Individual taxation MCQs Flashcards
A person has taxable income of £45,000. In the same tax year, after the deduction of their annual exemption, they have taxable chargeable gains of £15,000. They have no capital losses for capital gains tax (CGT) purposes. The basic rate tax band for the relevant tax year is £0 - £37,700. The two rates of CGT for the relevant tax year are 10% and 20%.
Based on the above information, what is the person’s CGT liability?
£1,500
£10,460
£3,000
£1,800
£900
£3,000
Correct. The 15,000 chargeable gain is taxed at 20%.
A person has a taxable income of £200,000. They recently made a taxable chargeable gain of £270,000 on the sale of the shares of an engineering company which they founded 10 years ago. The person held the shares since the incorporation of the company and was a director for the whole of that period, retiring at the date of disposal of the shares. The shares represented a 10% shareholding in the company. The person has not previously made any chargeable gains.
Will the person be able to claim any tax relief on this gain?
Business Assets Disposal Relief will apply to reduce the capital gains tax payable from 20% to 10% of the value of the gain.
Business Assets Disposal Relief will apply to reduce the income tax payable from 20% to 10% of the value of the gain.
No tax reliefs are available. Business Assets Disposal Relief will not apply since the person had only a 10% shareholding.
Business Assets Disposal Relief will apply. The person will not pay any capital gains tax on the gain.
No tax reliefs are available. Business Assets Disposal Relief will not apply since the person has now retired as a director of the company.
Business Assets Disposal Relief will apply to reduce the capital gains tax payable from 20% to 10% of the value of the gain.
Correct. This disposal fulfils the criteria for BADR to apply.
A person owns shares in a private limited company. The shares are not in an ISA. In the current tax year the person receives a dividend of £3,000. The person’s only other source of income in the tax year is their salary. Their taxable income, including the dividend, is £43,000.
The personal allowance for the current tax year is £12,570.
The basic rate tax band of 8.75% for the current tax year applies to dividend income up to and including £37,700 with the higher rate of 33.75% applicable from 37,701 to £125,140. The dividend allowance is £1,000.
How much tax will the person pay on their dividend income?
£262
£0
£800
£675
£1012
£675
Correct. You have correctly identified that the taxable income minus the dividend is £40,000, therefore the higher rate applies to the dividend. The first £1,000 of the dividend income is taxed at 0% and the remaining £2,000 will be taxed at the higher rate for dividends of 33.75%.
A person disposed of only one chargeable asset in the 2023/24 tax year, which was sold for £100,000. They bought the asset ten years ago for £45,000 with acquisition costs of £5,000. There was no subsequent expenditure before sale. The annual exemption for 2023/24 is £6,000. Sale costs were £2,700. The capital gains tax (‘CGT’) rate for basic rate taxpayers in 2023/24 is 10%, and for higher rate taxpayers it is 20%.
The person’s Taxable Income for 2023/24 was £50,000.
How much capital gains tax will the person have to pay on the disposal of the asset?
£8,800
£4,130
£8,260
£9,460
£18,585
£8,260
Correct. The net proceeds of sale will be £97,300 (£100,000 minus £2,700 sale costs). After deducting initial acquisition cost (£45,000) and incidental costs of the acquisition of £5,000, the chargeable gain will be £47,300. The taxable chargeable gain will be £47,300 minus the annual exemption (£6,000) = £41,300. As CGT is taxed after income, and we are told the person is a higher rate taxpayer with a taxable income of £50,000, all of the taxable chargeable gain of £41,300 will be taxed at the higher rate of 20%. The tax liability will therefore be £8,260.
A person is a partner in a small catering business. The following information relates to their income and other related tax affairs:
Trading profits for tax purposes £73,000
Savings related income £1,800
Gift of a painting from their grandmother £5,000 (market value)
Dividend on shares in a listed company £1,000
Contributions made by the person into a personal pension scheme £5,000
Interest on a loan the person took out to inject further capital into the business £3,500
What is the person’s Net Income?
£75,800
£72,300
£70,800
£67,300
£54,800
£67,300
Correct. The Net Income is calculated by calculating the Total Income and deducting available tax reliefs such as interest on qualifying loans and pension contributions.
Question 1
In one year, a man receives a salary of £21,335 per annum, interest of £75 from a bank
savings account, and £2,000 of dividends from shares which he owns in a company.
Assumptions: the personal allowance is £12,570; the personal savings allowance is £1,000
and the dividend allowance is £2,000.
Which of the following best represents his income tax liability for the tax year?
A £8,765.00
B £1,753.00
C £10,840.00
D £2,168.00
E £1,153.00
Answer
Option B is correct. NSNDI income is £21,335. Deduct personal allowance (£12,570) to give
taxable income of £8,765. This is all taxed at 20% = £1,753. The interest all falls within the
PSA (£1,000), which is taxed at 0%, so there is no tax to pay on this. The dividend income
all falls within the dividend allowance, which is taxed at 0%, so there is no tax to pay on this
either.
Note that the £1,753 represents the man’s overall tax liability for the tax year. It will be
necessary to allow for any tax deducted at source to calculate the amount of tax still owing.
Question 2
A partner joins three friends in a partnership on 6 October 2022, and it is agreed that the
four partners will share equally in the partnership’s income and capital profits and losses.
Which of the following best describes how the new partner will be assessed to income
tax on income from the partnership for the tax year ending 5 April 2023?
A They will be assessed on a quarter of the partnership’s trading profit from 6 April 2022
to 5 April 2023.
B Their partnership income will not be assessed until 5 April 2024, when they will be
assessed on a quarter of the partnership’s trading profit from 6 October 2022 to 5
April 2024.
C They will be assessed on a quarter of the partnership’s trading profit from 6 April 2022
to 5 April 2023 but will then receive a rebate for the tax which relates to the period
before they became a partner.
D Their partnership income will not be assessed until 5 April 2024, when they will
be assessed on a quarter of the partnership’s trading profit from 6 April 2022 to 5
April 2024.
E They will be assessed on a quarter of the partnership’s trading profit from 6 October
2022 to 5 April 2023.
Answer
Option E is correct. They will be assessed on a quarter of the partnership’s trading profit
because the four partners own the profits in equal shares. The rule is that for the first year,
partners are assessed on the trading profit from joining the partnership to the end of the
tax year.
Question 3
Following an investigation, a client has been informed by HMRC that they are in breach
of the general anti- avoidance rule (‘GAAR’). The client does not wish to contest HMRC’s
finding.
Which of the following best describes the consequences for the client?
A HMRC may sue the client for breach of contract for the amount outstanding.
B HMRC may require the client to pay a fine.
C HMRC may refer the matter to a tax tribunal.
D HMRC may issue a written warning to the client.
E HMRC may request the taxpayer to make just and reasonable adjustments to the
amount of tax paid.
Answer
Option E is correct. There is no contract, so option A is wrong. HMRC has the power to order
the just and reasonable adjustments – there is no such thing as a written warning (option D is
wrong), no power to impose a fine in these circumstances (option B is wrong) and no need to
refer the matter to a tribunal (option C is wrong).
Question 1
Assume that it is April 2023. In May 2022 a client disposed of her shareholding in a
company which specialises in importing and distributing food. The client resigned as a non-
executive director of the company in December 2020 but retained her shareholding until
May 2022. She sold all of her ordinary shares (6% of the company’s issued share capital)
for £188,651 on 3 May 2022, having bought them for £133,000 in May 2012, allowing for all
relevant costs of acquisition and disposal.
This is the only disposal that the client made in the 2022/ 23 tax year.
Which of the following best describes whether or not the disposal of the client’s
shareholding attracts business asset disposal relief?
A Yes, because the shares were in a trading company and the client held over 5% of the
company’s shares.
B Yes, because the client was a director of the company within the two years prior to the
disposal and held over 5% of the company’s shares.
C No, because the client was not an officer or employee of the company during the
whole of the two years prior to disposal.
D No, because the client held less than 10% of the company’s shares.
E No, because the company is not a personal company.
Answer
Option C is correct. This is because to benefit from business asset disposal relief, the
individual must have:
*
held over 5% of the shares in a trading company; and
*
been an officer or employee of that trading company; and
*
those conditions must have been satisfied for two years prior to disposal of the shares.
The client resigned nearly two years before the disposal so cannot benefit from the relief –
she was not an officer or employee for the whole of the two years prior to disposal.
Question 2
Assume that it is April 2023. A client, a higher rate taxpayer, sold his holiday home in the
Lake District in February 2023 for £450,000. He purchased it in 2010 for £300,000. The initial
expenditure (legal fees, valuation fees and stamp duty) amounted to £17,000 and the
incidental costs of disposal were £3,000.
He has made no other disposals in the tax year and has no losses to carry forward from
previous tax years.
Assumptions: the annual exemption for capital gains tax for individuals and personal
representatives is £12,300, whereas for trustees it is £6,150.
Which of the following CORRECTLY states the sole trader’s liability for capital gains tax
for the tax year?
A £11,770
B £150,000
C £130,000
D £32,956
E £23,540
Answer
Option D is correct.
Disposal value 450,000
Costs of disposal (3,000)
Acquisition Value (300,000)
Initial expenditure (17,000)
Chargeable gain (130,000)
Chargeable gain (£130,000) less the annual exemption of £12,300 = £117,700.
If the chargeable asset is residential property which is not the taxpayer’s main residence
(here, the client is selling his holiday home), the gains are subject to a surcharge of 8%. As the
client is a higher rate taxpayer, he will pay CGT at the rate of 28%.
£117,700 x 28% = £32,956
Question 3
A client, who was a basic rate taxpayer, dies owning a small office building worth
£290,000. The office building was given to her as a gift by her mother several years ago,
and she used it as an artist’s studio. At the time of the gift, the office building had a market
value of £100,000.
Which of the following best describes the client’s CGT position with respect to the office
building?
A The client will pay CGT on the gain of £190,000 (subject to any initial expenditure and
costs of disposal).
B The client’s personal representatives will pay CGT on the gain of £190,000 (subject to
any initial expenditure and costs of disposal).
C The client’s personal representatives will pay CGT on the building’s market value of
£290,000.
D The client will not pay any CGT and her personal representatives will acquire the
building at a deemed value of £100,000 as at the date of the client’s death.
E The client will not pay any CGT and her personal representatives will acquire the
building at market value as at the date of the client’s death.
Answer
Option E is correct. There is no charge to CGT on the death of a taxpayer, so option A is
wrong. The taxpayer’s personal representatives acquire the property at market value (here,
£290,000) as at the date of the taxpayer’s death, so options B, C and D are wrong. The capital
gain is therefore wiped out (although there may be inheritance tax implications).
A woman owns shares in a private limited company. The shares are not in an Individual Savings Account (ISA). In the 2022/23 tax year the woman receives a dividend of £5,000. Her only other source of income is her salary, and her taxable income, including the dividend, is £41,000.
In 2022/23 the personal allowance is £12,570, basic rate tax band is £12,571-£50,270 and the dividend allowance is £2,000.
How much Income Tax, if any, should the woman pay on the dividend?
A. None, because the dividend was paid by a private limited company whose payment of Corporation Tax on its distributable profits satisfies the woman’s liability for Income Tax.
B. None, because her taxable income including the dividend does not exceed the upper threshold for basic rate tax.
C. She should pay Income Tax at the Income Tax basic rate on the entire dividend because it exceeds her annual dividend allowance.
D. She should pay Income Tax at the appropriate dividend tax rate on the proportion of the dividend that exceeds her annual dividend allowance.
E. She should pay Income Tax at the Income Tax additional rate on the proportion of the dividend that exceeds her annual dividend allowance.
D - She should pay Income Tax at the appropriate dividend tax rate on the proportion of the dividend that exceeds her annual dividend allowance.
A woman owned a pet shop which she ran as a sole trader. She decided to sell the pet shop and become a partner in a dog grooming salon which has been operating for a number of years. When the woman joined the partnership, she took out a loan of £10,000 at an annual interest rate of 10% to purchase her partnership share. The loan is still outstanding in full. In the 2022/23 tax year the woman’s share of partnership profits was £38,000.
It took longer than the woman anticipated to find a buyer for the pet shop but she completed the sale on 6 April 2022 making a profit on the sale of £10,000.
In 2022/23 the personal allowance is £12,570 and the basic rate of Income Tax is 20%. The basic rate tax band is £0 - £37,700.
What is the woman’s liability for Income Tax in the 2022/23 tax year?
A. £4,886
B. £5,086
C. £7,086
D. £6,886
E. £5,286
A - £4,886
A person has total income for the 2023/2024 financial year of £53,000. In the 2023/2024 financial year, the person has made pension contributions of £3,000 and paid interest of £400 on a qualifying loan.
What deductions need to be made to calculate the person’s taxable income figure?
Select one alternative:
The pension contributions of £3,000 and the interest of £400.
A personal allowance of £12,570.
The interest of £400 and the personal allowance of £12,570.
The pension contributions of £3,000 and the personal allowance of £12,570.
The pension contributions of £3,000, the interest of £400 and a personal allowance of £12,570.
The pension contributions of £3,000, the interest of £400 and a personal allowance of £12,570.
This is a BLP question. This question concerns the deductions that may be made to an individual’s total income to calculate the figure for taxable income. In this example, the deductions would be the personal allowance, pension contributions and interest on a qualifying loan. Pension contributions and interest on qualifying loans are tax reliefs that are available and are required to calculate the net income figure. The personal allowance must then be deducted to calculate the taxable income figure.
A taxpayer is disposing of a tea shop business on which they have made a significant gain since purchasing the shop in 1994. They are working out which expenditure they will be able to deduct from the consideration to reduce their tax liability. Which one of the following pieces of expenditure is NOT an allowable expenditure for capital gains tax purposes?
* The surveyor’s fees incurred when they purchased the shop in 1994.
* Solicitor’s fees on dealing with the sale.
* The original cost of the business in 1994.
* The cost of an extension to the café area of the tea shop to allow more customers in.
* Replacement of roof tiles to the shop following a storm in 2006.
- Replacement of roof tiles to the shop following a storm in 2006.
