Cii Practive Test 3 Flashcards
When does a loss need reporting?
Loss only needs to be reported if it is more than four times the Annual Exempt Amount;
Any amount can be reported if the taxpayer wishes to offset against chargeable gains.
The time limit for claiming a loss is four years from the end of the year of assessment.
Explain the HMRC criteria surrounding the disposal of business assets in order to qualify for entrepreneurs’ relief.
Business assets must be held for a minimum period of one year.
Must be an employee/director of the company holding at least 5% of the shares.
The shares must be disposed of either while the company is a trading company; or within three years from the date it ceased trading.
Business assets include goodwill and business premises.
Dad transfers business shares to son as a gift. Explain how holdover relief could be used to mitigate dad’s CGT liability if he makes this transfer and the consequences to both dad and son of such a transfer.
While a disposal for dad, no immediate Capital Gains Tax chargeable.
Acquisition cost for son is deemed to be dad’s initial investment, not the market value.
Both need to apply for holdover relief.
Relief is only available if son remains UK resident for six years after the gift.
If any tax becomes due as a result of a loss of relief, son is liable for the tax but if he does not or cannot pay, dad will become liable.
Gift will be regarded as a PET of market value less any available exemptions.
Period of ownership to qualify for entrepreneurs’ relief starts from zero again.
Detail the five sufficient UK ties that HMRC will use to demonstrate Toby’s future residency, if this cannot be proved by the automatic tests.
FAWC90
Family - spouse, civil partner, minor children resident in the UK.
Accommodation in the UK used during the tax year.
Work in the UK of over 40 days in a tax year.
More time in the UK than in any other single country.
More than 90 days in the UK during either of the two previous years.
Explain how double taxation agreements, such as arrangements between UK and Spain, usually operate, especially in cases where time is equally spent between countries.
Taxation based on country of residence.
Residency based on where main home present; if two homes, the one lived in most.
It may be that an individual is regarded as resident for tax in more than one country.Double taxation agreements are put in place to avoid double taxation of the same income.
Tax paid in one country can provide credit in the other country.
If all things are equal, an agreement will be made between the tax authorities as to who should be claiming the tax.
Describe the CGT rules on the transfer of assets between a couple whilst married; if they separated; or if they divorced.
Married:
If living together in the tax year transfer between spouses is tax- free.
Separated:
From tax year after separation, but before divorce (not living together in tax year) gain is taxable.
Treated as non-commercial transfer between connected parties.
Market value is used as opposed to actual proceeds when calculating.
Divorced:
Fully taxable, unconnected parties. Commercial transaction/open market.
Explain the differences in CGT treatment regarding shares acquired as bonus issues, rights issues and scrip dividends.
Bonus:
Shares in the same class are deemed to have been acquired on the same date as the original holding/all gains subject to Capital Gains Tax.
No extra acquisition cost, as they are issued free.
Rights issue:
Subscription for further shares as new acquisition with additional costs/Capital Gains Tax levied on excess above acquisition.
Shares will be valued at the actual purchase price.
Scrip dividends/stock dividend:
Dividends paid as shares and not cash.
Treated as new acquisitions and charged accordingly.
Chattels calculation formula
Lower of:
Chattels method = Proceeds - £6000 x 5/3
Actual gain: Proceeds - costs - acquisition cost
State the factors that HM Revenue & Customs would use to distinguish whether someone is employed
Existence of contract of service. Set hours, holiday/sick and overtime pay. Master/servant relationship. Regular weekly or monthly pay/PAYE. Works for just one firm. Business provides all materials to work. Works from a company location. Reports to manager who dictates workload.
State the factors that HM Revenue & Customs would use to distinguish whether someone is self-employed
Contract to provide services. Ability to sub-contract. Person takes on business risk. Ability to work on own terms (not 9-5) Has to correct unsatisfactory work in her own time and at her own expense
Compare how earnings would be subject to income tax and national insurance as a sole trader or an employee
Sole Trader: Profits after allowable expenses subject to income tax.
Paid via self-assessment in two payments on account on 31 January in year of assessment and 31 of July following the end of the year of assessment, with a balancing payment or repayment on the following 31 January.
Class 2 National Insurance contributions payable as anticipated profits in excess of small profits threshold.
Payable under self-assessment with full amount for tax year being due on 31 January following the end of the year of assessment.
Class 4 payable on profits above lower annual limit.
Collected at the same time as income tax liability via self-assessment.
Employee:
Paid via payroll at the point of earning/PAYE;
Taxed at highest marginal rate.
Earnings subject to Class 1 National Insurance.
Outline the consequences for a person if their limited company fails
She has ‘limited liability’ up to the value of her share holding.
Her personal assets (such as the house) cannot be touched by creditors subject to no personal guarantees being in place.
Could be subject to restrictions as a result of insolvency.
Parents gift house to children but still live in it. List implications on: Income Tax, CGT & IHT
Income Tax:
POAT may apply/can opt for gifts with reservation to apply.
The cash value of the benefit is based on an open-market rent.
No tax is charged in any year in which the cash value is £5,000 or less.
Valuation date for the property is 6 April each year and it must be re-valued every five years.
They will receive credit for any rent paid.
The sons would be assessed for Income Tax on rental income received.
CGT:
Gift would be classed as a disposal by the parents; but should be exempt under principal private residence rules.
Any subsequent disposal by the sons would potentially be subject to CGT.
Inheritance Tax:
If they pay a full market rent GWR rules won’t apply.
If they do not pay full market rent GWR will apply.
The gift is a transfer of value/PET at the time of the gift.
No immediate charge to Inheritance Tax; which may be chargeable as a result of their death(s) within seven years.
A double Inheritance Tax charge may apply as the donor will be treated as making a second gift when they cease to retain their interest in it/move out.
Trustees concerned about the length of time they will be expected to continue in their role.
Outline the rules concerning perpetuities and accumulations that apply to a trust.
Trust is subject to Perpetuities and Accumulations Act 2009.
125 year perpetuity period regardless of any perpetuity period stated in the trust.
No limit on accumulation period.
The trust can be set up for a shorter period.
Trust can be wound up/ruling under Saunders v Vautier.
Trustees can resign.
What are the intestacy rules if a husband dies with a wife and children?
As husband had not made a Will he died intestate.
Wife assumes sole ownership of the jointly-held bank account or house held as joint tenants.
Wife would receive all man’s chattels.
Of rest of estate, wife would receive the first £250,000 absolutely and half of the balance.
The remainder (other half) would go to the children in equal shares.
