Individual Taxation Flashcards
Individual tax year
6 April - 5 April
Company tax year
1 April - 31 March
Two methods by which HMRC assess and collects income
- Self-assessment
- Deduction at source
Total income
A taxpayer’s gross income from all sources
- salary
- dividend
- savings income
Net income
Total income less available reliefs
Taxable income
Net income less the personal allowance
Savings income
Basic rate tax payers: first £1000
Higher rate tax payers: first £500
No savings income allowance for additional rate tax payers (income over £125,140)
Dividend income
No tax on the first £500 of dividend income
Benefits in kind
- not automatic deducted under PAYE
- employee must include them on tax return
- includes health insurance, company cars, gym memberships etc
- bonuses are included under PAYE
Deductions for calculating net income
- interest paid on qualifying loans
- loans to buy interest in partnership
- loans to contribute capital or make a loan to a partnership
- loans to buy shares in a close company
- loans to buy shares in employee-controlled company or invest in a co-operative - Pension scheme contributions
- amount equivalent to the pension scheme contribution made by a taxpayer during the tax year are deducted from total income
Personal allowance
£12,750
Calculating taxable income
Once net income is calculated, deduct taxpayer’s personal allowance (£12,570) to calculated the taxable income.
If net income is over £100,000, allowance is reduced by £1 for every £2 over £100,000.
Means no personal allowance on earnings above £125,140.
Applying tax rates
- non-savings
- savings
- dividends
Must all be separated out.
(non-savings = taxable income - savings income - dividend income)
Tax rates
Summary of income tax calculation
1) Calculate total income
2) Deduct available tax reliefs = net income
3) Deduct personal allowance (£12,570, reduced by £1 for every £2 over £100,000, none if over £125,140) = taxable income
4) Split taxable income into non-savings, savings, dividend income
5) Calculate whether personal savings allowance is available (check bands)
6) Apply relevant tax rates
7) Add tax amounts together to get the total tax liability
When is CGT charged?
When there is a chargeable disposal of a chargeable asset by a chargeable person which gives rise to a chargeable gain.
Charges on all gains made in a relevant tax year (6 April to 5 April).
Tax is payable on or before 31 January following the tax year in which the disposal occurs.
Two main types of disposals
- Sale of an asset
- Gift of an asset
Note: no chargeable disposal on death
Chargeable assets
Most forms are included EXCEPT:
- principal private residence
- motor cars for private use (including vintage cars)
- certain investments (e.g. ISAs)
- UK sterling and any foreign currency held for personal use
Consideration
- Selling to someone who isn’t a connected person - consideration is taken at the price paid
- Selling to connected person
- HMRC will deem consideration to be market value - Disposal at an undervalue
- if significant undervalue HMRC may deem disposal at market value (but not if simply a bad bargain - Gifts
- Donor is deemed to receive it at market value
Connected person:
- relatives (and their spouses) - parents, grandparents, brother and sisters but not aunts, uncles, nieces and nephews
- companies if under common control
- partners in business
Calculation of chargeable gain
Sale proceeds
- disposal expenditure
= net sale proceeds
- initial expenditure
- subsequent expenditure
= chargeable gain
Allowable expenditure
Disposal expenditure
- incidental costs of disposal
Initial Expenditure
- cost price of the asset
- incidental costs of acquisition
Subsequent Expenditure
- subsequent expenditure which enhances its value
- expenditure incurred in establishing, preserving or defending title to the asset
Capital losses
Any losses someone has made can be offset against the gains made that tax year.
No limit in carrying losses forward
Annual exemption for CGT
£3000
Rates of CGT
Basic rate: 18%
Higher and Add: 24%
CGT calculations
If taxable income plus the total taxable chargeable gain is less than the basic rate - 18%
If taxable income exceeds basic rate - CGT is 24%
If some under, some over, part under is 18% and part over is 24%
Business Asset Disposal Relief
Reduces CGT to 10% for gains on qualifying disposals for the first £1M (cumulative). (have to make a claim for it, not automatic)
- All or part of a trading business
- trading business
- owned for at least two years prior to the date of disposal - Assets in business that used to trade
- owned at least two years before ceased trading
- assets used in business when it ceased to trade
- assets disposed of within 3 years of ceasing to trade - Shares in a trading company
- company must have been trading for at least two years before disposal
- shares held for two years before disposal
- officer or employee who holds at least 5% of the ordinary voting shares and entitled to 5% of distributable profits and 5% of net assets on winding up for two years before disposal - Shares in a company that used to trade
- owned two years before trading
- officer or employee who holds at least 5% of the ordinary voting shares and entitled to 5% of distributable profits and 5% of net assets on winding up for two years before ceasing to trade
- shares disposed of within three years of the company ceasing to trade
After £1M is used CGT is taxed at regular rates.
Investors relief
Reduces rate of CGT to 10% for gains arising on disposals of qualifying shares (up to lifetime limit of £1M)
Qualifying shares:
- fully paid ordinary shares issued for cash consideration on or after 17 March 2016
- Company is a trading company or holding company of a trading company
- At time of issue none of the shares were listed
- Shares held by individual for 3 years and continuously since issue
- Individual is not an officer or employee of the company
Rollover relief - for businesses
Can ‘rollover’ the CGT liability into a replacement asset.
Applies to land and buildings, fixed plant and machinery and goodwill. New asset does not have to be same type as the old one.
Acquisition cost of replacement asset is reduced by amount of gain being rolled over.
Any tax payable is postponed until replacement asset is sold and no new qualifying assets are purchased.
Can roll over indefinitely
Hold-over relief (business asset)
When receive a a gift or transfer at undervalue can claim hold-over relief.
Donee (person receiving)’s acquisition costs are reduced by the amount of donors deemed gain.
CGT liability is then postponed until the donee disposes of the asset.
Business property relief - IHT
Applies to lifetime transfer and death estate
- held for two years
100%
- business interest in sole trader or partnership
- shares in unquoted company
50%
- shares in quoted company
- land or buildings, machinery or plant owned by transferor but used for business
