Chapter 9 - Direct Investments Flashcards
Lee has a number of residential properties that he lets out to tenants. What type of expenditure would be a deductible expense for income tax purposes?
а.Expenditure reimbursed by insurance.
b Renovations to make the building fit for letting
c.Cleaning and gardening.
d. Alterations and improvements
c.Cleaning and gardening.
Any expenses incurred in earning rental income can be deducted, these are referred to as deductible expenses. These include repairs and maintenance and letting agency fees.
Expenditure on repairs is allowed, but not the cost of alterations and improvements, or the cost of bringing a newly bought building into a fit state for letting.
A letting property business that purchases plant and machinery will normally qualify for:
a. the annual investment allowance up to £1m.
b. corporation tax relief up to £1m
c. corporation tax relief on the full amount of the expenditure.
d. the annual investment allowance on the full amount of the expenditure
a. the annual investment allowance up to £1m.
• The first £1m of expenditure in any year qualifies for the 100% annual investment allowance (AIA).
•Equipment that forms part of a building is not eligible for allowances.
• There are no capital allowances for furniture used in residential property; instead, replacement of domestic items relief may be claimed.
• Furniture and other equipment used in a commercial property are eligible for capital allowances.
Plant and machinery for use in the property-letting business (such as office equipment used by the owner to manage the business) is also eligible for capital allowances.
For ‘rent-a-room’ relief. the
a. space being let can be furnished or unfurnished.
b. property concerned must be in the
UK
c. room may be let for residential or business purposes.
d. space being let must be self-contained.
b. property concerned must be in the
UK
• If gross receipts in a tax year are not more than £7,500, the income is not charged to tax. If receipts are more than £7,500, landlords have a choice. They can either be taxed on the normal basis (income less expenses), or they can be taxed on the amount by which the gross receipts exceed £7,500 with no deduction for expenses.
There are various conditions attached to rent-a-room relief:
• The relief does not apply to a self-contained unit or to unfurnished accommodation.
•The property has to be in the UK.
• The let accommodation has to be used as a residence.
Saul is self-employed and a higher-rate taxpayer. He makes a profit of £ 15,000 from his buy-to-let properties. When preparing his accounts for the current tax year. what dates must be used and how much tax is due on these profits?
a. £6,000 income tax for the period which must end 31 March or 5 April
b. £2.850 corporation tax for the period which must end 31 March or 5 April
c. £6.000 income tax for the period which must end 6 April or 31 October.
d. 52.850 corporation tax for the period which must end 31 January or 6 April.
a. £6,000 income tax for the period which must end 31 March or 5 April
Income from letting property is taxable in the tax year in which it arises.
• Accounts have to be prepared for the actual tax year, although HMRC usually accepts accounts to 31 March instead of 5 April.
•Tax is payable under the self assessment rules together with tax on the individual’s income from all sources.
As the client is a higher rate tax payer he pays tax on the £15k at 40%
Rachel, an additional-rate taxpayer, receives £6200 gross interest from her building society savings account. How much is she left with after paying the income tax due on this interest?
a. £2790.
b. £4160
c. £3410.
d. £4560
c. £3410.
individuals are entitled to a personal savings allowance, which means that the first £1,000 for a basic-rate taxpayer, or £500 for a higher-rate taxpayer, of savings income is taxed at 0%. The personal savings allowance for a taxpayer who has any income taxed at the additional rate is nil.
Harry, a higher-rate taxpayer, has gilts that were left to him by his father several years ago. Harry has already fully utilised his personal savings allowance and has elected to receive interest from his gilts net of 20% income tax. For 2023/24 he received an interest pavment of £208. What additional income tax is due?
a. £52
b. £83.20
c. £41.60
d. £104
a. £52
Any investor can elect for 20% income tax to be deducted at source from the interest. This will be the full liability for a basic-rate taxpayer. A higher-rate taxpayer has to pay a further 20% of the gross interest while an additional-rate taxpayer has to pay a further 25%. Obviously, deduction of 20% income tax would not be helpful if the interest falls within the investor’s personal allowance or starting rate band or is covered by the personal savings allowance.
This question asks what the additional income tax due would be so it’s asking for 25% of £208. Stupidly worded question
Victor, a UK investor, has money in a bank account in the Channel Islands. He has not agreed for the bank to disclose details of the account to HMRC. The consequences of this are likely to be that
a. he will be taxed at the higher rate regardless of his tax status
b. the interest will escape tax if the money remains offshore for seven years.
c. any tax deducted cannot be offset against UK tax liability.
d. withholding tax is deducted from interest payments.
d. withholding tax is deducted from interest payments.
Investors who receive dividends from shares in companies outside the UK are liable to income tax at the same rates as on dividends from UK companies.
•Most overseas dividends are paid after the deduction of withholding tax.
•Double taxation agreements usually set out a rate of withholding tax that a country can charge a UK resident.
• The withholding tax can be set against the investor’s UK tax liability on the income. If the withholding tax exceeds the UK tax due on the income, the excess is not repaid.
If Josh transfers shares to his adult son what tax, if any, would always be payable on the shares that are transferred?
a. Stamp duty reserve tax
b. Income tax.
c. None
d. Capital gains tax
a. Stamp duty reserve tax
Stamp duty is payable on documents (such as stock transfer forms) that transfer legal ownership of shares, stock and unit trusts.
Shares bought through a stockbroker are usually transferred electronically so there is no stock transfer form. On paperless transactions, an equivalent tax called stamp duty reserve tax (SDRT) is charged on the agreement to transfer shares.
Aiden’s annual salary is £22,000 and he has savings interest of £1,274 in 2023/24. Assuming he has no other savings, the income tax due on this interest will be
a. £127.40
b. £254.80
c. £54.80
d. Nil
c. £54.80
Client has no additional savings so has the full £1000 personal allowance.
£1274 - £1000 = £274
£274 x basic rate tax 20% = £54.80
Jean, who is aged 52 and self-employed has net profits of £41,000 in 2023/24. She receives interest of £50 from her NS&l direct saver account. Assuming she has no other savings, how much income tax, if any, will Jean need to pay on her interest?
a £10.
b. £20
c. £5.
d. Nil
d. Nil
NS&I Direct Saver account
• This offers a higher interest rate than the investment account.
• Interest is taxable as savings income.
As interest is taxed as savings income there would be £0 income tax on this interest and so is covered by her Personal savings allowance of £1000
- In the tax year 2023/2024, Erskin’s savings income consists solely of £1,000 from his UK building society account and £1,000 from his offshore bank account which he leaves to accumulate offshore. His total income for the tax year is £90,000. What is his Income Tax liability on his total savings income?
A. £200
B. £400
C. £600
D. £800
C. £600
Personal Allowance Up to £12,570 0% + £1000 personal allowance
Basic rate £12,571 to £50,270 20% + £1000 personal allowance
Higher rate £50,271 to £125,140 40% + £500 personal allowance
Additional rate over £125,140 45% + £0 personal allowance
£2000 - £500 =£1500
£1500 x 40% = £600
What are the requirements for a property to qualify as furnished holiday to let
Correct. To qualify as a furnished holiday let, the accommodation must be furnished, let at a commercial rate for at least 210 days in total in the tax year and must not be let for continuous periods of more than 31 days for more than 155 days in the tax year. Only Steven’s furnished barn conversion would therefore qualify. - Chapter 9, Section C12, Learning Outcome 2.2
What are the requirements for a property to qualify as furnished holiday to let
Correct. To qualify as a furnished holiday let, the accommodation must be furnished, let at a commercial rate for at least 210 days in total in the tax year and must not be let for continuous periods of more than 31 days for more than 155 days in the tax year. Only Steven’s furnished barn conversion would therefore qualify. - Chapter 9, Section C12, Learning Outcome 2.2
Sally rents a room in her home for £140 per week. She is a basic rate taxpayer and her expenses for renting the room are £800 per year. Which type of relief applicable to this situation would result in the least amount of Income Tax being paid on the rental income?
Rent a room relief
Neither private residence relief nor business asset disposal relief is relevant to Income Tax.
Under the rent less expenses method, Sally would be liable to tax on £140 x 52 = £7,280 less £800 expenses = £6,480. Tax would be charged at 20% giving a tax bill of £1,296.
Under rent a room relief, Sally can receive rental income of up to £7,500 tax-free. Rent a room relief therefore results in the least amount of Income Tax for Sally.
- Chapter 9, Section C11, Learning Outcome 2.1
Glen receives a regular income from letting student property of around £40,000 a year. What is this income classed as?
the income is classed as investment income, not earned income.
Property income is classed as investment income rather than earned income and so does not count as relevant UK income for making pension contributions (unless income is from furnished holiday lettings). Property purchases and rent may be subject to VAT. The default basis of calculating property income is the cash basis. Income from all UK properties is pooled together rather than being taxed separately. - Chapter 9, Section C, Learning Outcome
2.1
