13: Tax Flashcards
What is income tax?
Income tax is paid by individuals on their income, such as earnings from employment, business profits, bank interest, and dividends.
What is capital gains tax (CGT)?
CGT is a tax on the profit when an individual disposes of an asset, calculated as the difference between the asset’s purchase price and its sale value.
Which tax do companies pay instead of income tax and CGT?
Companies pay corporation tax on their income profits and capital gains.
What is stamp duty?
Stamp duty is a tax on documents, such as stock transfer forms used to transfer shares, enforceable only if HMRC has stamped them to show the stamp duty has been paid.
Who generally has to account for VAT and who cannot reclaim it?
Most businesses must account for VAT, charging it on sales and reclaiming it on business expenditures. Consumers generally pay VAT without being able to reclaim it.
What is the difference between tax avoidance and tax evasion?
Tax avoidance is legally using tax laws to minimize tax liability, while tax evasion is illegally evading tax liability by not declaring income or transactions.
What is the General Anti-Abuse Rule (GAAR)?
GAAR allows HMRC to challenge transactions lacking a commercial purpose other than avoiding taxes such as income tax, CGT, or corporation tax.
Define ‘income’ in the context of income tax.
Income is money received on a recurring basis, such as salary, bank interest, and business profits, but excludes one-off sales of assets.
List the sources of taxable income.
Taxable income sources include:
- Trade, profession, or vocation income
- Property income
- Savings and investment income (interest and dividends)
- Employment and pensions income
What are the main stages in calculating income tax?
- Add up income from each source (TOTAL INCOME)
- Deduct allowable reliefs (NET INCOME)
- Deduct allowances (TAXABLE INCOME)
- Adjust for personal savings and dividend allowances
- Separate out non-savings, non-dividend income from savings income and dividend income
- Apply tax rates to calculate tax on each type of income
- Add together amounts of tax (TAX LIABILITY)
What is the tax year for income tax purposes?
The tax year runs from 6 April to 5 April of the following year.
When will expenditure be deductable?
When it is:
- wholly and exclusively incurred for the purposes of the trade
- of an income nature
- not prohibited from deduction (e.g. entertaining UK customers)
What relief can individuals claim on loan interest?
Individuals can deduct interest paid on loans specifically to buy a partnership share, contribute capital, or make a loan to a partnership.
Is capital expenditure deductible from total income?
No, but there are capital allowances, which allow deduction on a proportion of the money spent on plant and machinery from their net profit for income tax purposes.
Can you claim relief for interest paid on loans to invest in ‘close companies’ (small ones) and loans taken out by PRs to pay inheritance tax?
Yes you can.
What is the personal allowance in income tax?
The personal allowance is a set amount of income that an individual can receive tax-free each tax year. This amount is currently £12,570.
How is personal allowanced altered if a taxpayer’s net income is above £100,000?
It is reduced by £1 for every £2 which is above £100,000.
What are employment-related share schemes and when do they not apply?
When employees are partly paid by issuing them with shares for free or less than market value. The employees will be treated as having received the difference between the value of the shares and how much they spent on them.
These rules don’t apply when the employee is granted an OPTION to buy shares at some date in the future, but if they choose to do that, they may have to to pay income tax on the money between the market value and what they paid.
How are personal savings and dividend allowances adjusted?
These allowances let individuals receive a specified amount of interest on savings and dividends tax-free, depending on their taxable income and tax band.
What are the different rates of income tax?
Income tax rates include:
20% Basic rate - £12,570- £50,000
40% Higher rate - over £50,000
45% Additional rate - over £125,000
How is capital gains tax calculated?
CGT is calculated as:
[Chargeable Gain] = [Disposal Proceeds] - [Acquisition Cost] - [Incidental Costs] - [Improvement Expenditure]
What needs to be separated from the income, as they are taxed at different rates?
Savings and dividend income (from NSNDI).
Which is taxed first, Non-Savings, Non-Dividend Income (NSNDI), or Savings income?
Savings income is taxed after NSNDI, and finally dividend.
What is the disposal process in CGT?
Disposal can be a sale or a gift. If sold, the proceeds are the sale price; if given away, the proceeds are the market value. Disposals on death are not chargeable.
What are chargeable assets under CGT?
Most assets, including foreign currency and property, are chargeable. Exemptions include private motor vehicles and some wasting assets.
What are wasting assets?
Wasting assets are those with a predictable life of less than 50 years, such as computers and consumer goods, and are generally not chargeable under CGT.
What is the annual exemption for CGT?
The annual exemption allows individuals to deduct a set amount of their chargeable gains from their total gains each tax year. The exemption amount varies annually.
