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Level 5 Business Tax Planning > Lecture 2B > Flashcards

Lecture 2B Flashcards

1
Q

What is a basis period

A

The basis period refers to the period for which a business’s profits are taxed in a specific tax year

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2
Q

What does the basis period correspond to

A

the basis period corresponds to the accounting period for the business

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3
Q

What can happen to the basis period in the first few years

A

the basis periods during the first few years may differ from the normal rules

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4
Q

What are the different stages of the basis period in the first 3 years

A
  • Year 1: Actual Basis
  • Year 2: First 12-Month Basis
  • Year 3: Normal Basis
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5
Q

What is the basis period

A

The basis period is the date of commencement to the end of the tax year

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6
Q

If a business starts trading on the 1st August 2024 what is the basis period for to 2024/25 tax year

A

If a business starts trading on 1st August 2024, the basis period for the 2024/25 tax year would be 1st August 2024 to 5th April 2025

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7
Q

What does the second tax year for a company depend on

A

The second tax year depends on the accounting year-end

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8
Q

What happens if the second tax year’s accounting period exceeds 12 months

A

If the second tax year’s accounting period exceeds 12 months, then the first 12 months of trading are used as the basis period

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9
Q

What happens if the second tax year ends within the second tax year

A

If the accounting period ends within the second tax year, the basis period will be the accounting year

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10
Q

What currently applies by the third year

A

By the third tax year, the current year basis generally applies

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11
Q

In the third year what are profits taxed based on

A

Profits taxed are based on the 12-month accounting period ending in the tax year

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12
Q

What are overlapped profits used for

A

overlap profits are carried forward and used to reduce taxable profits in later years

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13
Q

What do the rules ensure when a business ceases trade

A

When a business ceases to trade, the rules ensure all profits are taxed up to the cessation date

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14
Q

What are the steps for calculating tax with cease of trade

A

Steps:
- Identify the cessation date
- Tax all profits from the end of the previous basis period to the cessation date
- Overlap relief can be deducted from the final taxable profits

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15
Q

What is overlap relief critical to managing

A

Critical to managing taxable profits and minimizing tax liability upon cessation

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16
Q

What can changing the accounting year complicate

A

Changing the accounting year-end can complicate basis period calculations and may create further overlaps

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17
Q

What is property income

A

Property income is income received from letting out property

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18
Q

What does property income typically include

A

Property income typically includes:
1. Rental income
2. Premiums
3. Income from letting out furnished holiday accommodation
4. Miscellaneous income

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19
Q

How is taxable property income calculated

A

Taxable property income is calculated as:
- Gross Rental Income – Allowable Expenses = Taxable Property Income

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20
Q

What does gross rental income include

A

Gross rental income includes money received from tenants such as:
- Rent payments
- Charges for additional services
- Non-refundable deposits

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21
Q

What are allowable expenses

A

Allowable expenses are costs incurred wholly and exclusively for the purpose of renting out the property

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22
Q

What are examples of allowable expenses for renting out properties

A

Examples include:
- Repairs and maintenance
- Property management fees
- Insurance premiums
- Mortgage interest
- Utility bills, council tax, and ground rent
- Replacement of domestic items

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23
Q

What do landlords receive on mortgage interest as it can’t be deducted as an expense

A

landlords receive a 20% tax credit on the interest paid

24
Q

What does the 20% tax credit on mortgage interest apply to

A

This applies only to residential properties, not furnished holiday lettings or commercial properties

25
Q

What are some special rules for property income

A

Special Rules for Property Income
1. Rent-a-Room Relief
2. Furnished Holiday Lettings
3. Lease Premiums
4. Non-UK Properties

26
Q

How can a landlords qualify for rent a room relief

A

If a landlord rents out a furnished room in their home, they may qualify for Rent-a-Room Relief

27
Q

How much money is un taxed from rent a room relief

A

The first £7,500 per year (£3,750 for joint owners) is exempt from tax

28
Q

What criteria needs to be met for furnished holiday lettings

A

FHLs enjoy special tax treatment, provided they meet strict criteria:
- The property must be available for letting for at least 210 days in a tax year.
- It must be let to the public for at least 105 days.
- Periods of long-term occupation (exceeding 31 days by a single tenant) cannot count towards the 105 days

29
Q

What are the benefits of FHL treatment

A

Benefits of FHL Treatment:
- Capital allowances can be claimed on furniture and fittings
- Profits qualify for Business Asset Disposal Relief and other business reliefs

30
Q

What is a premium

A

A premium is an upfront payment for granting a lease

31
Q

What is a premium treated like for leases under 50 years

A

For leases under 50 years, a proportion of the premium is treated as property income and taxed accordingly

32
Q

How can you calculate taxable income for lease premiums

A

Taxable income = Premium X 50-Years of lease/ 50

33
Q

How can tax payers with oversee properties avoid being taxed twice

A

Taxpayers may claim relief under double taxation treaties to avoid being taxed twice

34
Q

When does a property loss arise

A

If allowable expenses exceed rental income, a property loss arises

35
Q

What does capital allowance provide for businesses and individuals on qualifying capital expenditure

A

Capital allowances provide tax relief for businesses and individuals on qualifying capital expenditure

36
Q

How does capital allowance deduct costs

A

Instead of deducting the full cost of an asset in the year it was purchased, the cost is written off over several years

37
Q

What are the key types of allowance

A

The key types of allowances are:
- Annual Investment Allowance (AIA)
- Writing Down Allowances (WDA)
- First-Year Allowances (FYA)

38
Q

What is the relief like on annual investment allowance

A

Provides 100% immediate relief on qualifying expenditure up to the AIA limit

39
Q

What is the AIA relief limit

A

The limit is £1 million per year

40
Q

What does AIA apply to

A

Applies to most plant and machinery, excluding cars

41
Q

What is expenditure added to if it exceeds the AIA limit or doesn’t qualify

A

If expenditure exceeds the AIA limit or does not qualify for AIA, it is added to a pool and written down annually

42
Q

What are the different pools for written down allowance

A
  • Main Pool
  • Special Rate Pool
43
Q

What is the rate in the main pool

A

Main Pool: 18% per annum for most plant and machinery

44
Q

What is the rate in the special rate pool

A

Special Rate Pool: 6% per annum for specific assets, including:
- Integral features
- Long-life assets
- Thermal insulation of buildings

45
Q

What relief does first year allowance offer

A

Offers 100% relief for specific types of expenditure in the year of purchase

46
Q

What are some assets and circumstances that have unique rules for capital allowance

A

Certain assets and circumstances have unique rules for capital allowances:
- Cars
- Short-Life Assets
- Structures and Buildings Allowance (SBA)
- Research and Development (R&D) Allowances

47
Q

What relief do cars qualify for

A

Cars do not qualify for AIA, but they can qualify for WDA or FYA, depending on their emissions:
- 0g/km CO₂ emissions: 100% FYA
- 1–50g/km CO₂ emissions: 18% WDA (Main Pool).
- Over 50g/km CO₂ emissions: 6% WDA (Special Rate Pool)

48
Q

How are assets with an expected useful life of 8 years or less treated

A

Assets with an expected useful life of 8 years or less can be treated separately from the main pool

49
Q

What does SBA provide relief for

A

SBA provides relief for the construction or renovation of non-residential buildings

50
Q

What is SBAs relief rate

A
  • Relief is given at 3% per year on a straight-line basis, over 33⅓ years
  • Applies only to costs incurred after 29 October 2018
51
Q

What is the relief available for R&D

A

100% immediate relief is available for expenditure on R&D

52
Q

When is an asset disposed

A

When an asset is sold, scrapped, or no longer used for business purposes

53
Q

When is a balancing allowance allowed

A

If the sale proceeds of an asset are less than its tax-written-down value the difference is allowed as a balancing allowance

54
Q

When is a balancing charge used

A

If the sale proceeds exceed the tax-written-down value, the difference is added back to taxable profits as a balancing charge

55
Q

What happens to the disposal proceeds for pooled assets

A

For pooled assets the disposal proceeds are deducted from the pool balance

56
Q

What is it treated as if the pool balance becomes negative

A

If the pool balance becomes negative, the negative amount is treated as a balancing charge

Level 5 Business Tax Planning (12 decks)

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