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Business Law > Individual Taxation > Flashcards

Individual Taxation Flashcards

1
Q

What is an income receipt vs capital receipt?

A
  • Income receipt: money received on regular basis (salary/interest/rent)
  • Capital receipt: one-off, not part of regular activity
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2
Q

What is income expenditure vs capital expenditure?

A
  • Income expenditure: money spent on regular basis (bills/repairs/interest on loans)
  • Capital expenditure: one-off purchase or enhancement of asset
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3
Q

What is the tax year for individuals?

A

6 April in one year to 5 April in the next

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4
Q

What is the financial year for companies?

A

1 April in one year to 31 March in the next year

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5
Q

What is the personal savings allowance?

A

Applies to interest received by individuals on savings
- Basic rate taxpayers: first £1,000 at 0%
- Higher rate taxpayers: first £500 at 0%
- Additional rate taxpayers do not get one

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6
Q

What is the dividend allowance?

A

No individual pays any tax on the first £500 of dividend they receive - same for all taxpayers

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7
Q

What is net income?

A

Total income less available tax reliefs:
- interest paid on qualifying loans
- pension scheme contributions
- certain charitable donations

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8
Q

What is total income?

A

A taxpayer’s gross income from all sources before any deductions

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9
Q

What is taxable income?

A

Net income less the personal allowance

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10
Q

What is the personal allowance of tax year 24/25 and in what circumstances is it reduced?

A

£12,570

  • Reduced by £1 for every £2 of Net Income above £100,000
  • Individuals with Net Income of £125,140 and above will lose the benefit
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11
Q

What is the taxable income of a basic rate taxpayer?

A

£0 - £37,700

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12
Q

What is the taxable income of a higher rate taxpayer?

A

£37,700 - £125,140

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13
Q

What is the taxable income of an additional rate taxpayer?

A

£125,140 and upwards

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14
Q

What are the tax rates for non-savings income and savings income?

A

Basic rate = 20%
Higher rate = 40%
Additional rate = 45%

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15
Q

What are the tax rates for dividend incomoe?

A

Basic = 8.75%
Higher = 33.75%
Additional = 39.35%

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16
Q

What is the formula for calculating income tax?

A
  1. Total income
    (less available reliefs - interest/pension)
  2. Net income
    (less personal savings allowance)
  3. Taxable income
  4. Split income: non-savings, savings, dividends (Never Say Die)
  5. Apply savings/dividends allowances and tax rates
17
Q

What types of assets are specifically excluded from chargeable assets?

A
  • Principal private residence
  • Motor cars for private use
  • Government securities, national savings certificates, shares and securities held in ISAs, life assurance policies
  • Cash
18
Q

What is the formula for chargeable gain?

A

Consideration received (sale proceeds/market value) LESS allowable expenditure (disposal/initial/subsequent)

19
Q

What disposals are treated as made on a no gain/no loss basis?

A
  • Disposals to charities
  • Disposals to spouse - takes it at original cost
20
Q

What is the consideration received or deemed received for:
1. Disposal at arm’s length
2. Disposals between connected person
3. Disposals at an undervalue between unconnected persons
4. Gifts

A
  1. Disposals at arm’s length = price paid by buyer
  2. Disposals between connected person = market value of asset
  3. Disposals at undervalue = price paid b buyer
  4. Gifts = market value of asset at date of gift
21
Q

What are the types of expenditure that can be deducted from the sale proceeds to reach the chargeable gain?

A
  • Disposal expenditure - incidental costs of disposal
  • Initial expenditure - cost price of asset and acquisition
  • Subsequent expenditure on asset - incurred to enhance its value
22
Q

What are capital losses?

A

Created when cost of asset is greater than consideration received for it on disposal

  • can be deducted from gains in the same tax year
  • if there are insufficient gains, any unrelieved losses are set against gains in future tax years until used up
  • no time limit but must be used against first available gains
23
Q

What is the annual exemption?

A

£3,000
Individuals ONLY

24
Q

What figure is used to determine which rate of CGT is paid?

A

Taxable income - total income plus total chargeable gains (after deducting losses and AE)

Less than £37,700 = 10%
Exceeds £37,000 = 20%

Less than £37,000 but after the gains are added, the combined total exceeds threshold = part of the gains within the unused part of the basic rate tax band will be charged at 10% and any part that exceeds the threshold will be charged at 20%

25
Q

What is the formula for calculating CGT?

A
  1. Sale proceeds / market value
    (Less disposal expenditure)
  2. Net sale proceeds
    (Less initial/subsequent expenditure)
  3. Total chargeable gain
    (Less losses/AE)
  4. Taxable chargeable gain
  5. Apply applicable tax rates
26
Q

What is the Business Asset Disposal Relief?

A
  • Reduces higher rate of CGT from 20% to 10% on qualifying disposals
  • Each individual has a lifetime allowance of £1million
27
Q

What are qualifying disposals for BADR?

A
  1. All or part of a trading business
  2. Assets in a business that used to trade
  3. Shares in trading company
    - owned for at least 2 years prior to disposal
    - disposed within 3 years if ceases to trade
    - officer/employee holding at least 5% of ordinary voting shares

Critiera:
- 5% shareholding
- Employee/director
- Ownership for 2 years or more
- Not used up lifetime allowance of £1m

28
Q

What is Investors’ Relief?

A

Reduces higher rate of CGT from 20% to 10% on qualifying disposals of shares
- Lifetime limit of £10million

29
Q

What are conditions for shares to be qualifying for Investors Relief?

A
  • Fully paid up ordinary shares issued for cash consideration on or after 17 March 2016
  • Company is trading
  • None listed on stock exchange
  • Held for at least 3 years
  • Individual or connected person is not an officer or employee
30
Q

What is rollover relief?

A
  • Taxpayer postpones CG liability it realises on sale of an asset by rolling over the gain into a replacement asset
  • applies to land buildings, fixed plant and machinery and goodwill
31
Q

What is holdover relief?

A
  • Individual gives away a business asset and the CGT liability is postponed until the donee ultimately disposes of the asset
  • Donee’s acquisition cost for CGT purposes is reduced by amount of donor’s deemed gain
  • May also be claimed where an asset is sold at undervalue but relief will only be available on gift element
32
Q

What is the CGT position for two individuals in a partnership?

A
  • Individuals can elect to use Business Asset Rollover Relief (if applicable) which has the effect of postponing any liability to CGT
33
Q

Example of CGT Tax calculation
- Man has taxable income of £30,000
- He has chargeable gains of £50,000

What is his CGT liability (assume all deductions of allowances and reliefs have been made)

A

Basic rate tax band is £0 - £37,700

  • £30,000 of £37,700 basic rate tax band is taken up with taxable income
  • This leaves £7,700 to be applied towards capital gains
  • First £7,700 of £50,000 of chargeable gain is taxed at 10% (basic rate)
  • Remaining £42,300 is taxed at 20%

Total CGT liability is £9,230

34
Q

What is the marriage allowance for calculating income tax?

A

Marriage allowance allows a person whose income is lower than the personal allowance (£12,570) and whose spouse pays income at the basic rate, to transfer up to £1,260 (the marriage allowance) of their remaining allowance to their spouse / civil partner

  • it works to increase the personal allowance for the spouse who is paying income tax at basic rate

Where in calculation to use it:
- deduct at same time as deduct personal allowance

35
Q

What is the application of Business Property Relief for IHT purposes?

A
  • shares in unquoted company - 100% relief
  • shares in a quoted company - 50% relief (if the transferor controlled - owned more than 50%)

Conditions
- transferor must have owned the business assets for at least 2 years immediately prior to transfer

36
Q

From what point is IHT of the shares valued?

A

IHT at 40% is due on the value of shares at the time of transferor’s death

E.g., shares were purchased for £200,000. At time of death, shares were valued at £220,000.
- IHT calculated at 40% of £220,000
- in this example, assuming BPR does not apply

37
Q

Can an individual carry forward their annual exemption for CGT purposes?

A

Cannot carry forward annual exemption

  • But can carry forward losses for CGT purposes indefinitely until an individual has the opportunity to use them

You CANNOT carry forward AE - use it or lose it

38
Q

Who pays tax on profits of an LLP?

A

LLP is tax transparent
- This means the members of the partnership are liable to pay tax on the income profits and CGT, not the partnership itself

Business Law (11 decks)

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