Individual Taxation Flashcards
What is an income receipt vs capital receipt?
- Income receipt: money received on regular basis (salary/interest/rent)
- Capital receipt: one-off, not part of regular activity
What is income expenditure vs capital expenditure?
- Income expenditure: money spent on regular basis (bills/repairs/interest on loans)
- Capital expenditure: one-off purchase or enhancement of asset
What is the tax year for individuals?
6 April in one year to 5 April in the next
What is the financial year for companies?
1 April in one year to 31 March in the next year
What is the personal savings allowance?
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
What is the dividend allowance?
No individual pays any tax on the first £500 of dividend they receive - same for all taxpayers
What is net income?
Total income less available tax reliefs:
- interest paid on qualifying loans
- pension scheme contributions
- certain charitable donations
What is total income?
A taxpayer’s gross income from all sources before any deductions
What is taxable income?
Net income less the personal allowance
What is the personal allowance of tax year 24/25 and in what circumstances is it reduced?
£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
What is the taxable income of a basic rate taxpayer?
£0 - £37,700
What is the taxable income of a higher rate taxpayer?
£37,700 - £125,140
What is the taxable income of an additional rate taxpayer?
£125,140 and upwards
What are the tax rates for non-savings income and savings income?
Basic rate = 20%
Higher rate = 40%
Additional rate = 45%
What are the tax rates for dividend incomoe?
Basic = 8.75%
Higher = 33.75%
Additional = 39.35%
What is the formula for calculating income tax?
- Total income
(less available reliefs - interest/pension) - Net income
(less personal savings allowance) - Taxable income
- Split income: non-savings, savings, dividends (Never Say Die)
- Apply savings/dividends allowances and tax rates
What types of assets are specifically excluded from chargeable assets?
- Principal private residence
- Motor cars for private use
- Government securities, national savings certificates, shares and securities held in ISAs, life assurance policies
- Cash
What is the formula for chargeable gain?
Consideration received (sale proceeds/market value) LESS allowable expenditure (disposal/initial/subsequent)
What disposals are treated as made on a no gain/no loss basis?
- Disposals to charities
- Disposals to spouse - takes it at original cost
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
- Disposals at arm’s length = price paid by buyer
- Disposals between connected person = market value of asset
- Disposals at undervalue = price paid b buyer
- Gifts = market value of asset at date of gift
What are the types of expenditure that can be deducted from the sale proceeds to reach the chargeable gain?
- Disposal expenditure - incidental costs of disposal
- Initial expenditure - cost price of asset and acquisition
- Subsequent expenditure on asset - incurred to enhance its value
What are capital losses?
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
What is the annual exemption?
£3,000
Individuals ONLY
What figure is used to determine which rate of CGT is paid?
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%
What is the formula for calculating CGT?
- Sale proceeds / market value
(Less disposal expenditure) - Net sale proceeds
(Less initial/subsequent expenditure) - Total chargeable gain
(Less losses/AE) - Taxable chargeable gain
- Apply applicable tax rates
What is the Business Asset Disposal Relief?
- Reduces higher rate of CGT from 20% to 10% on qualifying disposals
- Each individual has a lifetime allowance of £1million
What are qualifying disposals for BADR?
- All or part of a trading business
- Assets in a business that used to trade
- 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
What is Investors’ Relief?
Reduces higher rate of CGT from 20% to 10% on qualifying disposals of shares
- Lifetime limit of £10million
What are conditions for shares to be qualifying for Investors Relief?
- 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
What is rollover relief?
- 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
What is holdover relief?
- 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
What is the CGT position for two individuals in a partnership?
- Individuals can elect to use Business Asset Rollover Relief (if applicable) which has the effect of postponing any liability to CGT
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)
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
What is the marriage allowance for calculating income tax?
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
What is the application of Business Property Relief for IHT purposes?
- 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
From what point is IHT of the shares valued?
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
Can an individual carry forward their annual exemption for CGT purposes?
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
Who pays tax on profits of an LLP?
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
