11 - Tax in the Financial Affairs of Individuals and Trusts

Question 1

Why might it be advantageous to chose investments that are subject to CGT rather than income tax?

Answer 1

The rates on potential gains are lower

Question 2

Why do income earners between £100K & £125K suffer a 60% marginal rate of tax?

Answer 2

Due to the gradual withdrawal of the personal allowance

Question 3

How might an offshore single premium bond be used as a tax shelter?

Answer 3

It would allow income to to be rolled up gross until the bond is paid out and therefore the tax position of the individual may be different

Question 4

When would the HMRC issue a APN? (accelerated payment notice?

Answer 4

If a person has used a tax avoidance scheme before the success or failure of the scheme has been determined. The APN requires payment of tax in advance and within 90 days of the notice

Question 5

What might be the drawbacks of using a tax avoidance scheme?

Answer 5

Draw the attention of HMRC & potentially give rise to an investigation
The expense of implementation and defence might reduce benefits
Schemes turn out to be ineffective
HMRC might charge penalties or underpaid tax where a scheme fails
Tendency for government to introduce legislation which could be retrospective

Question 6

how much of a personal allowance can be transferred to a spouse or civil partner?

Answer 6

£1,250 provided they do not pay tax at higher than the basic rate

Question 7

For transfers of assets between married or civil partners to escape CGT, does the couple have to live together?

Answer 7

Yes, within the tax year the transfer takes place

Question 8

How much is the family element of Child tax credits?

Answer 8

£545

Question 9

How much is the child element of Child tax credits and how does it effect third and fourth children born after 6th April 2017?

Answer 9

£2,830

Not paid on the 3rd or 4th child

Question 10

What is the income threshold for CTC?

Answer 10

£16,385

Question 11

How much is CTC and WTC reduced by over the income thresholds of £16,385 (CTC) and £6,530 (WTC)?

Answer 11

41p for every £1 over the limit

Question 12

How is child benefit reduced if the parents income is over £50,000 PA?

Answer 12

1% for every £100 of excess

Question 13

If a parent fails to notify the HMRC of excess income for child benefit, what are the consequences?

Answer 13

They will be charged penalties for failure to notify

Question 14

What might a person want to consider before exercising any share options?

Answer 14

Their position within the tax year in terms of CGT at 10% or 20% depending on their basic rate band within the year

Question 15

Why might a company director want to take dividends rather than renumeration?

Answer 15

May be able to reduce NIC’s
The rate of corporation tax is 19%
The dividend allowance of £2000

Question 16

What is the benefit of opting for a company car with emissions of up to 50g/km?

Answer 16

They qualify for capital allowances at the rate of 100% so are a deductible expense in the year of purchase for the employer

Question 17

What is the qualifying period for maximum state pension?

Answer 17

35 years

Question 18

Why might a lifetime ISA be more suitable for a basic rate tax payer?

Answer 18

The tax relief on the initial investment is the same as a pension, but with tax free withdrawals

Question 19

How much can you contribute to a partner of child’s pension if they have little or no earnings?

Answer 19

£3,600 (benefits from tax relief at 20%)

Question 20

How much is the exemption to IHT for a spouse or civil partner who is not UK domiciled?

Answer 20

£325,000

Question 21

What factors should be considered when making PET’s of assets?

Answer 21

Whether the asset produces income that is needed
The level of business relief on gifts
The availability of CGT holdver relief
Whether the person should maximise pension contributions before making any gifts

Question 22

What is the benefit of establishing a discretionary trust every 7 years?

Answer 22

There would be no immediate and potentially no future IHT liability

Question 23

How much business relief is available on death if the business is passed to a family member?

Answer 23

100%

Question 24

How might the annual exemption for IHT be used to the benefit of a child?

Answer 24

To pay into a pension for a child (net annual premiums of £2,880)
Pay into a CTF or JISA, up to £9,000

Question 25

What are the advantages of trusts when considering IHT planning?

Answer 25

Can provide cash when an estate is tied up in probate delays
The settlor can also be the trustee, giving some control of the gift without sacrificing IHT savings
Can protect family wealth from divorce, creditors or step-relatives
Can prevent large amounts or capital falling into the hands of recipients at the wrong time
Provide certainty the chosen person will benefit
They are confidential documents

Question 26

What are the three trusts mainly used in IHT planning?

Answer 26

Bare (absolute) trusts
Interest in Possession
Discretionary

Question 27

If the donor of a bare trust survives less than seven years when the trust was created, what are the consequences?

Answer 27

IHT may become payable if the gift is not covered by the donor’s nil rate band
Taper relief may be available is the death occurs after three years

Question 28

How is the treatment of an interest in possession and discretionary trust different to that of a bare trust in terms of how the gift is dealt with?

Answer 28

Bare trust - PET

IIP and discretionary - CLT

Question 29

What is the basic strategy for lifetime gifts?

Answer 29

Gift into a discretionary trust within the nil rate band
repeat every 7 years (ensuring the total does not exceed the nil rate band at the 10 year anniversary to avoid periodic charges
Make outright gifts into a bare trust where the donor has used their Nil rate band

Question 30

Where business asset relief is available, why may it not be beneficial to claim holdover relief?

Answer 30

Holdover relief only defers a gain and the 10% relief may not be available when the gift is ultimately disposed of

Question 31

What are some of the ways CGT can be minimised?

Answer 31

Disposal of investments standing at a loss in the same tax year to create a capital loss
Spread disposals over more than one year to use the annual exemption
Consider deferring or exempting gains by making EIS or SEIS investments
Transfer assets between spouses or civil partners

Question 32

How can a bed and breakfast be used?

Answer 32

Sell shares within an ISA and match with an acqusition
Husband and wife buy and sell shares to the same value
Buy and sell shares in different companies but in the same sector

Question 33

Do taxpayers who use registered tax avoidance schemes have to declare this on their tax return?

Answer 33

Yes, they must give there reference number

Question 34

How much income can be generated by a child from a parents gift and it not be treated as the parents income?

Answer 34

Up to £100 gross in a tax year

Question 35

State two ways that directors can reduce their NIC’s?

Answer 35

By taking dividends instead of salary and by sacrificing salary to increase the amount the company pays to company pension schemes

Question 36

How can pension contributions reduce CGT?

Answer 36

By increasing a person’s basic rate tax band and therefore reducing the amount of gains taxed at 20% (or 28% for residential property)

Question 37

Given that any unused nil rate band can be transferred to the surviving spouse, is there any reason to transfer assets up to the nil rate band on first death?

Answer 37

It could be advantageous where the asset transferred away from the spouse is expected to grow in value faster than the nil rate band