Chapter 4 Flashcards
Income tax rates for indervidual
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Income tax allowances
Personal allowance is 12570 - this started getting eroded when income above 100k
Blind person allowance 2870
Personal savings allowance basic = 1000, higher = 500, additional = 0
Savings rate allowance 5000 but salaries higher than 17500 = 0
Personal allowances
This is the 12,570 that you get tax free before the first band, however for every £2 you earn above 100k it is reduced by £1.
Tax rates
Basic = 20% higher = 40% additional = 45%
Personal savings allowance (PSA)
This is the amount of interest you can earn without having to pay tax. = 1000£ for basic rate taxpayers.
Starting rate for savings
Separate form the PSA. You can earn interest up to 5000 tax free. However for every pound you earn above the personal allowance it decreases. Meaning salaries above 17550 reduce this allowance to 0.
Dividend allowance (DA)
This means people can earn 1000 tax free regardless of their tax band. Above this is then taxed at the applicable rate.
Dividend below basic rate amount = 8.75%, Dividend above basic rate amount and below 125k = 33,75%, dividend above 125k = 39.35%
Marriage allowance
This is where you can transfer up 2 10% of your personal allowance to their partners allowance.
Income tax for trusts
Because trusts are not separate entities they are assessed on gains and income.
Types of trusts
Interest in possession - holding part of an asset or assets for one person while another uses without owning it.
Discretionary - they decide on beneficiaries
Accumulation and maintenance - until 25 the income and assets must be accumulated but then after this the beneficiary must have access to both.
Bare trusts - beneficiary has absolute access to the assets at a trigger usually 18 and this cannot be taken away.
Taxation of interest in possession trusts
If income goes through the trust then trustees are responsible for tax
If income goes straight to the beneficiary then they are responsible for the tax.
Taxation of discretionary trusts and accumulation trusts.
Standard rate of 20% is on the first 1000 and then 45% on anything above this.
Trusts for the vulnerable
If a trust is in place because someone is not caper able of managing their own affairs then this type of trust is tax free to stop people being taxed because of their disabilities as the assets would not usually be taxed. This can be a disabled person or a relevant minor.
Charities
Usually don’t pay tax including stamp duty
Savings income
This includes
Interest at banks and credit unions
Interest distributions
Income from bonds
Life annuity
Rental income
Residential = treated the same as business income and same rates because of that. However you can offset costs and losses against it.
Rent a room has a 7500 a year tax free allowance
Commercial rental income
These are taxed in the same way as other business income.
Tax treatment of open ended investment companies and unit trusts
OEICs if more than 60% of the assets pay interest then it pays interest this will then be paid gross and the individual is responsible for the tax.
When paying dividend for less than 60% fixed income investments this will also be paid gross and the individual will be responsible for the tax.
Equalisation payments
This is the payment investors receive when they first invest in a fund as proportion of their investment back, the fund will then give the investor a tax voucher meaning this payment will be tax free.
Accumulated income
Even if the fund rolls up the income and interest then the investor has still earned it and they will receive a tax voucher meaning they still have to pay that tax.
National insurance contributions
This is the contribution that then entitles you to certain social benefits from the government.
Anyone over 16 earning above a certain income.
Rates and allowances for NIC
Primary threshold = 242 above a week to the upper earning limit = 967
Lower = 123
Secondary = 175
Employed people = 12% between primary and upper, income above the upper = 2%
Self employed - small profits = 6725, meaning you pay 3.45pw class 2
Class three = 17.45pw
Class 4 lower profits 12750, higher = 50270
Class 4 rates between lower and higher = 9%
Additional income above higher = 2%
Amount of NIC payable
Employed = 12% on 242 to 967 income per week & an additional 3.25 on income above that
Self employed = class 2 or 4 depending on income.
Voluntary contributions
Any individual whose work or personal situation means they don’t pay NIC can opt into to keep building their pot. Ie if you were out of work but new you wouldn’t be for long you may choose to contribute for the long term benefits.
Capitals gains tax
This is the charge on disposing of a chargeable asset by a chargeable person
Disposal = selling, gifting, transferring, surrender of rights.
Charable/ exempt assets for CGT
PPR
Gift between spouses
Gifts to charities
Premium bonds
Assets in ISA
Private motor vehicle
Shares in VCT
EIS shares once held for three years
Lottery winnings
Forgin currency
Chargeable person
Resident of the UK
Application of CGT
6000 allowance in 23/24 now 3000 in 24/25, they pay the charge on the gain on their chargeable assets. After this it is 10% for basic rate and 20% for higher and additional rate. Or 18&28 from residential property.
Capital gains treatment for collective investments
Capital gain made within the open ended investment are tax free however when disposing of the investment will be liable.
Investment rust don’t pay tax either
Rela estate investment trust if the distribute 90% of the dividends don’t pay CGT either
IHT
IHT applies in a variety of ways not only on death. This can be on gifts during lifetime and on death. The lifetime gift is subject to eh 7 year rule. Rate = 40% above nil rate band.
Potentially exempt transfers
This is the 7 year rule - it becomes exempt after this time so during this time it is potentially exempt. This is the case for gifts into trusts.
Nil rate band (NRB)
This is a tax free amount for an estate and is 325k per person. This band can be passed onto spouses should the assets of a married couple solely be passed between them on first death.
Residential nil rate band
This was introduced because of the concerns tied to increased property value. This is an addition 175k relief that can be used for property. However only for estates under 2m.
Exemptions and relics to IHT
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Value of quoted shares in probate
This is the process of valuing on a quieter zip this is calculated by
Lower price + (difference between lower and offer price)/4
No quotes shares
You must negotiate a value and if it cannot be agreed then an appeal process can be followed.
Life policies
Are included into estates for IHT unless it is written into a trust meaning it is out of the estate and not subject to IHT.
Deeds of variation
This where a beneficiary of a will can make changes to their estate and decide not to benefit from the estate however it can only be done for valid wills. And be signed by all the parties who initially benefit from the will.
Estate administrators
Executors administrate the will
Administrators execute the wills plans post probate they are separate jobs and can be separate people.
Intestancy rules
This is we’re there is not a valid will and this then mean intestinal rules apply and the court of probate decides on the assets whereabouts. They follow a rule, spouses with children are usually the ones that are effected most negatively as 50% of a parents assets go to the children under intestate rule and not the spouse.
Order of intestate if there is no children or spouse
Parents
Siblings
Grandparents
Uncles
Half uncles
Residence
This refers to the short term view of where someone lives. It is determined using the STR statutory residence test and includes three tests.
These test are:
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Sufficient ties test
This determines residency based on various factors
If uk residence then it based on time spent in country and how many ties you need
16-45 = all 4
46-90 = 3
91-120 = 2
120 + = 1
Domicile
This is where they have a permanent home. You cannot have 2 domicile.
There are four types of domicile
Original
Choice
Dependency
Deemed
Tax implication of domicile and residency
If both then they pay tax on everything as normal. If resident but not domicile then they can claim remittance on income of foreign descent. They then pay a separate charge based on this remittance tax.
Double tax treaties
This is where indervidual are liable for 2 types of tax in two countries and providing these countries have double tax treaties then they can apply for double tax relief. Stopping it being taxed twice.
Stamp duty
Stamp duty and stamp duty reserve are types of financial transaction taxes. Stamp duty is on paper based transfers and SDRT is applicable on electronic transfers.
If there is a paper trail then it is stamp duty but if it is electrically then STRD at 0.5% for both.
Stamp duty land tax
Thai is the tax on transfer of property
Stamp duty land tax reliefs and exemptions
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Value added tax (VAT)
This is a tax that is charged for vat registered business on most goods and services that they provide. VAT registered beguines can claim back any VAT they have to pay.
Rates of VaT
Standard 20%
Reduced 0%
Zero 0%
Registering for VAT
Turnover above 85k
Or soon to be over 85k
Exempt or out of scope for VAT
Insurance
Providing credit
Education
Charities
Memberships
Health
Fixed fees are also out of scope ie MOT
Difference between exempt and zero rate
They count as taxable supplies but are taxed currently at 0% however out of scope meaning they cannot have tax added or reclaimed should they be bought.
Corporation tax
Charged on limited companies based on their profits. It is based off a calculating period of the accounting year for the bsuinesss.
Corporation tax rates
Under 50k (small profits) = 19%
Main rate on all profits (over 250k)= 25%
Special rate for unit trusts and OEIC = 20%
Taxation of franked income
Franked income is income when a holding company receives dividends from a company that it ownes, to stop this then being taxed again it is classified as franked income and hence is tax free.
Tax compliance
Although IFA have a duty to keep their clients affairs confidential if they are aware of illegal activity they are duty bound to make the authorities aware.
Ways around TX
Tax evasion
Tax avoidance
Tax migration = this is the proper structuring of an indervidual affairs so they don’t pay more tax than needed.
Foreign account tax compliance act (FATCA)
This is a US law to help fight against tax evasion form income earned in other countries.
Penalty for not reporting this is up to 50k fine.
Tax planning strategies
Tax planning is the process of organising
Resins is for selecting tax planning
Tax should not be the main focus for investment strategy but it should be considered. When selecting a strategy you should consider.
What’s the objectives
Are all allowances used
Does the wrapper benefits suit needs
Are their national announcements that could effect things
Is the clients circumstances set to change.
