Chapter 11 - Tax in the financial affairs of individuals and trusts Flashcards
Grace is employed part-time in her husband’s limited company receiving a salary of £10,000 per annum. The company pays a pension contribution of £75,000 into a pension plan on her behalf. However, HMRC has decided that the entire contribution cannot be treated as a business expense for corporation tax purposes. The most likely reason for this decision is because:
Select one:
a. the contribution has not been paid wholly and exclusively for the purposes of the business.
b. the contribution exceeds the annual allowance for the current tax year.
c. the contribution exceeds Grace’s relevant UK earnings for the current tax year.
d. Grace is only employed by the company on a part-time basis.
a. the contribution has not been paid wholly and exclusively for the purposes of the business.
chapter reference 11B1B
Ian and Ruth are married with a young child. Ian has ‘adjusted net income’ of £30,000, and Ruth has ‘adjusted net income’ of £53,400 a year. What, if any, is the effective percentage reduction in the amount of child benefit that they receive?
Select one:
a. 34%.
b. Nil.
c. 17%.
d. 68%.
a. 34%.
chapter reference 11B2B
Basil died several years ago when the nil rate band was £300,000. He left £100,000 to his daughter and the balance to Susan his wife. What transferable nil rate band, if any, would Susan be able to claim?
Select one:
a. 0%.
b. 67%.
c. 23%.
d. 33%.
b. 67%.
chapter reference 11E2A
On 6 April 2021, an additional-rate taxpayer invested £10,000 into his 10 year old son’s savings account. The savings account pays a gross rate of interest of 2.5%. How much income tax, if any, will be payable on the interest, assuming that the son has no other income in 2021/22?
Select one:
a. £12.50.
b. Nil.
c. £112.50.
d. £50.
c. £112.50.
chapter reference 11B2
Chang, a higher-rate taxpayer, lives with but is not married to his partner Michelle, who is a basic-rate taxpayer. What would be the tax position if Chang transfers his share portfolio valued at £80,000 into Michelle’s name?
Select one:
a. On the final disposal of the shares, the calculation of Michelle’s gain will be based on when Chang originally purchased the shares.
b. The income tax liability on future dividends will be unchanged.
c. The transfer to Michelle will always be exempt from capital gains tax.
d. The income tax liability on future dividends will be reduced.
d. The income tax liability on future dividends will be reduced.
chapter reference 11B1A
Helena has been paying into her company pension scheme for 21 years and is about to retire. The pension income she receives, for National Insurance contribution [NIC] purposes, will:
Select one:
a. be subject to NICs but at a lower rate.
b. not be subject to NICs.
c. be subject to NICs.
d. be subject to NICs at a higher rate.
b. not be subject to NICs.
chapter reference 11D1
In 2020/21 Frank utilised his annual inheritance tax exemption, and in 2021/22 he made only these gifts: £200 each to his six grandchildren on their birthdays; £10,000 to his daughter on her wedding, and £5,000 to a charity. How much will be treated as a potentially exempt transfer for inheritance tax purposes in 2021/22?
Select one:
a. £3,200.
b. £2,000.
c. £8,200.
d. £7,000.
b. £2,000.
chapter reference 11E2F
Valerie has utilised her annual inheritance tax exemptions in the current and previous tax years. She also made three further gifts: a gift of £10,000 to the National Trust; a payment of £6,000 per annum out of her regular income to cover her grandson’s school fees, and; an outright gift of £25,000 to her daughter. The total amount that will be treated as a potentially exempt transfer for inheritance tax purposes in 2021/22 is:
Select one:
a. £41,000.
b. £31,000.
c. £25,000.
d. £35,000.
c. £25,000.
chapter reference 11E2F
Brian would like to make a personal pension contribution in 2021/22 for his wife Pamela whose only income is investment income of £2,000 gross. What is the maximum net contribution he can make if the entire contribution is to be eligible for tax relief?
Select one:
a. £2,880.
b. £4,500.
c. £2,000.
d. £3,600.
a. £2,880.
chapter reference 11D1
As Jessica only pays class 2 National Insurance contributions, she should be entitled to:
Select one:
a. statutory maternity pay and new style Jobseeker’s Allowance.
b. new style Jobseeker’s Allowance and bereavement payments.
c. bereavement payments and State Pension.
d. new style Jobseeker’s Allowance and State Pension.
c. bereavement payments and State Pension.
chapter reference 11C1
Jack has adjusted net income of £59,000 per annum, whilst Jill’s is £52,000. They have two children under age 18 and Jill has always claimed the child benefit for the children. With the child benefit they currently receive:
You must select ALL the correct options to gain the mark:
a. they would both need to reduce their adjusted net income to £50,000 or under in order to avoid any high income child benefit charge.
b. they can elect to forgo receiving the child benefit if they wish to avoid paying any high income child benefit charge.
c. if Jill pays £1,600 gross into a pension plan, she will retain all of the child benefit payable.
d. they can reduce their adjusted net income by making pension or charity contributions.
e. any high income child benefit charge will be deducted from Jill, as she receives the child benefit payment.
a. they would both need to reduce their adjusted net income to £50,000 or under in order to avoid any high income child benefit charge.
b. they can elect to forgo receiving the child benefit if they wish to avoid paying any high income child benefit charge.
d. they can reduce their adjusted net income by making pension or charity contributions.
chapter reference 11B2B
Lisa, who is a non-taxpayer, would like to contribute £100 per month gross into a personal pension plan. How much tax relief, if any, will she receive on her contributions?
Select one:
a. 10%.
b. 5%.
c. 20%.
d. Nil.
c. 20%.
chapter reference 11D1
Frank, a company director, receives his sole income of £50,000 in the form of dividends from his business. From a taxation point of view, he:
You must select ALL the correct options to gain the mark:
a. would not be liable to National Insurance contributions
b. could pay his wife, who doesn’t work in the business, dividends of up to £7,500 without any concern that HMRC will challenge this.
c. will be able to use the dividend allowance to reduce the income tax he pays on these dividends.
d. would pay 7.5% income tax on all of his dividend income.
e. would pay basic and higher-rate tax after taking account of the dividend allowance.
a. would not be liable to National Insurance contributions
c. will be able to use the dividend allowance to reduce the income tax he pays on these dividends.
chapter reference 11B1B
Promoters of tax avoidance schemes must disclose their scheme to HMRC, primarily so that HMRC can:
Select one:
a. inform the EU.
b. assess the risk to investors.
c. include the details on their information leaflets.
d. block unacceptable schemes through legislation.
d. block unacceptable schemes through legislation.
chapter reference 11A4A
Sanjay, age 45 and in good health, runs his own business and is a higher-rate taxpayer. What factors should he take into account when deciding whether to invest for his retirement in a personal pension or an ISA?
You must select ALL the correct options to gain the mark:
a. The ISA must be taken as a lump sum whereas the pension fund must all be used to provide an income.
b. He will usually receive 40% tax relief on contributions to a personal pension.
c. A personal pension can promote better savings discipline as there are age restrictions on accessing the fund.
d. The ISA is not protected from creditors in the event of his bankruptcy.
e. The charges on a personal pension are usually lower than on an ISA.
f. Funds held in an ISA enjoy lower levels of taxation than the pension funds.
b. He will usually receive 40% tax relief on contributions to a personal pension.
c. A personal pension can promote better savings discipline as there are age restrictions on accessing the fund.
d. The ISA is not protected from creditors in the event of his bankruptcy.
chapter reference 11D
Ralph is currently self-employed but is thinking about setting up a limited company instead. If he was to do so, the tax advantages of this would allow him to:
You must select ALL the correct options to gain the mark:
a. determine the date of retirement or ceasing to work which may make a difference to the tax liability in the final year.
b. always pay a lower level of income tax.
c. choose an accounting date that can minimise the tax payments on his business profits.
d. receive the dividend tax allowance which can makes it attractive to run a business as a limited company.
e. potentially benefit from overlap relief.
a. determine the date of retirement or ceasing to work which may make a difference to the tax liability in the final year.
c. choose an accounting date that can minimise the tax payments on his business profits.
e. potentially benefit from overlap relief.
chapter reference 11B4
What strategies might an individual, who is not a company director, consider in order to minimise their National Insurance contributions?
You must select ALL the correct options to gain the mark:
a. Being paid less by way of salary and more in the form of a lump sum bonus.
b. Increase the amount the employer pays into a pension scheme by salary sacrifice.
c. Taking dividends instead of salary from a company in which they work and hold shares.
d. Being paid more by way of salary and less in the form of a lump sum bonus.
e. Taking salary instead of dividends from a company in which they work and hold shares.
b. Increase the amount the employer pays into a pension scheme by salary sacrifice.
c. Taking dividends instead of salary from a company in which they work and hold shares.
chapter reference 11C2
How long after a death do beneficiaries of a will have to enter into a deed of variation?
Select one:
a. Six months.
b. Two years.
c. Eighteen months.
d. Three years.
b. Two years.
chapter reference 11E1
Keith and Jala are married with two children. Keith earns £48,000 and Jala earns £45,000. Which of these changes to Keith’s or Jala’s income would have the most impact on their entitlement to child benefit?
Select one:
a. Keith receives a bonus from his employer of £7,000 while Jala’s remains unchanged.
b. They both start new jobs with different employers, each with a new salary of £50,000 pa.
c. Keith and Jala both receive a 5% annual pay increase.
d. Jala receives commission from her employer of £9,000, while Keith’s salary is increased to £50,000.
a. Keith receives a bonus from his employer of £7,000 while Jala’s remains unchanged.
chapter reference 11B2B
Ashwin is 10 years old and a non-taxpayer who has been given money by his mother. How much interest can this money earn tax-free per tax year?
Select one:
a. £12,500.
b. £3,600.
c. £100.
d. £9,000.
c. £100.
chapter reference 11B2
Dick reached State pension age in May 2021 and, although he could have retired, has decided to continue working on a self-employed basis. What National Insurance contributions would he have to pay in 2021/22?
Select one:
a. Class 4 [if his profits are large enough] only.
b. Class 2 and class 4 [if his profits are large enough] only.
c. Class 3 and 4 [if his profits are large enough] only.
d. Class 2 only.
a. Class 4 [if his profits are large enough] only.
chapter reference 11C
Blair, who is 55, has total earned income of £115,000 for 2021/22. How much more income tax will Blair pay in 2021/22 compared with someone of the same age with total earned income of £100,000?
Select one:
a. £3,000.
b. £7,500.
c. £6,000.
d. £9,000.
d. £9,000.
chapter reference 11A2
Which State benefit is paid irrespective of an individual’s National Insurance contribution record?
Select one:
a. New style Jobseeker’s Allowance.
b. Child Benefit.
c. Bereavement Benefits.
d. State Pension.
b. Child Benefit.
chapter reference 11C1
Mark is considering making a potentially exempt transfer [PET] of property to a family member. What are the potential advantages of making such a transfer?
You must select ALL the correct options to gain the mark:
a. There is never a capital gains tax consequence on this type of transfer.
b. There is no lifetime charge on transfers over the nil rate band.
c. If Mark survives for seven years there will be no inheritance tax liability for the PET.
d. A PET will normally be a lifetime gift, but with the donor retaining control of the asset.
e. PETs are never subject to inheritance tax.
b. There is no lifetime charge on transfers over the nil rate band.
c. If Mark survives for seven years there will be no inheritance tax liability for the PET.
chapter reference 11E2C
If Rebecca makes her first ever lifetime transfer and incurs an immediate inheritance tax liability, she will have made a transfer into a:
Select one:
a. bare trust of £370,000.
b. discretionary trust of £370,000.
c. discretionary trust of £325,000.
d. bare trust of £325,000.
b. discretionary trust of £370,000.
chapter reference 11E2D
If Martin wishes to transfer some shares to his spouse to reduce the tax liability on a dividend payment, the transfer must be:
Select one:
a. for a minimum of 12 months.
b. absolute and unconditional.
c. absolute only.
d. unconditional only.
b. absolute and unconditional.
chapter reference 11B1
Alex is a company director who has a salary of £45,000. What action would he take if he wants to minimise the income tax that he pays?
Select one:
a. Increase his salary to above the upper earnings limit.
b. Transfer the ownership of his private car to the company so that it is taxed as a benefit in kind.
c. Increase his pension contributions that are made by his employer.
d. Take dividends from his company instead of a salary.
d. Take dividends from his company instead of a salary.
chapter reference 11C2
Hannah has made the following gifts in 2021/22: £1,500 split equally between her six godchildren, £3,000 each to her grandson and granddaughter on their 18th birthdays and £1,000 to her friend’s daughter on her marriage. Assuming she made no gifts in 2020/21, the total of non-exempt gifts is:
Select one:
a. £1,500.
b. £2,000.
c. £6,500.
d. nil.
d. nil.
chapter reference 11E2F
