Deck 1 Flashcards
HMRC requirements for a holiday home to qualify as a furnished holiday letting.
- Must be available for letting to the public for periods of at least 210 days in total in a tax year.
- The property must be let for at least 105 days in any tax year.
- The property must be let on a commercial basis.
- The property must be within the UK of EEA
- The property may be let for continuous periods over 31 days;
6 But not longer than 155 days in any tax year.
What are the tax benefits of registering a second property as a furnished holiday let?
- A Furnished Holiday Let is regarded as a trade and would, therefore qualify for Entrepreneurs Relief on disposal.
- Earnings from lettings are regarded as qualifying earnings for pension contributions.
- Rollover relief/holdover relief/loss relief available for CGT.
- Business Property Relief could be available on death if qualifying period and conditions are met.
- Income is classed as trading income, not investment income so expenses can be fully deducted from the profits.
- Capital allowances can be claimed and losses can be used t reduce income tax.
State the circumstances in which the loss of Business Property Relief could happen in respect of shareholdings in an unlisted company.
- Company is wholly or mainly dealing in securities, stocks or shares.
- Company primarily trades in land or buildings.
- The business is subject to a binding contract for sale at the time of death/transfer.
- Assets not used/required for future use in the business at the time of transfer.
- The company becomes listed.
- The company ceases to engage in a qualifying trade.
State the requirements that must be met for an estate to qualify for the reduced rate of IHT due to a charitable gift and explain briefly how the net estate is calculated.
- To qualify for the reduced rate if Inheritance Tax of 36%;
At least 10% of the net value of the estate
Must be left to a qualifying/registered charity/sports club association
The net value of the estate is the sum of al the assets after deducting any debts, liabilities;
Reliefs or exemptions;
And any available/transferred nil rate band
List 3 components of an estate that will be used to calculate an estates’ qualification for the reduced rate of IHT due to a charitable gift.
Survivorship
Settled property/trust
General/remaining estate
Describe the requirements for a will to be valid
The will must be in writing/suitable format
Signed by a testator who must have capacity/sound mind
Witnessed be at least two people in the presence of the testator
Witness and their spouses/Civil Partners cannot be beneficiaries
What could revoke/invalidate a will
Making a new will
Marriage/Civil Partnership
Unless will has been specifically made in anticipation of Marriage/Civil Partnership
Destruction of the existing will (with the intention to revoke)
How could a personal injury trust affect entitlement to state benefits?
The trust fund is disregarded for means testing as long as only capital is withdrawn on an ad-hoc basis
Regular withdrawals could impact eligibility
Only the amount of compensation paid should go into the trust
What conditions must be met for a trust to qualify for the special tax regime for trusts for the vulnerable?
The trust property can only be applied for the benefit of the beneficiary
The beneficiary must be entitled to the income.
According to section 89(4) of the Inheritance act 1984, what are the definitions of ‘disabled’?
Incapable, by reason of mental capacity within the meaning of the mental health act 1983/manging their affairs
Or
In receipt of an attendance allowance/disability living allowance/personal independence payment.
What are the main duties of a trustee?
Consider the standard investment criteria and suitability of the investments.
Diversification
Obtain advice of a suitably qualified person (unless one of the other trustees has this expertise).
Investment should be reviewed at leat annually and varied if appropriate.
Manage the money and act in the best interest of the beneficiaries.
Comply with the trustee act 2000
Keep proper accounts
Consider the beneficiaries tax position/complete tax returns
Invest any cash promptly
Have a statutory duty of care when carrying out their duties to invest monies as if they were their own.
Register assets in the trust name/hold trust documents of title/trustee’s own assets.
What is the difference between capital allowances and allowable expenses?
Capital Allowances;
Items that might be used in business over several years.
Generally, items that will have a useful life of over two years
Allowable Expenses;
Costs paid with the sole purpose of earning business profits.
How is Class 2 National Insurance collected and when would this need to be paid
4 weekly by direct debit
Or
Half yearly
Paid on 31st Jan within the tax year and 31st July after the tax year with balancing payment on the following 31st Jan.
How is Class 4 National Insurance collected and when would this need to be paid
Paid via self-assessment
Paid on 31st Jan within the tax year and 31st July after the tax year with balancing payment on the following 31st Jan.
State Benefits that are dependent on National Insurance contributions
The basic state pension
Additional State Pension/S2P
Jobseeker’s Allowance, the contribution based element.
Employment and Support allowance, the contribution based element/Universal credit.
Incapacity Benefit
Maternity Allowance
Bereavement Allowance/Payment
Widowed Parent’s Allowance
Explain how the chargeable gain on a bond is calculated on surrender
Onshore bonds are already deemed to have paid basic rate tax/subject to corporation tax internally.
The gain will be calculated for the full life of the bond
The gross surrender amount is added to any withdrawals made.
Minus the initial investment amount and any additional top ups.
The gain is divided by the number of whole years of ownership
The slice is added to the owner’s income for the relevant tax year.
Any amount into higher rate tax subject to 20% income tax and multiplied by the number of years of ownership.
Any amount into additional rate tax subject to 25% income tax and multiplied by the number of years of ownership.
State the criteria a company must meet to qualify as a suitable investment to obtain financing via an Enterprise Investment Scheme
Gross assets of no more than £15,000,000 prior to investment and no more than £16,000,000 after.
Must be permanently based in the UK
Carrying out a genuine qualifying trade
Unlisted on major exchange when Enterprise Investment Scheme shares are issued
Raising no more than £5,000,0000 under EIS
Fewer than 250 employees
In the event of bankruptcy, in what order of priority must creditors be paid?
- Secured Creditors
- Expenses of Bankruptcy
- Preferential Creditors
- Floating Charge Holders
- Unsecured Creditors
- Interest due on debts since the bankruptcy order
- Debts to spouse/civil partner
Explain the IHT implications of assigning a term assurance policy into a discretionary trust
The assignment of the term assurance policy into trust is a transfer of value for IHT purposes
The value is deemed to be the market value at the date of transfer.
This would be either of nil or of negligible value if the life assured is in good health.
Health problems experienced by the life assured could impact HMRCs valuation of the transfer
If the life assured dies within 2 years of the transfer the HMRC may deem the value of the transfer as being the sum assured.
The premiums are transfers of value.
They could be claimed as exempt under the normal expenditure out of income exemption or the £3,000, annual exemptions could be used.
What actions could an individual take in order to support their application for a new domicile of choice?
Have a purpose for remaining there i.e family/employment/retirement
Sever all links with the UK/existing domicile
Open a bank account in the new country
Write a will in the new country
Arrange to be buried in the new country
Purchase a property in the new country
Register to vote in the new country
Apply for citizenship in the new country
State the steps an individual would have taken to report a loss to HM Revenue & Customs (HMRC) during the time he held his UK assets, including timescales and amounts where relevant.
If you completed a self‐assessment tax return for the year in which you made the loss, you must claim the loss within four years from the end of that tax year.
If you did not complete a self‐assessment tax return for the year in which you made the loss, the time limit
All losses:
Loss only needs to be reported if it is more than four times the Annual Exempt Amount;
or taxpayer wishes to offset against chargeable gains.
Explain the HMRC criteria surrounding the disposal of company assets in order to qualify for entrepreneurs’ relief.
Business assets must be held for a minimum period of one year.
Must be an employee of the company holding at least 5% of the shares.
The shares must be disposed of either while the company is a qualifying/trading company;
or within three years from the date it ceased to be a trading company.
Business assets include goodwill and business premises.
Detail the five sufficient UK ties that HMRC will use to demonstrate residency, if this cannot be proved by the automatic tests.
Spouse, partner, children resident in the UK.
Accommodation in the UK used during the tax year.
Substantive work in the UK of over 40 days in a tax year.
More than 90 days in the UK during either of the two previous years.
More time in the UK than in any other single country
Explain how double taxation agreements, usually operate, especially in cases where time is equally spent between countries.
Taxation is based on country of residence.
Residency based on where main home present; if two homes, it is the one lived in most.
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.
It may be that an individual is regarded as resident for tax in more than one 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 married couple.
If living together in the tax year; transfer between spouses is no gain, no loss/tax‐ free.
Describe the CGT rules on the transfer of assets between a married couple who are 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.
Describe the CGT rules on the transfer of assets between two people who are divorced
Fully taxable, unconnected parties.
Commercial transaction/open market.
Explain how shares are identified when they are disposed of and why this is relevant for the calculation of CGT.
Acquisitions made on the same day.
Acquisitions made within the following 30 days
Acquisitions made within the share pool.
To prevent ‘bed and breakfasting’;
crystallising an artificial gain/loss while maintaining beneficial ownership of the asset.
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.
State the factors that HM Revenue & Customs would use to distinguish whether an individual is self-employed
Contract to provide services.
Ability to sub‐contract.
If the individual takes on business risk.
Does individual have to correct unsatisfactory work in their own time and at their own expense?
Have to provide the equipment personally.
State the factors that HM Revenue & Customs would use to distinguish whether an individual is employed
Existence of contract of service.
Set hours, holiday/sick and overtime pay.
Master/servant relationship.
Regular weekly or monthly pay /PAYE.
If individual works for just one instructor.
Equipment is provided by the company.
Income Tax implications of gifting away a property and continuing to live in it
Pre‐owned asset tax (POAT) may apply/can opt for gifts with reservation (GWR) 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 recipient of the gifted property would be assessed for Income Tax on rental income received.
Capital Gains Tax implications of gifting away a property and continuing to live in it
The gift would be classed as a disposal by the parents for CGT purposes;
but should be exempt under principal private esidence rules.
Any subsequent disposal by the recipient of the gifted property would potentially be subject to CGT.
Inheritance Tax implications of gifting away a property and continuing to live in it
If they pay a full market rent/if they do not pay full market rent.
Gift with reservation rules will not apply/GWR will apply.
The gift is a transfer of value/potentially exempt transfers 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.
Explain the steps that would need to be completed for an individual to appoint attorneys under a Lasting Power of Attorney, for property and financial affairs.
Must be presented on the specified form.
Registered with the Office of the Public Guardian/Court.
Signed by the Donor and Attorney.
Certified by a certificate provider.
Including the relevant payment.
Donor must have capacity when granting the power.
Following the death of the Settlor, how long will the trustees will be expected to continue in their role under the rules concerning perpetuities and accumulations
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/Saunders v Vautier.
Trustees can resign.
Differences between a valid trust and an enforceable contract
Trustees are legal owners but beneficiaries can enforce the terms of a trust if a breach occurs - Only the parties to a contract generally have equitable/ legal rights under it
Trusts based on equity rather than common law
Beneficiaries to a trust may be unaware of the trust, parties to a contract must be aware of its items (beneficiaries must be advised of trust once they reach majority)
A contract requires consideration whilst a trust requires no consideration
Contract requires offer and acceptance
A trust can be established for a minor but a minor cannot make an enforceable contract
A valid trust requires no agreement between the settler and beneficiaries, a contract does require agreement between the parties
Trustees
Can be any number
Where trust property includes land must be a minimum of 2 and maximum of 4 (unless trust corporation) (Trustee Act 1925)
Must be over 18 and of sound mind (can be a bankrupt or in prison!)
Replacement required where existing trustee;
Remains outside UK for over year
Is a minor
Dies
Refuses to Act
Is unfit/incapable of acting
Desires to be discharged
Death of all trustees does not invalidate trust – trustees can be appointed by a court
Powers to delegate to an agent
Trustee Act 2000 allowed delegation of powers except relating to:
Distribution over trust assets
How fees are dealt with
Appointment of new trustee
Delegation of trustee’s power
Not liable for loss due to acts of agent provided due care taken with appointment
Breach of trust
Beneficiary can take legal action where they believe trustee has/will committed a breach
If court agrees, it can;
Issue injunction prohibiting intended action
Order trustee to make restitution i.e. appropriate payment to beneficiary
Order return of any trust property wrongly transferred
When can beneficiaries to end the trust, by insisting assets distributed;
All beneficiaries are ascertained
No possibility of future beneficiaries
All of full age and mental capacity
Unanimous agreement of all beneficiaries
Trusts can be created by
Deed – terms are expressly set out
Will
Statute
Orally
By implication – i.e. business partnership
Court Order
The three trust certainties
Words – the intention to create a trust
Subject – the trust property
Object – the beneficiaries – must be certain i.e. naming/ described as a class. Wording should be precise i.e. not just say relatives.
Perpetuities and Accumulations Act 2009
Applies only to lifetime trusts created and wills executed on or after 5th April 2010 and wills dated after that date
Single perpetuity period of 125 years (although can be shorter)
May accumulate income for whole of trust period
Accumulation period for charitable trusts reduced from indefinitely to 21 years
Shorter period may be chosen and incorporated in the trust deed
Where perpetuity period is uncertain trustees can execute a deed to establish a fixed perpetuity period of 100 years
Uses of Trusts
Reduce Tax
In intestacy
In wills
To provide for families
To assist a charity
To provide pensions
To give property for those who cannot hold it
To provide for disabled or vulnerable people
Gain protection from creditors
Difference between charitable trusts and other trusts
Charitable trust cannot be void for uncertainty of the object
Charitable trust not subject to general law on perpetuities
Charitable trust can continue indefinitely and can be varied if it becomes obsolete
If becomes impracticable – property can be applied to another charitable purpose as close to other as original – known as cy-près doctrine
Accumulate income for a maximum of 21 years
Tax position of charitable trusts
Exempt from income tax and CGT provided the funds are used for charitable purposes
Disposals to charities generally exempt from CGT
Outright gifts to charities free of IHT
Reduction in rate of IHT payable form 40% to 36% if at least 10% of net estate left to charity
Gifts to charitable trusts may qualify for income tax relief (gift aid / payroll giving). Charity can reclaim gift aid
Power of Attorney
Created by deed
Executed by one person giving another authority to act for them
Must be witnessed by at least one person and signed by the donor
General POA is revoked when someone loses capacity
Person of unsound mind cannot execute a POA
If donor unable to sign due to a physical disability can be signed by another but needs two witnesses
Requirements for an LPA to be valid;
Donor must be over 18 and not bankrupt
Attorney must be over 18 and not bankrupt
Donor must have capacity
It must comply with the regulations made under the MCA Act 2005 – in a prescribed format
It must state that the donor and attorney have read the prescribed information and the attorney understands their duties
There must also be a certificate from a prescribed person that the donor understands the LPA and that there has been no fraud or undue pressure (Can nominate up to 5 people to be notified of registration, two certificate providers are required if no-one is to be notified)
Two forms Health and Welfare LPA, Property and Financial affairs LPA plans to amalgamate on to one form
Powers cannot be exercised until registered at OPG – can be done at any time
Property and Financial affairs LPA is effective as soon as registered (donor can stipulate powers), Health and Welfare at onset on mental incapacity (can decide aspects of care to be covered)
Circumstances in which an LPA can be revoked;
By the donor whilst retaining capacity
Death of the attorney or Donor
Bankruptcy of the attorney
Bankruptcy of the donor (Welfare decisions continue)
Dissolution of marriage between donor and attorney
Incapacity of the attorney
Bankruptcy procedure
Debtor (or creditor owed at least £5000, increased from £750 from Oct 2015) applies to court for debtor to be adjudged bankrupt
If court agrees debtor declared bankrupt
Control of all debtor’s assets passes to Official Receiver
Debtor submits statement of affairs to Official Receiver following a bankruptcy order
Official Receiver (OR) then decides whether or not to call a meeting of creditors to enable them to appoint an insolvency practitioner of their choice as the trustee in bankruptcy
OR must call a meeting if at least 10% of creditors (by value) demand it
Trustee in bankruptcy takes ownership of bankrupt’s property
If no trustee in bankruptcy appointed then Official Receiver acts as trustee
Trustee in bankruptcy collects all bankrupt’s property, sells it and uses it to repay creditors as far as possible
After 1 year bankruptcy usually discharged
If full disclosure not made then can be re-opened
BRO may be imposed to protect the public from bankrupts whose conduct has been reckless or irresponsible
BRO imposes restrictions which may last form 2 – 15 years after discharge
Bankrupt may be discharged in less than one year
Restrictions placed on a bankrupt;
Disclose all their property to a trustee
Not conceal any debts or assets
Not destroy or falsify any records
Not make any false statements to the trustee
Not dispose of property with intent to defraud creditors
Not fraudulently give preference to one creditor over another
Not leave the country with any of their property
Not obtain credit without disclosing their status
Cannot be a company director/ member of parliament
Self-assessment and trustees
Tax return must be completed in the same way as individuals
Same payment dates (2 on account and one final)
CGT paid by 31st January after end of tax year (no payments on account)
All trustees jointly and severally liable
Often dealt with by one trustee
Unpaid tax can be recovered from any of the trustees who may also be personably liable for any penalties incurred
Taxation of a Bare Trust
Income belongs to beneficiary;
Based on beneficiary’s tax rate
Beneficiary liable for tax, personal allowance can be used
Beneficiary must include trust income on tax return
Parents gifting money to an unmarried minor child – treated as a settlor interested trust - £100 rule applies. Parent could reclaim any tax from the trust
Has CGT advantages as child can use their annual CGT allowance which will be at least double that of the trust
Taxation of Trusts for vulnerable beneficiaries
Income and capital gains taxed on individual beneficiary rather than normal trust rules
Not all trusts for benefit of vulnerable person enjoy special tax treatment, only;
Disabled persons
‘Relevant’ minor children
Finance Act 2005, ‘Disabled person’;
Person who by reason of mental disorder (meaning within Mental health act 1983) incapable of administering their property or managing their affairs
Person in receipt of attendance allowance or disability living allowance care component at highest or middle rate/ DLA mobility component at higher rate or in receipt of personal independence payments
Trust property can only be applied for benefit of the disabled person
Any income must be paid to disabled person
‘Relevant minor’ is a child who has not yet attained age 18 and at least one of parents died.
Eligible trusts for relevant minors:
Statutory trusts (or Scottish equiv.)
Trusts established under will of deceased parent of relevant minor
Trust established under Criminal Injuries Compensation Scheme – giving absolute entitlement at age 18
Trustees are able to apply small amounts of income and capital (equivalent to the lower of £3000 or 3%) without having to prove it’s for the benefit of a vulnerable beneficiary
Both trustee and beneficiary must make a joint election using HMRC VPE1 which is irrevocable until one of the following events occurs:-
Person ceases to be a vulnerable person
Trust ceases to be a qualifying trust
Trust is terminated
Taxation of 18-25 trust
Created by parent’s will or intestacy, or under Criminal Injuries Compensation Scheme
Absolute interest must be given to beneficiary by age 25
Beneficiary treated as owning the trust assets for IHT purposes up to age 18
Exit charge then levied based on number of quarters elapsed since age 18 when assets distributed (maximum of 28/40ths i.e. 7 years between 18 and 25)
Income tax - Discretionary Trust
Trustees have £1,000 standard rate band
is split by number of trusts settlor has in existence in the tax year
(Min each can have is £200)
Thereafter, higher rate tax is due. 32.5% on dividends and 45% on savings and other income
Trustees’ expenses are allowable in calculating any income chargeable at higher rate
Expenses first set against dividend income, savings income and then other income
Tax relief on the expenses is received, increasing the trust basic rate band
Expenses only allowable if they are properly chargeable to income (premiums on life policies, adviser fees etc do not count) and any exempt income will have expenses proportionately reduced (e.g. trustees are non resident)
On distribution income becomes trust income and is liable to 45% tax
Trustees may have further tax liability at this stage
Outline an individual’s responsibilities as an executor of a will
Establish the assets and debts of the estate/net value.
Apply to HM Revenue & Customs/complete PA1 Form/Inheritance Tax (IHT) 400/relevant form.
Pay the IHT bill.
Obtain Probate.
Gather the assets of deceased estate/any monies owed.
Pay off any outstanding mortgage/tax/debts.
Distribute the net proceeds to the named beneficiaries.
Act with due care/best interest of estate.
State the conditions that must be satisfied for a deed of variation to be effective for IHT purposes
The deed must refer to the Will.
All beneficiaries must be 18 or over.
All beneficiaries must be of sound mind
Must be executed within two years of death
Must contain a statement to the effect that it is for IHT/as if deceased had made it.
It must be signed by all beneficiaries whose entitlement is varied.
There must be no consideration for money/monies worth.
IHT treatment of Discretionary Trust
Transfer into the trust was a chargeable lifetime transfer.
The amount above the nil rate band/£325,000.
Less two annual exemptions of £3,000/£6,000.
Would have been subject to Inheritance Tax at 20% if paid by the trust or 25% if paid by Settlor.
If Settlor dies within seven years
There could be further tax to be paid by the trustees.
Based on the amount above the then nil rate band/nil rate band at date of death.
Taper relief might be available.
Credit would be given for tax paid at outset.
Periodic charges could be levied every ten years.
Exit charges could be levied on any capital distributions or appointments.
Explain Quick Succession Relief
In place to avoid IHT being paid on the same asset ina short space of time. (quick succession)
Only available if in receipt of the gift within 5 years of death
Tax charged on death is reduced by a percentage of the IHT paid on the original gift.
The percentage applied depends on how long ago the gift was:
Less than 1 year - 100% 1 - 2 years - 80% 2 - 3 years - 60% 3 - 4 years - 40% 4 - 5 years - 20%
The relief is on the increase in the estate of the recipient of the gift.
How does rent a room relief work?
An individual renting out a room in their only property has 2 options on how to be taxed.
They can elect to use rent a room relief or not.
Using rent a room relief, income tax is charged against any rental income which exceeds the allowance, currently £7,500.
Expenses can not be offset against the income when using rent a room relief.
Income is taxed at individuals rate of tax.
If they choose not to use rent a room relief, then the rental income minus any expenses will be charged at the individual’s rate of tax.
How do contributions to a retirement annuity contract differ from other pensions?
Contributions are not subject to relief at source on contribution.
Relief has to be applied for via self assessment.
Relief is then given as a deduction from taxable income.
The deduction is the amount of the contribution made.
