5. Different taxes and their implications

Question 1

What are some of the general taxes that an individual / entity may be subject to?

Answer 1

• Income tax
• Capital gains tax(CGT)
• Inheritance tax (IHT)
• Corporation tax
• Wealth tax
• Stamp duty
• Value added taxes (VAT) (or GST)

Question 2

What are direct and indirect taxes?

Answer 2

Tax on income is known as direct taxes, and taxes based on expenditure are known as indirect taxes.
Indirect taxes include:
-VAT, GST, Insurance premium tax, excise duties, customs duties

Question 3

What are the 3 types of income tax systems?

Answer 3

• Progressive tax system - Rate of tax increases as the individual’s earnings increase, above a threshold (which is usually tax exempt) (UK).
• Proportional tax system - Flat tax regime, where there is an exemption for a certain amount of earned income and then a single rate is charged on the remainder. e.g. Jersey and Guernsey
• Regressive tax system - Rate of tax falls as the level of income that is subject to tax rises.

Question 4

What are the 3 types of income that would be subject to income tax?

Answer 4

• Non-savings income - trading, employment and property income
• Savings income - bank or building society interest
• Dividend income

Question 5

What types of income would be exempt from income tax?

Answer 5

• Gambling winnings
• Income from Individual savings accounts (ISAs)
• Certain redundancy payments
• Some social security benefits

Question 6

What is corporation tax?

Answer 6

Companies subject to to corporation tax on their profits.

Question 7

What is capital gains tax?

Answer 7

Tax on profits or gains that are made when a chargeable asset is disposed of.

Question 8

What is a chargeable person?

Answer 8

A chargeable person includes individuals or companies who are resident in the UK.

Question 9

What is a chargeable disposal?

Answer 9

A chargeable disposal includes the disposal, sale, gift or loss or destruction of an asset.

Question 10

What are exemptions to chargeable assets?

Answer 10

• Principal private residence
• Motor vehicles
• Gilt edges securities
• Qualifying corporate bonds
• Investments made in an ISA
• Certain wasting chattels

Question 11

Types of assets and their locations for tax purposes

Answer 11

• Land and Buildings - where it is physically present
• Chattels - where they are located
• Debts - where the creditor is located
• Patents and royalties - where they are registered

Question 12

What is inheritance tax?

Answer 12

Tax payable by the person who inherits a deceased person’s assets (where is the estate is over the nil rate band). Also payable when trusts are settled or gifts are made. (other than PETs)

Question 13

What are exempt transfers for IHT?

Answer 13

Includes gifts made as follows:

• To a spouse or civil partner
• To some national institutions such as museums or universities
• To UK political parties
• To qualifying charities
• In considerations of marriage
• Gifts less than £250
• Regular gifts

Question 14

What are potentially exempt transfer for IHT?

Answer 14

Any gift made to an individual as long as the donor survives 7 years after making the gift.

Question 15

What is taper relief?

Answer 15

If the donor of a gift dies between 7-3 years of making a gift, taper relief is applied. This reduces the amount of IHT payable on a sliding scale based on the time between when the gift was made and the date of death.

Question 16

What are wealth taxes?

Answer 16

Determined according to an individual’s net-worth which is above a pre-determined level. Usually at a low rate.

Question 17

What is annual tax on enveloped dwellings? (ATED)

Answer 17

Annual tax of a fixed sum for residential properties owned by non natural persons.

Question 18

What is value added tax (VAT)?

Answer 18

Charges at 20% on most goods and services. Indirect tax. Collected by supplier and paid over to HMRC.

Question 19

What is withholding taxes?

Answer 19

Tax deducted from interest and dividends paid to residents of foreign countries.

Question 20

What is the European Savings Tax Directive?

Answer 20

EUSTD applies to residents of the EU who have overseas investments. The aim is to enable interest payments made on savings held in one member state to be paid to someone in another member state and be taxed on those savings in accordance with the taxation legislation in the recipients country of residence.

Question 21

What was the US Foreign Account Tax Compliance Act (FATCA) designed to do?

Answer 21

To limit the tax evasion of US tax payers holding offshore accounts by placing reporting requirements on foreign financial institutions (FFIs).

Question 22

What is the role of FFIs in FATCA?

Answer 22

They are required to report information about financial accounts held by US tax payers or foreign entities where a US tax payer holds a substantial interest.
Reporting by FFIs is made directly to the Internal Revenue Service (IRS), although some jurisdictions have entered in intergovernmental agreements which allows FFIs to report to their tax authorities who will in turn report to the IRS.

Question 23

What is a non-participating FFI?

Answer 23

A non-participating FFI is one that has not yet signed an agreement with the IRS to undertake due diligence on the accounts held with its organisation. Non-participating FFIs are subject to withholding taxes.

Question 24

What is CRS?

Answer 24

Common Reporting Standard was introduced by the OECD countries and means that most developed countries will now automatically disclose tax information relating to income and assets of non residents to the tax authorities.

Question 25

What are IGAs?

Answer 25

Intergovernmental agreements aim to improve international tax compliance and are based on reporting and automatic exchange of information.

Question 26

Prior to the implementation of the Financial Act 2013, how was an individual deemed to be resident in the UK?

Answer 26

• Where they were physically present in the UK for 183 days or more during the fiscal year
• Where they spent 91 days or more each fiscal year on a 4 year average
• Where they came to the UK with the intention of residing there permanently
• Where they habitually lived in the UK and only went abroad for short periods of time

Question 27

What introduced the statutory residence test and when is it applied?

Answer 27

The Finance Act 2013
Under this legislation, a person will be resident in the UK for a tax year if they spent 183 days or more in the UK. If they did not, these tests apply.

Question 28

What is the Automatic overseas test?

Answer 28

Under the statutory residence test, if any of the following are met, then the individual is automatically a non-resident:
-If a person was resident in the UK for 1 of the 3 previous fiscal years and spent less than 16 days in the UK
-If a person was not resident in the UK for any of the 3 previous fiscal years and spent less than 46 days in the UK
-The person worked full time overseas without significant breaks and spent less than 91 days in the UK in the fiscal year; the number of days in the fiscal year on which they worked for more than 3 hours in the UK was less than 31(does not apply for people who work on ships or planes)
If none of the above apply, the Automatic UK test is applied.

Question 29

What is the Automatic UK test?

Answer 29

If any of the following apply, they are a UK resident for the tax year:
-183 days or more were spent in the UK
-The person had a home in the UK during all or part of the tax year and spent at least 91 consecutive days in the UK (30 of which fall in the fiscal year); and had no overseas home or one where not a more than a permitted amount of time was spent there.
If none of these apply, the sufficient ties test is applied

Question 30

What is the sufficient ties test?

Answer 30

The number of days in the UK determines the number of ties that a needed to make a person a UK resident. Ties include:

• Family ties
• Accommodation ties
• Work ties
• 90-day ties
• A country tiqe

Question 31

What are the different types of domicile?

Answer 31

• Domicile of origin - acquired at birth from father (or mother is parents are not married)
• Domicile choice - Chose domicile, the individual must be present in the country they wish to have considered as their new domicile; and must demonstrate that they intend to leave the UK on a permanent basis. (i.e. sever all ties)
• Domicile of dependency - Domicile which follows that of the person whom they are legally dependent
• Deemed domicile - A person is deemed domicile for IHT purposes if they have been resident in the UK for income tax purposes for not less than 17 out of the last 20 years. (concept for IHT only!)

Question 32

What is the arising basis of taxation?

Answer 32

A person who is resident in the UK will be taxed on their income as it arises, wherever that income or those gains are in the world.

Question 33

What is the remittance basis of taxation?

Answer 33

Allows individuals to pay UK tax on their foreign income and gains only when they are remitted to the UK. This is available to individuals who are resident but not domiciled or not ordinarily resident.