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Business Law and Practice (V) > Individual taxation > Flashcards

Individual taxation Flashcards

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1
Q

Difference between direct and indirect tax?

A

Direct tax = assessed by reference to individual’s chargeable gains on basis of individual’s circumstances e.g. income tax, CGT

Indirect tax = imposed by reference to transactions e.g. VAT, Corporation Ta

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2
Q

Difference between income receipt and capital receipt?

A

Income receipt = money received on regular basis (trading profits, interest on savings, rent received as landlord)
Capital receipt = from a transaction not part of regular activity; ‘one-off’ transaction (sale of business premises)

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3
Q

Difference between income expenditure and capital expenditure?

A

Income expenditure = money spent part of day-to-day trading (bills for heating, general repairs)
Capital expenditure = money expended to purchase capital asset as part of infrastructure of business (large machinery, enhancing a capital asset)

Enhancing a capital asset does not include routine maintenance

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4
Q

Why is income/capital distinction important?

A

Certain income expenditure can only be set off against income receipts to reduce tax bill - same rule for capital

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5
Q

How can cost of some capital assets (expenditure) be set off against trading profits (income receipts) of business each year during life of asset concerned?

A

Through system of capital allowances

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6
Q

What is the capital allowances regime?

A

Allows certain types of capital expenditure to be deducted when calculating income receipts - reducing tax bill

Exception to general rule

Spreads cost of capital expenditure on certain capital items over period of time - achieved by proportion of capital expenditure being deducted from income receipts over period

Is the tax equivalent of depreciation; allows cost of asset to be deducted in amounts over period of time (i.e. reduction on income receipt makes up for the money you are ‘losing’ on the value)

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7
Q

What are the tax years for individuals and companies? For individuals, when must self-assessmet tax return be filed?

A

Individuals - 6 April to 5 April
Companies - 1 April to 31 March

For individuals, self-assessment tax return must be filed by midnight 31 Jan

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8
Q

What are the two methods used by HMRC to collect income tax, and who uses each one?

A
  1. Self assessment - individuals calculate own tax bill (directors, high and additional rate taxpayers, self-employed)
  2. Deduction at source - payer of taxable sum obliged to decuct tax and account for it to HMRC - recipient of taxable sum receives net of tax (PAYE)
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9
Q

What is the difference between total, net and taxable income?

A

Total = taxpayer’s gross income from all sources
Net: total income less available reliefs
Taxable: net income less personal allowance

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10
Q

What are the 7 steps to calculating income tax?

See worked examples in conjunction

A
  1. Calculate total income
  2. Deduct available reliefs (interest on qualifying loans and pension contributions) = net income
  3. Deduct personal allowance (£12,570 subject to equation for those over £100,000) = taxable income
  4. Split taxable income into non-savings, savings and dividend income (non-savings income = taxable income - savings and dividend income)
  5. See whether personal savings allowance available
  6. Apply relevant tax rates
  7. Add together for total tax liability

T - total income
N - net income
T - taxable income
S - split incomes
P - personal savings allowance
A - apply rates
A - add up

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11
Q

What types of income are included?

A
  1. Income (if received after deduction at source - use gross amount in calculation)
  2. Savings
  3. Dividends
  4. Benefits in kind (health insurance, gym membership) - must report amount to HMRC
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12
Q

What is the personal savings allowance basic, higher, and additional rate taxpayers?

A

Basic rate taxpayers entitled to first £1,000 of savings
Higher rate taxpayers entitled to first £500 of savings
Additional rate entitled to none

Entitled to first = taxed at 0%

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13
Q

What is the dividend allowance and how does one get it?

A

No individual pays tax on first £1,000 on dividend income

No condition; same for all taxpayers!

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14
Q

What tax reliefs are available for income?

When calculating net income

A
  1. Interest paid on qualifying loans
  2. Pension scheme contributions (amount paid is deducted from total income)
  3. Certain charitable donations

Amount deducted from total income will be the amount paid on loan/scheme

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15
Q

What is a qualifying loan?

A
  • To buy interest in partnership
  • To contribute capital or make loan to partnership
  • Loans to buy shares or make a loan to a close company
  • Loans to buy shares in an employee-controlled company or cooperative
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16
Q

What is the personal allowance equation for those earning over £100,000?

A

For individuals with net income between £100,001 and £125,140:
£12,570 - (net income - £100,000)/2 = reduced allowance

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17
Q

If you earn over £125,140, what do you lose?

A

The whole benefit of personal allowance £12,570

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18
Q

What is the order differnt types of income are taxed in?

A
  1. Non-savings
  2. Savings
  3. Dividend income

Never Squash Donuts???!!!

Subject to personal savings allowance and dividend allowance

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19
Q

What is the difference between net and taxable income?

A
  • Net = total income less available tax relief
  • Taxable = net less personal allowance
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20
Q

How to figure out non-savings income?

A

Taxable income less savings and dividend income

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21
Q

What are the tax rates?

A

Tax bands are
* 0-37,700 (basic)
* 37,701-125,140 (higher), and
* 125,141+ (additional)

Non-savings and savings income both 20 (basic), 40 (higher) and 45 (additional).
Dividends are 8.75 (basic), 33.75 (higher), and 39.35 (additional)

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22
Q

Are personal savings allowance and dividend allowance applied before or after taxing?

A

Before obviously (see example)

NB when you apply it…

E.g. Taxpayer receives £5,000 on savings interest - already have taxable income of £35,000

  • Available basic rate left is £2,700 (£37,700-£35,000)
  • £5,000 taxed as follows:

  1. £2,200 (£2,700 - £500 PSA) @ 20% = £440
  2. £2,300 (remaining) @ 40% = £920
    See cake method below if you don’t get this
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23
Q

What savings income is taxed at 0% for….

  • Basic rate
  • Higher rate
  • Additional rate
A
  • Basic = £1,000
  • Higher = £500
  • Additional = N/A
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24
Q

How are the different tax rates to different bands of income applied?

The cake method

A

See picture below but baso:

  • Each type of income sits on top of one before (order as above: non-savings, savings, dividend)
  • Each will exhaust the previous tax bracket and then move on to next one
  • If one type of income rises through the band = must be apportioned accordingly (as with example in previous card)
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25
Q

How do National Insurance contributions affect individual’s personal income tax computation?

A

They don’t

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26
Q

Can a taxpayer reduce their income liability by making gifts of certain income-producing items e.g. shares to their children?

A

No - under legislation referred to as the ‘settlements’ legislation, the income is treated as remaining with taxpayer who made gift

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27
Q

When is capital gains tax charged?

A

When there is a…

  1. Chargeable disposal (sale of asset and gift of asset during taxpayer’s lifetime)
  2. Of a chargeable asset
  3. By a chargeable person
  4. Which gives rise to a chargeable gain

Charged on all gains made in relevant tax year (6 April - 5 April)

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28
Q

When is CGT charged?

A

On all gains made in relevant tax year (6 April to 5 April)

Tax payable on 31 Jan following year in which disposal occurs

I.e. do not have to pay CGT every single time

29
Q

What is excluded from being a chargeable asset?

A

All forms of property unless excluded such as…

  1. Principal private residence
  2. Motor cars for private use
  3. Certain investments (GOV securities, ISAs, life assurance policies)
  4. UK sterling and any foreign currency held for family’s personal use
30
Q

How does a disposal give rise to a chargeable gain?

A

A gain needs to have been made - i.e. consideration (deemed to have been) received

Appropriate rate of CGT then applied to chargeable gain

Disposals to charities exempt

31
Q

What is the ‘consideration received’ for 1) disposals at arm’s length and 2) between connected persons, disposals at undervalue, and gifts?

A

Price paid by buyer for disposals at arm’s length

Market value for disposals between connected persons (relatives except lateral relatives, common companies, partners in business), disposals at undervalue, and gifts (i.e. sale deemed to be made at market value, donor deemed to have received market value of asset at date of gift)

E.g. woman gives daughter shares worth £40,000 for £5,000 (the same price she bought them for years ago) - she is deemed to have disposed of shares for £40,000

32
Q

How do disposals between spouses work?

What happens to base cost?

A
  • Spouse exemption means neither gain nor loss occurred so no CGT payable
  • Spouse will take over base (original) cost after receiving

Spouse takes over base (original) cost

33
Q

What is the capital gains tax calculation?

A
  1. Sale proceeds/market value less disposal expenditure = net sale proceeds
  2. Net sale proceeds less initial expenditure and subsequent expenditure = chargeable gain
  3. Chargeable gain less carried forward/-across losses and annual exemption = taxable chargeable gain

Chargeable gain more simply = sale proceeds less allowable expenditure

34
Q

What is allowable expenditure?

A

Three kinds of expenditure which can be deducted from (deemed) consideration received

Enable taxpayer to minimise gain made and thus minimise tax

35
Q

What are the three types of allowable expenditure?

A
  1. Initial expenditure - cost of asset as well as incidental costs (e.g. lawyer’s fees)
  2. Subsequent expenditure (enhancing value/establishing or defending title to asset)
  3. Disposal expenditure - incidental costs of disposure (e.g. agent’s commission)

E.g. paid £20,000 (initial expenditure) for shares plus £600 in fees (initial expenditure) and then £1,250 in fees (disposal expenditure) to sell shares - can all be deducted to reach chargeable gain

36
Q

When is a capital loss made, how can it be used, and how does it apply to gifts?

A
  • Made when cost of asset greater than consideration received for it on disposal
  • Those made in same tax year can be carried across and deducted from any gains made in tax year (after being set off against other capital gains made in same tax year first)
  • Does not apply to gifts

E.g. bought a painting for £20,000, which is now worth only £16,000. By selling at £16,000, will have made a loss of £4,000

37
Q

Can capital losses be carried forward?

Is there a time limit?

A

Unrelieved losses (if insufficient gains) can be set against gains in future tax years until used up

  • No time limit but must be used against first available gains

If insufficient gains against which to offset losses in the same tax year that they are incurred = unrelieved losses set against gains in future tax years (in so far as gains in those years not covered by annual exemption) until used up

38
Q

What is the annual exemption for CGT?

A

Individuals (not companies) can make up to £6,000 of gains tax free in tax year

39
Q

Do companies pay CGT?

A

No - they pay corporation tax (i.e. corporation tax on chargeable gains)

40
Q

Do charities pay CGT?

A

Generally exempt

41
Q

What are the rates of CGT for the individual?

A
  • Basic rate taxpayers = 10%
  • Higher and additional rate taxpayers = 20%

Hence income tax calculated before CGT to establish which taxpayer!!

E.g. individual’s taxable income above basic rate threshold of £37,700 = CGT 20%

42
Q

What happens if individual’s taxable income is less than basic tax rate threshold of £37,700, but after gains added the combined total exceeds the threshold?

A

Part of gains within unused part of basic tax rate CGT 10% and parts that exceed threshold CGT 20%

I.e. gains are effectively ADDED to income tax calculation

43
Q

What does Business Asset Disposal Relief do?

A

Reduces the higher rate of CGT from 20% to 10% on gains arising on qualifying disposals

Reduced 10% rate applied to taxable chargeable gain (post-deductions, losses, and annual exemption) - might be 10% anyway but if 20% changed to 10%

44
Q

What is a qualifying disposal?

Business Asset Disposal

A

A disposal of:

  1. All or part of a trading business
  2. Assets in a business that used to trade
  3. Shares in a trading company / company that used to trade
45
Q

What are the conditions for disposing of all/part of a business or assets in a business that used to trade?

1 + 2

So many conditions - just putting most important

A
  • Must be/have been a trading business
  • Must have owned for at least 2 years prior to date of disposal/before it ceased to trade
  • (For assets in a business that used to trade) Assets must have been used in business when it ceased to trade and disposed of within 3 years of business ceasing to trade
46
Q

What are the conditions for disposing of shares in a trading comapny or company that used to trade?

3 + 4

A
  • Company must have been a trading company at least 2 years before date of disposal
  • Shares must have been held for 2 years before date of disposal/before company ceased to trade
  • Person disposing shares must be/have been an officer or employee of company holding at least 5% of ordinary voting shares, entitled to 5% of profits available for distribution and 5% of net assets on winding up for at least 2 years
  • Shares must be disposed of within 3 years of company ceasing to trade
47
Q

What are the common conditions for all qualifying disposals for BADR?

Remember these if anything!

A
  • Owned for 2 years
  • Must have been a trading company
  • Disposed of within 3 years of ceasing to trade
48
Q

Is Business Asset Disposal Relief automatic?

A

No - taxpayer must make claim before first anniversary of 31 Jan following tax year in which relevant disposal made

49
Q

What is the Business Asset Disposal Relief lifetime allowance and what happens to gains made after this?

A
  • £1 million cumulative lifetime allowance
  • Any gains after this 10 or 20% according to normal rules

Means the first £1 million of qualifying gains that an individual makes in his lifetime can be charged to CGT at a reduced rate of 10%; individual can make as many qualifying claims as they like during lifetime until cumulative gains reach £1m lifetime limit (any gains beyond will be charged at either 10% or 20% according to normal rules)

50
Q

What type of companies is Business Asset Disposal Relief available and unavailable to?

A

Trading businesses/companies. Not available for investment entities (non-trading)

51
Q

What does Investor’s Relief do?

A

Reduces higher rate of CGT from 20% to 10% for gains arising on disposals of qualifying shares

52
Q

What investors is Investor’s Relief available to and how long must they have held those shares?

A

Investors of unlisted trading companies who hold shares for at least 3 years

53
Q

What conditions make a qualifying share?

A
  • Fully paid ordinary shares
  • Issued for cash consideration on/after 17 March 2016
  • Company is (or has been since shares issued) a trading company/holding company of a trading group
  • At time of issue of shares, no shares were listed on recognised stock exchange (company was unlisted)
  • Shares were held continuously by the individual for at least 3 years from 6 April 2016
  • The individual is not/has not been from date of issue of shares an officer/employee of the company or any connected company

Must all be met

54
Q

What are the differences between BADR and IR?

A
  • Individual must have been an officer/employee for BADR, must not (have) be(en) for IR
  • Qualifying disposal for BADR, qualifying share for IR
  • Owned for 2 years for BADR, owned for 3 year for IR

Similarity: company must (have) be(en) a trading company

55
Q

Is there a lifetime limit on investor’s relief?

A

£10 million lifetime limit

56
Q

What are the two main business reliefs which defer CGT liability?

A
  1. Replacement of business assets relief (Rollover Relief)
  2. Gift of business assets relief (Hold-over Relief)
57
Q

How does Rollover Relief work?

A

Any gain arising from a disposal of a qualifying asset is carried forward and ‘rolled’ into the cost of a qualifying replacement asset. The cost of the replacement asset is reduced by the amount of the gain being rolled over. Taxpayer elects to postpone CGT liability until replacement asset is sold and no new asset purchased in its place

Avoids need to pay CGT every time business assets sold/replaced

E.g. sells property for £400,000 and makes a gain of £100,000. Uses the £400,000 to buy new property and rolls over gain. CGT base cost for new property is £300,000

58
Q

Does the new asset need to be the same type as that replaced?

A

No - only needs to be within qualifying assets list (land and buildings, fixed plant and machinaery and goodwill)

59
Q

Does the rollover have a time limit?

A

No - can carry on indefinitely provided sufficient qualifying assets bought within time limits

NB annual exemption cannot be used to reduce gain rolled over

60
Q

How does hold-over relief work?

A

Where individual gives away business asset, donor will have no liability to CGT but donee’s acquisition cost for CGT purposes is reduced by the amount of donor’s deemed gain (so will have less to deduct from when calculating CGT). CGT liability postponed until donee ultimately disposes of asset (but further can be claimed if donee gives away asset)

Means donee hit with large CGT upon disposal

As a transfer of a gift, the market value rule will apply

61
Q

Can hold over relief be used for transfers of undervalue?

A

Yes, but relief only available on gift element

Difference between price paid and market value

62
Q

What can hold over relief be claimed on?

A

Goodwill, assets used in business and shares in an unlisted trading company

63
Q

Following content - recall basic IHT principles from WAE

A
64
Q

What is Business Property Relief? How long must assets be owned?

A

Exemption applying to value of qualifying business assets owned for at least 2 years before transfer available to lifetime transfers and the death estate

In the ‘Exemptions & relief’ stage of calculating IHT

65
Q

What does business property include?

A
  • Business or interest in one
  • Shares
  • Land or buildings, machinery or plant owned by transferor but used for business purpose by a company transferor has control over or a partnership in which the transferor was a partner
66
Q

For what type of business is Business Property Relief not available?

A

If business constists wholly or mainly for making/holding investments

67
Q

What are the rates of relief for BPR?

A
  • 100% - transfers of a(n interest in a) business or shares in an unquoted company
  • 50% - shares in a quoted company but only if shareholder had control of the company and to the land or buildings category

100% relief applies to all private company shares regardless of size

68
Q

What happens where a lifetime transfer qualified for BPR when it was made but is then re-assessed following the transferor’s death within 7 years?

A

BPR only available when reassessing the transfer if the property transferred (or replacement property) still qualifies for BPR in transferee’s hands when transferor dies (or transferee if earlier)

Business Law and Practice (V) (13 decks)

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