Chapter 11 - Tax In The Financial Affairs Of Individuals And Trusts Flashcards
Max, a company director, wants to reduce his National Insurance contributions in this tax year. What action is he LEAST likely to take?
a. Take less salary and more in the form of a lump sum bonus.
b. Reduce his income from the business whilst maintaining his company directorship.
c. Take more income as dividends instead of salary.
d. Increase the amount of employer pension contributions via salary sacrifice.
a. Take less salary and more in the form of a lump sum bonus.
individuals should consider adopting the following strategies to minimise their NICs;
• Taking dividends instead of salary since dividends do not count as earnings for NIC purposes. There will always be a saving to the extent that dividends fall within the £1,000 dividend allowance
• Increasing the amount the employer contributes to company pension schemes by salary sacrifice within the constraints of the annual pension allowance
In 2022/23 Frank utilised his annual inheritance tax exemption, and in 2023/24 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 2023/24?
a £3200
b. £8200
c. £7000
d. £2000
d. £2.000
This one is because the marriage gift allowance allows £5k to child, £2.5k to another relative or £1k to anyone else and the annual gifting allowance is £3k
So the £200 each are all Exempt not potentially exempt as they are in the £250 limit as are £3k and £5k of the £10k gift to the daughter, leaving £2k
The gift to a charity is also exempt not potentially exempt.
The remaining £2k is a PET because it is to a person.
As Jessica only pays class 2 National Insurance contributions, she should be entitled to:
a. statutory maternity pay and new style Jobseeker’s Allowance.
b. bereavement payments and State Pension.
c. new style Jobseeker’s Allowance and bereavement payments.
d. new style Jobseeker’s Allowance and State Pension.
b. bereavement payments and State Pension.
The following benefits depend on an individual’s (or partner’s) NICs record:
•the new State Pension;
• the new style Jobseeker’s Allowance (class 1 NICs only);
• bereavement payments;
•the new style contribution-based Employment and Support Allowance (ESA); and
• Maternity Allowance.
Jake, a higher-rate taxpayer, receives earned income and dividend income. If he makes a personal pension contribution in 2023/24 that results in his dividend income being removed from the higher-rate tax bracket, the effective rate of tax relief will be:
а. 40%
b. 45%
c. 22.5%
d. 33.75%
b. 45%
Pension contributions that have the effect of removing dividends from the higher rate tax bracket can produce tax relief at an effective rate of 45% in 2023/24. Higher-rate taxpayers who make a pension contribution save tax at 45% to the extent that their basic rate tax band is extended so that it covers their dividend income.
Arthur has made lifetime gifts over the last seven years that exceed the nil rate band and has also fully used his annual exemption in 2023/24 and the previous two years. If he makes a further gift of £80,000 to his grandson in the current tax year, the most appropriate life assurance policy to cover any potential inheritance tax liability on this would be a seven year:
a. decreasing term assurance with an initial sum assured of £80,000
b. level term assurance with a sum assured of £32,000.
c. decreasing term assurance with an initial sum assured of £32,000.
d level term assurance with a sum assured of £80,000.
b. level term assurance with a sum assured of £32,000.
A seven-year level term assurance policy could be taken out to cover the potential IHT liability on the death estate if the donor dies within seven years of making a PET. If a PET is made that causes the nil rate band to be exceeded, any potential liability to IHT on that excess could be covered by a form of decreasing term assurance over that period.
we want to cover the 40% liability, meaning we cover 40% of £80k on decreasing term to match tapered relief. So £32k on dec term assurance
You use level term assurance for gifts within the NRB, then use decreasing for any outside the band, this is because gifts within the NRB won’t have the tapered relief and so must stay level unlike gifts outside the NRB.
Oliver, who is aged 45, has total earned income of £116,210 for 2023/24 How much more income tax will Oliver pay in 2023/24 compared to someone of the same age with total earned income of £100,000?
a. £9726
b. £7387
c £8105
d. £6484
a. £9726
individuals with an income between £100,000 and £125,140 (in 2023/24) suffer an effective 60% marginal tax rate on earned income in that tranche of income because of the gradual withdrawal of the personal allowance.
lan 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?
a. 17%
b. 34%
c. 68%
d. Nil
b. 34%
Taxpayers who receive Child Benefit, or have a partner who receives Child Benefit, may be subject to the high income child benefit charge if their adjusted net income’ is more than £50,000 in a tax year. The tax charge in effect withdraws all or part of the Child Benefit received by removing 1% of the Child Benefit received for every £100 of excess ‘adjusted net income’ over £50,000.
This is £3400 over the £50k limit so 1% per £100 equates to 34%
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:
a. the contribution has not been paid wholly and exclusively for the purposes of the business.
b. the contribution exceeds Grace’s relevant UK earnings for the current tax year.
c. the contribution exceeds the annual allowance for the current tax year. X Incorrect, chapter reference 11B1B
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.
Both individuals need to be genuinely involved as business partners and a written partnership agreement is highly desirable.
This question does not ask about the tax free limit pension allowance, don’t get confused, this is asking about the corporation tax aspect.
Jing made a gift of £50,000 to her son in June 2023, having made no other lifetime gifts. The most appropriate life assurance policy for her to cover any potential inheritance tax liability on her estate would be a seven year:
a. level term assurance policy with a sum assured of £50,000.
b. decreasing term assurance policy with a sum assured of £17600
c. decreasing term assurance policy with an initial sum assured of £50,000.
d. level term assurance policy with an initial sum assured of £17,600
d. level term assurance policy with an initial sum assured of £17,600
The annual exemption of £3,000 is worth using, especially for individuals who cannot afford to make more substantial lifetime capital gifts.
A seven-year level term assurance policy could be taken out to cover the potential IHT liability on the death estate if the donor dies within seven years of making a PET. You use level term assurance for gifts within the NRB, then use decreasing for any outside the band, this is because gifts within the NRB won’t have the tapered relief and so must stay level unlike gifts outside the NRB.
To do this you want to cover the 40% IHT liability.
£50,000 - (£3000x2)PA = £44,000
£44,000 x 0.4 = £17,600
£17,600 on a level term
On 6 April 2023, an additional-rate taxpayer invested £10,000 into his ten 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 2023/24?
а £50.
b. £112.50
C. Nil
d. £12.50
b. £112.50
Children have their own personal allowances and so, can have tax-free income of up to £12,570
income of more than £100 gross in a tax year derived from a gift from a parent is taxed as that parent’s income if the child is under 18
£10,000 x 0.025 = £250
£250>£100
£250 x 0.45 = £112.5
With regard to Inheritance Tax, John, having fully used his annual gift exemption in the previous tax year, makes the following gifts in the tax year 2023/2024
I.£5,000 to his niece at age 21.
II.£4,500 to his godchild on her marriage.
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III.£1,500 spread equally to his six nephews.
Ignoring exemptions through the normal expenditure rules, how much in total of the money gifted will be deemed potentially exempt?
A. £4,000
B. £5,250
C. £5,500
D. £7,000
C. £5,500
Each tax year, you can give a tax free gift to someone who is getting married or starting a civil partnership. You can give up to:
• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £1,000 to any other person
If you’re giving gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance.
For example, you can give your child a wedding gift of £5.000 as well as £3,000 using your annual exemption in the same tax year.
You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.
£1000 on god child
£3000 on Niece from annual exemption
£1500 on 6 children as £250 allowance x 6 = £1500
Which gets £5500
Jim, an additional-rate taxpayer, has £300,000 of FTSE 350 property shares showing a gain of £150,000. He also owns an offshore assurance bond, with 100 segments, valued at £300,000 showing a £100,000 gain. He wants to gift £150,000 to his daughter, with the smallest tax liability for himself. He has already used his Capital Gains Tax exemption. How best is this done and with what tax liability, if any, for him?
A. Assign 50 segments of the bond with no tax liability.
B. Assign 50 segments of the bond with a tax liability of £22,500.
C. Gift £150,000 of the shares rolling over the tax liability.
D. Gift £150,000 of the shares with a tax liability of £21,000.
A. Assign 50 segments of the bond with no tax liability.
The investor could assign the policy for no consideration to someone who would pay income tax, if any, at a lower rate. This could be, for example, a spouse or civil partner or a child aged 18 or over. The tax liability would then depend upon the tax status of the assignee. The assignment must, however, be outright and unconditional.
Dennis and Hannah are married. Dennis, aged 90, is in poor health and Hannah, aged 50, is in good health. They each have around £2,000,000 n deposit and readily transfer assets between themselves as they want. They are going to give their daughter, Tonia, £900,000 in total as soon as possible. With regard to avoiding any Inheritance Tax liability at the time of the gift and the likelihood of minimising Inheritance Tax overall, how best should they arrange any gifts?
A. Dennis gifts £900,000 to Tonia.
B. Dennis and Hannah each gift £450,000 to a flexible interest in possession trust with Tonia as default beneficiary.
C. Hannah gifts £900,000 to Tonia.
D. Hannah gifts £900,000 to a discretionary trust with Tonia included among the possible beneficiaries.
C. Hannah gifts £900,000 to Tonia.
This gives time to create exempt transfers and if Dennis passes then the IHT allowance will pass to Hannah
Niamh has been rightly advised that she would be better off, on taxation grounds, if she invested an offshore life assurance bond rather than unit trusts. She is an additional-rate taxpayer who makes use of her Capital Gains Tax exemption each year through her other assets. Which feature of the bond is most likely to be in the adviser’s mind as most important?
A. No possibility of any tax liability within the funds of such bonds.
B. The top slicing feature to reduce eventual possible tax liability on full surrender.
c. The top slicing feature to reduce possible tax liability on partial withdrawals.
D. Withdrawal of up to 5% per annum of the original investment permitted with Income Tax deferred.
D. Withdrawal of up to 5% per annum of the original investment permitted with Income Tax deferred.
•It is possible to withdraw an amount equal to 5% from the policy on an annual basis without triggering a chargeable event. The 5% allowance is based on the investment amount and is tax deferred.
• If in any year 5% is not withdrawn, it can be carried forward to the future years on a cumulative basis (see the next example).
Jack owned a second property as a joint tenant with his daughter Miranda. They purchased it 10 years ago, each paying 50% of the purchase price. On Jack’s death, the property was valued at £900,000. All his other assets were solely in his name and were bequeathed to his wife. What Inheritance Tax, if any, was due?
Transfers on or within seven years of death are:
£0 to £325,000 = 0%
Over £325,000 = 40%
A. Nil.
B. £50,000
C. £180,000
D. £230,000
B. £50,000
Relief is only available in respect of one home, but it is possible to nominate which home should qualify where there is more than one in an estate. However, a property that was never a residence of the deceased, such as a buy-to-let property, does not qualify.
This doesn’t say it but you have to infer that he uses his NRB of £325000
£450000 (as he paid half) - £325000
= £125000
£125000 x 0.4 = £50k
