Individual Taxation

Question 1

What is an income receipt vs capital receipt?

Answer 1

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

Question 2

What is income expenditure vs capital expenditure?

Answer 2

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

Question 3

What is the tax year for individuals?

Answer 3

6 April in one year to 5 April in the next

Question 4

What is the financial year for companies?

Answer 4

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

Question 5

What is the personal savings allowance?

Answer 5

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

Question 6

What is the dividend allowance?

Answer 6

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

Question 7

What is net income?

Answer 7

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

Question 8

What is total income?

Answer 8

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

Question 9

What is taxable income?

Answer 9

Net income less the personal allowance

Question 10

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

Answer 10

£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

Question 11

What is the taxable income of a basic rate taxpayer?

Answer 11

£0 - £37,700

Question 12

What is the taxable income of a higher rate taxpayer?

Answer 12

£37,700 - £125,140

Question 13

What is the taxable income of an additional rate taxpayer?

Answer 13

£125,140 and upwards

Question 14

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

Answer 14

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

Question 15

What are the tax rates for dividend incomoe?

Answer 15

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

Question 16

What is the formula for calculating income tax?

Answer 16

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

Question 17

What types of assets are specifically excluded from chargeable assets?

Answer 17

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

Question 18

What is the formula for chargeable gain?

Answer 18

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

Question 19

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

Answer 19

• Disposals to charities
• Disposals to spouse - takes it at original cost

Question 20

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

Answer 20

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

Question 21

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

Answer 21

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

Question 22

What are capital losses?

Answer 22

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

Question 23

What is the annual exemption?

Answer 23

£3,000
Individuals ONLY

Question 24

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

Answer 24

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%

Question 25

What is the formula for calculating CGT?

Answer 25

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

Question 26

What is the Business Asset Disposal Relief?

Answer 26

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

Question 27

What are qualifying disposals for BADR?

Answer 27

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

Question 28

What is Investors' Relief?

Answer 28

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

Question 29

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

Answer 29

- 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

Question 30

What is rollover relief?

Answer 30

- 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

Question 31

What is holdover relief?

Answer 31

- 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

Question 32

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

Answer 32

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

Question 33

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)

Answer 33

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

Question 34

What is the marriage allowance for calculating income tax?

Answer 34

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

Question 35

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

Answer 35

- 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

Question 36

From what point is IHT of the shares valued?

Answer 36

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

Question 37

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

Answer 37

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

Question 38

Who pays tax on profits of an LLP?

Answer 38

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