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IMC IE Chapter 10 > 10.4 Taxation of investments, Stamp Duty, Corporation tax, VAT > Flashcards

10.4 Taxation of investments, Stamp Duty, Corporation tax, VAT Flashcards

1
Q

Summarise direct investments in terms of:

  • Income
  • Capital
  • Withholding
  • Stamp Duty
A

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2
Q

How are Collective investment schemes taxed at fund level?

A

Collective investment schemes pay corporation tax at 20% on income and no tax on gains.

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3
Q

How are Investment trusts taxed at fund level?

A

Investment trusts pay the standard rate of corporation tax on income and no tax on gains.

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4
Q

How are REITs taxed at fund level?

A

REITs pay no tax on income or gains.

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5
Q

Summarise tax liabilities for investors in terms of:

  • Income tax
  • Withholding tax
  • Capital gain
  • Stamp duty
A

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6
Q

What do collective investment schemes include?

A
  • Unit trust
  • Investment company with variable capital (ICVC)
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7
Q

What is an equity CIS?

A

Over 60% of fund invested in equities

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8
Q

What is a Debt CIS?

A

Over 60% of fund invested in debt

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9
Q

What does REIT stand for?

A

Real estate investment trust company

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10
Q

What does VCT stand for?

A

Venture capital trust

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11
Q

What does ITC stand for?

A

Investment trust company

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12
Q

Sometimes income from a collective investment scheme is not paid out to the investor but instead is reinvested to purchase more units/shares in the fund. How is this taxed (as the investor has not received it)?

A

Although the investor has not received it through the post or in their bank account, their fund has received it, so they are taxed on income reinvested back into their fund each tax year. The investor will receive a statement from the company detailing how much income has been reinvested to enable them to declare this on their tax return.

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13
Q

What is stamp duty?

A

Stamp duty is a form of UK taxation payable on transfers of assets such as real estate and certain securities.

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14
Q

How does stamp duty work in relation to securities?

A

In relation to securities, stamp duty is payable on certificated share purchases over £1000. Traditionally the stock transfer form is stamped in order to evidence the payment of the tax.

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15
Q

What is stamp duty reserve tax (SDRT)?

A

More typically nowadays, there is no transfer document as securities are held in dematerialised (electronic) form within CREST. For transfers on these securities, the tax is known as stamp duty reserve tax (SDRT).

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16
Q

List 5 securities which require stamp duty reserve tax.

A
  1. Shares in a UK Company
  2. Shares in a foreign company with a share register in the UK
  3. Options to buy shares
  4. Purchases of the right to shares
  5. UK convertible loan stock
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17
Q

Who is liable to pay stamp duty?

A

The buyer of the securities.

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18
Q

List 7 investments which are not liable to Stamp Duty or SDRT?

A
  1. Gilts
  2. Corporate bonds (including Eurobonds) and debentures (unless convertible)
  3. Units in unit trusts or OEIC shares
  4. Shares traded on the AIM, the high-growth segment of the LSE or AQSE Growth Market
  5. Bearer securities
  6. Overseas securities
  7. New issues
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19
Q

Which securities are dealt with under special rules when it comes to SDRT?

A
  • Unit trusts
  • OEICs
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20
Q

What are the SDRT rules for unit trust and OEICs?

A

There is no SDRT when the investor purchases from the fund manager, but when units are surrendered the fund manager is charged SDRT. The fund manager pays the SDRT directly to HMRC and usually passes this on to the unit holders through management charges.

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21
Q

List 3 other things which are exempt stamp duty or SDRT transfers.

A
  1. Recipients of gifts
  2. Registered charities
  3. LSE member firms (who are not fund managers) and are granted intermediary status by the LSE e.g. market makers
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22
Q

What are the stamp duty and SDRT rates?

A

The rate of taxation is the same for both stamp duty and SDRT (0.5%).

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23
Q

What is SDRT rounded to?

A

SDRT is rounded to the nearest penny

24
Q

What is stamp duty rounded to?

A

Stamp duty is rounded up to the next £5

25
Q

When is there no stamp duty liability?

A

On certificated transfers, there is no stamp duty liability if the purchase is less than £1,000.

26
Q

What is stamp duty land tax?

A

Stamp duty land tax is a transaction tax on land in the UK; it is a charge on documents that transfer ownership of property.

27
Q

How is SDLT unlike most modern taxes?

A

Unlike most modern taxes SDLT is not collected directly from taxpayers by assessment. The purchaser of land is responsible for making a land transaction return and paying the SDLT within 30 days of the effective date of the transaction.

28
Q

What are the SDLT rules for first-time buyers?

A

Note that first-time buyers pay zero stamp duty land tax on the first £300,000 for property purchases up to £500,000. The remaining £200,000 is chargeable at 5%. If the property value is above £500,000 normal rates apply.

29
Q

What is the rate of tax for SDLT?

A

The rate of tax is a percentage of the purchase consideration for the transaction (rounded-down to the nearest pound).

30
Q

Summarise the percentage of SDLT on residential land or property – freehold or leasehold.

A

SDLT on residential land or property – freehold or leasehold – is as follows:
• For a purchase price/lease premium or transfer value of up to £125,000 the SDLT for a main residence is 0% and the SDLT for additional residential properties is 3%.
• For a purchase price/lease premium or transfer value between £125,001 to £250,000 the SDLT for a main residence is 2% and the SDLT for additional residential properties is 5%.
• For a purchase price/lease premium or transfer value between £250,001 to £925,000 the SDLT for a main residence is 5% and the SDLT for additional residential properties is 8%.
• For a purchase price/lease premium or transfer value between £925,001 to £1,500,000 the SDLT for a main residence is 10% and the SDLT for additional residential properties is 13%.
• For a purchase price/lease premium or transfer value over £1,500,000* the SDLT for a main residence is 12% and the SDLT for additional residential properties is 15%.

Note: SDLT is charged at a flat rate of 15% on residential property costing more than £500,000 when bought by certain corporate bodies.

31
Q

What rate of tax is a SDLT calculation for a residential property based on?

A

A progressive rate of tax.

32
Q

Calculate the SDLT on a main residence bought for £600,000.

A

£125,000 at 0% = £0
£125,000 at 2% = £2,500
£350,000 at 5% = £17,500
TOTAL SDLT = £20,000

33
Q

Summarise SDLT for commercial property.

A
  • For a purchase price/lease premium or transfer value of up to £150,000 the SDLT rate is 0%.
  • For a purchase price/lease premium or transfer value between £150,001 to £250,000 the SDLT rate is 2%.
  • For a purchase price/lease premium or transfer value above £250,000 the SDLT rate is 5%.
34
Q

How is SDLT charged for new leased property?

A
  • SDLT for new leased property is based on the net present value (NPV) of the lease (lease premium).
  • However, SDLT will also consider the rent over the term of the lease. If the total rent over the term of the lease (known as net present value (NPV)) is below £125,000 for residential property or below £150,000 for commercial property, there will be 0% SDLT.
    If the net present value is above £125,000 for residential property and between £150,000 and £5 million for commercial property, an additional SDLT of 1% of the net present value is charged. Where the net present value of the commercial property is above £5 million, SDLT rises to 2%.
35
Q

What is Land and Buildings Transaction Tax (LBTT)?

A

Land and Buildings Transaction Tax (LBTT) is a tax applied to residential and commercial land and buildings transactions (including commercial purchases and commercial leases) where a chargeable interest is acquired. It is a marginal tax and was introduced in Scotland on 1 April 2015, replacing SDLT.

36
Q

What is it important to distinguish between when it comes to corporation tax?

A

It is important to distinguish between limited companies, sole traders and partnerships.

37
Q

Who pays corporation tax?

A

Only limited companies pay corporation tax based upon their business profits over a 12-month period (their financial year).

38
Q

What are the 3 major factors of corporation tax?

A
  1. Is self-assessed
  2. Most companies pay 9 months and 1 day after the end of their accounting period
  3. Large companies (profits = £1.5m) pay in 4 quarterly instalments
39
Q

How are profits made by sole traders and partnerships taxed?

A

Profits made by sole traders and by partnerships are assessed against each individual’s share in the business. This share of the profits is then taxed through income tax rather than corporation tax.

40
Q

Which companies pay corporation tax?

A

Corporation tax is payable by UK resident companies on their worldwide profits, and by companies resident overseas on their profits arising in the UK.

41
Q

What income is corporation tax payable on?

A

The tax is payable on income, such as operating profits and interest receivable, and gains, such as the profit arising from the sale of a building or shares.

42
Q

How long must a business keep its records?

A

A business is generally obliged to keep records to enable them to complete and justify a tax return for six years.

43
Q

How much is corporation tax?

A

Corporation tax is paid at a rate of 19% regardless of size of company.

44
Q

What 3 things can a company’s trading losses normally be set against?

A
  1. Income and gains of the same accounting period.
  2. Income and gains of the previous year.
  3. Trading profits from the same trade in future years.
45
Q

What do the rules allow for losses made during the final 12 months of trading?

A

Losses made during the final 12 months of trading can be carried back three years. Losses are set against more recent periods before earlier periods.

46
Q

What is VAT?

A

VAT is a tax charged on the provision of many goods and services in the UK. It is designed to be a tax on the end consumer, i.e. a sales tax.

47
Q

What must happen in order for VAT to be charegable?

A

For VAT to be chargeable there has to be a taxable supply of goods or services by a taxable person in the course of business carried on by him.

48
Q

What counts as a taxable supply?

A

A taxable supply includes goods and services in the UK and the importation of some goods.

49
Q

What is a taxable person?

A

A taxable person is a legal person (such as a company or sole trader) registered for VAT purposes.

50
Q

What kind of tax is VAT and what does this mean?

A

VAT is an ad valorem tax i.e. it is added to the sales price of goods and services. Not every good or service has VAT added to the price, only those goods or services which are deemed to be taxable supplies. Supplies include items that are sold or gifted.

51
Q

Summarise the 3 categories of supply

A
  • A standard-rated taxable supply is charged VAT at 20%
  • A reduced taxable supply (e.g. domestic fuel) is charged VAT at 5%
  • A zero-rated taxable supply (e.g. children’s clothes, printed books) is not charged VAT
52
Q

Why is the type of supply important?

A

The type of supply is important because it determines whether a business can reclaim the VAT it has suffered on purchases.

53
Q

Which supplies can reclaim VAT and which can’t?

A

Only those businesses making taxable supplies can reclaim VAT. A business making exempt supplies or supplies outside the scope of VAT cannot reclaim the VAT it has paid on purchases of goods and services.

54
Q

What do the rules on ‘exempt supplies’ typically include?

A

The rules on ‘exempt supplies’ typically includes charities, which results in charities paying VAT.

55
Q

What must a business be in order to reclaim VAT?

A

A business can only reclaim VAT if it is a taxable person. A business with a VAT taxable turnover of £85,000 must register with the HMRC. Businesses can register voluntarily to charge VAT to allow themselves to reclaim the VAT they have suffered.

56
Q

What are the VAT rules for stockbrokers?

A

Services traditionally provided by stock brokers are classified differently for VAT purposes:

  • Discretionary and advisory services are standard-rated taxable supply
  • Execution only services are exempt from VAT

IMC IE Chapter 10 (6 decks)

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