BLP - Week 6 Individual Taxation Flashcards
What are direct taxes?
Income tax, CGT, and corporation tax are direct taxes.
Direct taxes depend on the taxpayer’s circumstances.
What is an indirect tax?
VAT is an indirect tax, based on transactions.
Indirect taxes are not dependent on the taxpayer’s circumstances.
Define income receipts.
Money received on a regular basis classified as income receipts.
Examples include trading profits, bank interest, and rent payments.
Define capital receipts.
Receipts from transactions that are not part of regular activity, considered one-off transactions.
Example: Profit from selling a property owned by a business.
What is income expenditure?
Day-to-day business expenses.
Examples include bills for utilities, wages, and marketing.
What is capital expenditure?
Purchasing an asset as part of the business infrastructure, considered long-term investment.
Examples include purchasing machinery or property.
What are capital allowances?
Tax relief for capital expenditure, similar to depreciation, allowing certain expenses to be deducted over time.
This spreads the cost of capital assets rather than waiting for their sale.
What is the tax year for individuals and companies?
Individuals are taxed from 6 April to 5 April the following year.
Companies are taxed from 1 April to 31 March.
What are the steps to calculate income tax?
- Calculate** total income**.
- Deduct tax reliefs to get net income.
- Deduct personal allowance to get taxable income.
- Classify taxable income (non-savings, savings, dividends).
- Apply the personal savings allowance (if applicable).
- Apply tax rates.
- Add tax amounts to get total liability.
What is total income?
Total income is a taxpayer’s gross income from all sources.
Includes savings, benefits in kind, and dividends.
How is net income calculated?
Net income is total income minus available tax reliefs.
Tax reliefs include interest on qualifying loans and pension contributions.
Interest paid out on qualifying loans
This is NOT interest received by the individuals. This is the interest an individual pay TO the banks on the cost of receiving certain loans from the bank.
What is taxable income?
Taxable income is net income minus personal allowance.
How is the personal allowance reduced for high earners?
It is reduced by £1 for every £2 of net income over £100,000. It is fully removed at £125,140. ]
Formula: [£12,570] - [(NET INCOME - £100,000)/2]
What must be done to calculate taxable income?
Split the taxable income into non-savings, savings, and dividend income.
Non-savings income = taxable income – savings income – dividend income
This classification affects the tax rates applied.
What are the personal savings allowances for taxpayers?
Basic rate taxpayers have a £1,000 allowance, higher rate taxpayers have £500, and additional rate taxpayers have none.
What is the tax treatment of dividend income?
The first £500 of dividend income is tax-free.
What is the tax rate for non-savings income and savings income?
0 – 37,700 - 20%
37,701 – 125,140 - 40%
+ 125,140 - 45%
What is the tax rate for dividends?
0 – 37,700 - 8.75%
37,701 – 125,140 - 33.75%
+ 125,140 - 39.365%
What is the ‘cake’ method in income tax calculation?
Each type of income is viewed as a layer of a cake: non-savings income is the base, savings income is the middle, and dividend income is the top.
This method helps visualize the order of taxation.
What are the four elements required for CGT to apply?
CGT is charged on gains made from chargeable disposals of chargeable assets by chargeable persons.
- Chargeable disposal
- Chargeable asset
- Chargeable person
- Chargeable gain
It applies to gains made in the tax year from 6 April to 5 April.
What is a chargeable disposal?
The sale or gift of an asset during the taxpayer’s lifetime.
There is no chargeable disposal on death.
What types of assets are excluded from CGT?
Gifts to charity, principal private residence (PPR), motor cars for private use, ISAs, government securities.
PPR exemption can apply even if the owner moves out before selling.
What must individuals do to qualify for the Principal Private Residence (PPR) exemption?
Occupy the PPR as their only or main residence during the whole period of ownership.
Can an owner claim the PPR exemption even if they weren’t living in the home during the last 18 months of ownership?
Yes, they can still claim the exemption for this period.
How is the main residence determined when an individual owns more than one home?
It is determined by where they spend most time.
Can a married couple each claim a separate PPR?
No, a married couple can only have one PPR between them unless they are legally separated.
What types of private use items are considered exempt from CGT?
- Motor cars for private use
- Certain investments (government securities, ISAs, etc.)
- UK sterling and foreign currency held for personal use.
What is the formula to calculate the chargeable gain?
Chargeable gain = sale price - original costs.
What are the costs/allowable expenditure you can deduct from sale price, to determine the taxable chargeable gain?
- Initial expenditure
* The cost price of the asset (the ‘base cost’); and
* The incidental costs of acquisition (eg surveyors’ fees/lawyers’ fees). - Subsequent expenditure
* Subsequent expenditure on the asset which enhances its value; and
* Expenditure incurred in establishing, preserving or defending title to the asset. - Disposal expenditure
* Incidental costs of disposal (eg agents’ commission).
What is the annual exemption (AE) for the current tax year 2024/25?
£3,000.
What are the standard CGT rates?
- 10%
- 20%
Are gifts to charities subject to CGT?
No, gifts to charities are exempt.
What happens to CGT when assets are transferred between spouses?
No CGT is due, and the recipient inherits the asset’s original cost.
What is the consideration received in a disposal at arm’s length?
The price paid by the buyer when the asset is sold.
Who are considered connected persons for CGT purposes?
- Relatives and spouses of relatives
- Companies under common control
- Partners in business.
What happens in a disposal between connected persons?
The seller is deemed to have received market value regardless of actual sale proceeds.
What occurs when a gift is made concerning the market value?
The donor is deemed to have received the market value of the asset at the date of the gift.
Do companies pay CGT?
Companies do not pay CGT. Instead, gains are taxed at corporation tax rates.
What is the tax rate for basic rate taxpayers concerning CGT?
10%.
What is the tax rate for higher and additional rate taxpayers concerning CGT?
20%.
What does business asset disposal relief do?
Reduces the higher rate of CGT from 20% to 10% for qualifying disposals.
What is a qualifying disposal for business asset disposal relief?
- All or part of a trading business [owned for at least 2 years].
- Assets in a business that used to trade [owned for at least 2 years].
- Shares in a trading company [2 years and at least 5%].
- Shares in a company that used to trade [2 years and at least 5%].
What is the £1 million lifetime limit for business asset disposal relief?
The first £1 million of gains is taxed at 10%.
What is investors’ relief (IR)?
Benefits investors in unlisted trading companies who hold their shares for at least three years.
What are the conditions for shares to qualify for investors’ relief?
- Fully paid ordinary shares issued for cash;
- Company is/had been a trading company;
- Shares held for at least three years; and
- Individual is not an officer or employee of the company.
What is replacement of business assets relief (rollover relief)?
Defers CGT liability on the sale of certain business assets by rolling over the gain into a qualifying replacement asset.
What is gift of business assets relief (hold-over relief)?
Defers CGT when a business asset is gifted or transferred at less than its market value.
