Calculations Flashcards
Greg is employed as a call centre manager and has gross earned income in the current tax year of £36,000. He also received interest from a Building Society account of £1,500. Calculate, showing all your workings, the total Income Tax he should pay.
Detailed explanation
Interest from banks and building society accounts and NS&I accounts is paid gross. The personal allowance is deducted from non-savings income (i.e., earnings).
The remaining income is taxed at the appropriate rate for the band it falls into.
As none of Greg’s income falls into the higher rate, he is entitled to the £1,000 personal savings allowance available to basic-rate taxpayers. Savings income falling within this band is charged to tax at 0%. The remaining savings income is then taxed at the basic rate.
CII R03 Study Text Chapter 1, Sections B1 and I2
Joanne is employed as an IT Developer and has gross earned income in the current tax year of £42,800. She also received dividend payments from her share portfolio of £8,600. Calculate, showing all your workings, the total Income Tax he should pay.
Detailed explanation
The personal allowance is deducted from non-savings income (i.e., earnings). The remaining income is taxed at the appropriate rates for the band they fall into.
Dividends are paid gross. The first £1,000 of dividend income is covered by the dividend allowance and charged to tax at 0%. In this instance, £6,470 of the remainder is charged to tax at 8.75% because it uses up the remaining basic rate band. The final £1,130 is charged to tax at 33.75% because it falls within the higher rate tax bracket.
CII R03 Study Text Chapter 1, Sections B2 and I2
Andrew is aged 90, is married, and has gross income from pensions of £32,000 in the current tax year. He also received an interest distribution from his corporate bond OEIC of £2,400 and dividend payments of £1,000. Calculate, showing all your workings, the total Income Tax he should pay.
Detailed explanation
The interest distribution has been paid gross.
Andrew is married and aged 90. He is therefore entitled to the Married Couple’s Allowance of up to £10,375 (2023/24).
However, as his total income is in excess of £34,600 (2023/24) this is reduced by £1 for every £2 in excess of £34,600.
£35,400 - £34,600 = £800
£800 / 2 = £400
The MCA therefore reduces from £10,375 - £400 = £9,975.
The allowance works as a tax reducer at a rate of 10%. Therefore £997.50 can be deducted from Andrew’s income tax bill.
The remaining amount is the tax he should now pay. CII R03 Study Text Chapter 1, Section H4
Steve is an employee of GH Enterprises. In addition to his gross salary of £36,000 in the current tax year, he is provided with a petrol company car with a list price of £22,000 and a CO2 emission rate of 175g/km. He uses this for personal as well as business use. Calculate, showing all your workings, the value of the taxable car benefit.
Answer
55g = 16%
175 – 55 = 120
120 / 5 = 24%
16% + 24% = 40%.
But the maximum charge is 37%
£22,000 x 37% = £8,140.
Detailed explanation
Car benefit is calculated on the value of the vehicle as a percentage of the CO2 emissions. The base rate is 16% for emissions at 55g/km, rising in 1% increments for each additional 5g of CO2, up to a maximum of 37%.
175g/km CO2 emissions is 120g/km higher than 55g/km base line. 120/ 5 = 24%. 16% + 24% = 40%. But the maximum charge is capped at 37%.
£22,000 x 37% = £8,140.
CII R03 Study Text Chapter 1, Section G2A
In the current tax year, Sally has gross earned income from her employer of £24,000 and she also received a cheap loan from them of £18,000, on which she is being charged an interest rate of 1.25%. She also took out a loan of £15,000 at an interest rate of 8%, which she used to buy 10% of the shares in a trading company run by two of her friends. Calculate, showing all your workings, the value of the taxable benefit on the loan from her employer. Also calculate the amount of Income Tax relief she can expect as a result of the loan for the company shares she bought.
Answer
Loan:
£18,000 x (2.25% - 1.25%) = £18,000 x 1% = £180
Company shares:
£15,000 x 8% = £1,200
£1,200 x 20% = £240
Detailed explanation
The value of the taxable benefit of the beneficial loan from her employer is the difference between the rate of interest paid and the official rate, which is set at 2.25% for 2023/24.
£18,000 x (2.25% - 1.25%) 1%. = £180.
Interest paid on the loan, which was used to buy shares in the company run by her friends, is eligible for tax relief on the interest. £15,000 x 8% = £1,200 interest per year.
She can therefore deduct £1,200 from total income. She is a basic-rate taxpayer and therefore saves £1,200 x 20% = £240 per year in tax.
CII R03 Study Text Chapter 1, Sections G3 and D1
Pete has gross earned income of £49,000 from his employment as a graphic designer in the current tax year. From the bank account which he started for his 4-year-old. Calculate, showing all your workings, the total Income Tax he should pay. daughter, interest of £120 is received. He has other savings interest of £1,600.
Detailed explanation
As interest on daughter’s account is in excess of £100, the income is treated as belonging to Pete.
The Personal Allowance is deducted from total income.
The taxable income is then taxed according to the bands in which it falls.
As a higher-rate taxpayer, Pete is only eligible for a £500 personal savings allowance. CII R03 Study Text Chapter 1, Section J2A/B
Lisa has gross earned income in the current tax year of £55,000. During the year she contributed £4,000 gross (£3,200 net) to a personal pension scheme. Calculate, showing all your workings, her Income Tax liability.
Detailed explanation
From earned income, the personal allowance is deducted to arrive at taxable income, which will then be taxed according to the tax band it falls into.
Although Lisa only paid £3,200 net to the pension provider (£4,000 minus basic rate tax relief of 20%: £4,000 x 20% = £800), the full grossed up amount is eligible for higher-rate relief.
This is given by extending the basic rate tax band by the amount of the grossed-up contribution, so Lisa benefits from an additional £4,000 being taxed at 20% instead of at 40%. £37,700 + £4,000 = £41,700 x 20% = £8,340
The remainder of her taxable income is taxed at 40%: £42,430– £41,700 = £730 x 40% =
£292.
CII R03 Study Text Chapter 1, Section F & Chapter 12, Section A1, Activity 12.4
Jackson has gross earned income in the current tax year of £36,100. He received interest from a purchased life annuity of £4,000 and dividends of £9,300. Calculate, showing all your workings, the total Income Tax he should pay.
Detailed explanation
Interest from a purchased life annuity must be grossed up, i.e. - divided by 0.8
£4,000 / 0.8 = £5,000
Personal allowance deducted from total income to give taxable income.
As a higher-rate taxpayer Jackson is entitled to a £500 personal savings allowance. The remaining savings income is charged to tax at 20% and he is entitled to a refund of the tax taken at source from the purchased life annuity.
Jackson is also entitled to a £1,000 dividend allowance. The first £1,000 of his dividend income is therefore charged to tax at 0%. The remainder is charged at the basic rate for dividend income of 8.75% and the higher rate for dividend income of 33.75%.
CII R03 Study Text Chapter 1, Section I2
Allan has gross earned income of £32,000 in the current tax year. He also has a petrol company car with a list price of £20,000 and CO2 emissions of 145g/km, and fuel for private use paid for by his company. He received interest from his bank account of £475 and dividend payments of £1,400. Calculate, showing all your workings, his taxable income.
Detailed explanation
Car benefit is calculated on the value of the vehicle as a percentage of the CO2 emissions. The base rate is 16% for emissions at 55g/km rising in 1% increments for each additional 5g of CO2. 145g/km CO2 emission is 90g higher than the 55g base line. 90 / 5 = 18. 16%
+ 18% = 34%.
£20,000 x 34% = £6,800.
Fuel benefit is calculated at the same percentage as CO2, i.e. 34% - on fixed figure of
£27,800.
£27,800 x 34% = £9,452.
The personal allowance is deducted from total income to give taxable income, which is taxed according to the bands it falls into.
CII R03 Study Text Chapter 1, Section G2A & G2C
Josephine has net income of £54,000 in the current tax year and she currently receives child benefit of £2,901.60 per year for her three children. What High Income Child Benefit Charge will she suffer?
Answer
£1,160.64
Detailed Explanation
The charge is 1% of the amount of child benefit received for every £100 of income over
£50,000.
£2,901.60 x 1% = £29.016 (£54,000 - £50,000) / £100 = 40 So, £29.016 x 40 = £1,160.64
CII R03 Study Text Chapter 1, Section J3
Cleo’s employer provides her with rent-free accommodation. The market value of the free rent is £9,000. The employer paid £110,000 for the property. What is the taxable value of Cleo’s accommodation benefit, assuming her occupation is not exempt from the tax charge?
Answer
£9,787.50
Detailed Explanation
The taxable value of Cleo’s accommodation is the market value of the free rent of £9,000 plus:
2.25% on the excess of the cost of the property over £75,000:
£110,000 - £75,000 = £35,000 @ 2.25% = £787.50
£9,000 + £787.50 = £9,787.50
CII R03 Study Text Chapter 1, Section G4A
Ann took out a loan to buy shares in her own company. The annual interest is £20,000. Her total income is £80,000. In the current tax year, she made gross pension contributions of £25,000. How much of the interest can she deduct from her total income as an allowable deduction?
Answer
£20,000
Detailed Explanation
The maximum Ann can deduct from her total income in relation to the interest is capped at the higher of £50,000 and 25% of adjusted total income.
Ann’s adjusted total income is £80,000 - £25,000 = £55,000.
£55,000 @ 25% = £13,750.
Ann can therefore deduct the full £20,000 from her income. CII R03 Study Text Chapter 1, Section D
Xanthe earns £120,000. In the current tax year, she made a personal pension contribution of £6,000. What is her personal allowance for the current tax year?
Answer
£6,320
Detailed Explanation
The personal allowance is reduced by £1 for every £2 in excess of adjusted net income.
To arrive at adjusted net income, we can deduct Xanthe’s pension contribution from her earnings. Personal contributions are paid net, so we gross them up first:
£6,000 / 0.8 = £7,500.
£120,000 - £7,500 = £112,500
£112,500 - £100,000 = £12,500
£12,500 / 2 = £6,250.
Xanthe’s personal allowance is therefore £12,570 - £6,250 = £6,320 CII R03 Study Text Chapter 1, Section H2
Dot earns £37,500 a year. Her husband Joe earns £10,000. If Joe makes an election under the marriage allowance, what will Dot’s Income Tax liability be for the current tax year?
Lewis, an additional-rate taxpayer, makes a gift aid payment to the Cats Protection League of £8,000. (a) Calculate how much, in total, the Cats Protection League will receive as a result of Lewis’s donation and explain how they will receive this. (b) Calculate how much Income Tax relief Lewis will receive as a result of his donation and explain how he will receive this
Answer
£10,000 in total
£8,000 directly from Lewis, £2,000 reclaim from HMRC Detailed explanation
A donation made under gift aid is treated as a payment on which basic rate tax has already been paid. The charity can reclaim the Income Tax deducted from HMRC.
To gross up £8,000 by the basic rate tax we divide by 0.8 = £10,000.
So, in addition to the £8,000 the charity receives from Lewis, the charity can reclaim a further £2,000 from HMRC, meaning they will receive £10,000 in total.
(b) Calculate how much Income Tax relief Lewis will receive as a result of his donation and explain how he will receive this.
Answer
£4,500
By extension of his basic and higher rate tax bands Detailed explanation
Lewis makes a net payment of £8,000. The charity receives £10,000, meaning that Lewis has in effect already received Income Tax relief at 20% on the donation.
In addition, Lewis’s basic and higher rate tax bands are extended by the gross amount of the donation. As a result, his basic-rate tax band is £47,700 (£37,700 + £10,000) meaning he pays tax at the basic rate of 20% on £10,000 of income that without the donation would have been charged at 45%. This gives him additional relief of 25% on
£10,000 (£2,500). Total tax saved on the £10,000 gross donation is therefore £2,000
+ £2,500 = £4,500 (i.e., 45%)
CII R03 Study Text Chapter 1, Section E1
Steve, who earns £50,000 a year, is a member of a defined contribution pension scheme which operates under the net pay arrangement. Steve contributes 8% of his gross salary and his employer matches his contribution. Steve also receives a bonus of 20% of his salary each year. He has recently received a letter from his company regarding the introduction of salary sacrifice in lieu of the bonus. Calculate Steve’s Income Tax saving if he opts for salary sacrifice in lieu of his usual bonus.
Answer
£3,146
Jeremy has weekly earnings from his employer of £1,000 in February 2024. Calculate, showing all your workings, the employee National Insurance contributions (NICs) that will be due on these earnings.
Detailed explanation
As an employee, Jeremy is liable for class 1 NICs on earnings above the primary threshold (PT) of £242 per month. The first £242 of earnings per week are not subject to NICs.
Earnings between £242 and £967 are subject to NICs at 10%.
£967 - £242 = £725
£725 x 10% = £72.50
Earnings in excess of £967 are subject to NICs at 2%.
£1,000 – £967 = £33
£33 x 2% = £0.66
CII R03 Study Text Chapter 2, Sections B2A and B3A & Chapter 12, Section A2B, Activity 12.7
Charlie has weekly earnings from his employer of £1,100. Calculate, showing all your workings, his employer’s liability to National Insurance contributions (NICs) on his earnings.
Charlie’s employer is liable for class 1 NICs at the employers’ rate on Charlie’s earnings. Detailed explanation
The first £175 of earnings per week are not subject to employer’s NICs. Weekly earnings in excess of £175 are liable for NICs at 13.8%.
CII R03 Study Text Chapter 2, Sections B2A and B3B & Chapter 12, Section A5B, Activity 12.7
Ella is 18 and has weekly earnings of £975 in February 2024. Calculate, showing all your workings, Ella’s and her employer’s weekly liability to National Insurance contributions (NICs).
Detailed explanation
Ella:
The first £242 of earnings per week are not liable for NICs. Earnings between £242 and £967 are liable for NICs at 10%.
£967 - £242 = £725. £725 x 10% = £72.50.
Earnings above £967 are liable for NICs at 2%.
£975 - £967 = £8. £8 x 2% = £0.16.
Employer:
The first £175 of earnings per week are not liable for NICs.
Earnings above £175 are normally liable for NICs at 13.8%. However, because Ella is under 21, her employer benefits from a 0% band between £175 and the upper secondary threshold (UST) of £967. Thereafter, employer NICs revert to 13.8%.
£975 - £967 = £8. £8 x 13.8% = £1.10
CII R03 Study Text Chapter 2, Section B3A, B3B
Tracy is a company director and is paid a single lump sum director’s fee for the current tax year of £54,500. Calculate, showing all your workings, her liability to National Insurance contributions (NICs).
Detailed explanation
All company directors have an annual earnings period for NIC purposes.
For earnings up to £12,570 (the annual primary threshold), there is no liability to NICs Earnings between £12,570 and £50,270 are liable for NICs at 11.5% in 2023/24.
£50,270 - £12,570 = £37,700. £37,700 x 11.5% = £4,335.50
Earnings above £50,270 are liable for NICs at 2%.
£54,500 - £50,270 = £4,230. £4,230 x 2% = £84.60.
CII R03 Study Text Chapter 2, Section B7
Wendy is a director of two unconnected companies, ABC Ltd and ZYX Ltd, and received director salaries in the current tax year of £34,000 at both. Calculate, showing all your workings, her National Insurance contributions (NICs), if she applies for a deferment in relation to the directorship of ZYX Ltd.
Detailed explanation
NICs for directors’ single lump sum payments are calculated against annual maximums. Maximum class 1 NICs that can be paid in 2023/24 is £4,335.50 (£50,270 - £12,570 =
£37,700 x 11.5%).
The combined earnings received from ABC Ltd and ZYX Ltd (£34,000 + £34,000 =
£68,000) are in excess of the upper earnings limit (UEL) of £50,270 for 2023/24.
Earnings from ABC Ltd (£34,000, minus lower annual limit amount of £12,570 = £21,430) are calculated in the normal way. £21,430 is therefore liable for NICs at 11.5%.
Applying for a deferment allows the earnings from ZYX Ltd (£34,000 minus lower annual limit amount of £12,570 = £21,430) to be calculated at only 2%. £21,430 is therefore liable for NICs at 2%.
At the end of 2023/24 year, Wendy is liable to pay the difference between the annual maximum for class 1 NICs of £4,335.50 plus 2% of the combined earnings over £37,700 after taking off the PCT for each and the NICs she actually paid (£2,893.05).
NICs at 2% {(£34,000 - £12,570) + (£34,000 - £12,570) - £37,700} x 2% = £103.20.
End of year balancing payment is £4,335.50 + £103.20 - £2,893.05 = £1,545.65. CII R03 Study Text Chapter 2, Section B9C
Ria is self-employed. In the current tax year, she had taxable profits of £55,000. Calculate, showing all your workings, her liability to National Insurance contributions (NICs).
Detailed explanation
As a self-employed person, Ria is liable for class 2 NICs. These are paid at a flat rate of
£3.45 per week in the current tax year.
As Ria’s profits are above the lower annual limit of £12,570, she is also liable for class 4 NICs on the amount that falls within the lower and upper annual limits, £12,570 and
£50,270, at 9%.
£50,270 - £12,570 = £37,700 x 9% = £3,393.00.
The excess of profits above the upper annual limit of £50,270 is liable for additional class 4 NICs at 2%.
£55,000 - £50,270 = £4,730 £4,730 x 2% = £94.60.
CII R03 Study Text Chapter 2, Sections C1A and C1B & Chapter 12, Section A5B, Activity 12.8
Helen is self-employed and her accounts are made up to 31 May each year. The last three years’ accounts are as follows: Year to 31 May 2021 – profit = £11,000, Year to 31 May 2022 – loss = -£3,500, Year to 31 May 2023 – profit = £13,000. How much profit will be taken into account for class 4 National Insurance contribution purposes in tax year 2023/2024?
Answer
£9,500
Detailed explanation
The profit of £13,000 is assessable to income tax in 2023/2024 but the 2022/2023 loss is brought forward, leaving a reduced profit figure for class 4 NIC purposes.
£13,000 - £3,500 = £9,500
NB
The loss in 2022/2023 can be set against any other income for income tax purposes.
CII R03 Study Text Chapter 2, Section C1B & Chapter 12 A5B Activity 12.9
Rachel is both employed and self-employed. In the current tax year, she is expecting to pay class 2 NICs of £179.40, class 4 NICs of £2,615 and class 1 NICs of £1,540. Bearing in mind the annual maxima, what is Rachel’s liability to class 4 NICs?
Answer
£1,853
Detailed explanation
For individuals who are both employed and self-employed, class 4 NICs are limited to the maximum for class 4 (£50,270 - £12,570 @ 9% = £3,393.00) less the main rate class 1 NICs paid.
£3,393.00 - £1,540 = £1,853.
CII R03 Study Text Chapter 2, Section D3
Paul bought a holiday cottage in Devon in May 2011 for £120,000. He paid £2,000 in legal fees and then spent a further £25,000 on renovations. In March 2024, he sold the property for £180,300 incurring legal fees of £2,500. Paul’s taxable earnings for the year are £33,700. Calculate, showing all your workings, his Capital Gains Tax liability.
Detailed explanation
From the proceeds of the sale, Paul can deduct the costs incurred in acquiring and selling the property and the renovations. By deducting these from the sale proceeds we establish the gain.
From this figure, the CGT annual exempt amount of £6,000 (2023/24) can also be deducted before calculating the amount of tax to be paid.
The gain, after deduction of the CGT annual exempt amount is treated as the top slice of income, any part of the gain that is in the basic rate band is taxable at 18% and the rest is taxable at 28%.
CII R03 Study Text Chapter 3, Section D3 & Chapter 12, Section A5C, Activity 12.10
Maggie bought a property in July 2009 for £85,000. In October 2015 when it was worth £95,000, she sold it to her brother Peter for £90,000. In May 2023, her brother then sold the property for £112,300. Assume no other costs were involved. Calculate, showing all your workings, Peter’s Capital Gains Tax liability assuming he has a taxable salary of £15,000. How would your answer have differed if the asset disposed of had been a unit trust holding?
Detailed explanation
When a disposal is between individuals with a close connection, for example, relatives, the disposal is not ‘at arm’s length’ and the actual market value is used instead of the sale proceeds in calculating gains.
On the sale between Maggie and her brother Peter, the market value of the sale was
£95,000, which is the figure used for the calculations, even though the money which changed hands was only £90,000. Therefore, Maggie is considered to have sold the property and Peter to have bought the property for £95,000.
When Peter then sells the property the acquisition cost is again taken as being £95,000, even although he only actually paid his sister £90,000.
From the proceeds of £112,300, he can deduct the acquisition cost of £95,000 and the
£6,000 CGT annual exempt amount to establish the gain. The gain is then taxed at 18% as this remains within the basic rate tax band.
Had the asset been a unit trust – or indeed any asset other than residential property – then the gain would have been taxed at 10%.
CII R03 Study Text Chapter 3, Section B1
In November 2023, David sold the business he had run as a sole trader since April 2001. The gains on the sale were £250,300 in respect of the goodwill and £315,000 in respect of the business premises and equipment. Calculate, showing all your workings, his Capital Gains Tax liability.
Detailed explanation
From the sale of the business, David received £565,300.
Business asset disposal relief can be claimed when an individual disposes of a business, part of a business, or assets used wholly in connection with the business, after 5 April 2008.
To qualify for the relief, the assets must have been owned for at least two years before the date of disposal. The relief covers the first £1m of qualifying gains made during his lifetime and these gains are taxed at 10%.
As David has owned the business for more than two years, he can claim business asset disposal relief on the net gain (i.e., the gain after the deduction of his CGT annual exempt amount).
CII R03 Study Text Chapter 3, Section F1 & Chapter 12, Section B2D
Olivia purchased an antique painting at auction in January 2011 for £35,000, incurring costs of £1,750. She sells the painting privately in February 2024 for £31,000 after spending £1,000 on cleaning and restoration. In March 2024, she sells a run-down buy- to-let property for £77,300 which she had purchased in February 2016 for £65,000. Assume no other costs are involved. Calculate, showing all your workings, her Capital Gains Tax liability, assuming Olivia is a basic-rate taxpayer.
Detailed explanation
From the sale proceeds of the painting, Olivia can deduct the acquisition price and the acquisition and restoration costs. This results in a loss.
The gain made on the sale of the buy-to-let property can be reduced by offsetting the loss from the sale of the painting.
The CGT annual exempt amount can then be deducted to give the taxable gain. This wipes out any gain.
If there was a taxable gain on the property, it would be taxed at 18% (assuming Olivia remains a basic-rate taxpayer).
CII R03 Study Text Chapter 3, Section D3/D4 & Chapter 12, Section A5C, Activity 12.10
Billy sold his sole trader business, which he had run for 6 years, in October 2023 receiving £180,000 for the goodwill element and £150,000 for the premises and equipment, which he had originally purchased for £50,000. In March 2024, he sold a holiday home in Spain for £220,300, which he had purchased for £150,000 in 2011. He incurred legal fees of £1,800 on the purchase and £2,400 on the sale. Billy is a higher-rate taxpayer. Calculate, showing all your workings, his Capital Gains Tax liability.
Detailed explanation
From the gain made on the sale of his business, Billy can claim business asset disposal relief on gains of up to £1m made over his lifetime. The gain qualifies for the relief because the business and the assets have been owned for more than two years. Business asset disposal relief taxes the whole gain at 10%.
In calculating the gain from the sale of the holiday home, Billy can deduct the acquisition price and costs on purchase and sale and the CGT annual exempt amount.
CII R03 Study Text Chapter 3, Section F1 & Chapter 12, Section B2D
Briony bought a set of 8 antique chairs at auction in July 2011 for £12,000, incurring costs of £800. In September 2023, when they were worth £26,300, she sold the set of chairs to her sister for £10,000. In February 2024, she sold her 25% share in a partnership for £180,000, (which she had acquired for free) and assets used in the partnership for £20,000 that had an original purchase cost of £15,000. Briony is a higher-rate taxpayer. Calculate, showing all your workings, her Capital Gains Tax liability.
Detailed explanation
As the sale of the chairs is to a ‘connected person’ the sale price is taken to be the market value, even though less was actually received. From the market value, the acquisition price and costs can be deducted.
Bear in mind that the £6,000 chattels limit applies to the set of chairs as a whole rather than to each individual item. As the value at disposal exceeds £15,000 there is no chattels relief, and the gain is computed by the normal method.
The sale of the partnership shares and assets qualify for business asset disposal relief. CII R03 Study Text Chapter 3, Sections B1 and F1
Barbara owns a cottage which she purchased for £100,000, net of costs, on the 1st May 2010 and used as her main residence until 31st July 2016. During that time, there were three years when she worked abroad and 12 months when she lived with her sister. After each of these periods she returned to the cottage. On the 1st August 2016, she moved to her current main residence and has only used the cottage for holidays since then. She is now selling the cottage for £300,000 net of sale costs. Calculate Barbara’s liability to Capital Gains Tax if she completes the sale on 31st March 2024 assuming she is a higher-rate taxpayer.
Answer
£26,152.33
Logan owns the following shares in XYZ Ltd:
The share price this afternoon is 95p. How much will Logan’s gain be if he now sells 2,000 shares?
Answer
£295
Esther invested £20,000 into a portfolio of shares on 1 July 1978. On 31 March 1982, the portfolio was valued at £26,000. Esther now wishes to encash the holding, which is worth £72,000. She has made no other disposals for CGT in the current tax year. What is the gain chargeable to Capital Gains Tax?
Answer
£33,700
In 2023/24, Scout sold a portfolio of shares and made a gain of £20,000. He also sold a rented residential property and made a gain of £30,000. His taxable income (after the deduction of the personal allowance) was £32,200. Calculate, showing all your workings, his Capital Gains Tax liability.
Answer
£10,170
Grant died on 23rd March 2024, leaving £10,000 to his favourite charity, £180,000 to his wife and £350,000 cash to be split equally between his son and daughter. He had made no gifts during his lifetime. Calculate, showing all your workings, the Inheritance Tax liability on Grant’s estate.
Ria made the following gifts: 01/09/2018 £40,000 to her daughter October 2019, £20,000 to her granddaughter June 2023 and £2,000 to her niece, No other gifts have been made in her lifetime. She dies in March 2024, leaving an estate of £460,000 to her daughter. Included in this is the family home worth £200,000. Ria has never married.Calculate, showing all your workings, the Inheritance Tax liability on her estate.
Detailed explanation
The gifts made to her daughter and granddaughter are Potentially Exempt Transfers at the time they are made. They will become chargeable if Ria dies within seven years of death and if her cumulative total of transfers within those seven years exceeds the NRB available at that time. In this case, she has died within seven years of making them, but their value does not exceed the NRB.
The gift to daughter can make use of the current and previous year’s annual exemption (total £6,000).
The gift to granddaughter can make use of the current year’s annual exemption (total
£3,000).
The gift to her niece is exempt as it is within the annual exemption limit of £3,000. When Ria dies, the two PETs are within the NRB and so are not liable for tax. However,
they reduce the amount of NRB available to be used against the total estate left on death by £51,000.
£325,000 - £51,000 = £274,000 to be used against the estate on death.
In addition, we can deduct £175,000 – Ria’s residence nil rate band – as she has left the family home to her daughter.
The remainder of the estate - £11,000 – is liable for IHT at 40%.
CII R03 Study Text Chapter 4, Section A2, B2C & Chapter 12, Section A5D, Activity 12.19
Paul died in May 2022 and left his estate, valued at £400,000, to his friend Mark. The tax paid on Paul’s estate was £40,000. Mark then died in February 2024, leaving an estate worth £650,000 to his nephew. Calculate, showing all your workings, the Inheritance Tax liability on Mark’s estate.
Detailed explanation
Quick succession relief is available when property in a deceased’s estate passed to them by a chargeable transfer in the five years before their death. The tax charged on the second death is reduced by a percentage of the IHT paid on the first death. The percentage reduction varies according to the number of years between the transfer and death.
The IHT is calculated in the normal way on the estate of the second deceased. £650,000
-325,000 = £325,000 x 40% = £130,000
Quick Succession relief is calculated by the formula:
Tax paid on the first transfer x Net transfer
Gross transfer
40,000 x (400,000 – 40,000)
400,000
= 36,000 x 80% = 28,800
The tax due on the second deceased’s estate is then reduced by the Quick Succession Relief amount - £130,000 - £28,800 = £101,200 – to give the actual tax liability.
CII R03 Study Text Chapter 4, Section B4D
Jamie died in July 2008, having made a cash gift of £250,000. The nil rate band at that time was £312,000. His wife, Kate, died in January 2024, leaving an estate of £745,000 to her daughter. £400,000 of this estate represented the family home. Calculate, showing all your workings, the nil rate band and residence nil rate band increases and the Inheritance Tax liability for Kate’s estate.
Detailed explanation
Any unused amount of NRB can be transferred to the surviving spouse or civil partner’s estate, up to a maximum of 100%.
The unused amount of NRB on the death of the first spouse is calculated as a percentage of the full NRB available.
Jamie died in the 2008/09 tax year when the NRB was £312,000.
On Kate’s death her NRB can be increased by any unused percentage, i.e., 19.87%.
Kate dies in the 2023/24 tax year, with a NRB of £325,000, which can be increased by the unused percentage.
Total NRB for Kate’s estate - £325,000 + £64,577.50 = £389,577.50
The Residence NRB was not available prior to 6 April 2017, meaning 100% of it can be brought forward on second death. Total Residence NRB for Kate’s estate - £175,000 (2023/24 rate) x 2 = £350,000.
The excess above this amount is liable to tax at 40% CII R03 Study Text Chapter 4, Section A2, B4F
Clive makes the following gifts: 01/08/2019 £30,000 to his wife, 01/09/2020 £5,000 to his daughter on her marriage May 2021 and £75,000 to his granddaughter, 01/10/2023 £68,000 to his daughter January 2024 and £1,500 to his friend, No other gifts have been made in his lifetime. He dies in March 2024, leaving an estate of £400,000. £200,000 goes to his wife and the remaining £200,000 in cash to his daughter.Calculate, showing all your workings, the Inheritance Tax liability following his death.
Detailed explanation
The gift made to his wife in 2019 is exempt as a transfer to a spouse.
The gift made to his daughter on her marriage is exempt as a transfer by a parent on marriage up to £5,000 limit.
The gifts made to his granddaughter in 2021 and his daughter in 2023 are PETs.
The 2021 PET can use the current and previous year’s annual exemption - £6,000. The 2023 PET can use the current and previous year’s annual exemption - £6,000.
The gift to his friend in 2024 is also a PET but no exemptions are available as the current year’s annual exemption was used by the October 2023 gift.
On death the PETs in 2021, 2023 and 2024 of £69,000, £62,000, and £1,500 use up
£132,500 of the NRB leaving (£325,000 - £132,500) £192,500 to be used against the estate on death.
The excess is liable for tax at 40%.
CII R03 Study Text Chapter 4, Sections B2C & Chapter 12, Section A5D, Activity 12.19
Julian made the following gifts: 01/08/2016 £150,000 to his son, 01/06/2018 £150,000 to his daughter, 01/10/2020 £90,000 to his brother and £72,000 to his sister, 01/07/202 £150,000 to a Discretionary Trust for his grandchildren No other gifts have been made in his lifetime. He then dies in November 2023. Calculate, showing all your workings, the Inheritance Tax liability on the gifts he has made.
Detailed explanation
The gifts made in 2016, 2018 and 2020 to his son, daughter, brother, and sister are PETs. The 2021 gift into the Discretionary Trust is a chargeable lifetime transfer.
Annual exemptions can be used on lifetime gifts. You can carry forward any unused balance from the previous year.
Chargeable lifetime transfers result in an immediate tax charge if they, along with any other chargeable lifetime transfers in the previous 7 years’ cumulative total, exceed the available NRB. In this example, the NRB has not been exceeded and there is therefore no tax to pay during lifetime.
On death, the PET in 2016 was made more than 7 years before death, so drops out of the calculation.
The PETs in 2018 and 2020 are within the NRB and so are not liable for tax.
The Chargeable lifetime transfer to the Discretionary Trust in 2021 is within 7 years of death, so tax at the death rates becomes applicable. Taper relief is available to reduce the liability, however as the transfer was made within 2-3 years of death, the full amount of the transfer is chargeable.
This is liable to tax at the full death rate of 40%. £122,000 x 40% = £48,800
CII R03 Study Text Chapter 4, Section B2C & Chapter 12, Section A5D, Activity 12.19
Harriet made the following gifts: 01/06/2020 £290,000 to her son, 01/01/2021 £68,000 to a Discretionary Trust for her grandchild. No other gifts have been made in her lifetime and she dies in October 2023, leaving an estate of £525,000 to her son, including the family home. Her husband pre-deceased her, leaving the full value of his nil rate band to their son in cash. The remainder of his estate went to Harriet. Calculate, showing all your workings, the Inheritance Tax liability on her estate.
Detailed explanation
The gift made in 2020 to her son is a PET. The gift into the Discretionary Trust is a chargeable lifetime transfer.
Chargeable lifetime transfers result in an immediate tax charge if they, along with the previous 7 years’ cumulative total of chargeable lifetime transfers, exceed the available NRB. In this example, the previous transfer was a PET and is therefore ignored.
On death, the PET in 2020 is within the NRB and so is not liable for tax.
On death, the chargeable lifetime transfer to the Discretionary Trust in 2021, is within three years of death, so tax at the death rates becomes applicable. No taper relief is available to reduce the liability as death occurred within three years. Therefore, the full amount of £27,000 is chargeable at the death rate of 40%.
Two residence nil rate bands of £175,000 can be deducted from the value of the estate before it is charged to tax.
The total of the amount due on the estate on death plus the additional tax on the chargeable transfer is the final IHT liability.
CII R03 Study Text Chapter 4, Section A2, B2C/D & Chapter 12, Section A5D, Activity 12.19
Stan invested £15,000 into a single premium onshore life assurance bond on 14th March 2013 and fully surrendered the bond on 26th April 2023 receiving £21,600. No withdrawals had taken place before final encashment. In the current examinable tax year, his gross income is £25,000 and his personal allowance is £12,570. How much additional tax is due on the gain assuming his personal savings allowance has already been used on interest income?
Detailed explanation
The amount invested is deducted from the surrender value to show the amount of the gain.
The gain is then added to taxable income to calculate the Income Tax liability.
If taxable income plus the gain is within the basic rate tax band there is no further Income Tax to pay.
If the full gain had taken Stan over the basic rate tax band, we would have used the 5-step top-slicing process to establish whether any tax was due at the higher rate and any relief due.
CII R03 Study Text Chapter 10, Section G2
Trudy makes a chargeable gain on a bond that she has held for just over 5 years of £25,000. In the current examinable tax year, her gross income is £47,500 and her personal allowance is £12,570. Calculate, showing all your workings, the top slicing relief she will receive for the current examinable tax year.
Answer
£2,616
George invested £25,000 into a single premium onshore life assurance bond on 4th May 2014. On the 17th April 2018, he withdrew £4,500. On 21st August 2020, he withdrew £2,200. He fully surrendered the bond on 19th May 2023 and received £29,400. In the current examinable tax year, his gross income is £55,770 and his personal allowance is £12,570. Assume he has already used his personal savings allowance on interest income and has done so throughout the period of ownership. Calculate, showing all your workings, his Income Tax liability on the gain from the bond.
Detailed explanation
Onshore single premium bonds have a 5% annual allowance, which permits withdrawals of up to 5% of the amount invested each year with the tax deferred. The 5% annual allowance works on a cumulative basis, that is, if not used in any year, it can be rolled forward.
£25,000 x 5% = £1,250. The withdrawals in years 2018 and 2020 are within the cumulative allowance, so no tax was paid on them at the time. However, on final surrender they have to be added back into the tax liability calculation.
The amount received on full surrender, plus the previous withdrawals (within the 5% annual allowance), give the total amount received from the investment.
From this, the amount invested is deducted to give the amount of gain.
The gain is then added to the taxable income to determine the tax band into which it falls.
As George is already a higher-rate taxpayer, before the addition of the gain, he is liable for further tax of 20% on the full amount of the gain.
CII R03 Study Text Chapter 10, Section G2
Kerry invested £20,000 into a single premium onshore life assurance bond on 2nd February 2015. On 14th April 2020, when she was a higher rate taxpayer, she withdrew £6,500. On 19th July 2023, she withdrew a further £1,500. On 4th March 2024, she fully surrendered the bond and received £18,200. In the current examinable tax year, her taxable income is £38,600. Assume she has already used her personal savings allowance and has done so throughout the period of ownership. Calculate, showing all your workings, her Income Tax liability on the bond.
Onshore single premium bonds have a 5% annual allowance, which permits withdrawals of up to 5% of the amount invested each year with the tax deferred. The 5% annual allowance works on a cumulative basis, that is, if not used in any year, it can be rolled forward. £20,000 x 5% = £1,000.
When the withdrawal is made in 2020, it exceeds the cumulative 5% allowance by £500. The £500 which is in excess of the cumulative total is treated as an immediate ‘chargeable event’ and would be liable for tax in that tax year, depending on Kerry’s other income at that time. As the £500 has been taxed at the time, it is not added into the calculation at full surrender, but the amount within the 5% cumulative allowance is.
After the ‘chargeable event’ of £500, the cumulative 5% allowances until that time are considered to be fully used up and the process starts again. When the withdrawal in 2023 is made, it is fully within the new cumulative allowance, so on final surrender it has to be added back into the tax liability calculation.
As we have no personal savings allowance to take into account, we can use the more straightforward top slicing calculation.
The amount received on full surrender, plus the previous withdrawals (within the 5% annual allowances), give the total amount received from the investment.
From this, the amount invested is deducted to give the amount of gain.
The gain is then added to the taxable income to determine the tax band into which it falls. The gain is taxed at 20%.
CII R03 Study Text Chapter 10, Section G2
Tim purchased shares in Abbott plc in 2000 for £750; he later sold them on 14 May 2023 for £18,800, with stockbroker fees of £145. Tim’s taxable income for the year is £36,700. Calculate his Capital Gains Tax liability.
Detailed explanation
The procedure is to deduct the normal costs of acquisition and sale costs, then the annual exempt amount. Due to Tim’s taxable income of £36,700, the gain will straddle the tax bands.
£37,700 (basic rate band) - £36,700 (taxable income) = £1,000. This is taxed @ 10% because it falls within the basic rate (£100). The remaining £10,905 is taxed at the higher rate of 20% = £2,181. Total £2,281.
CII R03 Study Text Chapter 3, Section E
James is aged 78 and his wife is aged 75. They bought a joint life purchased life annuity, receiving £4,200 gross per year, where the capital element is £2,900. They are both basic-rate taxpayers. Calculate, showing all your workings, the tax deducted by the life office and any further tax liability for James and his wife.
Detailed explanation
Purchased life annuities are split into a capital and an interest element. The capital element is deemed to be a part return of the capital used to purchase the annuity and is not taxable. The interest element is taxable and is taxed as savings income with Income Tax deducted at 20%.
Deducting the capital element from the amount of the annuity gives the interest element. The interest element is taxed by the life office at 20%.
After deduction of tax James and his wife would receive £3,940.
As they are both basic-rate taxpayers, there is no further tax for them to pay. Depending on their other income, they may be able to reclaim some, or all of the tax taken at source. This is because the interest element can be offset against their personal savings allowances.
CII R03 Study Text Chapter 1, Section B1B
Campbell invested £86,000 into an offshore bond in March 2016. He fully surrendered the bond in August 2023 and received £118,000. In the current examinable tax year his income is £55,000. £2,000 of this is savings income. Calculate, showing all your workings, the net gain received.
Detailed explanation
With an offshore bond and his personal savings allowance already used, Campbell who is a higher-rate taxpayer will be liable for 40% tax on the full (gross) gain when the bond is encashed. On a gain of £32,000, this produces a liability of £12,800, leaving a net gain of
£19,200.
CII R03 Study Text Chapter 10, Sections H1
