Flagged Questions Flashcards
Jason has a holding of corporate bonds and his friend Michael has a holding of gilts. Jason wants to know how his holding differs from Michael’s. You can tell him that
A. only corporate bonds are exempt from CGT on any profit arising from a sale.
B. only the interest from corporate bonds is taxable as savings income.
C. only the interest from corporate bonds is always paid gross.
D. only corporate bonds can be traded on the stock market.
While the interest from corporate bonds is always paid gross (with no tax deducted at source), a taxpayer can elect to have interest from gilts paid net (after basic rate tax has been deducted). Both are exempt from CGT, produce interest that is taxable as savings income and can be traded on the stock market. - Chapter 9, Section ABA ABB, Learning Outcome 2.1
Lisa has recently made a £100,000 gain on selling her buy to let home. She is now considering whether to reinvest this in an Enterprise Investment Scheme (EIS). Which of the following would be a benefit to Lisa of doing this?
A. She can defer the original gain until she disposes of the ElS shares.
B. 50% of the original gain will be exempt from tax.
C. Any subsequent gain would be taxed at a lower rate on disposal.
D. This will reduce the base cost of the ElS shares by the original gain.
A. She can defer the original gain until she disposes of the ElS shares.
Correct. The gain on selling her buy to let property can be deferred until she disposes of the ElS shares. - Chapter 3, Section F5, Learning Outcome 2.2
Oakley is liable to income tax on the accrued interest in the sale proceeds of his gilt holding. This is because in the current tax year his total nominal holding of gilts has exceeded
A. £500
B. £1,000
C. £2,000
D. £5,000
D. E5,000
Any accrued interest in the sale proceeds of a gilt is liable to income tax if the individual’s total nominal holding of gilts exceeds £5,000 on any day in the tax year. - Chapter 9, Section ABA, Learning Outcome 2.1
Why might Tom, a higher-rate taxpayer with an adventurous attitude to risk, want to invest a lump sum in an Enterprise Investment Scheme?
A. To have control over the investment
B. To gain CGT exemption after a holding period of 3 years
C. To receive dividends tax free
D. To receive 50% Income Tax relief on an investment of £200,000
B. To gain CGT exemption after a holding period of 3 years
The investment will usually be free from CGT once it has been held for 3 years. Dividends are not tax free (that’s a VCT) and tax relief is given at 30% on an investment of up to f1m (up to f2m if the amount over £ 1m is invested in knowledge intensive companies). - Chapter 10, Section K1, Learning Outcome 2.2
Ali has purchased a holding of gilts and his partner Chris has bought local authority bonds. All wants to know how his investment differs from Chris’s. You can tell him that
A. only Chris can trade his investment on the London Stock Exchange.
B. only Ali’s investment is exempt from Capital Gains Tax.
C. Ali has effectively lent his money to the Government.
D. Chris can offset any losses against other capital gains.
C. Ali has effectively lent his money to the Government.
Gilts are loans to the Government, whilst local authority bonds are loans to local government authorities. Both products can be traded on the stock exchange, and both are exempt from CGT. Neither Ali nor Chris can offset losses against other gains. - Chapter 9, Section A3B/C, Learning Outcome 2.1
Simeon has a share of partnership profits of £250,000. During the current tax year, he made a gross personal pension contribution of £25,000, charitable donations of £15,000 through payroll gifting and paid interest of £55,000 on a loan taken out to finance the partnership. It is true to say that
A. Simeon’s adjusted total income is £210,000.
B. the maximum allowable deduction for the loan is £50,000.
C. the full amount of the interest is an allowable deduction.
D. relief is restricted to a period of one year from the making of the loan.
C. the full amount of the interest is an allowable deduction.
Adjusted total income is total income plus charitable donations through payroll less all types of pension contributions.
For Simeon, this is £250,000 + £15,000 - £25,000 = £240,000. The maximum allowable deduction is therefore the higher of £50,000 and £240,000 @ 25% = £60,000. The full amount of interest is therefore deductible. The one-year limit applies to loans taken out for IHT purposes. - Chapter 1, Section D. Learning Outcome 1.1
Joanne sold an investment property to her sister at its market value of £120,000 making a gain of £40,000. She has allowed her sister two years to pay for the house. When would Joanne be liable to pay any Capital Gains Tax (CGT)?
D. Joanne must pay any CGT based on the contract date but can pay in instalments.
In this case, as the deferred consideration is payable more than 18 months after the disposal, HMRC will usually agree to the tax being paid in instalments. Joanne must, however, still pay any CGT based on the contract date. - Chapter 3, Section B2, Learning Outcome 3.2
Which of the following statements regarding Stamp Duty on documents transferring share ownership is true? (Tick all that apply.)
A. The rate is 0.5% of the purchase price.
B. Stamp duty is paid by the seller.
C. Stamp duty is paid by the purchaser.
D. The purchaser is responsible for paying the stamp duty to HMRC.
A. The rate is 0.5% of the purchase price.
C. Stamp duty is paid by the purchaser.
Stamp duty is charged at 0.5% of the purchase price and is paid by the buyer, not the seller. The stockbroker acting for the buyer is normally responsible for paying stamp duty to HMRC. - Chapter 7, Section B, Learning Outcome 2.1
On Sarah’s death, the nil rate band was £300,000. In her will, she left £70,000 in trust for hen nephews and the remainder of her estate of just under £1m to her husband James. Two years prior to her death, she had made an outright gift of £56,000 to her niece. On James’s death, his estate was valued at £2.2m, including the family home valued at £575,000. There was no mortgage.
His estate was left to the couple’s two children. James had made no lifetime gifts. What is the IHT liability on James’s estate?
A. £520,000
B. £523,000
C. £572,000
D. £574,600
C. £572,000
On Sarah’s death 40% (£120,000/£300,000) of her NRB was used (£120,000 being the £70,000 left in her will, plus the £50,000 gift after 2 x annual exemptions made to her niece), leaving 60% of the NRB in place at the date of James’s death available to James’s estate (£325,000 @ 60% = £195,000).
be careful with this, there is a lot going on but make sure you recognise that transfers on death do not get the annual allowance, so in this case only the transfer 2 years prior gets the annual allowance
2 x RNRB are also available, 2 x £175,000 = £350,000.
However, as James’s estate is in excess of £2m we need to reduce the RNRB by £1 for every £2 over. £2.2m - £2m = £200,000 / 2 = £100,000. £350,000 - £100,000 = £250,000.
IHT is therefore due on £2,200,000 - £195,000 - £325,000
- £250,000 = £1 430,000 @ 40% = £572,000.
- Chapter 12, Section ASD, Learning Outcome 4.1
Susan is considering purchasing either a Real Estate Investment Trust (REIT) or an Investment Trust. She should be aware that (Tick all that apply.)
A. both products may pay out dividend income.
B. only the REIT can be ISA-wrapped.
C. a REIT is a type of investment trust.
D. neither product is subject to CGT on disposal.
E. all income from a REIT is paid gross.
A. both products may pay out dividend income.
C. a REIT is a type of investment trust.
Both products pay out a dividend and both can be ISA-wrapped. A REIT is a type of investment trust. Both products are subject to CGT on disposal. While the dividend income from a REIT is paid gross, the property income is usually paid net. - Chapter 10, Section E J3, Learning Outcome 2.2
Maxine is considering whether to invest in Friendly Society policies for each of her three children and has asked you to supply some information. You tell her that: (Tick all that apply.)
A. the maximum monthly premium is £25.
B. premiums can only be paid monthly.
C. the funds are free of UK tax on income and gains.
D. she can only have one policy per family.
A. the maximum monthly premium is £25.
C. the funds are free of UK tax on income and gains.
The maximum monthly premium into a friendly society policy is £25, but premiums can be paid at other frequencies, e.g., annually. The funds are free of UK tax on income and gains, but Maxine can have one policy for herse and one for each of her three children. - Chapter 10, Section G3, Learning Outcome 2.2
Luanne, who earns £23,500 a year and has no other income, wishes to make a gross contribution of £4,375 into her group personal pension (GPP). This means that
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A. she will make a gross payment and tax relief is deducted from her total income.
B. she must claim £875 back via self-assessment.
C. the GPP’s scheme administrator will claim £875 from HMRC.
D. her employer will refund £875 into the GPP.
C. the GPP’s scheme administrator will claim £875 from HMRC.
Pension contributions are tax free, as Luanne is basic rate the scheme admin can claim back 20%
The scheme administrator of the GPP will claim the basic-rate tax deducted of £875 from HMRC. - Chapter 1, Section F2, Learning Outcome 1.1
Maureen, a basic-rate taxpayer, has just invested £50,000 into a guaranteed income bond that has been constructed by the provider using a medium-term note. She should be aware that? Tick all that apply.
A. Her personal savings allowance can be used to reduce the amount of tax payable.
B. Any chargeable gains are subject to CGT in the normal way.
C. Her tax liability will be met at source with a 20% tax credit.
D. Products constructed in this way cannot be held in an ISA wrapper.
A. Her personal savings allowance can be used to reduce the amount of tax payable.
B. Any chargeable gains are subject to CGT in the normal way.
Income is taxed as savings income, meaning Maureen’s £1,000 personal savings allowance is available (if not used elsewhere). Chargeable gains are subject to CGT. The income is paid gross, so there is no tax credit. This type structured product can be held in an ISA wrapper. - Chapter 10, Section C3, Learning Outcome 2.2
Jack is employed in one of the largest high street banks. He has noticed on his pay slip that he has a PAYE code of 543L. Which of the following is the correct explanation of what this means?
A. £453.25 will not be taxed each month.
B. £543.00 will be taxed each month.
C. £543.00 will not be taxed each month.
D. £453.25 will be taxed each month.
A. £453.25 will not be taxed each month.
A PAYE code of 543L means that £5,439 / 12 = £453.25 will not be subject to tax each month. (The final digit is always deemed to be a 9 so 543L becomes £5,439). - Chapter 6, Section B1, Learning Outcome 1.6
When considering investing in a Venture Capital Trust (VCT), investors should be aware that: Tick all that apply.
A. Income Tax relief is withdrawn if the shares are disposed of within six years.
B. the company must not be a close company.
C. it must be a listed company.
D.the disposal of VCT shares are potentially liable to CGT at 10%.
B. the company must not be a close company.
C. it must be a listed company.
Income Tax relief is clawed back if the shares are sold within 5 years, rather than 6. The company itself must not be a close company and must be listed. The disposal of VCT shares is exempt from CGT. - Chapter 10, Section L,
Learning Outcome 2.2
An individual can transfer overseas assets into an excluded property trust to protect themselves from IHT. It is true to say that such trusts are usually
A. interest in possession trusts and the settlor can be one of the beneficiaries.
B. interest in possession trusts but the settlor cannot be one of the beneficiaries.
C. discretionary trusts but the settlor cannot be one of the beneficiaries.
D. discretionary trusts and the settlor can be one of the beneficiaries.
D. discretionary trusts and the settlor can be one of the beneficiaries.
Assets within an excluded property trust remain protected from Inheritance Tax even in the event of the settlor subsequently becoming UK domiciled. Such trusts are usually discretionary trusts, and the settlor can be one of the beneficiaries. - Chapter 12, Section B6B, Learning Outcome 3.2
When would a Capital Gains Tax (CGT) chargeable disposal be deemed to have taken place in the following scenarios?
A. Sian, a beneficiary under a trust, becomes absolutely entitled to the trust assets.
B. James makes a gain of £120,000 on selling his main residence.
C. A married couple changes ownership of their investment bond when one becomes a basic-rate taxpayer.
D. Peter dies and his antique car is passed to his son in accordance with his wishes.
A. Sian, a beneficiary under a trust, becomes absolutely entitled to the trust assets.
When a beneficiary under a trust becomes absolutely entitled to the trust assets this is deemed to be a disposal for CGT purposes by the trustees. The sale of a main residence is exempt from CGT. An assignment between spouses of an investment bond is not a disposal for CGT purposes, nor is an asset passed on in accordance with a will. - Chapter 3, Section A, Learning Outcome 1.3
One of your clients has recently been asked to be a trustee on a discretionary trust which has the bulk of its investment in equities. He is concerned about the taxation of any dividends for the trust and the beneficiaries. You tell him that the trust is
A. liable for 39.35% Income Tax after they have exceeded their standard rate band and the beneficiary is deemed to have received trust income not dividend income.
B. not liable for any Income Tax and the beneficiary pays an extra 22.5% if they are a higher-rate taxpayer.
C. liable for 8.75% Income Tax with the beneficiary paying an extra amount as determined by their own tax status.
D. liable for 39.35% Income Tax after they have exceeded their dividend allowance and the beneficiary is deemed to have received trust income not dividend income.
A. liable for 39.35% Income Tax after they have exceeded their standard rate band and the beneficiary is deemed to have received trust income not dividend income.
Discretionary trusts are liable to Income Tax at the additional rate after they have used up their standard rate band. For dividend income, this is 39.35%. When a beneficiary receives income from a discretionary trust, they are deemed to have received ‘trust income’. The original source of the income becomes irrelevant. - Chapter 1, Section L5B,
Learning Outcome 3.1
Henry has recently made a transfer to a discretionary trust. What is a necessary condition for the disposal to qualify for holdover relief?
A. Henry and the trustees must all be UK resident.
B. The disposal must be of shares to a company.
C. Henry needs to claim it.
D. Inheritance Tax must have been paid on the transfer.
C. Henry needs to claim it.
To qualify for holdover relief regarding a trust, only the donor needs to make the claim. Only the recipient needs to be resident in the UK. It is not available for transfers of shares to a company. Transfers chargeable to IHT qualify for holdover relief, even if no IHT is actually paid (i.e., because the gift is within the available nil rate band). - Chapter 3, Section F2, Learning Outcome 1.3
Sally wishes to ensure that the money she gifts to her 16-year-old child does not result in an Income Tax charge for herself. She should therefore avoid investing funds for her child in
A. a Junior cash ISA.
B. a cash ISA.
C. a stocks and shares Child Trust Fund.
D. a stocks and shares Junior ISA.
B. a cash ISA.
The special provision to tax the parent on income derived from an asset that the parent has given a child does not apply to Junior ISAs or Child Trust Funds. It does, however, extend to ISAs held by 16- and 17-year-olds. - Chapter 1, Section J2A, Learning Outcome 4.2
Aniket is considering using a discretionary trust to make provision for his children and future grandchildren as well as to mitigate his own Inheritance Tax (IHT) position. He should be aware that: (Tick all that apply.)
A. the transfer in is a potentially exempt transfer.
B. capital distributions to a beneficiary may trigger an exit charge.
C. the beneficiaries are entitled to an equal amount of income and capital.
D. if a beneficiary dies, there is no charge to IHT on the beneficiary’s estate.
B. capital distributions to a beneficiary may trigger an exit charge.
D. if a beneficiary dies, there is no charge to IHT on the beneficiary’s estate.
The transfer into a discretionary trust is a chargeable lifetime transfer (CLT), not a potentially exempt transfer (PET). Capital distributions to a beneficiary trigger an exit charge. If a beneficiary dies, there is no charge to IHT on the beneficiary’s estate. None of the beneficiaries have a specific entitlement to any of the income or capital of the trust until the trustees use their discretion to make a payment. - Chapter 4, Section H5, Learning Outcome 3.2
Ruth borrowed £500,000 four years ago, which is charged on her house, but was used to buy shares in her daughter’s company. On Ruth’s death, the shares are worth £700,000 and the house is worth £900,000. Which of the following is correct in relation to the Inheritance Tax position?
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A. Any business relief will be unaffected by the mortgage on Ruth’s property.
B. The full value of the house will be included in Ra’s death estate.
C. The residence nil rate band will be unaffected by the mortgage on Ruth’s property.
D. Ruth must have purchased at least 10% of the shares to be eligible for business relief.
B. The full value of the house will be included in Ra’s death estate.
The full value of the house will be included in Ruth’s death estate because the mortgage will be set against the shares that qualify for business relief. Business relief is therefore affected by the mortgage. The RNB is potentially reduced as the mortgage will be deducted from the property when working out the RNRB available. There is no size restriction for Ruth’s shareholding for business relief purposes. - Chapter 11, Section E2E, Learning Outcome 4.1
