Module 1 Income tax Flashcards
What would qualify as a qualifying interest payment
Share purchase in the borrowers company or loans to the company
Partnership insurance
Purchase of plant and machinery for use in partnership
For payment of inheritance tax (relief restricted to a period of one year from making the loan
What are the limits for a qualifying interest payment
The deduction is limited to the higher of 25% of the individuals adjusted total income for £50,000 which ever the higher
What is adjustedtotal income
Total income plus charitable donations made via payroll minus pension contributions
What is adjusted net income in connection with the reduction of the personal allowance
Total income less deductions for loss relief and interest payments from which the gross amount of personal pension and gift aid contributions are deducted.
Personal allowance lost at a rate of £1 for every 2 £ above £100,000
Currently when the income is more than £125,000 the personal allowance is reduced to 0
Factors that HMRC may take into account to establish that someone is self-employed (8)
Contract for the provision of services rather than a contract of service
Individual has control
Individual receives a fixed price for the work regardless of the time taken
Entitlement to subcontract work
Risk – can make a loss as well as a profit
Ability to work for numerous people
Working at an expense
Provides own tools for the job
Any benefits provided e.g. sickness holiday
Quick description of overlap relief
Year one: the tax for the first year is the based on the profits for that text year (not the accounting year if that ends after the end of the first tax year sage I will August). Apportioned.
Year 2 to: the tax for the second year is based on the profits for the accounting period ending in the tax year. If that is not a full year it is based on the first 12 months profits. If there is longer than a year assessment is usually based on the profits of the 12 months ending on the accounting date
Some of year 1 may be taxed twice this is the overlap relief available in last year
What is property allowance in connection with rentals
You can get up to £1000 each tax year in tax-free allowances for property or trading income
If your annual gross trading or property income from one or more trades or businesses is more than £1000 you can use the tax-free allowance instead of deducting any expenses or other allowances
If your expenses are more than your income it might be beneficial to claim expenses instead of the allowances as the property allowance cannot create a loss
Quickly explain beneficial loans
The taxable value of beneficial loans in excess of £10,000 is based on the difference between the interest rate paid by the employee and the official rate (2.5% in 19/20)
Employee accommodation can be taxed if the rent is free or low unless the employee is classified as having an exempt occupation
Other than an exempt occupation how is the benefit taxed
Assessed on the benefit the employee receives by living in the accommodation – this is normally the annual rent
When the accommodation is owned by the employer and cost more than £75,000 there is an additional charge based on the excess of the cost of the property plus the cost of any improvements over £75,000
The charge is 2.5% of the XS (i.e. the official rate)
Explain tax on the trustee of an interest in possession trust
– Charged at basic rate i.e. 7.5% dividend income and 20% or other income
– no allowances
– no liability to the higher rate tax
– no relief for expenses of managing the trust that these are deductible in arriving at the beneficiaries income
– complete R185 and pass to beneficiary
Interest in possession trust – how are trustees expenses dealt with
Trustees not entitled to tax relief on expenses for managing the trust
Trust expenses are deductible in arriving at beneficiaries income
Higher /additional rate tax due by beneficiary is paid on income received after deduction of expenses
Interest in possession trust – how is beneficiary text
Text at beneficiaries rates with tax already paid by the trustees deducted from their liability/reclaimable as appropriate
Allowances can be used to offset any tax due
If trust income is paid directly to the beneficiaries rather than by the trust it is taxed as per bed trust
Note that parental rules apply and that if it is a settlor interested trust the trust income is taxed on the Settlor
Discretionary trust – how are trustees text
– Trustees have a standard rate band (£1000 spread across all sectors discretionary trust, minimum £200 to trust)
– income within standard rate band charged basic rate
– there after 38.1% for dividends or 45% or other income
– trustees expenses are allowable in calculating income chargeable
– expenses are set first against dividend income then savings then I’ll ring come
Dash expenses are gross stop at the right appropriate to the income they are set against
– the income so relieved to remind is chargeable at the same rate
Discretionary trust – how is beneficiary taxed
– Income paid out is trust income and carries 45% tax credit
– beneficiary with a lower rate of tax can reclaim this
– any reclaim made by completing form R40
– Because dividend income is only taxable at 38.1% but income distributed becomes trust income at 45% the trustees must pay the additional tax to cover the 45% tax credit – beneficiaries can only claim credit for tax paid by the trustees
– if trustees decide to accumulate income rather than pay out it is Carry Forward in a tax Pool
Discretionary trust – tax on the Settlor
Parental settlement and Settlor interested rules apply
