11 - Tax in the Financial Affairs of Individuals and Trusts Flashcards
Why might it be advantageous to chose investments that are subject to CGT rather than income tax?
The rates on potential gains are lower
Why do income earners between £100K & £125K suffer a 60% marginal rate of tax?
Due to the gradual withdrawal of the personal allowance
How might an offshore single premium bond be used as a tax shelter?
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
When would the HMRC issue a APN? (accelerated payment notice?
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
What might be the drawbacks of using a tax avoidance scheme?
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
how much of a personal allowance can be transferred to a spouse or civil partner?
£1,250 provided they do not pay tax at higher than the basic rate
For transfers of assets between married or civil partners to escape CGT, does the couple have to live together?
Yes, within the tax year the transfer takes place
How much is the family element of Child tax credits?
£545
How much is the child element of Child tax credits and how does it effect third and fourth children born after 6th April 2017?
£2,830
Not paid on the 3rd or 4th child
What is the income threshold for CTC?
£16,385
How much is CTC and WTC reduced by over the income thresholds of £16,385 (CTC) and £6,530 (WTC)?
41p for every £1 over the limit
How is child benefit reduced if the parents income is over £50,000 PA?
1% for every £100 of excess
If a parent fails to notify the HMRC of excess income for child benefit, what are the consequences?
They will be charged penalties for failure to notify
What might a person want to consider before exercising any share options?
Their position within the tax year in terms of CGT at 10% or 20% depending on their basic rate band within the year
Why might a company director want to take dividends rather than renumeration?
May be able to reduce NIC’s
The rate of corporation tax is 19%
The dividend allowance of £2000
What is the benefit of opting for a company car with emissions of up to 50g/km?
They qualify for capital allowances at the rate of 100% so are a deductible expense in the year of purchase for the employer
What is the qualifying period for maximum state pension?
35 years
Why might a lifetime ISA be more suitable for a basic rate tax payer?
The tax relief on the initial investment is the same as a pension, but with tax free withdrawals
How much can you contribute to a partner of child’s pension if they have little or no earnings?
£3,600 (benefits from tax relief at 20%)
How much is the exemption to IHT for a spouse or civil partner who is not UK domiciled?
£325,000
What factors should be considered when making PET’s of assets?
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
What is the benefit of establishing a discretionary trust every 7 years?
There would be no immediate and potentially no future IHT liability
How much business relief is available on death if the business is passed to a family member?
100%
How might the annual exemption for IHT be used to the benefit of a child?
To pay into a pension for a child (net annual premiums of £2,880)
Pay into a CTF or JISA, up to £9,000
What are the advantages of trusts when considering IHT planning?
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
What are the three trusts mainly used in IHT planning?
Bare (absolute) trusts
Interest in Possession
Discretionary
If the donor of a bare trust survives less than seven years when the trust was created, what are the consequences?
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
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?
Bare trust - PET
IIP and discretionary - CLT
What is the basic strategy for lifetime gifts?
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
Where business asset relief is available, why may it not be beneficial to claim holdover relief?
Holdover relief only defers a gain and the 10% relief may not be available when the gift is ultimately disposed of
What are some of the ways CGT can be minimised?
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
How can a bed and breakfast be used?
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
Do taxpayers who use registered tax avoidance schemes have to declare this on their tax return?
Yes, they must give there reference number
How much income can be generated by a child from a parents gift and it not be treated as the parents income?
Up to £100 gross in a tax year
State two ways that directors can reduce their NIC’s?
By taking dividends instead of salary and by sacrificing salary to increase the amount the company pays to company pension schemes
How can pension contributions reduce CGT?
By increasing a person’s basic rate tax band and therefore reducing the amount of gains taxed at 20% (or 28% for residential property)
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?
It could be advantageous where the asset transferred away from the spouse is expected to grow in value faster than the nil rate band
