Chapter 27 Miscellaneous Provisions Flashcards
national saving certificates, premium bonds, ISAs, high income child benefit charge
National savings certificates – interest earned on them are tax-free
Premium bonds – max you can hold is £50,000. All prizes are tax-free.
Individual savings accounts (ISAs) – no tax on income, no tax on capital gains. There are 4 different kinds of ISA, a cash ISA, stocks and shares ISA, an innovative finance ISA and a lifetime ISA. In 19/20 an individual can invest £20,000 into an ISA.
Lifetime ISAs – available to people ages 18-40. Put up to £4,000 a year, the contributions eligible for a 25% tax free bonus from the government. It can be used to buy a first home up to £450,000 provided the ISA has been held for 12 years. Alternatively, funds can be withdrawn after the individuals 60th birthday. If withdrawn before then or to not buy a first home the bonus is lost, and the individual will be subject to a 5% charge.
Junior ISA – up to £4,368 per annum for an individual under the age of 18.
Help to buy ISAs – were open until 30 November 2019, used to buy a first home. The government pay a tax-free bonus of 25% provided the balance on the account is at least £1,600, the bonus is limited to £3,000. Savers invest up to £1,200 in the first month and then up to £200 a month. You can only use one government bonus to buy your first home.
High Income child benefit charge – usually stop on 31st August after the child’s 16th birthday, unless the child is in education, or when they turn 20 if later. Payments are £20.70 a week for the eldest child plus £13.70 a week for other children. If the adjusted net income of either partner is above £50,000 the high-income child benefit charge will apply. The charge is 1% of the child benefit for every £100 of adjusted net income in excess of £50,000. If adjusted net income reaches £60,000 or over, you receive no child benefits. Adjusted net income is net income less the gross amount of any personal pension contributions and the grossed-up amount of any gift aid donations. You can elect not to receive the child benefit.
pre-owned assets
Pre-Owned Assets – where a taxpayer gives away an asset or provides consideration for the acquisition of an asset and the taxpayer can benefit from that asset after the gift and the arrangement does not fall within the gifts with reservation rules for inheritance tax then the pre-owned assets (POA) rules apply.
The POA rules impose an income tax charge on the former owner of the asset in respect of the benefit he has obtained from the use of the asset in question. The most common asset is land and buildings. The benefit the donor obtains from the use of lands and buildings is measured in terms of the annual rents that could be obtained.
POA charges on chattels – value of asset x HMRC official rate of interest less rents paid by the donor for the use of the chattel. Then you get the notional income. The chattel is valued at the date which the taxpayer first becomes liable to the income tax charge. The income tax charge is based on that value for the first and the following four tax years. A new valuation is required after the first five tax years.
Election to avoid a POA charge – the election is that no income tax charge will arise under the POA rules in respect of the asset he continues to benefit from but the donor will instead be treated as having made a gift with reservation under the inheritance tax rules, so the asset forms part of his estate for inheritance tax. The election should be made no later than 31 January following the tax year and applies on an asset-by-asset basis.
life insurance, liability of the policyholder, partial surrenders and interaction with personal allowance
Life Insurance – they either pay out a lump sum when someone dies or act as an investment vehicle to provide a return on an investment. The policies are either qualifying or non-qualifying. Qualifying policies are long term where regular premiums are paid with little variation in the amount paid year on year. there is no tax when a qualifying policy matures. Non qualifying policies tend to be funded by a single premium and have the nature of an investment vehicle. These are taxed on maturity under the rules for life-insurance gains.
Liability of the policyholder – when a policyholder cashes in a non-qualifying life policy this is a chargeable event. Any gains arising on the chargeable event are chargeable to income tax. Chargeable gains are treated as the top slice of an individual’s income. Gains treated as savings income. Gains on non-qualifying life policies are deemed to carry a notional 20% tax credit. The credit can reduce the liability but cannot be repaid.
Partial surrenders – policyholder can make a partial surrender of a policy without this giving rise to an income tax charge. However partial surrenders will only avoid an income tax charge if they do not exceed 5% of the initial investment per policy year. This 5% can apply cumulatively. When the policy matures, the partial surrenders not brought into charge are added to the policy gain to give the amount chargeable to income tax.
Interaction with personal allowances – as chargeable event gains are treated as income; they will be part of a taxpayer’s net income. Therefore, the effect of a chargeable event gain could be to reduce personal allowances. This will be the case where a chargeable event gain causes an individual’s adjusted net income to exceed £100,000. In addition, a chargeable event gain could also affect the married couple’s allowance for a taxpayer born before 6 April 1935.
