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IMC Unit 1 > Chapter 10 > Flashcards

Chapter 10 Flashcards

1
Q

Fiscal Year

A

Same as the tax year
Individuals and trusts subject to income tax
6 April - 5 April

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2
Q

Financial Year

A

Companies subject to UK corporation tax on profits + VAT
1 April - 31 March

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3
Q

Self Assessment

A

Some individuals need to fill in a self assessment tax return:
- Self employed individuals
- Individuals with capital gains in the year
- Taxpayers with other income, such as rental, savings or dividends
Deadlines:
- 31 October of fiscal year for paper suvmission
- 31 January of the fiscal year for online submission
- 31 January deadline for payment of tax due

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4
Q

PAYE

A

Pay As You Earn
Tax is calculated at source from gross income and deducted to form net pay

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5
Q

Residence

A

Where someone is physically present during fiscal year
Nothing to do with nationality

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6
Q

Automatic Overseas Resident

A

If any of these conditions are met, the individual is an overseas resident (no UK tax):
1. Present in the UK for fewer than 16 days in current fiscal year
2. Not present in the UK during the last 3 fiscal years and present in the UK for fewer than 46 days in the current fiscal year
3. Work full time overseas, and spent fewer than 91 days in the UK, and spent more than 30 days working in the UK

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7
Q

Automatic UK Resident

A

If none of the Automatic Overseas Resident tests apply:
1. Present in UK for at least 183 days in a fiscal year
2. Their only home (or main address) is in the UK (available for use more than 91 days, used for at least 30 days)
3. They work full time in the UK

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8
Q

Sufficient Ties Test

A

If none of the Automatic Tests (UK / Overseas) apply, the more ties the individual has to the UK, the more likely it is they will deemed to be a UK resident (and pay UK tax):
- A family tie
- An accomodation tie
- A work tie
- A 90 day tie

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9
Q

Domicile

A

Not the same as residence
Where the individual considers “home” country to be

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10
Q

Domicile of Origin

A

Acquired from father (or mother)
Effectively by birth

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11
Q

Domicile of Choice

A

Applies from age 16, relates to emigration
Leaves country of domicile and settle in another country

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12
Q

Deemed Domicile

A

If an individual is resident in the UK for any 15 out of 20 consecutive years

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13
Q

UK Resident & Domiciled

A

Taxable by the UK on their worldwide income as it arises
Does not have to be remitted to the UK to be taxable
Assume for questions unless otherwise stated

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14
Q

UK Resident but Not UK Domiciled

A

UK income taxable as it arises
Foreign income < £2k automatic remittance
Foreign income >= £2k choose to pay on arising or remittance

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15
Q

Overseas Resident

A

Taxable on their UK income as it arises
Overseas income is not subject to UK tax

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16
Q

Remittance

A

Only have to pay tax on income if you bring it into a country and spend it in that country
If you don’t bring it in, then you don’t need to pay tax in that country

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17
Q

Arising

A

Declare and pay tax in the country, e.g. the UK

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18
Q

Taxable Income

A
  • Non-savings income, e.g. employment
  • Savings income, e.g. interest or life annuity
  • Divident income
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19
Q

Personal Allowance

A

Tax free income against any of the taxable income sources up to $12,570
For those earning over £100,000, personal allowance will reduce by £1 for every £2, goes to nil above £125,140

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20
Q

Personal Savings Allowance

A

Only for savings income
Basic rate tax payer = £1,000
High rate tax payer = £500
Additional rate tax payer = £0

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21
Q

Personal Dividend Allowance

A

Only for dividend income
All tax payer rates: £1,000

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22
Q

Tapering

A

Reduction in tax allowance as income increases
Only applies to Personal Allowance limits

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23
Q

Tax Calculation Order

A
  1. Remove all allowances
  2. Non-savings income allowance
  3. Savings income allowance
  4. Dividends income allowance
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24
Q

Basic Rate Tax

A

Taxable income <= £37,700
Non-savings rate = 20%
Savings income = 20%
Dividends = 8.75%

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25
Q

Higher Rate Tax

A

£37,700 < Taxable income <= 125,140
Non-savings rate = 40%
Savings income = 40%
Dividends = 33.75%

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26
Q

Additional Rate Tax

A

125,140 < Taxable income
Non-savings rate = 45%
Savings income = 45%
Dividends = 39.35%

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27
Q

‘Taxable’

A

Examiner has already applied personal allowances to these incomes, proceed as though after the allowance has been removed

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28
Q

‘Gross’

A

Apply the different personal allowances before applying any tax calculations

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29
Q

National Insurance

A

Same as an employment tax
Paid by employees, employers, and the self-employed
Class 1: Employed persons
- Employee class 1 primary NICs
- Employer pays class 1A on tax benefits, e.g. company car
- Employer pays class 1B on PAYE income
Class 2 & 4: Self-employed
- Assuming profits above the small profits threshold
- Class 2 paid at flat rate
- Class 4 paid at a variable rate
Class 3: Voluntary contributions to fill gaps in record
- Minimum of 35 years NICs needed to get full, basic pension

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30
Q

Trust Tax

A

Trustee is responsible for settling tax OBO beneficiaries
Assets are earning interest and capital gains
First £1,000 under standard rate band at basic rate tax
More than £1,000 at full Trust rate at additional rate
Beneficiaries receive monies net of tax plus reporting
Beneficiary will then calculate personal taxes, compare with what they would have owed if owned Trustee assets outright, then request a rebate from HMRC

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31
Q

Bare Trust Tax

A

Existance of Bear Trust is ignored, taxed at beneficiaries’ marginal rate

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32
Q

Capital Gains Tax

A

Payable by chargeable persons (based on tax residency) on chargeable disposal (sell, gift, transfer) of a chargeable asset

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33
Q

Chargeable Persons

A
  • UK resident, taxeable on worldwide gains on an arising basis
  • Overseas resident, no liability to capital gains on assets in the UK or elsewhere
34
Q

CGT Rates

A

Net chargeable gains of £6,000 do not need to be declared
Above £6,000:
- 10% for basic rate payers
- 20% for higher and additional rate payers
- 18% and 28% on property respectively

35
Q

Chargeable Assets

A
  • Company shares and qualifying bonds
  • Second property or subsequent properties (e.g. holiday homes or buy-to-let)
  • Units in CIS
  • Currency bought for gain
36
Q

Exempt Assets

A
  • Primary residence
  • Betting / lottery
  • Currency for holidays
  • National savings certificates & premium bonds
  • Private motor cars
  • Life assurance policies
  • Gilts and qualifying bonds
  • Gifts to charities
37
Q

Allowable Costs

A

Can be subtracted from the proceeds ahead of CGT calculations
- Fees and commissions for disposal
- Advertising costs
- Costs of purchase and costs associated with purchase
- Enhanced expenditure, e.g. extending the property (not maintenance)

38
Q

CGT Losses

A
  1. Current year losses offset gains in same tax year
  2. Annual exemptions
  3. Losses from previous tax years to reduce gains
  4. Unused losses can be carried forward indefinitely
39
Q

‘Chargeable Gain’

A

Can assume the examiner has already removed the £6,000 of capital gains allowance

40
Q

Inheritance Tax

A

IHT, Charge on transfer of a person’s estate on or before death:
- UK domiciled individuals on worldwide assets
- Non-UK domiciled individuals on UK assets

41
Q

IHT Scenarios

A
  • Assets transferred up to 7 years before death (lifetime transfer)
  • Assets transferred into discretionary Trusts for others (lifetime transfer)
  • Asset transferred at death
42
Q

PET

A

Potentially Exempt Transfer does not use a trust
- Not taxed immediately
- Becomes chargeable if the person dies within 7 years of gift*
*Sliding scale if they die between 3-7 years

43
Q

CLT

A

Chargeable Lifetime Transfer does use a discretionary trust
- Taxed immediately
- Becomes chargeably again if the person dies within 7 years of gift*
*Sliding scale of 0-3 years, half value of assets is paid. 3-7 years then half into the estate then declines

44
Q

Exempt Transfer

A

No tax paid if transfer is to spouse

45
Q

IHT Rates

A

Basic rate is 40% of value of asset transfered after exempt transfers are then removed
Nil rate band:
- First £325,000 exempt from IHT
- Plus main residence £175,000 exempt (only covers transfers to “direct issue”, i.e. their children)

46
Q

Married / Civil Partners

A

First person dies, any unused nil rate band will be inherited by the second person
I.e. if husand leaves everything to wife, none of nil rate is used so when wife dies she can use 2x the nil rate band

47
Q

Gifts to Charity

A

If 10% or more is left to charity, the IHT rate is reduced to 36% (rather than 40%)

48
Q

Anti-Avoidance Legislation

A
  • It is not possible to transfer legal title of an asset to another person and retain a beneficial interest to avoid IHT, i.e. you cannot sign over your house and stay living in it paying below market rent or none at all
  • If a beneficial interest is retained, HMRC will treat the asset as part of the estate, no matter how long after the person lives after having made the transfer
49
Q

Direct Investment

A

Owned/held directly by the investor outside of a fund and outside of a tax efficient wrapper (e.g. ISA):
- Cash = Income
- MS&I = Variable income
- Gilts = Income, Witholding if requested
- Corp Debt = Income
- Equity = Income, CGT, Stamp Duty
- Primary Residence = Stamp Duty
- Investment Residence = Income, Capital, Stamp Duty
- Chattels (personal possessions) = CGT if selling price above £6,000

50
Q

Indirect Investment

A

Client invests into a fund controlled by an investment manager
Tax at the fund level are paid by the investment manager at 20% on income but no tax on gains. REITS pay no tax on income or gains
Tax at investor level are paid by clients:
- Equity (majority) CIS = Dividend tax on income, CGT
- Debt (majority) CIS = Savings tax on income, CGT
- Investment Trust Company (ITC) = Dividend tax on income, CGT, Stamp Duty
- REIT = Non-savings on Income, 20% withholding, CGT, Stamp Duty
- Venture Capital Trust (VCT) = Stamp Duty

51
Q

Stamp Duty

A

Paid by the purchaser (not seller) when re-registering certain registered form assets into their name:
- Stamp Duty payable on paper based securities on purchase
- Stamp Duty reserve tax on electronic based securities on purchase
- Stamp Duty land tax on property/land purchase

52
Q

Stamp Duty (Paper)

A

0.5% of purchase price
Price paid by purchaser is more than £1,000

53
Q

SDRT

A

Stamp Duty Reserve Tax
0.5% of purchase price
- UK registered shares
- Options on shares
- UK convertible loan stock

54
Q

Stamp Duty (Paper) & SDRT Exemptions

A
  • AIM/NEX shares
  • Gilts
  • Corporate bonds
  • Overseas securities
55
Q

SDLT

A

Stamp Duty Land Tax paid in England or Wales

56
Q

SDLT Residential Rates

A

Standard residential rates:
- Up to 250k = 0%
- 250k < 925k = 5%
- 925k < 1.5m = 10%
- More than 1.5m = 12%
- Corporate purchases at 15% above 500k
Additional residential properties are purchased (holiday homes, buy-to-let), +3% to rates
First time buyers for purchases up to 625k, first 425k = 0%, 425k - 625k = 5%. Above 625k purchase then standard rates

57
Q

SDLT Non-Residential Rates

A
  • Up to 150k = 0%
  • 150k < 250k = 2%
  • More than 250k = 5%
58
Q

Corporation Tax

A

UK resident companies are required to pay tax on their worldwide profits:
- 19% on <£50,000
- 25% on >£250,000
- 19%-25% on a sliding scale (first £50k at 19% then 25% on profits between £50k and £250k)

59
Q

Corporation Tax Payment

A

Normally within 9 months and one day after accounting year end
Large companies (chargeable profits above £1.5m) pay quarterly

60
Q

Trading Losses

A

Companies can offset their profits to reduce their Corporation Tax bill
- Income and gains from the same accounting period
- Income and gains from the previous year
- Trading profits frmo the same trade in future years

61
Q

VAT

A

Value added tax charged on goods and services in the UK paid by ultimate consumer
Annual turnover over 85k must register for VAT and charge VAT to their customers
- Standard rate = 20%
- Zero-rated (e.g. child clothing) = 0%
- Reduced (e.g. energy) = 5%
- Supplies outside scope of VAT = N/A (exempt)

62
Q

Reclaim VAT

A

Businesses making exempt supplies or supplies outside the scope of VAT cannot reclaim VAT it has paid
If a company is not registered for VAT, or a company is making exempt supplies, then they cannot reclaim VAT they are paying to their suppliers

63
Q

Pension

A

Tax wrapper to shield investments from income and/or CGT
Designed for UK resident tax payers to save for their retirement
UK tax resident under 75 can make contributions to registered scheme and claim tax relief on contributions

64
Q

Pension Contributions

A

Can pay whatever you want but over these limits there are charges levied against contributions:
- Annual allowance of £60k
- Basic amount of £3.6k (non tax payers)
- Amount of contributions are limited to 100% of annual earnings

65
Q

Pension Tax Relief

A

Tax relief matches the tax status of the contributor, i.e. basic rate tax payer gets 20% relief

66
Q

Pension Lump Sum

A

Up to 25% can be taken from an accumulated pension pot to a limit of £268,275
Drawing down rest of the pot is considered as non-savings income (i.e. no tax)

67
Q

Tax Efficiency vs Evasion

A

Evasion is illegal, immoral, and the lying or illegitimate hiding of information from HMRC to avoid payment of tax
Efficiency is the legal structuring of your portfolio to optimise tax payments to HMRC

68
Q

ISA

A

Individual Savings Account up to £20,000 per year by any UK tax resident
Sheltered investment accounts where gains are tax free
On move abroad, any existing ISAs are frozen so no new ISAs can be opened and no further contributions. Not forced to liquidate existing ISAs, they remain in situ
Can transfer wealth between different types of ISA without affecting annual allowance

69
Q

Stocks & Shares ISA

A

Min. 18 years old
Shares, bonds/gilts, unit trusts/ITs/OIECs/REITs
Gains/income is exempt

70
Q

Cash ISA

A

Min. 16 years old
Cash savings account
Interest is exempt from savings income tax

71
Q

Junior ISA

A

Used to save for future of a child
Child, and no one else, can access the monies in the ISA until child reaches 18
Annual limit of £9,000
Set-up as a fund so range of investment options within ISA

72
Q

Offshore Funds

A

Held and located outside of the UK, such as a tax havens, with very different tax rules and procedures

73
Q

Reporting Funds

A

Does the fund manager report income, gains, or data to the HMRC
Complies with reporting fund rules
Dividents received offshore are taxable to UK residents
CGT as capital gain

74
Q

Non-Reporting Funds

A

Do not report data to HMRC
Income and gains taxed as income
Cannot use annual CGT exemption
Losses cannot be offset against gains

75
Q

Life Assurance

A

Before ISAs, these products were common for investors saving for their future
Still useful for saving above the ISA limit or expecting change to tax bracket
For a product to qualify:
- At least annual premiums
- Term of at least 10 years
- Premiums totalling less than £3,600 per year

76
Q

Qualifying Life Assurance

A

e.g. Endowments
Investor makes regular contributions to the policy over time
Taxed as insurance, i.e. payout at maturity are entirely free of all taxes (tax free)

77
Q

Single Premium Life Assurance

A

Non-qualifying policies or life assurance bonds
Proceeds received net of 20%, effectively withholding tax
Taxable at margin rate of income tax at maturity, i.e. if you’re basic rate taxypayer you pay no further tax as you’ve already paid 20% on the premium

78
Q

Life Company Bonds

A

Tax deferral available for what are single premium life assurance policies
Deferral is until a chargeable event (death or encashment of policy)
Up to 5% of the capital originally invested may be withdrawn per year without triggering a chargeable event
Amount withdrawable is cumulative, i.e. if Y1 = 0%, Y2 <= 10%

79
Q

VCTs

A

Venture Capital Trusts (close ended fund)
- Incentives to invest in start ups and small companies
- 30% income tax relief (new shares only, IPO shares)
- Must hold for 5 years for relief
- Maximum investment for relief benefits = £200k
- Exemption from income tax on dividends
- No CGT

80
Q

EISs

A

Enterprise Investment Schemes (direct investment)
- Aimed at helping smaller, higher-risk trading companies
- Only available to individuals who invest in EIS companies
- 30% income tax relief of the cost of the shares
- Must hold for 3 years for relief
- Max investment of £1m so relief is up to £300k
- No CGT

81
Q

Tax Planning

A

Sharing wealth - personal allowances, transfer of ownership, exempt transfers
Tax-free allowances:
- £20k ISA
- £9k Junior ISA
- £12.3k CGT
Investments that reduce tax exposure - Pensions, EISs, VCTs, tax free NS&I products, eligible bonds
Administration - tax efficient will, record capital losses, full tax review at the end of each year

IMC Unit 1 (10 decks)

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