Chapter 12 Personal tax – aspects

Question 1

1.1 Domicile

Answer 1

There are three types of domiciles to be aware of for personal tax purposes:
- Domicile of origin (follows the father)
- Domicile of dependency (up to 16)
- Domicile of choice
An individual can also be deemed domicile for IT and CGT. A taxpayer can be deemed domicile in the following situations:
- UK resident for at least 15 of the 20 years ending immediately before the current tax year, or
- No longer UK domiciled but was born in the UK and had a UK domicile of origin and is UK resident in the current tax year.
These rules were put in place from 6 April 2017, transitional rules have been put in place. These state if under the first test (15/20) an individual will not be classed as deemed domicile if they are not UK resident in the current year and have not been UK resident in any tax year since 2017/18.

Question 2

1.2 Residence

Answer 2

• Does the individual satisfy any of the automatic overseas tests? This is being resident in the UK in at least one of the three previous years and spending less than 16 days in the UK in the current year. Not resident in the UK in last 3 previous years and spends less than 46 days in the UK in the current year. Or in the current year works an average of 35 hours per week overseas, no gaps of more than 30 days between periods of overseas work and does less than 31 days of UK work and spends less than 91 days in the UK. If yes, then the individual is not UK resident.
• Does the individual satisfy any of the automatic UK tests? This is spending at least 183 days in the UK in the tax year. Has a home in the UK and no home overseas and spends at least 30 days in the UK home in the tax year. Or they satisfy the full time UK work test which is working an average of 35 hours per week in the UK over the 365-day period and during this there are no periods of more than 30 days when not working in the UK and more than 75% of working days in the UK. Or more than one day when working and more than 3 hours in the UK that falls into both this tax year and the 365-day period. If yes, then UK resident.
• Does the individual satisfy the sufficient ties test. If yes, then UK resident and if no then not UK resident

Question 3

1.3 The sufficient ties test

Answer 3

The following ties are relevant:
- UK resident spouse or child under 18
- Accommodation available in the UK for more than 91 days continuously in the tax year and they spend more than 1 night a year there.
- Working in the UK for more than 3 hours per day for at least 40 days in the tax year
- Spend more than 90 days in the UK in either or both of the two preceding tax years.
- Additionally, for an individual who has been resident in the UK in any of the three previous years, there is the country tie, which is being present in the UK for more days than in any other single country in the current tax year.

Days spent in the UK in tax year
UK resident in any of 3 preceding
years (number of ties needed)
Not UK resident in any of the 3
preceding years (number of ties needed)

Less than 16 Automatic overseas test met Automatic overseas test met
16 – 45 At least 4 Automatic overseas test met
46 – 90 At least 3 All 4
91 – 120 At least 2 At least 3
121 – 182 At least 1 At least 2
183 days or more Automatic UK test Automatic UK test

Question 4

1.4 Residence – split year treatment

Answer 4

Resident can be split between tax years. The individual is treated as only being resident for part of the year. This means worldwide income is taxable for the period in which they are UK resident and only UK income is taxable when non-resident.
The tax year can only be split for years in which the taxpayer is resident.

Question 5

1.4.1 Leaving the UK – split year residence treatment

Answer 5

The tax year can only be split if the individual is leaving to take up work:
- Is UK resident in the current year when considering the tax year as a whole, and
- Was UK resident in the tax year before departure, and
- Will be non-resident in the tax year after departure, and
- Meets the full time work abroad tests for the proportion of the current tax year after their full time work overseas starts. When using these tests, the less than 91 days UK presence and less than 31 days UK work limits are reduced proportionally as they are only been used to consider part of a year.
When split the taxpayer is classed as non-resident from the first day of overseas work of more than 3 hours. In some situations, the tax year of departure can also be split if an individual is either leaving the UK to accompany a partner who has taken full-time work overseas or if they cease to have any UK home.

Question 6

1.4.2 Arriving in the UK – split year resident treatment

Answer 6

This can be split in one of four situations. There are:
- Individual arriving to work full time in the UK for at least 365 days, starting in this tax year. For split year basis to apply the individual must be non-resident in the tax year before arrival and resident in the current year if considering as a whole. The sufficient ties test must not be met for the period in the tax year before work has started. The taxpayer will be classed as resident when the work starts.
- The individual ceases full-time work abroad and returns to the UK. To split the tax year the individual must be UK resident in the tax year of arrival, and in the year following the year of arrival if considering the tax year as a whole and have not been UK resident in the year immediately before the current year due to meeting the full-time work overseas tests and be UK resident in at least one of the four tax years immediately before the year of arrival. The individual is classed as UK resident the day after the day overseas work ceases.
- If the individual returns with a partner who has returned from full-time work overseas
- Where an individual acquired a UK home part way through the year

Question 7

2.1 Overseas aspects of income tax

Answer 7

Duties performed wholly or partly in the UK Duties wholly outside UK
In the UK Outside the UK
UK resident and domiciled Arising Arising Arising
UK resident but
not domiciled Arising Arising * Possible remittance
or arising
Not UK resident Arising Not taxable Not taxable

*A non-UK domiciled individual can apply the remittance basis within the first three years of UK residence.

Question 8

2.2 Overseas aspect of other income

Answer 8

UK income Overseas income
UK resident and domiciled Arising Arising
UK resident but not domiciled Arising Possible remittance
Not UK resident Arising Not taxable

Question 9

2.3 Personal allowances

Answer 9

Can be claimed in full by UK resident individuals. Non-residents can claim only if they are citizens of the EEA, resident in the Isle of Man or Channel Islands, current or former crown servants, former residents who have left for health reasons or resident in territories with which the UK has a relevant double tax agreement clause.

Question 10

2.4 The remittance basis

Answer 10

Can be considered for individuals who are UK resident but non-domiciled. It is automatic when unremitted foreign income and gains are less than £2,000 or the individual has no UK income and gain, does not remit any foreign income and gains and has been resident in the UK for less than 7 out of 9 tax years or is under 18 for the whole tax year. PA and AEA available.
The claim is optional for everyone else to whom the basis possibly applies to. There is a remittance basis charge when the individual is resident for 7 out of 9 tax years (£30,000 charge) or resident for 12 out of the last 14 tax years (£60,000 charge). No PA or AEA for these individuals.

Question 11

2.5 Double taxation relief

Answer 11

If overseas income is taxed both in the UK or overseas DTR is available to reduce the UK tax liability. The overseas income is included in the UK tax comp gross of any overseas tax deducted and UK tax is calculated as normal. A deduction is given at the lower of the UK tax on overseas income and the overseas tax suffered.

Question 12

2.6 Overseas aspects of CGT

Answer 12

UK income Overseas income
UK resident and domiciled Arising Arising
UK resident but not domiciled Arising Possible remittance,
limited relief for overseas losses
Not UK resident Not normally taxable Not taxable

Question 13

2.7 non-UK resident individuals

Answer 13

From 6 April 2015 UK CGT is payable on disposal of UK residential property by non-UK resident individuals, trusts and close companies. Only the post 2015 gain is taxable, or taxpayer can time apportion the gain using an election.
From 6 April 2019 the treatment applies to disposal of non-residential property and UK property rich assets (shares in a company where at least 75% of gross assets are UK property). Allowable cost is 2019 MV. An election can be made to ignore re-basing and instead calculate based on entire ownership; time-apportionment election not available.
Any losses arising on the above assets for non-residents are ring fenced. They must make a return and payment on account of CGT tax arising on disposal of UK land and property rich assets within 60 days. A payment on account takes account of qualifying losses and the AEA amount and uses an estimate of the taxpayer’s taxable income.

Question 14

2.8 UK deemed domicile.

Answer 14

Transitional rules apply here. CGT is calculated by using the April 2017 market value in place of cost. They apply when a qualifying individual sells an asset on or after 6 April 2016 and the asset was not located in the UK between 16 March 2016 and 5 April 2017. A qualifying individual is a taxpayer who has suffered a remittance basis charge in any tax year prior to 2017/18 and was not born in the UK with a UK domicile of origin and was treated as having a UK deemed domicile by virtue of the long-term residence rule for 2017/18 and all following years up to the date of disposal.
An irrevocable election can be made to ignore rebasing and use the original cost instead in the calculation.

Question 15

2.9 Temporary non-residence

Answer 15

Anti-avoidance rules apply to stop individuals delaying disposals or receiving income until a period of non-residence. The rules apply when an individual ceases to be UK resident and has previously been UK resident for at least four out of the last seven tax years and is non-resident for a period of less than 60 months.
The rules apply to capital assets acquired at a time when the individual was UK resident but disposed when they were non-resident. Income taxed on a remittance basis that accrued during a period of UK residence but was remitted during the period of non-UK residence.

Question 16

3.1 International aspects of personal tax – working overseas.

Answer 16

If the individual satisfies the full-time work overseas for a whole tax year, they will obtain the benefit of the split year treatment. When working overseas, cost of overseas accommodation, return trips home and up to two return trips a tax year for spouse/children provided the employee is overseas for over 60 days continuously is a tax-free benefit.

Question 17

3.2 Remittance basis claimants

Answer 17

Need to consider if the loss of the PA and AEA and the RBC outweigh the savings by not taxing the unremitted income. Remittance basis claims are made each tax year. If the basis does not apply, consider separating funds to be able to identify which funds are actually being remitted.

Question 18

3.3 Business investment relief

Answer 18

Remittance basis taxpayers can bring funds into the UK without charge if the following are met:
- Remitted funds are used to make a loan to or acquire shares in an unquoted trading company which is UK resident or trades in the UK through a UK PE
- The funds are invested within 45 days of being brought into the UK.
- Once the investment is sold, the proceeds are removed from the UK or reinvested in another qualifying investment within 45 days.
- If conditions for relief are no longer met, the investment must be sold within 90 days. The investor then has 45 days to move the proceeds out the UK or reinvest in a qualifying asset.
- An election must be made.
- There is no limit to the amount of funds in a business investment relief claim.
There are also no charges for a remittance basis taxpayer who brings assets into the UK for sale in the UK provided the funds are all received by first anniversary of 5 January following tax year of disposal, and the proceeds are taken offshore within 45 days of receipt.

Question 19

3.4 Remittance basis for CGT

Answer 19

In the first year an individual uses the remittance basis, relief can be obtained for overseas capital losses if an irrevocable election is made. In this case, UK and overseas losses are used in order of remitted overseas gains, unremitted overseas gains and then UK gains.
If the election is not made in the first year, relief can never be obtained for overseas losses. If an individual who has previously made the election becomes UK domiciled, it no longer takes effect. If they then become non-domiciled again, the election must be made in the first year of claiming the remittance basis.

Question 20

4.1 Alternative investment vehicle – family investment companies

Answer 20

The shareholders of the company will be different generations of a family, the parents will usually be directors of the company. The children may be shareholders but are unlikely to hold voting rights.
Transfers are not transfers of value. The family members subscribe for their shares, does not cause an IHT charge. The shares are newly issued, so no stamp duty. If cash is transferred no tax arises. On the transfer of other assets, a charge will arise to CHT but not IHT. For CGT the connected party rules are used. If the asset is a building the company must pay SDLT. If the shares in the FIC are transferred once the company is set up, this is a gift for CGT and a PET for IHT.
As a company the FIC pays corporation tax on income and gains. If the company borrows money to buy shares in other companies any interest on the loan gains tax relief as a NTLR debit. If the company sells shares in another company, it may qualify for SSE.
the members of a FIC are subject to income tax as extracted from the company.

Question 21

4.2 FIC advantages and disadvantages

Answer 21

Tax advantages include no IHT charges on the set up, profits are subject to CT, SSE may be available on the sale of shares in another company, tax relief if the company borrows money and no tax charge on dividends received. Other benefits mean parents can control assets, simple structure and allows for succession planning.
Tax disadvantages include a double charge to tax on profits, stamp duty paid if land and buildings or shares are transferred, charge to CGT if assets are chargeable and the company is likely to be close so subject to anti-avoidance rules for close companies. Other disadvantages include more formality in setting up and need to comply with Companies Act 2006.

Question 22

5.1 Trusts

Answer 22

• Interest in possession trust: more than one beneficiary who are entitled to all income of the trust as it is earned, but at the end of the trust the capital passes to the remainderman.
• Discretionary trust: no beneficiary has the absolute right to the income of the trust, instead the trustees decide what to pay out.
• Bare trust: trustees are legal owners of any property, but beneficiary has absolute right to all the property and any income generated.

Question 23

5.2 Interest in possession trusts

Answer 23

All income is taxed on the trustees and beneficiaries. Income subject to basic rate of tax. Trust does not have a PA or nil rate bands. All remaining income after tax is paid to beneficiaries. Tax is always deductible from dividend income first, then savings and non-savings income. Beneficiary includes the income from the trust in their tax computation. The trust deed may specify a particular beneficiary is entitled to be paid a set amount every year. The trustees can deduct the annuity before calculating the tax payable in the trust. The annuity will be paid net of basic rate tax.

Question 24

5.3 Discretionary trusts

Answer 24

All income taxed on trustees. Beneficiaries only pay tax on income paid to them in the year. Trust has a basic rate band of £1,000, all other income subject to additional rate. Trust has no PA or nil rate bands. Trust expenses can be deducted before tax is payable. When a beneficiary receives a distribution, it is treated as it was received net of a 45% tax credit. The payment is grossed in their comp as non-savings income and a credit can be claimed in respect of the tax paid by the trust.

Question 25

5.4 CGT – trust disposal of assets

Answer 25

CGT treatment is the same for a trust regardless of the type. A gain arises and calculates in the same way as an individual. Trust receives half the AEA (£6,150), the amount is divided by the number of trusts the settlor has set up, subject to the minimum AEA of £1,230. Trusts pay CGT at the main rate (20%/28%). PPR is available if the beneficiary occupied a residential property as their main residence before the disposal. If there is an immediate charge to IHT, gift relief will be available for CGT, even if the asset sold is not a qualifying business asset.

Question 26

5.5 Other capital taxes on trusts

Answer 26

For CGT we categorise relevant property trusts and qualifying interest in possession trusts. Discretionary trusts are relevant property trusts. Interest in possession trusts are relevant property trusts if set up since 22 March 2006 whilst the settlor is alive. An interest in possession trust set up on the settlor’s death or prior to 22 March 2006 is referred to as a qualifying interest in possession trust.

Question 27

5.6 Relevant property trusts

Answer 27

Three charges to IHT can potentially arise on a relevant property trust:
- Setting up of the trust and any subsequent transfers of assets into the trust are chargeable lifetime transfers. An immediate charge to IHT arises when the asset is transferred, plus a further charge if the settlor dies within seven years.
- Every 10 years a principal charge is payable on the value of the assets in the trust at this date. This tax is payable by the trust.
- If assets are passed out of the trust to a beneficiary, the trust pays an exit charge on the value of the assets distributed.
Two further charges to CGT can arise on a relevant property trust:
- The gift of assets to the trust by the settlor, including when the trust is set up, are chargeable disposals for CGT. The exception is a transfer on the settlor’s death. If the assets are exempt, no CGT arises. If not, the gain is calculated as market value less cost. Gift relief is available if an immediate charge arises for IHT.
- Assets passed out of the trust to a beneficiary it is a chargeable disposal for CGT. The trustees are treated as if they sold the assets for market value, and a gain arises. As there is an immediate charge to IHT, gift relief is available.

Question 28

5.7 Other capital taxes on qualifying interest in possession trust

Answer 28

The trust is created by transferring the assets based on the settlor’s wishes in the will. A life tenant will be named, and they are entitled to the income throughout the life of the trust. A charge to IHT arises unless the life tenant is the settlor’s spouse. No charge to CGT will arise as transfers on death are exempt from CGT, base cost of assets transferred is probate value.
When the trust ends the assets pass from the life tenant to the remainderman. If the trust ends on death of life tenant, the assets are included in the settled property calculation. IHT payable unless the remainderman is the life tenant’s spouse. No CGT. If the trust ends while the life tenant is alive, the gift is a PET for IHT, for CGT this is treated as a disposal at MV.

Question 29

5.8 Bare trusts

Answer 29

Existence of the trust is ignored for tax purposes. The beneficiary is taxed on the income and included in their self-assessment. The set up of the trust is treated for CGT purposes as a gift by the settlor. If this is set up in the settlor’s life it is a PT for IHT and gift at MV for CGT. If set up on death, the assets are in the calculation in the estate for IHT and exempt from CGT.
Transfer of assets from the trust (other than to beneficiary) is treated as a disposal by beneficiary. This is a PET is the beneficiary is alive for IHT and gift at MV for CGT. Otherwise included in estate for IHT and exempt from CGT.
Transfer of assets to the beneficiary is not treated as a disposal for IHT and CGT purposes.

Question 30

5.9 Trusts for minor children

Answer 30

If an individual puts money or property for their child who is unmarried and under 18 into a trust, the parent is taxed on payments of income, capital, benefits and amounts the child is entitled to but not paid of the trust. The rule does not apply if the total taxable amount does not exceed £100.

Question 31

5.10 Settlor interested trusts.

Answer 31

This in one in which property can be paid to or applied for the benefit of the settlor and/or their spouse. Income arising in the trust is taxed on the settlor, even if they do not receive it. If trustees have paid tax on the income, the settlor can claim a tax credit.

Question 32

5.11 Capital sums paid to settlor.

Answer 32

When the trust lends money, or repays a loan, to the settlor or their spouse, the settlor is taxed on the lower of the capital sum paid by the trustees and the available income of the trust.

Question 33

6.1 Small self-administered pension schemes

Answer 33

Taxation of SSAS is similar to occupational schemes but has extra benefits. A SSAS can borrow up to 50% of the fund value. It can also lend 50% of the fund value to its own company and invest less than 5% of the pension fund value in its own company. The scheme cannot invest in residential property or tangible movable property.

Question 34

6.2 Self-invested pension plan

Answer 34

Type of personal pension scheme, subject to same rules as any other personal scheme. It can borrow 50% of the value of the fund but cannot lend money. It can purchase any amount of shares in any company. The scheme cannot invest in residential property or tangible moveable property.

Question 35

6.3 Common use of a SSAS or a SIPP

Answer 35

Most common is to hold commercial property being used in the business of the sponsoring company (SSAS) or pension investor (SIPP). The tax advantages are:
- Business will rent for the use of the property which is tax deductible.
- Pension fund does not pay income tax/CGT on rental income and lease premium.
- On the disposal of property, the fund will not be liable to pay CGT on profit.