of fact as to which of the residences is the PPR. A married couple can only have one PPR between them: they cannot each have a different principal place of residence (unless separated)
which certain investments are exempt as a chargeable assets?
includes:
- government securities
- National Savings certificates
- shares and securities held in Individual Savings Accounts (ISAs)
- life assurance policies
what is a chargeable gain?
the consideration received (or deemed to have been received)
what are the rates applied to chargeable gains?
20% or 10%, unless upper rate gain
for CGT purposes, how are disposals to charities treated?
no gain/no loss
for CGT purposes, how are gains made by charities treated?
gains made are exempt, provided that the gain is applied for charitable purposes
for CGT purposes, how are disposals between spouses treated?
- no gain/no loss
- the spouse acquires the assets at the base cost (original cost) from the spouse who disposed of it
for CGT purposes, what is the consideration received deemed to be in a disposal at arm’s length?
the consideration received will be the price paid by the buyer when the asset is sold
for CGT purposes, what is the consideration received deemed to be in a disposal between connected persons?
HMRC will deem the seller to have received market value irrespective of the actual sale proceeds
for CGT purposes, what is the consideration received deemed to be in a disposal at an undervalue?
HMRC will deem the seller to have received market value
for CGT purposes, what is the consideration received deemed to be in a disposal (gift)?
the donor will be deemed to have received the market value of the asset from the donee at the date of the gift
who is a connected person for CGT purposes?
✅parents
✅grandparents
✅siblings
✅issue
✅Companies, if they are under common control.
✅Partners in business
❌uncles and aunts
❌nephews and nieces
❌spouses (no gain/no loss)
basic calculation of chargeable gain
for CGT purposes, what is considered allowable expenditure?
- initial expenditure
- subsequent expenditure
- disposal expenditure
for CGT purposes, what is considered initial expenditure?
- The cost price of the asset (the ‘base cost’); and
- The incidental costs of acquisition (eg surveyors’ fees/lawyers’ fees).
for CGT purposes, what is considered subsequent expenditure?
- Subsequent expenditure on the asset which enhances its value; and
- Expenditure incurred in establishing, preserving or defending title to the asset.
for CGT purposes, what is considered disposal expenditure?
- Incidental costs of disposal (eg agents’ commission).
when does a capital loss occur?
when the cost of an asset is greater than the consideration received for it on disposal
on what disposals do capital losses not apply?
gifts
Since CGT is only charged on overall gains made by an individual in a tax year, what happens to any capital losses?
- capital losses that an individual has made in a tax year can be carried across and deducted from any gains made in the same tax year
- if there are insufficient gains against which to offset the losses in the same tax year that the losses are incurred, any unrelieved losses are carried forward to future tax years (in so far as the gains in those years are not covered by the annual exemption of £3,000)
what are the limitations on carrying forward capital losses?
- no time limits
- but must be used against the first available gains
what is the annual exemption?
all individuals (not companies) are entitled to make up to £3,000 of gains tax free
what taxes do companies pay on their gains?
corporation tax on chargeable gains (not CGT)
do charities pay CGT?
charities are generally exempt from paying CGT
what are the rates of CGT?
- basic rate: 10%
- higher and additional rate: 20%
- upper rate: 18% or 28% (eg for a disposal of a property that is not a PPR)
when will an individual’s CGT rate be 10%?
when:
taxable income
+
total taxable chargeable gains after all allowable deductions (incl losses and AE)
=
less than basic rate threshold of 37,700
when will an individual’s CGT rate be 20%?
Where an individual’s taxable income exceeds the basic rate tax threshold of £37,700
when will an individual’s CGT rate be partly 10% and partly 20% (apportioning)?
Where an individual’s taxable income is less than the basic rate tax band threshold of £37,700
but after the gains are added, the combined total exceeds that threshold:
- that part of the gains within the unused part of the basic rate tax band will be charged to CGT at 10%; and
- any part that exceeds the threshold will be charged at 20%
Summary of capital gains tax calculation
what is business asset disposal relief (BADR)?
BADR reduces the higher rate of CGT from 20% to 10% for gains arising on qualifying disposals beyond the first £1million gains made (lifetime allowance)
for BADR, at what point in the calculation is the reduced 10% rate applied?
it is applied to the taxable chargeable gain (the last step)
what is a qualifying disposal?
- All or part of a trading business;
- Assets in a business that used to trade;
- Shares in a trading company; or
- Shares in a company that used to trade;
how can BADR be claimed?
the taxpayer must make a claim on or before the first anniversary of 31 January following the tax year in which the relevant disposal is made
what are the conditions for a qualifying disposal of all or part of a business?
- The business must be a trading business; and
- The business must have been owned for at least 2 years prior to the date of disposal
what are the conditions for a qualifying disposal of assets used in a business that used to trade?
- The business must have been owned for at least 2 years before it ceased to trade;
- The assets must have been used in the business when it ceased to trade; and
- The assets must have been disposed of within 3 years of the business ceasing to trade.
what are the conditions for a qualifying disposal of shares in a company?
- The company must be and have been for at least 2 years before the date of disposal, a trading company;
- The shares must have been held for at least 2 years before the date of disposal;
- The person disposing of the shares must have been an officer or employee of the company who holds at least 5% of the ordinary voting shares and entitled to at least 5% of the profits available for distribution and 5% of the net assets on a winding up, for at least 2 years before the date of disposal.
what are the conditions for a qualifying disposal of shares in a company that used to trade?
- The shares must (generally) have been owned for at least 2 years before the company ceased to trade;
- The person disposing of the shares must have been an officer or employee of the company who heldat least 5% of the ordinary voting shares and was entitled to at least 5% of the profits available for distribution and 5% of the net assets on a winding up, for at least 2 years before the company ceased to trade; and
- The shares must be disposed of within 3 years of the company ceasing to trade.
what type of companies is BADR not available for?
investment companies
eg buy to let property investment
to whom does Investors’ Relief apply?
investors in unlisted trading companies who hold their shares for at least 3 years
what is Investors’ Relief?
IR reduces the higher rate of CGT from 20% to 10% for gains arising on disposals of qualifying
shares, subject to a lifetime limit of £10 million
in the context of Investors’ Relief, what is a qualifying share?
- The shares are fully paid ordinary shares and were issued to the individual for cash consideration on or after 17 March 2016;
- The company is (and has been since the shares were issued) a trading company or the holding company of a trading group;
-
At the time of issue of the shares, none of the company’s shares were listed on a recognised
stock exchange; - The shares are held by the individual for at least 3 years from 6 April 2016 (and continuously since issue); and
- The individual (or any connected person) is NOT (nor at any time has been from the date of
issue of the shares) an officer or employee of the company (or any connected company)
what are the 2 main business reliefs which
defer (postpone) CGT liability?
- Replacement of business assets relief (rollover relief)
- Gift of business assets relief (hold-over relief)
what are the rules on Replacement of business assets relief (rollover relief)?
- To avoid having to pay CGT each time certain business assets are sold and replaced, a taxpayer
can elect to postpone the CGT liability that arises on the sale of such an asset by ‘rolling over’ the gain into a qualifying replacement asset. - This applies to land and buildings, fixed plant and machinery and goodwill. The new asset need not necessarily be of the same type as the old one. It merely needs to be within the list of qualifying assets.
- The effect of this relief is that any gain arising from a disposal of a qualifying asset is carried forward and ‘rolled’ into the cost of a qualifying replacement asset. The acquisition cost of the replacement asset is reduced by the amount of the gain being rolled over.
- Therefore, any tax liability is postponed until the replacement asset is sold and no new qualifying replacement asset is purchased in its place.
- It is possible to roll over gains indefinitely, provided sufficient qualifying assets are bought within the requisite time limits.
- Note. The AE cannot be used to reduce any gain rolled over.
what are the rules on Gift of business assets relief (hold-over relief)?
Where an individual gives away a business asset, the donor (the person making the gift) and
donee (the person receiving the gift) can claim hold-over relief. As a transfer at an undervalue or
gift, the market value rule will apply. The donor will have no liability to CGT but the donee’s
acquisition cost for CGT purposes is reduced by the amount of the donor’s deemed gain.
In effect the CGT liability is postponed until the donee ultimately disposes of the asset (although
further hold-over relief can be claimed if the donee then gives away the asset).
As in the case of roll-over relief, the whole chargeable gain must be held over if a claim for holdover
relief is made. The donor cannot use their AE to reduce the gain held over.
Hold-over relief may also be claimed where an asset is sold at undervalue but the hold-over relief
will only be available on the gift element, ie the difference between the price paid and the market
value.
Business assets on which hold-over relief may be claimed include goodwill, assets used in the
business and unquoted shares in a trading company.
