Business (Individual Taxation) Flashcards
What is the distinction between income and capital expenditure when reducing a tax bill?
- Income expenditure can only be deducted from income receipts
- Capital expenditure can only be deducted from capital receipts.
How can calculating income and capital receipts/expenditure help reduce the tax bill?
- By calculating the total profit correctly
INCOME RECEIPTS — INCOME EXPENDITURE = TOTAL PROFITS.
- By deduct proceeds realized upon disposa of a capital asset
CAPITAL RECEIPTS — CAPITAL EXPENDITURE = REDUCED CAPITAL EXPENDITURE
What are income receipts?
Money received on a regular basis
Including…
* Trading profits
* Interest from banks
* Rent received
What are capital receipts?
Money received from a one-off transaction not part of regular activity
e.g., sale of premises by a newsagent.
What is income expenditure?
Money spent as part of regular day-to-day trading
For example…
* Heating
* Lighting
* Staff wages
* Running costs
* Loan interest
What is capital expenditure?
Money spent on a one-off transaction
For example….
* Expended to purchase a capital asset as part of the infrastructure
* Large items such as equipment
* Enhancing a capital asset
What are capital allowances?
Tax relief for capital expenditure is usually given at the time when the capital asset is sold.
However, depreciation of an asset is considered in some case > capital allowances spread the cost of capital expenditure by a proportion of the capital expenditure being deducted from income receipts
How does the assessment of tax differ for individuals and companies?
Individuals are assessed on income and capital gains tax annually (6 April to 5 April)
Companies are assessed for corporation tax from 1 April to 31 March.
What is the PAYE system?
Pay As You Earn (PAYE) is a system where employers deduct income tax and account to HMRC, allowing employees to receive net salaries.
What are the methods of HMRC collection for income tax?
Income Tax
- Self-assessment (individual calculates tax and submits)
- Deduction at source (payer deducts & recipient receives net of tax).
What is total income tax ?
Taxpayer’s gross income from all sources.
What is net income?
Total income minus available tax reliefs.
What is taxable income?
Net income (having applied reliefs) minus personal allowance.
How is total income calculated?
Income Tax > Total Income (Step 1)
- Add together all the receipts from all sources of income
- Exclude Capital Receipts!!!
When calculating total income, is interest savings included?
Income Tax > Total Income (Step 1)
Interest received on savings is subject to income tax.
However…
- Basic Rate taxpayers are entitled to their first £1,000 of interest at 0%
- Higher rate taxpayers are entitled to their first £500 at 0%.
How are dividends treated in income tax?
Income Tax > Total Income (Step 1)
No tax on the first £500 due to Dividend Allowance
Divident Allowance
How are benefits in kind taxed?
Income Tax > Total Income (Step 1)
Benefits in Kind are subject to income tax when calculating Total Income
How do you calculate Net Income?
Income Tax > Net Income (Step 2)
Deduct the available tax reliefs from the Total Income to establish Net Income.
What are the main tax reliefs in calculating net income?
Income Tax > Net Income (Step 2)
- Interest paid on qualifying loans
- Pension scheme contributions.
How does interest paid on qualifying loans provide tax relief?
Income Tax > Net Income (Step 2)
The amount of interest paid on these loans by a taxpayer are deducted from their total income:
Loans to….
* Buy into a partnership
* Contribute capital/ make a loan to a partnership
* Buy shares in (or make a loan ) to ‘close’ company
* Buy shares in an employee-controlled company
* Invest in a co-operative
How do pension contributions provide tax relief?
Income Tax > Net Income (Step 2)
An amount equivalent to the pensions scheme contributions made by a taxpayer during the tax year are deducted from their total income.
What is the third stage once Net Income has been calculated?
Once Net income has been calculated, the next stage is to deduct the taxpayer’s personal allowance from the net income to ascertain the Taxable Income
What is the personal allowance for 2024/2025?
Income Tax > Taxable Income (Step 3)
£12,570
Reduced by £1 for every £2 of net income above £100,000,
Net Income of £125,140 + lose the benefit of personal allowance completely
What figure indicates No Personal Allowance?
Income Tax > Taxable Income (Step 3)
£125,140 +
How are tax rates applied to different types of income?
Income Tax > Tax Rates (Step 4)
The different types of income (non-savings, savings, dividend) must be separated & taxed in the order of
(1) non-savings
(2) savings
(3) dividend
What is Never Say Die?
Income Tax > Tax Rates (Step 4)
Spply tax rates in the order of…
- Non-Savings
- Savings
- Dividents
What is non-savings income and its tax rates?
Income Tax > Tax Rates (Step 4)
Taxable income minus savings and dividends
Taxed at…
* 20% (basic)
* 40% (higher)
* 45% (additional)
Always use up the lower band first and then move to the higher bands
What is savings income and its tax rates?
Income Tax > Tax Rates (Step 4)
Savings Income — Personal Savings Allowance
- Taxpayers entire taxable income up to £37,700 > first £1000 is 0%
- Taxpayers entire taxable income exceeds £37,700 but does not exceed £125,140 > first £500 is 0%
- No savings allowance for those with taxable income over £125,140
Then Apply Savings Rate
- Basic Band (up to £37,700) @ 20%
- Higher (£37,501 - £125,140) @ 40%
- Additional (+£125,140) @ 45%
Always use up the lower band first and then move to the higher bands
What is dividend income and its tax rates?
Income Tax > Tax Rates (Step 4)
Dividend income after nil rate (First £500 at 0% irrespective of tax band) taxed at
- 8.75% (basic)
- 33.75% (higher)
- 39.35% (additional).
Always use up the lower band first and then move to the higher bands
When applying the tax rate, do you apply one rate for the entire income?
Income Tax > Tax Rates (Step 4)
No. Always use up the lower band first and then move to the higher bands
For example, imagine you have non-savings of £152,000 - this is taxed as follows….
- Basic: 37,900 x 20% = £ 7,540
- Higher: 125,140 – 37,700 = 87,440 x 40% = £34,976
- Additional: 152,000 – 125,140 = 26,860 x 45 % £12,087
Total Tax on Non-Savings = £54,603
What is the Taxable Income threshold for Basic Band?
Income Tax > Tax Rates (Step 4)
£0 - £37,700
What is the Taxable Income threshold for Higher Band?
Income Tax > Tax Rates (Step 4)
£37,701 - £125,140
What is the Taxable Income threshold for Additional Band?
Income Tax > Tax Rates (Step 4)
Above £125,140
What are the main steps for computing income tax due?
Summary of Income Tax
- Calculate Total Income
- Deduct Reliefs
- Deduct Allowances
- Split income types & Apply rates
- Sum taxes
What is Capital Gains Tax (CGT) aimed at?
Taxing the profit from the disposal of a capital asset that has appreciated in value.
What qualifies as a chargeable disposal for CGT?
- Sale or lifetime gift of an asset
- Disposals on death do not count
What are chargeable assets for CGT?
All property is subject to CGT unless excluded…
- Principal Private Residence
- Motor cars for private use
- Certain investments (e.g. government securities, shares held in ISAs and Life Assurance Policies)
- Currency held for personal needs
What constitutes a chargeable gain in CGT?
The gain is calculated based on consideration received minus allowable expenses
How is an asset valued for CGT if the Disposal is at Arms Length?
Price paid by the buyer
How is an asset valued for CGT if the Disposal is at an undervalue?
Market value at date of disposal
How is an asset valued for CGT if the Disposal is between connected persons?
Relatives, Spouses of relatives, lineal descendants, Companies under common control, Partners in business
Deemed the seller to have received market value irrespective of the actual proceeds.
How is an asset valued for CGT if the Disposal is a gift?
Market value at the date of the gift
What is there is a spousal disposal? Is CGT payable?
No CGT is payable.
What are allowable expenditures for reducing CGT?
- Incidental costs of disposal (e.g. agents commission)
- Initial Expenditure: The cost of the asset (the base cost paid) & the cost of acquisition (e.g. Surveyor and lawyer fees)
- Subsequent expenditure on enhancing the asset value or establishing, preserving or defending title to the asset. Repairs ar not allowable since they do not enhance.
How to calculate the chargeable gain?
CGT > Step 1
Consideration Received (or market value)
—
Allowable Expenditure (e.g. original purchase price) =
Chargeable Gain — Annual Exemption (if remaining)
Andy purchased a sailing board in May 2019 for £100,000. He sold it in May 2024 for £130,000
What is the chargeable gain?
CGT > Step 1
£130,000 - £100,000
= Gain of £30,000
What is the annual exemption for CGT?
Each individual can make up to £3,000 of gains tax-free.
How to calculate Total Taxable Chargeable Gains?
CGT > Stage 2
Add Taxable Income and Total Chargeable Gains after Deductions
Then apply the rate depending on the Taxable Income….
If less than Basic Rate (below £37,700) = CGT Rate of 10%
If exceeding basic rate = CGT Rate is 20%
If Taxable Income is less than Basic Rate, but after gains, exceeds £37,700, the unused part of the basic rate is carged at 10%, and remaining at 20%
What is Business Asset Disposal Relief in CGT?
CGT > Stage 2
If the disposal is a ‘qualifying business disposal’ it reduces the CGT rate from 20% to 10%.
What are qualifying disposals for Business Asset Disposal Relief?
CGT > Stage 2
- Trading businesses
- Business assets used to trade
- Shares in a trading company
- Shares in a company that used to trade
For Business Asset Relief, when does disposal of all or part of a business qualify?
CGT > Stage 2
- Trading business
- Owned for at least 2 years prior to disposal
For Business Asset Relief, when does disposal of an asset used in a business that used to trade qualify?
CGT > Stage 2
- The business was owned for at least 2 years prior to ceasing
- The assets were used in the business when it ceased ; and
- The assets must have been disposed of within three years of the business ceasing to trade
For Business Asset Relief, when will disposal of shares qualify?
CGT > Stage 2
- Shares must have been owned for at least 2 years
- The person disposing must have been an officer or employee of the company holding at least 5% ordinary voting shares for at least 2 years before date of disposal.
- The shares must have been disposed of within three years of the business ceasing to trade
If the company has ceased trading, must have been owned for at least 2 years before the company ceased trading; and
What is the lifetime allowance for Business Asset Disposal Relief?
CGT > Stage 2
Individuals have a £1 million lifetime allowance at the 10% CGT rate.
Any gain beyond £1 million will be charged at either 10% or 20% depending on the rate the individual pays CGT.
What is Investor Relief in CGT?
CGT > Stage 2
- A 10% CGT rate on qualifying shares, with a lifetime limit of £10 million
- Only for shares bought post-17 March 2016.
How do shares qualify for Investor Relief?
CGT > Stage 2
- Must be fully paid-up ordinary shares
- Held for at least three years
- Issued in a non-listed trading company or its holding company.
- The individual is not an officer or employee of the company or connected company
What is Replacement of Business Assets Relief (Rollover Relief)?
CGT > Stage 2
Taxpayer can postpone CGT liability on the sale of a business asset sold and replaced by rolling over the gain into the replacement asset.
- The new asset need not be of the same type as the old.
- The acquisition cost of the replacement asset is reduced by the amount of the gain being rolled over.
- The annual exemption cannot be used to reduce gain rolled over.
What is Gift of Business Asset Relief (Hold Over Relief)?
Where an individual **gives away (gift) **a business asset, the donor and donee can claim hold over relief.
CGT liability is postponed until donee disposes of asset. The donee would have to pay their own and the donor’s tax liability on disposal.
You can have as many deferrals.
What is the Business Relief Exemption in inheritance tax?
Inheritance Tax
BPR reduces IHT payable on qualifying business property where there is a LIFETIME Transfer and DEATH Transfer.
For BPR, what assets qualify?
- Unquoted shares (LTD shares)
- Quoted shares (PLC Shares);
- Business or interests in a business; and
- Assets owned but used for business.
The transferor must have owned the business assets continuously for at least 2 years immediately prior to transfer.
Are there any exclusions to Business Property Relief (BPR)?
A business or shares are not business property if the business consists wholly or mainly of dealing in securities, stocks, shares, land or buildings, or making or holding investments.
What is the minimum ownership period required for Business Property Relief (BPR)?
The transferor must have owned the business assets continuously for at least 2 years immediately prior to transfer.
What is the relief percentage for** transfers of a business or interest in a business** under Business Property Relief (BPR)?
100% Relief.
What is the relief percentage for transfers of shares in an unquoted company (LTD) under Business Property Relief (BPR)?
100% Relief.
What is the relief percentage for transfers of quoted shares (plc) if the shareholder has control of the company under Business Property Relief (BPR)?
50% Relief.
What is the relief percentage for transfers of land, buildings, or machinery used for business under Business Property Relief (BPR)?
50% Relief.
