Chapter 9 - Direct Investments Flashcards
Cash
- Bank/building society interest/ NS&I -paid gross
- Taxable at starting, basic, higher or additional rate
- Starting rate of 0% only applies if savings income falls within first £5,000 of taxable income
- Personal Savings Allowance: o £1,000 for basic rate taxpayers o £500 higher rate o None for additional rate o Tax charged at 0% o Must not have any income taxable at higher rate to be eligible for £1,000 PSA o Nor at additional rate for £500 PSA
Help to Save
- Targeted at low earners (working tax credit / universal credit)
- Every £1 saved in 4 years, 50p tax-free bonus
- Save up to £50 per month
- Bonus pays out end of year 2 and 4
National Savings & Investments
Premium bonds
o Min £25, Max £50,000
o Tax-free prizes
Junior ISA
o Min £1, Max £9,000
o Fixed interest, tax-free
Income Bonds
o Min £500, Max £1m (£2m joint)
o Monthly interest at variable rates
o Taxable
Direct ISA
o CAT standard cash ISA
o Variable interest rates
o Interest credited tax free on 5 April
Direct Saver o Available from age 16 o No withdrawal penalties o Interest paid gross but taxable o Minimum balance of £1, Max £2m (£4m joint)
Investment account o Available from age 16, but can be opened for child under 16 o No withdrawal penalties o Interest paid gross but taxable o Min £20, max £1m (£2m joint)
Guaranteed income / growth bonds o Fixed rate of interest either paid monthly or re-invested o Both available in 1 and 3-year bonds o Not available to new customers o Min £500, max £10,000 (£20,000 joint)
Savings certificates
o Not available for new customers
o Max holding £15,000 per individual per issue
o Fixed interest issues - bought with lump sum and interest accumulated, free of income tax and CGT
o Index-linked issues - return linked to rate of inflation, 3 and 5-year terms, free of income tax and CGT
Fixed Interest Securities
- Individuals not liable to CGT on disposal of gilts/qualifying corporate bonds
- Losses not allowable
- Income taxable as savings income therefore PSA can be used
- Gilts
o Loans to government
o Fixed rate of interest paid twice yearly
o Interest paid gross but taxable (can elect to have 20% tax deducted)
o Can hold till maturity or sell via stock exchange
o Exempt from CGT - Corporate Bonds (Debentures)
o Loans to companies
o Interest paid gross but taxable
o Traded on stock exchange if qualifying then CGT exempt
o Discounted securities; securities where issue price is less than amount payable on redemption by 15%. Relevant discounted securities are exempt from CGT - Local Authority Bonds
o Loans to local government authorities
o Interest paid gross but taxable
o Qualifying corporate bonds so CGT exempt
Building Society Demutualisation
- Cash bonus: disposal for CGT purposes (payment for giving up membership rights)
- Free shares: not subject to income tax or CGT, but subject to CGT liability on sale
Shares
- Shareholders -part-owners in company
- Offers income (dividends) and capital growth
- Gains potentially subject to CGT, losses normally allowable
- Share prices fall and rise according to fortunes of company
- Spread exposure through investing in collectives
- Dividends paid gross
- First £2,000 taxed at 0% under dividend allowance
- Thereafter basic rate taxpayers - 7.5%
- Higher rate taxpayers - 32.5%
- Additional rate taxpayers - 38.1%
Property - Let Property
o Tax charged on profits in tax year they arise
o Income from all UK property is pooled
o Overseas property income is taxed separately
o Accruals basis used, unless income before expenses £150,000 or less, then cash basis used (unless opt out)
o £1,000 property allowance
o Income is treated as investment income
o Not ‘relevant earnings’ for pension contributions (except from furnished holiday lets)
o Loss in year of assessment automatically carried forward and set against future property letting
o Cannot offset property letting losses against other income
o Disposal of let property is liable to CGT
o If lettings are trade then may qualify for rollover relief, holdover relief or business asset disposal relief
Property - Trading Income
- Where landlord provides substantial services in connection with the lettings, then letting income can be taxed as a trade
- Advantages:
o More scope for losses
o Relevant earnings for pension contributions o CGT rollover and holdover relief
Property - Property Partnerships
- Taxed in same way as trading partnerships under self-assessment
- Substantial business activity required for property letting to be taxed as partnership business (not merely jointly owning a property)
Property - Deductible Expenses:
o Repairs and maintenance allowed but not alterations/improvements
o Interest paid on loans/overdraft for purposes of property letting. But, finance costs in relation to residential property restricted to a basic rate reduction, e.g. finance costs £1,000, reduction in tax bill is £1,000 @ 20% = £200. Restriction does not apply to furnished holiday lettings / commercial properties.
Property - Other Expenses:
o Legal fees - e.g., short lease renewals
o Professional charges - e.g., rent collection
o Buildings insurance, water rates, council tax - if paid by landlord
o Cost of services paid by landlord e.g., cleaning
Property - Capital Allowances (for non-residential lets)
o Plant and machinery - available for capital expenditure on equipment installed in let property or used in maintaining it
o Furniture and other equipment used in a commercial property is eligible for capital allowances
o Annual investment allowance - 100% of up to £1m to 31 Dec 2021, £200,000 1 Jan 2022 onwards
o Expenditure in excess of AIA limit qualifies for 18% writing down allowance
Property - Replacement furniture relief
- landlords can claim deduction for replacement of furnishings in residential dwelling: cost of replacement plus cost of disposal of old one minus any proceeds of selling old one
Property - Premiums on Short Leases
- If lease/sub-lease is granted for less than 50 years, then premium is treated as rent
- Amount taxable = amount of premium reduced by 1/50th for each year of lease (other than 1st year)
- Reverse premiums - sum paid by landlords to induce potential tenant to take out a lease
- Tenant taxable on premium
- Premium not deductible from landlord’s letting income, but allowable enhancement expenditure on disposal of property
Property - Letting Part of Home
- CGT exemption for owner’s own or main residence
- Any part of home that is let is not covered by exemption
- Letting relief is availably, owner must be in shared occupancy with the tenant
- If part of the property is let and the landlord is in shared occupancy, then special exemption - gain arising on part that is let is reduced by lowest of:
o £40,000
o Amount of gain exempt because house is main residence
o Gain attributable to the let part or period of letting
-£40,000 limit is available to each individual whose main residence it is
