Personal tax Flashcards
allowable deductions must be
 incurred wholly exclusively and necessarily in the performance of employment, duties, 
occupational pension schemes
run by employer, deducted from employee pay under a net pay arrangement, gross contributions, relief at source
personal pension scheme
taxpayer pays net amount into a pension scheme after tax, relief obtained by extending basic rate band
GAYE- Give as you earn
deducted from earnings, before tax, tax relief at source
gift aid
relief is given via extension of BR band, net payments after PAYE tax deducted
qualifying travel
expenses
deductible if business travel or travel to temporary place of work (24 months max)
allowable mileage rates for a car/van
First 10k is 45p a mile
After that it’s 25p a mile
If employer pays more than HMRC mileage rate..
The difference is a taxable benefit
If employer pays less than HMRC mileage rate..
Difference is tax deductible
Mileage rates per passenger
5p a mile
Mileage rates for motorbike
24p a mile
Mileage rates for bike
20p a mile
subsistence, tax deductible?
Expenses incurred staying away from normal workplace are allowable
entertainment, tax deductible?
Entertaining clients allowable IF reimbursed by employer
professional fees and subscriptions
If employee pays for one relevant to work this is an allowable deduction
If employer pays the benefit and cost will be matched
If expenses are reimbursed by the employer
ALLOWABLE means automatic exemption
NOT ALLOWABLE means the reimbursement is taxable on the employee and added onto employment income
How can tax planning reduce income tax liability
take advantage of exempt benefit
lower co2 emissions, repay fuel
don’t contribute more than 5k to a car
take advantage of allowable deductions
increase BIKs as there’s no NICs
Tax rates - Employment income
Basic rate 20% (up to £37500)
Higher rate 40% (£37500-150000)
Additional rate 45% (£150000+)
property income comes from
rent of land
rent of property
can be residential or commercial
what basis of assessment is used for property income
If under £150k - Cash basis or opt for accrual
If over £150k - accruals basis
When can you get relief on furniture or furnishings for property
If it’s a like-for-like replacement
Property allowance
If expenses are under £1k can claim a property allowance of £1k and deduct from income INSTEAD of expenses
How to treat property losses
Immediate loss relief (offset current year) THEN carry forward
tax planning - property income
partner with lowest tax rate to have ownership
enough income to utilise personal allowance
utilise losses
Sources of interest (non savings income)
Bank & Building society
National savings & investment accounts
Investments in gilts (gov securities)
Loan stock in companies
Savings allowance and tax rates
0% savings allowance:
BR taxpayer - first £1k
HR taxpayer - first £500
AR taxpayer - nothing tax free
dividend allowances
First £2k dividends are tax free for everyone
dividend tax rates
BR £1-37500 @ 7.5%
HR £37501-150000 @ 32.5%
AR £150001+ @ 38.1%
Tax free investments
ISAs - Individual savings accounts
NS&I - National savings and investments certificate
Other exempt income..
Statutory redundancy pay
Income from NSI Certs
Winnings
Scholarships and educational grants
Child benefit
Personal injury interest
Sharesave interest
Local authority grant
Income tax repayment interest
Tax planning - Investments
Invest maximum into ISAs
Invest in tax free eg premium bonds
Lowest rate taxpayer in a marriage to receive
Offset and utilise pa
Types of taxable income
Non savings
Savings
Dividends
Personal allowance for this exam and order in which it is applied
£12500
Non savings then savings then dividends
What act does the personal allowance change under
finance act
what order does tax get calculated in
non savings
savings
dividends
when can the BR band be extended
gift aid
personal pension contributions
how does gift aid extend the BR band
BR BAND 37500 + GROSS AMOUNT
how does gift aid work
you make a net donation of 80%, HMRC top this up by 20%
personal pension contributions and the BR band
extends by the grossed up amount
maximum personal pension contributions to get tax relief
The greater of:
£3600 and 100% of earnings
Capped at 40% for full relief
who pays national insurance
Over 16 years old
Sole trader earning over £6475
Employee earning over £9500
difference classes of national insurance
class 1
class 2
class 3
class 4
who is class 1 NI payable by
employees and employers
who is class 2 payable by
sole traders and partnerships with profits over certain level
who is class 3 payable by
voluntary
who is class 4 payable by
sole traders and partnerships over certain profits
EE and ER NICs
Primary class 1 are deducted from EEs pay
ERs pay secondary class 1 on the EEs cash earnings
ERs also pay class 1a on EEs non cash earnings eg BIK
how to calculate gross earnings for NICs
Before allowable deductions, including cash equivalent benefits and excluding non cash equivalent benefits
class 1 secondary contributions and employment allowance
Pay 13.8% on gross earnings over £8788 with no limit
In 20/21 there’s an employment allowance of 4k
There is only a capital gain when there has been a…
chargeable disposal by a chargeable person of a chargeable asset
chargeable disposals occur on..
sale of an asset
gift of an asset
when assets are lost or destroyed
gifts on death are exempt from CGT
gifts that are exempt from CGT
gifts on death
gifts to spouse (no gain no loss)
gifts to charities
chargeable person
an individual
chargeable assets and exempt assets
EXEMPT ASSETS ARE:
cars
gilts
residents own home
wasting chattels (life under 50yrs)
non-wasting chattels (less than £6k)
qualifying corporate bonds
gambling
ISAs
medals
foreign currency
gold sovereigns
How to calculate CGT
gross proceeds / mkt val minus incidental costs of sale = net proceeds
net proceeds less: cost, enhancement expenditure, incidental costs =
chargeable gain / loss
gross proceeds
sale value (or market value if disposal is a gift or sold to connected party)
incidental costs of sale
costs incurred which are necessary to make sale
enhancement expenditure
capital expenditure that increases the value of the asset and is still intact at disposal
chargeable gain
gain after deducting allowable expenses
when do you pay CGT
On gains where disposal has occurred within the tax year, payable at 31st January
What is the rate of CGT dependent on
The taxpayers income (BR, HR, AR)
Rate of CGT either 10% or 20%
annual exempt amount for CGT
£12300 for CGT
Only used to bring gains to £Nil, not create a loss
CGT and losses
current year losses HAVE to be offset in year
whereas with brought forward losses you can choose how much to use (i.e only enough to still utilise annual exemption)
how to work out a part disposal (cgt)
Original cost X (A/(A+B)
A is market value of part disposed of
B is market value of remaining part of asset
Connected parties and CGT
The proceeds are deemed at market value always
Losses can only be carried forward against gains with the same connect party
Disposals to spouse or civil partner
no gain no loss
proceeds = cost
cost transferred over
chattels and the two types
chattels are tangible moveable objects
non wasting (over 50yrs life)
wasting (under 50yrs life)
What types of chattels are exempt from CGT
wasting
and non wasting under £6k
card
CGT treatment of non wasting chattels
look at the cost and proceeds:
IF both are under 6k = exempt
IF both more than 6k = normal CGT
IF one above and one below = special rules (in reference material)
special chattel rules
cost under 6k, proceeds over = LOWER of normal gain or 5/3 x (proceeds-6k)
cost over 6k, proceeds under = restrict loss proceeds are 6k
What is PPR
principal private residence
What is PPR relief
- normally eliminates charge to CGT
- dependent on periods of occupation during ownership of property
How to calculate principal private residence relief
calculate the normal CGT first
IF ppr for whole ownership = exempt
IF never occupied = full CGT
IF part occupied = pro rata
When can a PPR deemed occupied
Taxpayer must’ve occupied PPR at some point
What periods are deemed occupation
9 months prior to disposal if after 06/04/20
18 months prior to disposal if before 06/04/20
Periods where taxpayer is working overseas
Periods where taxpayer working elsewhere in UK up to 4 yrs
Periods where taxpayer was self employed and working elsewhere up to 4 years
Periods up to 3 years
What are the matching rules for shares (the order)
Same day
Next 30 days
Share pool
FA 1985 Share Pool
Pools together purchases of shares in the same company
Needs date, number, and cost columns
How to calculate disposal from share pool
Disposal =
Cost of pool x (Shares disposed / total shares in pool)
Bonus Issue
Free shares given in proportion to existing shareholding
NO cost, Shares imcrease
Rights Issue
Shares given at a lower cost to existing shareholders, amount determined in proportion to existing shareholding
Inheritance Tax
Tax on the transfer of wealth
Can be charged on certain gifts made during an individuals life / result of death
lifetime tax
Can be charged on the transfer or gift of certain assets called chargeable lifetime transfers
What can death tax be charged on
transfer / gift of assets made in the 7 years prior to death
value of assets being transferred at time of death (in death estate)
What assets are liable to tax if the taxpayer is UK domicile
Liable to inheritance tax on their worldwide transfer of assets
When is an individual deemed UK domiciled
Condition A - Born in Uk, domicile of origin Uk, resident in UK for 17/18 or later
Condition B - When they’ve been a UK tax resident for 15 of the last 20 years immediately prior to the tax year
exempt transfers
transfers to spouse / parter
transfers to charities / political parties
what is the value of transfer (inheritance)
measured as the fall in wealth of the donor
Fall in wealth
Referred to as the diminution of value in the donors estate
How to value shares (inheritance etc)
the LOWER of:
- the quarter up value
- average of highest and lowest marks bargains
How to calculate the quarter up value
Lower quoted (bid) price + (higher quoted price - lower quoted price) x 1/4
how to calculate average marked bargain value
highest marked bargain + lowest marked bargain / 2
When is there no transfer of value
When there is no gratuitous intent
Payment is for maintenance of family
Types of lifetime transfers
PETs - Potentially exempt transfers
CLTs - Chargeable lifetime transfers
Potentially exempt transfers
No lifetime tax on PETs
Only chargeable to death tax if the donor dies within 7 years after the transfer
Exempt if donor survives
Chargeable lifetime transfer
- gift to a trust
- appointed as trustee to look after the beneficiary assets
- lifetime tax is 20% if trustee pays, 20/80 if donor pays tax
- always assume the donor pays the tax
Small gifts exemption against lifetime transfers
Small gifts up to £250 per donee each tax year to individuals
IF one exceeds £250, whole exemption doesn’t applt
Marriage exemption (lifetime transfers)
£5000 parent to child
£2500 from grandparents
£2500 by one party of marriage
£1000 anyone else
Annual exemptions (lifetime transfers)
£3000 - first 3k of value transferred is exempt and set against first gift
use this AFTER other exemptions
C/F up to one year only and use last
Exempt transfers of value
Normal expenses out of income
Typical payment over years
Made out of income
Don’t affect transferors standard of life
Calculation of lifetime tax
Nil rate band - 0%
Excess - 20%
What is Nil rate band (lifetime tax)
£325000 for 20/21 year
0% where value of accumulated transfers in 7 years prior to transfer doesn’t exceed it
What is lifetime tax charged on
20% on value representing fall in wealth of donor
Steps in calculating lifetime tax
- deal with transfers in chronological order
- ignore exempt transfers
- value transfers
- deduct marriage and annual exemption
- if PET = ignore for now
-Calculate tax on CLTS
What is death tax payable on
Lifetime gifts made within 7 years prior to death
Death estate
Who’s responsible for paying death tax on gifts
Donee (received it)
What does taper relief refer to
Reduces IHT due on death if donor survives at least 3 years after making the gift
% depends on the number of years
Applied AFTER tax has been deducted
Death estate
Assets and liabilities at time of death
Transfers to people in will
No exempt assets
Exempt transfers = to spouse / charities / political parties
Legal debts are deductible
Tax on the death estate
After any gifts within 7 years
Charged at 40% after deductions, remaining nil rate band and additional res nil rate band
When can additional residential
Nil rate band be deducted
£175000
Provided the deceaseds home is in the estate and left to direct descendanf
Who is death tax paid by
Residuals legatle (final named beneficiary) using value of assets
Payments of lifetime tax
Transfers between 6th April - 30th Sept = next 30th April
Transfers between 1st Oct - 5th April = 6 months later
Death tax payments
6 months after death
