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ACCA ATX: Advanced Tax > Pensions & Other Tax Efficient Investment Products > Flashcards

Pensions & Other Tax Efficient Investment Products Flashcards

1
Q

True or False: Contributions to personal pensions can be ignored in the personal tax computation.

A

True: As contributions are made net of tax at 20%, basic rate taxpayers get full tax relief at source.

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2
Q

What are the two main implications of gross personal pension contributions and/or gross gift aid schemes?

A
  1. Extend the basic and higher rate tax bands

2. Affects the personal allowance calculation

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3
Q

How do higher rate taxpayers gain tax relief on pension contributions?

A

Additional Relief of 20% by extending the basic rate band:

£33,500 + (cash contribution * 100/80)

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4
Q

How do additional rate taxpayers gain tax relief on pension contributions?

A

Additional Relief of 25% by extending the basic rate and higher rate bands:
£33,500 * (cash contribution * 100/80)
£150,000 8 (cash contribution * 100/80)

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5
Q

True or False: If your employer pays into your personal pension you can no longer claim an exempt benefit?

A

False - an employer can pay into your personal pension and it is still an exempt benefit.

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6
Q

Name the two types of occupational pension schemes.

A
  1. Final Salary (defined benefit)

2. Money Purchase (defined contribution).

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7
Q

What are the features of a final salary (defined benefit) pension scheme?

A

Benefits guaranteed by employer

Pension and tax-free lump sum based on final salary and length of service.

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8
Q

What are the features of the money purchase (defined contribution) pension scheme?

A

No guarantee of benefits by employer

Benefits (within statutory maxima) are dependent on level of contributions and growth of fund.

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9
Q

How are occupational pension contribution reliefs claimed?

A

Taxed at source via PAYE deduction from salary.

NB: We do not gross up or extend the tax bands for occupational pension contributions.

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10
Q

Employer Contributions Facts

A
  1. Tax free benefit to any type of pension arrangement
  2. Deductible trading expense in employers tax computation
  3. Use up part of the annual allowance
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11
Q

What are the two main ways in which the government limits pension contributions?

A
  1. Maximum Contributions by the Individual

2. Annual Allowance

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12
Q

How are the maximum gross tax relievable contributions calculated?

A

Higher of:

  1. £3,600
  2. Individual’s relevant earnings chargeable to income tax
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13
Q

What constitutes relevant earnings for tax purposes?

A
  1. Employment Income
  2. Trading Income
  3. Income from FHL’s
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14
Q

What is the annual allowance for pension contributions?

A

£40,000

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15
Q

True or False: Employer pension contributions count towards the annual allowance?

A

True.

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16
Q

How many years can we carry forward any unused annual pension allowance?

A

3 years on a FIFO basis.

2017/18 first and then Y-3, Y-2, & Y-1

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17
Q

What is the condition that we are allowed to carry forward any unused annual pension allowance?

A

Must have been a member of a registered pension scheme within that tax year.

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18
Q

When is the annual allowance reduced?

Hint: 2 Income conditions must be met.

A
  1. When an individuals ANI is greater than £150,000 the allowance will reduce by £1 for every £2 the limit is exceeded.
  2. 5 * (ANI - £150,000) = reduction in allowance.
  3. When threshold income exceeds £110,000.
    (Net Income - Gross Personal Pension Contributions)
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19
Q

True or False: If an individuals ANI surpasses £210,000 the annual pension allowance is reduced to zero.

A

False: There is a £10,000 minimum annual allowance.

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20
Q

When a tax charge is imposed for exceeding the annual allowance limit, where do we see this in the tax computation?

A

Bottom half of tax comp as ‘top slice of tax’ and is taxed at the normal NSI rates subject to Basic/Higher/Additional Rates.

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21
Q

What is the pension lifetime allowance?

A

£1,000,000.

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22
Q

How much of a pension can be withdrawn tax free?

A

Upto 25%.

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23
Q

How is the non-withdrawn value of a pension fund taxed if 25% is taken tax free.

A

Taxed a regular pension income.

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24
Q

What happens if a pension fund grows beyond the lifetime allowance?

A

A charge is made on the excess:
Lump Sum is taxed at 55%
Pension Income is taxed lower at 25% as is taxable when drawn (lump sum will not be).

25
Q

What defines an EIS (Enterprise Investment Scheme) company?

A
  1. Must be a small & unlisted trading company
  2. Must carry out a qualifying trade
  3. Must have a permanent establishment in the UK to qualify for income tax relief.
26
Q

What activities are excluded from the definition of a ‘qualifying trade’ for the purposes of EIS?

A
  1. Dealing in land and property backed activities.
  2. Financial Activities
  3. Providing Accountancy or Legal Services
27
Q

What are the three beneficial schemes for tax reduction?

A
  1. Enterprise Investment Scheme (EIS)
  2. Seed Enterprise Investment Scheme (SEIS)
  3. Venture Capital Trusts (VCT)
28
Q

What are the key conditions that a company must meet in order to qualify as an EIS company?

A
  1. Gross Assets
29
Q

What are the key conditions that an investor must meet in order to qualify for the EIS?

A
  1. Subscribe for shares wholly in cash
  2. Not be connected to the company (i.e. not employed or holding more than 30% shares)
  3. Not hold any other shares in the company at the time an investment is made.
30
Q

True or False: Dividends from an EIS are fully taxable.

A

True.

31
Q

What are the three reliefs available from investing in an EIS?

A
  1. Income Tax Relief
  2. Capital Gains Tax Relief
  3. Reinvestment Relief
32
Q

How is income tax relief claimed via an EIS?

A

It is a tax reducer available on subscriptions of upto £1,000,000 in any tax year.

33
Q

Income tax relief if given as the lower of two amounts. What are they?

A

Lower of:

  1. 30% of the amount subscribed (upto £1m max.)
  2. Individuals income tax liability for the year
34
Q

For how many years can an investor claim to have some of the shares treated as previous tax years?

A

One. The previous tax year only.

35
Q

When is EIS income tax relief withdrawn?

A

When the shares are held for less than three years.

36
Q

In which two ways is EIS income tax relief withdrawn?

A
  1. If shares sold at a loss, we withdraw the lower of:
    a) Proceeds x 30%
    b) Proceeds x The Original Rate of Relief Obtained
  2. If shares are sold on a gain or the transaction is not at arms length, all of the relief is withdrawn.
37
Q

What is the consequence of EIS being sold at a loss for income tax relief purposes?

A

Any income tax relief not withdrawn will reduce the cost of shares and therefore reduce the capital loss available.

38
Q

How is Capital Gains Tax relief made on EIS?

A

Gain on sale of shares is exempt if held for three years.

Gain taxed normally if held for less than three years.

39
Q

How does EIS CGT relief impact capital losses and cost?

A

Capital losses are always allowable, but cost is reduced by EIS relief.

Loss can be relieved against general income in the same way as trading losses.

40
Q

What is EIS reinvestment relief and how long is the reinvestment period?

A

Is a deferral relief available when disposing of a chargeable asset and reinvesting the gain in the shares of a qualifying company.

It is a frozen gain that is only taxable when the shares are sold.

Reinvestment period is one year before to three years after disposal.

41
Q

What type of companies have Seed Enterprise Investment Schemes (SEIS) available to them?

A

Very small unquoted trading companies.

These are smaller than the EIS qualifying companies.

42
Q

What reliefs are available under the SEIS?

A
  1. Income tax relief
  2. Capital Gains tax relief
  3. Reinvestment Relief
43
Q

How is income tax relief claimed unders SEIS?

A

50% income tax reducer of the amount subscribed upto £100,000 max.

All or part of investment can be treated as if made in previous year.

44
Q

When is SEIS income relief withdrawn?

A

If the shares are sold within 3 years.

Transfers of shares between spouses are not treated as a disposal.

45
Q

How is CGT relief given under SEIS?

Same as EIS

A

Gain on shares exempt if held for more than three years.

Capital losses are always allowable with cost reduced by SEIS relief.

46
Q

When is SEIS reinvestment relief available?

A

Where an individual makes a gain in a tax year and invests in SEIS shares in the same year.

This is an exemption of 50% and is not a frozen gain like EIS.

47
Q

What are the key conditions for a company to qualify as an SEIS?

A
  1. Main purpose to carry on a new qualifying trade that has not been carried on for longer than two years at the date of issue.
  2. Must be unquoted with a PE in the UK
  3. Total value of company assets must be less than £200,000 immediately before the share issue
  4. Fewer than 25 full time employees
  5. Not previously raised money via EIS or VCT schemes
  6. SEIS investment upto three years prior to the date of investment must not exceed £150,000
  7. Lifetime cap of £12 million that the company can receive under EIS, SEIS and VCT,
48
Q

What are the key conditions for the shares when subscribing to an SEIS?

A
  1. Subscribed to wholly in cash and be fully paid up.

2. Issued to raise money for a qualifying business activity within 3 years,

49
Q

What are the key conditions for the individuals for a SEIS?

A
  1. Cannot be employees

2. Cannot hold more than 30% of the ordinary shares, voting rights, or be able to control the company.

50
Q

What are Venture Capital Trusts?

A

Quoted investment trusts set up to invest in unquoted trading companies.

51
Q

What is the subscription limit for VCT’s?

A

£200,000 per tax year

52
Q

How is income tax relief given on VCTs?

A

30% income tax credit of the amount of shares held (upto £200,000)

53
Q

When is income tax relief on VCT’s withdrawn?

A

If shares are disposed of within 5 years.

54
Q

True or False: VCT dividend income is tax free

A

True

55
Q

True or False: CGT is exempt with VCTs

A

False - CGT is exempt on both new and secondary purchases.

56
Q

Are capital losses allowable or dis-allowable for the purposes of VCT?

A

Not Allowable.

57
Q

What is the minimum holding period for shares under VCTs?

A

No minimum.

58
Q

What is the basic structure of a VCT?

A 
Shareholders
                    |
                 VCT
                    |
Individual EIS Companies

ACCA ATX: Advanced Tax (6 decks)

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