Chapter 6 Flashcards
When is financial year
6 April to 5 April
Wha is personal allowance
£12570
What is personal allowance for someone who earns 110k
£1 for every £2 earned over 100k is taken off personal allowance
110k -100k = 10k excess
10k/2 =5k
12570-5000=7,570
At what income does someone have zero personal allowance
£125,140
What is tax saving from transferring 10% of personal allowance
£252
Can only be done if person with addition personal allowance doesn’t pay higher or additional tax rate
Personal saving allowance 3 brackets
Basic rate tax payers receive allowance of 1000
Higher rate have allowance of 500
Additional rate payers have no allowance
How much dividend allowance is there and what rate is paid on dividends
£500
8.75% at basic rate
33.75% at higher rate
39.35% at additional rate
Income tax rates
Starting rate for saving = 0 to 5k
Basic rate 20% =0.2 0 to 37.7k
Higher rate 40%= 37.7k to 124,140
Additional rate 45% anything above
When can income tax relief be taken
If they are paying interest on a loan to
Buy PPE
Buy interest in an unquoted employee owned company
Invest in partnership
Buy ordinary shares
Pension contributions
Pension contribution max limit
Max limit is the higher of:
Relevenat earnings in tax year with annual cap of 60k
Or £3600
What is income where max pension contribution will be 10 k
360k
Income in excess of 260k means pension contribution max is reduced by £1 for every £2 excess
When are trusts exempt from income tax
Trusts with gross income of no more than £500
£500 exemption is divided by the number of trusts the settlor has created
Dividend income tax rate and all other income tax rate in trus t
Dividend income tax rate = 39.35%
ALl other income tax rate = 45%
What is national insurnace
People in work, employed or self employed make payments towards benefits
What is primary contribution threshold
Earnings below certain emaount mean no NIC have to be paid by employee
The number of years that someone needs to have paid NIC to qualify for new max state pension is
35 years
What is class 1A NIC
Paid by an employer if employee receives taxable benefits like company car
Classs 1b NIC
Paid by an employer if they have entered a pay as you earn scheme steelement agreement with HMRC
C;lass 2NIC
Effectively abolished April 2024
Self employed with low profits may still pay in order to maintain entitlement benefits
Class 3 NIC
Voluntary contributions made if they have not had to make compulsory ones
Class.4 NICS
Have to be paid by if self employed and earn over certain amount of profits each year
What is cap gains tax rate
For basic rate income earner = CGT is 10%
For higher and additional rate payers = CGT is 20%
What is CGT for sale of buy to lets
Basic pay 18%
Higher and additional pay 24%
What is business sale CGT
10%
How much is exempt from CGT each year
3k
Assets exempt from CGT 9
Persons main home
Private cars
ISA
NS&I saving certificates
Vetting and lottery
Premium bond Prizes
UK Gilts and most corp bonds
Shares under EIS or SEIS scheme
Foreign currency for personal use
How quickly should CGT be paid for uk residential property sale
60 days
Inheritance tax rate
40% on excess of 325k inheritance
Any unused nil rate on a persons death can be transferred to their surviving spouse or civil partner (percentage is transferred, not amount)
IHT exemptions
No IHT when estate passes to spouse
Residence nil rate band
Wedding gifts up to 5k, charity gifts and first 3k each year
Anyone leaving at least 10%of estate to charity from a reduced IHT of 36%
What is residence nil rate band
Provides additional allowance when family hone is passed to children
And current allowance is 175k
So current nil rate band is 500k = 175k plus 325k
RNRB tapers if estate worth over 2 million
What is potentially exempt transfer
Is gifted, person has to survive for 7 years
Tapered relief if person survives at least 3 years
Chargeable lifetime transfers
Most trransfers into trusts are immediately liable to IHT if transfer exceeds sonar nil rate band Wedding gifts
What does statutory residence test divide tax payers into 3
Automatically non resident
Automatically resident
Those who need to review connecting factors and amount of time spent in UK
When is a person a non resident
Visit uk fewer than 16 days each tax year
Non uk resident for 3 years and visit uk for less than 46 days a year
Work full time overseas and visit uk less than 91 days a year
Conditions for being a resident 3
Present in uk for at least 183 days
Only residence is in uk and had home for at least 91 days and live their for at least 3 days
Carry out full time work in uk
Domicile
A person is domiciled in in a country where they have their permenant home
Difference between resident and domicile
Can be have multiple residency at a time but only one domicile at a time
When are non domiciled people domiciles in uk
Uk resident for 15 of the previous 20 tax years
Remittance basis of taxation
Person pays uk tax on uk sourced income and capital gains as they arise
What is remittance basis charge and when is it payable
Tax on the in remitted overseas income or gains that are left outside the uk
Individual has 2k or more of unremitting overseas income or gains
Remittance basis charge
30k if person resident for 7/9 previous tax year s
60k is person is resident for 12/14 tax years
What re non uk residence not entitled to
Income tax personal allowance or CGT exemption
IHT for domiciled and non doms
Person is domiciled in UK thenIHT applies to all assets
If non dom, IHT only applies to uk assets
How is large amounts of income taxed
At source through Pay as you earn (PAYE)
How long must tax record be kept
5 years
What happens to self employed or people who pay less than 80% of their income at source
A system of payments on account is used
Tax payer will pay two equal payments on 31 jan and 31 July
Tax avoidance
Legal structuring of tax affairs to ensure lowest possible tax bill
Punishment for tax evasion
Pay tax due plus interest on tax due plus penalty charge
Stop duty land tax
Tax on land purchases
What’s included in stamp duty land tax
Date of purchase
Purchase price
Calculation of SDLT payable
Stamp duty rates residential
0% up to 250k
5% 250k - 925k
10% 925k - 1500k
12% over 1500k
Stamp duty rates on non residential
0% up to 150k
2% 150k to 250k
5% over 250k
When does stamp duty tax increase
Additional 3% added to rates in residential property if buying increases number of residential properties held
First time buyers stamp duty rule
First time buyers do not pay SDLT on first 425k on properties costing 625k or less
How does rent affect land tax of residential and non residential
Residential - If total rent over life of lease is above 250k additional 1% is paid on excess of 250k
Non residential - 1% charged on rent between 150k and 5 mill, 2% of excess 5 mill
Stamp duty reserv tax
Is paid on paperless transaction when investor buys:
Shares (foreign or uk)
Options and rights to buy shares
Interest in shares
When is stamp duty reserve tax also paid
Unit trust and OEIC are bought
How is SDRT usually done
Transactions paperless done through CREST usually and they automatically deduct SDRT and send it to HMRC
What is the stand duty reserve tax rate
Flat 0.5%
When is stamp duty paid on shares
Price is greater than 1k and purchase is recorded on transfers form
Corp tax rates
19% on profits less than 50k
25% on 250k profits or more
Between 50k and 250 k profits = 19% on first 50k and 26.5% on remainder
How do large corp pay corp tax
Large corp = profits over 11.5million
Four quarterly installments
What is very large company
Profits over 20million
Value added tax (vat
Chargeable on the taxable supply of goods or services in the uk and imports by taxable person
When is VAT added to trader
Is taxable turnover is greater than 90k
3 VAT rates
0%
5%
And 20%
Difference between vat exempt and vat of 0%
0% means firms can reclaim vat on their purchases
Vat exempt firms cannot reclaim vat on purchases
How does VAT work for financial advisor
Is a sale of investment occurs - no VAT
If there is just stand along recommendations or advice - VAT added
Saving income has what tax rate and include
20%
Most purchased life annuities
Interest on gilts
What allowance is there for saving income
5k benefits from 0% tax rate
What is allowance for dividend income
500 pounds
Dividend tax rates
8.75% on basic rate tax band
33.75%
In higher rate tax band
39.35% tax rate on additional rate payers
Can running costs be used to offset against rental income tax liability
Yes
What is CGT exempt
Sale of main residence
Any gains made form sale of gilts or corp bonds
What happens to contributions of over 60 k to pension
Tax is paid on excess
What is thee tax free pension commencement lump sum
Equal to 25% of accumulated funds and is restricted to £268,275
Money purchase annual allowance
reduced annual allowance for pension contributions, triggered when you flexibly access your pension savings limiting future contributions to £10,000 per year.
If individual dies before 75 what happens to DC fund
Leave remaining of DC fund to anyone they want tax free
What are ISA
Wrapper that can shield investments from taxation
Must be UK resident to invest through ISA
CASH ISA
Money invested into cash deposit with bank where there is no capital uncertainty
Stocks and shares isa include 5
Shares and corp bonds issued by Listed companies
Gilts
Units or shares in authorised funds
Shares in investment trust
Innovative finance ISA
Allows loans through peer to peer lending platforms to be shielded form tax
Life time isa
Annual investment limit of 4k with gov adding 25% on amount invested
Help to buy isa
Type of cash isa available to first time house buyers and has annual vestment limit of 2.4k
Gov will pay 25% on amount invested up to 3k
What is max isa investment limit and which isa does this apply to
Cash, stocks and shares, innovative finance ISA and lifetime
20k limit
Junior isa
Under 18 max investment is 9k a year
Child can have max or of two junior isa over childhood
What are uk collective investment schemes exempt from
Tax on gains made within fun d
What is income of uk collective investment schme subject to
Tax rate of 20%
Management expenses can be offset against income
When can personal savings allownce be used for uk collective investment schemes against income
If fund holds more than 60k of investments in interest bearing securities
Rule for offshore funds
No tax payable by fund
What is tax treatment for uk investor of offshore fund
Depends if fund has reporting or non reporting status to HMRC
Proceed from qualifying life assurance are ….
Usually free of income tax and CGT for the original beneficiary
What happens when life assurance policy is sold within 10 years
20% tax is payable by higher rate tax payers, 25% by additional tax payers
What determines if life assurance policy is qualifying
Premiums payable for 10 years
Premiums must be paid annually or more frequently
Premiums restricted to 3.6k per year
What are investors permitted to withdraw from life insurnace funds
Withdraw up to 5% of original premium each policy year until 100% is reached (20 years) with no income tax liability
Most trransfers into trusts are immediately liable to IHT if transfer exceeds sonar nil rate band
What are chargeable lifetime transfers subject to to
Immediate 20% IHT charge if the reduction in the value of the donors estate exceeds available nil rate band
Property transfers into estates rules
Property can be passed out of an estae and into trusts every seven years at current nil rate band Wedding gifts
How much tax on uk bond
Tax payable by individuals with marginal rate of 40 or 45% - at 20% or 25% respectively
Gross roll up?
Offshore policiees insured by life funds based in jurisdictions which impose no taxes on income or cGT
Characteristic of REIT
Rental income and cap gains are exempt from tax at RIET Level but dividends to investor are taxed
REITS required to distribute majority of their tax exempt rental income to shareholders
What tax benefits does a VCT qualify for
Get tax benefits on max qualifying investment of 200k per year :
Tax rendition of 30% of the amount invested - investment held for 5 years
Dividends are tax free
No CGT on shares sold
What is enterprise investment scheme (EIS)
Support investment in smart up companies
How can EIS support businesses
Income tax relief - indiviual can reduce their income tax liability by 30% of amount invested, provided EIS investment held for 3 years
CGT Exemptions if shares sold after 3 years
CGT Deferral - by reinvesting gains in EIS shares
Loss relief - EIS shares sold at a loss can be set against investors income
What is a SEIS
Runs along aside EIS but for companies less than 2 years old = greater risk
50% income tax relief up to 200k
CGT exemption of 50% reinvested (max 100k)
CGT exempt if held for 3 years
Income tax relief of investment of 50k for EIS. What is net cost of investment
30% of 50k =15k
50k - 15k =35 K
Businesses property relief
Investments in business that carry out a trade rather than investment activities can get relief from IHT including:
Shares in unquoted companies, including AIM shares
An interest in an unincorporated business
What is relief system for business property relief
One BPR shares owned fro 2 years, they can be inherited free of IHT
What can also offer IHT exemption
ISA that specifically invests in AIM listed companies
Tax planning involves
Specific circumstances of client, marital status, health, age, wealth, current income
When does residential nil rate band not apply
Doesn’t apply if inheritance is not by children
So if inherited by brother then no RNRB can be used
Ways to reduce iHT
Gifting assets to family at least 7 years before death
Estates transferred to spouse
Gifted to charity is exempt or if 10% gifted to charity then IHT is 36%
Using annual IHT exemption of 3k per year
What produces non taxable income
ISA
NS&I saving certificates and NS&I premium bonds
What investments are non income producing as far as tax system is concerned but still pay regular returns
single premium life assurance bonds have an effective annual allowance based on 5% of the original investment
This 5% is tax deferred and not tax free income
How to make use of income tax personal allowance 3
Transferring investment capital to spouse who is on lower rate taxpayer
Using dividend allowance
What is marginal tax rate on income between 100k and 125.14k
60% due to 40% being higher rate income tax and 20% due to loss of personal allowance
Other tax mitigation schemes
Contribution to pension schemes
Investment under EIS and VCT attracts 30% income tax relief
Investment under SEIS attracts 50% tax relief
20k isa allowance
Annual CGT allowance
3k
Common strategies to mitigate CGT
Spreading ownership of asssets to take advantage of 3k allowances
Spread out disposals of assets to different tax years to make use of allowance
Realise losses to reduce gains
Bed and breakfasting shares
Use isa to shield from CGT
What is bed and breakfasting
Sell shares and buy them back the next day
How has governemnt stopped bed and breakfasting
Gov introduced a 30 day rule (30 days must elapse from sale and purchased)
Ways of overcoming 30 day bed and breakfasting rule
Spouse sells shares and other spouse buys them back
Repurchase similar but not identical security
How does bed and breakfasting work
Done to crystallise gains in order to effectively use CGT allowance
Personal saving allowance
Basic tax payer =£1000
Higher rate tax payer =£500
Additional rate tax payer = £0
How can personal saving income tax liability be reduced
Use isa allowance
Are gilts CGT exempt
Yes
If a daughter had married before father had died, what is Max IHT exempt wedding gift that can be given to the newly wedded daughter
5k
What is the max value of exempt IHT gift a person can make a year
3k
If David pays 10k into pension scheme, how much is actually paid into the scheme
David earns gross 60k
12.5k bc
10k x 100/80
If David is a higher rated tax payer, he has 30k savings and savings income of 900 pounds, how much tax can be saved if isa is used
Only 400 pounds out of the 900 is taxed
4/9ths of the income needs to be shielded from tax
4/9 times by 30k is £13,333
13.3k is less than the 20k isa limit so the tax saving would be £160, ie £400 at 40%
What do you have to pay if you are above primary threshold
Class 1 NIC
How is most saving income paid
Gross
What is the stamp duty tax in Scotland and wales
Scotland = land and buildings transaction tax (LBTT)
Wales= land transaction tax (LTT)
