Chapter 6 Flashcards
Income Tax
6.1.1 Describe the principles of income tax applicable to earnings, savings and investment income in the UK
IT applies at basic, higher or additional rates based on a person’s total income
Tax year = 6 Apr - 5 Apr
Every taxpayer has an £11,850 personal allowance, which is withdrawn at a rate of £1 for every £2 earned where taxpayers income exceeds £100k
Non-domiciled taxpayers using the remittance of the basis of taxation not able to claim the personal allowance
Income in excess of PA is liable to tax.
Rates for 2018/19
Starting rate for Savings: 0% £0 - £5,000 Basic rate: 20% £0 to £34,500 Higher rate: 40% £34,501 to £150,000 Additional rate: 45% Over £150,000
IT also applies to savings (see above)
A person only qualifies for the 0% if their non-saving income is below their PA plus £5,000 (£16,850)
Savings income is paid gross
6.1.2 Describe, in relation to income tax, the system of allowances, reliefs and priorities for taxing income
Personal allowance increased by the transferable allowance (only when their spouse/civil partner income is not taxed at the higher or additional rate)
Allows taxpayer to transfer a fixed amount of £1,190 (10% roughly of PA) to spouse or civil partner
Beneficial if one partner’s income is less than £11,850
Tax saving 2018/19 is £238 (£1,190 at 20%) - given to the recipient as a deduction from their tax liability
Savings income paid gross, with a personal savings allowance being available depending on a person’s income rate
Basic rate taxpayer = £1000 savings allowance
High rate taxpayer = £500 savings allowance
Additional rate = no allowance
Dividend income is treated as paid gross, with a £2000 dividend allowance.
Once exceeded dividend income taxed at 7.5% for basic rate, 32.5% higher and 38.1% additional rate
Top slice - so taxable at taxpayers highest marginal rate
Individual paying interest on the loan may receive relief in that year if they took the loan to:
Buy plant machinery for partnership or employment use
Buy interest in an unquoted employee-controlled company
Invest in a partnership or a cooperative
Buy an ordinary share in, or lend money to, a close company controlled by five or fewer shareholders or solely by directors.
The final tax liability for higher/ additional rate may be reduced by certain payments
Pension contributions - Individual under 75 may receive tax relief on contributions to a registered PS in a tax year. Max limit is the higher of:
Relevant annual earnings in a tax year subject to an annual cap of £40,000 (2018/19)
A basic amount of £3,600
A taxpayer can claim relief on pension contributions at their marginal tax rate, I.E additional ratepayer will receive 45% tax relief
6 April 2016 - higher earners with an income above £150,000 have their standard £40,000 allowance reduced by £1 every £2 of income in excess of £150,000 until allowance reaches a minimum of £10,000
An exception is where net income (after-tax) is no more than £110,000
£3,600 when an individual doesn’t have sufficient income to claim relief
Max such a person can pay is £2,880 (£3,600 less 20% basic rate relief)
Meaning total of £3,600 a year will be paid into their PS even though they earn less than this
Donations to charities: gift aid can provide tax relief at the taxpayer’s marginal rate
6.1.3 Explain the taxation of the income of trusts and beneficiaries
Amount of IT depends on the type of income and whether it falls within the standard rate that applies to the first £1,000 of income
Tax rates on accumulation/discretionary trust income (first £11,000 or standard rate band)
Type of income
Tax Rate 2018/19
Dividend income
7.5% (dividend ordinary rate)
All other income (property, trading, savings)
20% (basic rate)
Tax rates on accumulation/discretionary trust income (over £11,000)
Dividend income
38.1% (dividend trust rate)
All other income (property, trading, savings)
45% (trust rate)
Standard rate is applied in sequence; first, non-dividend income; second, dividend income
If settlor sets up more than one trust £1000 standard rate is divided equally between trusts
Where trust income is paid out to the beneficiary at the trustee’s discretion - treated as having already been taxed at the trust rate (45%)
If beneficiary overall income level means they are a non-taxpayer, basic or higher rate they may be able to reclaim some or all of this back
National Insurance Contributions
6.1.4 Describe the system of national insurance contributions (NIC)
People in work pay into the NIC scheme to receive certain benefits
If under the state pension age and working in the UK - they have to pay a certain amount of Class 1 NICs (earnings dependent)
If earnings below primary contribution threshold no NICs have to be paid
Other classes of NIC:
Class 1A NICs: Paid by the employer if an employee receives certain taxable benefits from the employer - E.G Company car
Class 1B NICs: Employer if they have entered a PAYE settlement with HMRC
Class 2 NICs: Sefl-employed. If earnings below the sefl-profit threshold then no NIC to be paid
Class 3 NICs: Voluntary contributions I.E they do not earn enough for compulsory contributions. Help plug gap in NIC record
Class 4 NICs: May have to be paid by self-employed if profits over a certain amount each year.
Women and widows can receive reduced class 1 and 2 NICs if applied before 21 May 1977
They may not get contributory benefits and receive less of the new state pension
35 years contributing into NIC to qualify for the maximum new state pension
Capital Gain Tax
6.1.5 Describe the principles of Capital Gains Tax (CGT) in the UK
CGT paid by UK residents on the sale (disposal) of an asset
10% for basic taxpayers - where income and gains don’t exceed the basic threshold (£34,500 2018/19)
20% for higher and additional rate taxpayers
18% and 28% for basic and higher/additional taxpayers, payable on the sale of a residential property that is not the owner’s main residence
10% CGT rate is paid on the disposal of a certain business asset if entrepreneurs’ relief is available
A portion of gains is made exempt from CGT each year - 2018/19 = £11,700
Only net chargeable gains are taxed (losses can be deducted from chargeable gains)
Losses exceeding gains in a year can be brought forward and set against future gains
Assets exempt from CGT including; private homes, private car, ISAs, National Savings and Investment saving certificates, betting and lottery winnings, premium bond prices, GILTS and most corporate bonds, Shares under the EIS or SEIS provided income tax relief has not been withdrawn and foreign currency for personal use
Inheritance Tax
6.1.6 Describe the principles of inheritance tax (IHT) in the UK
IHT charged on an individuals estate at death, on gifts 7 years prior to death and on chargeable lifetime transfers (CLT)
IHT applies above the taxable threshold (or nil rate band) of £325,000 (18/19)
IHT payable on the excess at a rate of 40%
Unused nil rate on a person’s death can be transferred to their surviving spouse or civil partner for use on their death
Percentage of nil rate band that is transferred
£150,000 estate, nil rate band = £300,000 (50% not used
Second death nil rate band = £325,000 - increase by 50% to £487,500
6.1.7 Explain the limitations of lifetime gifts and transfers at death in mitigating IHT
No IHT if the passing of estates to S/CP who permanently live in the UK - unless a lifetime gift or upon death
Residential Nil Rate Band (RNRB) allowance when a home/share of a home is passed to children/grandchildren at death (inc step-children, adopted/foster)
RNRB currently £125,000 increasing to £175,000 in 20/21 in line with consumer price index (CPI)
Combined nil band rate is, therefore, a potential £450,000 (NRB:£325,000+RNRB:£125,000)
Wedding gifts up to £5,000, charity gifts and the first £3,000 given away per year are also exempt
Lifetime gift exceeding the above = potentially exempt transfer (PET). Free from IHT if the donor lives for 7 years after the gift is made
Anyone leaving 10% net estate to charity benefit a reduced IHT band at 36%
Transfers into trusts liable to IHT if exceeds nil rate band = CLTs
Only transfer into a trust that counts as a PET is for a trust for the disabled
CLTs - immediate 20% IHT charge if owners estate (after allowable deductions) exceeds nil rate band
Applies to tax year CLT made
Not subject to further IHT provided donor survives for 7 years after making the gift
If not, CLT added to the estate of the deceased and taxed @ 40% (taking into account NBR) - credit allowed for 20% lifetime transfer
Taper relief may apply if the donor survived at least 3 years after making the gift
If eventual IHT is less than 20% already applied - no rebate is given
Property can be passed out of an estate into a trust every seven years at current NBR
Property can be passed out of an estate into a trust each year to a value of 1/7th of the NBR
Any combo of gifts transferred to a trust over 7 years at current NBR
Lifetime gift with strings attached or a gift with reservation of benefit still included in their estate upon death and liable to IHT
Residence and Domicile
6.1.8 Explain the implications of residence and domicile in relation to liability to income tax, CGT and IHT
Statutory residence test divides taxpayers into three categories, each step considered - the person moves on until a conclusion reached:
Part A) Automatically non-resident
They visit the UK for < than 16 days during the tax year
They’ve been a non-UK resident for the past 3 tax years and visit the UK for < 46 days during TY
They work full time overseas and visit UK < 91 days during the TY (no more than 30 days working in the UK)
Part B) Automatically resident
Present in the UK for 183 days or more during TY
Their only residence is the in the UK, but must have had income for at least 91 days and lived there for at least 30 days during the tax year
They carry out full-time work in the UK
Part C)Those who need to review connecting factors with and the amount of time spent in the UK
Neither part A or B apply - further tests are applied based on ties to the UK (family, work, accommodation)
Domicile - a person can only be domiciled in one country at a time(a person can have multiple residencies)
Domiciled at birth - 16 years can acquire a domicile of choice
Non-domiciled considered domiciled for all tax purposes if they have been a UK resident for 15 of last 20 years
Non-resident is liable to IT only on income arising in the UK.
The UK resident who is non-UK domiciled pays UK tax on UK-sourced income and CGT on any investment in the UK. For overseas - only pay tax if remitted into the UK
Remittance basis charge (RBC) - the tax on unremitted overseas income/gains outside the UK. The charge = £30,000 for a person who has been a resident for 7/9 TY and £60,000 for a person who has been a resident 12/14 TY
The System of UK Tax Compliance
6.1.9 Describe the system of tax compliance including self-assessment, pay as you earn (PAYE), tax returns, tax payments, tax evasion and avoidance issues.
Additional tax to pay - self-assessment
Taxpayers required to keep sufficient records to prep a tax return
Business records required for 5 years after 31 Jan following TY
Paper returns by 31 Oct following the end of TY, electronic returns by 31 Jan following the end of TY
Tax for self-employed or pay less than 80% of last years income tax at source
System of payments on account is used - two equal payments 31 Jan in TY and 31 Jul following TY plus further 31 Jan balancing payment
Tax avoidance = legal structuring of tax affairs to ensure the lowest possible tax bill
Tax evasion = deliberate actions to evade paying the full amount of tax due
Lead to criminal investigation and prosecution
May have to pay disputed amount upfront while the dispute is resolved = accelerated payments
Land Taxes
6.1.10 Describe the principles of stamp duty land tax (SDLT) as applied to property transactions (buying, selling and leasing)
SDLT - a self-assessed tax on land transactions involving any estate, interest, right or power in or over land in England and N Ireland
Scotland land and buildings transaction tax (LBTT) replaces SDLT
Whales land transaction tax (LTT)
Rates of SDLT:
Resident Non-resident Slice of purchase price Rate Slice of purchase price Rate £0 - £125,000 0% £0 - £150,000 0% £125,001 - £250,000 2% £150,001 - £250,000 2% £250,001 - £925,000 5% Over £250,000 5% £925,001 - £1.5mil 10%
Over £1.5mil
12%
Additional 3% SDLT if buying an additional new residential property
First-time buyers pay no SDLT on a property up to £300,000
Residential leasehold - same as above; however, if rent over the life of the lease is, ore than £125,000 - additional 1% SDLT charged to the portion over £125,000
Above same for non-residential except charged between £150,001 and £5mil and 2% on any portion in excess of £5mil
Additional rate of 15% is charged on entire purchase price where companies or collective investment schemes by residential properties with a value over £500,000
Stamp Duty Reserve Tax and Stamp Duty
6.1.11 Describe the principles of SDRT
SDRT paid on paperless transactions when an investor buys - shares in UK company (except AIM, NEX and high growth segment of LSE), shares in a foreign company with a share register in the UK, options to buy shares, rights arising from shares already owned and interset in shares
SDRT payable when units in unit trusts or shares in OEICs are purchased
No SDRT when an investor buys units from the fund manager or wher units are surrendered
Transfering using CREST - most electronic transfers that are charged SDRT carried out through CREST
CREST automatically deducts SDRT and sends to HMRC - investors stockbroker then bills them SDRT and their fees
SDRT at a flat rate of 0.5% (rounded up or down to the nearest penny) based on what the investor paid for the shares, not what they are currently worth
For cash transaction - SDRT is based on the amount of cash paid
The price paid is over £1,000 stock transfer form will need to be stamped by HMRC and SD charged. Under £1,000 no SDRT (note SD only charged where the purchase is recorded on a stock transfer form)
Corporation Tax
6.1.12 Explain how companies are taxed in the UK
UK company liable to corp tax on its worldwide profits and chargeable gains arising in an accounting period
2018/19 single rate of CT = 19% on profits
COmpanies trading loses can be set against income and gains of the same accounting period and previous year and against income and gains of future years
Losses incurred in the final 12 months of trading can be carried back 3 years - must be set against the most recent period before the oldest
Company’s tax liability = self-assessed
Usually, 9 months and 1 day after accounting period ends
Large corporations pay quarterly instalments - based on estimates of the company’s liability tax for that year - large company = profits over £1.5mil
Value Added Tax
6.1.13 Describe, in outline, the principles of value-added tax (VAT)
Tax on the supply of goods and services in the UK
Tax on import of some goods/ services by a taxable person in the course of their business
Trader must register for VAT with HMRC if their taxable turnover is more than £85,000
Can voluntary register if TO less
3 rates: 0%, 5% and 20%
5% VAT applies to energy services/products
20% (standard rate) most other goods and services
Zero-rated supply is different from exempt items
Businesses supplying zero-rated items can reclaim VAT on any purchase - business supplying exempt items cannot reclaim
Financial advisor arranges the sale of a retail investment with a customer - charges to customer exempt from VAT
If service is purely advice or recommendations - any charges to the customer are subject to VAT at the standard rate
Taxation of Direct Investments
6.1.14 Analyse the taxation of direct investments including cash and cash equivalents, fixed-interest securities, equities and property
Savings income:
Bank and building society interest is paid gross, including NS&I products and from interest distributions from authorised unit trusts, investment trust and OEICs
Some saving income has a basic rate of 20% deducted at source inc:
Interest paid by a company
Most types of purchased life annuities
Interest on government stocks is usually paid gross - taxpayer can elect Net
A non-taxpayer can reclaim 20% deducted
Where interest falls within personal savings allowance or is taxed at start rate of 0% - taxpayer can also reclaim tax deducted
First £5,000 of savings income benefits from the start rate of 0%
Dividend income:
Paid gross
£2,000 dividend allowance available tax-free irrespective of taxpayers income tax rate
Dividend taxed at 7.5% basic, 32.5% high and 38.1% additional
Property income
Liable to income tax
Running costs can be offset against rental income to reduce tax liability
Capital Gain Tax
Shares and property are subject to CGT if the asset is sold or gifted
Gains from the selling of primary residence exempt from CGT
Gains from the sale of gilts or corporate bonds also exempt
Taxation of Indirect Investments
6.1.15 Analyse the key features and taxation of indirect investments including pension arrangements, different types of individual savings accounts (ISAs), and child trust funds, onshore and offshore life assurance policies, real estate investment trusts (REITs), venture capital trusts (VCTs) and enterprise investment schemes (EISs), business property relief investment and social impact tax relief investments
Pension arrangements:
Under the age 75 tax relief on contributions to a registered pension scheme. Max contribution that can be made is the higher of:
Relevant earning subject to an annual cap of £40,000 or
A basic amount of £3,600
Releif of taxpayers marginal rate (40% for higher)
If savings exceed annual cap - tax is payable at the marginal rate on the excess
Earnings over £150,000 tapered annual cap
An individual gets basic rate tax relief for personal pension contributions by making payments net of basic rate tax
Higher and additional rate tax relief is given by extending the basic and higher rate tax limits by the amount of the gross pension contributions
At retirement - PCLS of 25% accumulated fund is available
DC schemes have flexibility when it comes to withdrawing pension at age 55
Withdraw any amount - any in excess of the PCLS 25% is treated as income
After an excess of 25% taken reduced to £4,000 = money purchase annual allowance (MPAA)
If an individual dies before 75 can leave DC to anyone tax-free
Death after 75 lumps sums and pension income are taxed on receipt
Lifetime allowance of £1,030,000
Indexed annually in line with CPI
If pension exceeds the limit at retirement the excess subject to lifetime allowance charge of 25% (if income) and 55% (if taken as lump sum)
ISAs:
ISA = shield investments from taxation (IT and CGT)
The investor must be a UK resident when the investments made
Cash ISAs = money invested in a cash deposit with a bank or building society - no capital uncertainty
Stocks and shares ISAs = Money can be invested in various products
Innovative Finance ISA = allows loans made through P2P lending platforms shielded from tax
Help to Buy ISA = available for first-time buyers - max £2,400 the gov will pay a bonus of 25% up to £3,000
Lifetime ISA = available for adults under 40 with an annual limit of £4,000 gov added bines of 25% invested.
ISAs generally have an investment limit of £20,000.
Junior ISAs (JISA) = children under the age of 18 or born after 2 Jan 2011 - or who not eligible for a child trust fund. Max £4,260 per TY Can have S&S JISA and/or Cash JISA
Can be opened anyone with parental responsibility for the child
Onshore and offshore collective investment schemes:
CIS exempt from tax on gains within the fund - advantage over life funds
Management expenses can be offset against income
Liable for CGT on disposals of CIS - including switching between sub-funds od an umbrella fund
Investment trusts are exempt from tax on gains, and non-dividend income is subject to corporation tax.
Investment trust shareholder subject to the same taxation as normal shareholders of company shares
Offshore funds = no tax payable by the fund - sometimes small local jurisdiction tax may be applied
Tax treatment of a UK investor in an offshore fund depends on reporting / non-reporting status
Reporting funds have applied to HMRC for status and meet certain criteria inc providing reports of their reportable income
Uk investor will have to declare actual distributions received plus their reportable income in excess of sums distributed
Dividends (in excess of dividend allowance) taxed at dividend rates
Any gain from fund disposal = CGT
Non-reporting funds can accumulate income in the fund - UK investor liable to income tax on any distribution or encashment of such funds
Onshore and offshore life insurance funds:
Individuals liable for tax on a UK bond are treated as having paid tax on the gain at a basic rate (20%) - tax only payable by those individuals with a marginal rate of 40/45%
Offshore policies can be issued in a jurisdiction with no tax on underlying fund = gross roll-up
Irrecoverable withholding tax may be deducted from interest and dividends received by the fund
Qualifying Life assurance policy tax-free for the original beneficiary
Rules determining if the policy is a qualifying one:
Premiums must be payable for at least 10 years
Premiums must be paid annually or more frequently
Policies issued after 6 Apr 13 - premiums restricted to £3,600 PA - all policies owned by an individual
If surrendered or sold within 10 years or 75% of the policy term, - tax 20 % high rate and 25% additional rate on surplus.
Top slicing = Gains divided by the number of complete policy years held - E.G £5,000 gain 2 years held (5000/2) = £2,500
Tax calculated 2,500 @ 20% = £500 x years served (EG 2) = £1000 tax
Offshore life assurance bonds - no corporation tax on income or gains; although withholding tax on dividends is not reclaimable
Gross roll-up can make fund grow quicker than OS fund
Withdrawals in excess of 5% are liable to UK income tax
REIT:
Rental income and CG exempt from tax at REIT level but taxed at the investor level when they are paid as dividends
To ensure income and gains are taxed at the investor level
REITs required to distribute the majority of tax-exempt rental income to shareholders
Basic tax rate 20% is generally withheld from the dividend - dividend then taxed as property income at the the invesotre marginal tax rate
VCT:
Investors in VCT receive tax benefits on a maximum qualifying investment of £200,000 per year:
Tax reduction of 30% of investment - withdrawn if shares are sold within five years
Dividends received are tax-free
Sale of shares exempt from CGT
EIS:
Income tax relief: an individual with 30% or less in a company can reduce their income tax liability by 30% of the invested amount - provided EIS held for 3 years from date issued/commencement of trade
Max qualifying investment is £1mil per TY
Can treat their EIS subscription for EIS shares as if they made in the previous TY to carry income tax relief back one year
CGT exemption - no CGT payable on shares sold after 3 years of issue or commencement of trade (what comes later) - given EIS given and still applicable
CGT deferral - an investor can defer CGT liability by reinvesting gains in EIS shares - has to be no more than one year before or three years after the disposal of the asset
Loss relief - EIS shares disposed of at a loss can be set against an investors income in with the same or previous TY
Limit the investment exposure (42p in the £1 for 40% tp, 38p in the £1 for 45% TP)
Or a loss can be offset against chargeable gains - saving CGT at a rate of 10% or 20%
SEIS:
Runs alongside EIS - target start-up companies
Provides 50% income tax relief for up to £100,000 investment per TY with CGT exemption of 50% reinvested gains
Exempt from CGT on disposal if it is held for 3 years
Business Property Relief:
Investment in businesses that carry on trade rather than investment activities can qualify for business property relief (BPR):
Shares in unquoted AIM companies
An interest in an uncorporated business
BPR can be used in a person’s estate planning strategy
When BPR shares have been owned for 2 years can be inherited free of IHT
AIM-listed shares within ISAs - ISA in AIM-listed companies expected to qualify for BPR can offer IHT exemption as well as ISA benefits of tax-free income and CG
Social Investment Tax Relief
SITR encourages individuals to support social enterprises and helps them access new sources of finance.
Eligible investment can deduct 30% of the cost of the investment (Max £1mil in a TY) from their income tax liability - current or previous TY
Must be held for 3 years
Org invested in must have defined the regulated social purpose
Charities with <250 employees and gross assets of no more than £15mil may be eligible
If an investor has gained in that TY - can defer CGHT liability if their gain in a qualifying social investment
Tax will then be payable when social investment is sold or redeemed.
No CGT on any gain from the investment - but IT on dividends or interest.
