AF1 Flashcards
What are the IR35 rules?
A personal service company is a limited company set up by an individual through which the individual provides services to a client. Effectively an alternative to self-employment.
IR35 rules say that if you would be deemed employed if the personal service company (or partnership) didn’t exist, then you will be taxed in the same way (i.e. can’t get around NI by paying yourself dividends instead).
Indications of employment/self employment
- Does the contract indicate employment?
- One client or many?
- Set working hours?
- Payment at hourly or daily rate?
- Holiday, sick pay, benefits
- Control over work (can they sub-contract)
- Who decides where work is carried out?
- Provide own equipment?
- Have they provided any capital, responsible for losses?
What is “relevant UK earnings” and what is it used for?
Relevant UK earnings is employment + trading income and this is used to determine the amount of pension contributions you can make.
I.E. pension contributions limited to max (3600, relevant UK earnings).
Remember you only get tax relief on up to the annual allowance, but can still technically make a pension contribution up to the amount of your relevant UK earnings.
What is “Adjusted Net Income” and what is it used for?
Adjusted net income is all income less pension contributions.
It is used to determine allowances (eg personal allowance if over £100k, child tax benefit if over £50k, child tax credit if joint income over £16,105).
What is “Adjusted Income” and “Threshold Income” and what are the used for?
Adjusted income is income from all sources with all pension contributions added back.
Threshold income is income from all sources with all pension contributions deducted.
For every £2 of adjusted income above £150k you lose £1 of annual allowance, down to a minimum of £10k.
However if threshold income is below £110k you are not affected by this tapering.
What is the general requirement regarding transfers (usually between spouses) for tax purposes to be effective?
All transfers must be outright and unconditional.
This applies (for example) when you transfer assets between spouses to reduce CGT, income tax or IHT.
What is the IHT treatment when a UK domicile dies and leaves assets to a non-UK domiciled spouse?
The normal 100% spousal exemption is not available for transfers/gifts from a UK domicile to a non-UK domicile.
However there is an additional £325k nil-rate band made available, so you can give your spouse twice the usual amount tax free.
This effectively makes up for the fact that when the non-dom spouse dies they won’t have a UK NRB.
When deciding what assets to put inside trusts, what are the advantages of:
- Investment bonds;
- Growth assets (collectives, equities etc.)
Investment bonds can be assigned into and out of trusts without triggering income tax or CGT. The gains get rolled up and only get taxed when the bond is finally cashed in, based on whoever is holding them at the time.
This allows trustees to assign the bonds to beneficiaries before they are cashed in, so they can be taxed on the individual instead of at high trust rates.
On the other hand if the transfer into trust is not a PET then holdover relief may be available to avoid paying CGT on growth assets. There is no such benefit for investment bonds.
Advice for people returning to the UK
As soon as a UK domicile returns to the UK they are liable for income tax on worldwide income the moment they arrive.
So they should realise gains and close savings accounts (etc) before returning.
Note that if they are returning within 5 years temporary non-residence rules may mean gains become taxable.
If they are non-domiciled this is less of an issue as the can choose not to remit income.
When below the £6,025 (tax tables) limit, can self employed people still pay?
Self employed people can elect when they do self assessment to pay class 2 NICs even if below the £6,025 limit.
How is income split between married couples?
If investments are owned jointly (regardless of the percentage split) income will be assumed to be shared 50:50 between married couples.
If they wish the split to be assessed on a different basis they need to make a declaration to HMRC.
Key points to remember in IHT questions on gifts
- Don’t forget the £3k per person annual gift allowance (rolled forward up to 1 year)!
- Even if a CLT is not taxable (i.e. within NRB) you get a mark for saying it will reduce the remaining NRB for the next 7 years.
3 tax issues around annuities
Generally the interest gets paid net of 20% tax, so you need to gross this element up and apply the 20% tax credit.
Those within personal allowance can apply to receive interest component gross.
If an annuity is purchased on behalf of somebody else the entire annuity payment is taxable, there is no tax-free capital return element.
Tax treatment of savings income on minors:
- Directly held;
- Junior ISA;
- Child Trust Fund;
- Cash ISA.
If gross savings income directly held or in cash ISAs (relevant for unmarried 16-18 year olds) is over £100 pa, then it is assessed for tax on the parents. This is ONLY IF the cash for the savings came from the parents (gifts from grandparents aren’t affected by this rule).
Junior ISAs and CTFs are exempt from this treatment.
