Questions Flashcards
Advantages of a property which qualifies as a furnished holiday let
Income is treated as trading income; loss relief available
CGT rollover relief available is property sold and another purchased
Holdover relief is available on disposal of property
Business asset disposal relief available on disposal
How does a offshore fund obtain and keep its reporting status
Can apply to HMRC for reporting status
Must report details of all its income to HMRC and inform investors of their share of funds income for their tax return
Fund retains status as long as it complies with the rules
Impact of bankruptcy on the trust
If beneficiary trust itself is not directly affected
If they have a right to income or capital, trustee in bankruptcy can claim this
If discretionary trust, trustees can use their discretion and not make a payment
Main duties of a trustee
Must hold title to the trust property
Have a duty to maximise the return on trust fund and use utmost diligence to avoid loss
Keep property accounts of all trust property
Provide beneficiaries with information
Carry out their duties with a duty of care
Act in the way and ordinary prudent business person would be expected
Make the same types of investments if they owned the propert
Invest in line with the term of the trust
Have a regard to the suitability of investments and diversification
Obtain and consider proper advice from a qualified person
Review the investments regularly and vary if appropriate
Avoid conflicts of interest
Ongoing requirements that EIS must satisfy in order to receive favourable tax treatment
Gross assets of not more than 15m before investment and no more than 16m after
Be permanent establishment in uk
Be unlisted when EIS shares are issued
Fewer then 250 full time employees
Raised no more than 5m under the EIS
Carry on a qualifying trade
Explain who is responsible for reporting and payment of IHT and when this must be done
Personal representatives must make an IHT return to HMRC within 12 months
Personal representatives responsible for paying the tax on the estate
IHT must be paid by end of the 6th month
State conditions which must be met to qualify for a furnished holiday let
Available to let for 210 days a year in tax year
On a commercial basis to public
Let for 105 days a year
Up to 31 days at a time
Explain the options you have to delegate powers with reference to the Trustee Delegation Act 1999 and Trustee Act 2000
Trusteee can delegate all their powers to an attorney by power of attorney under the trustee delegation act 1999
The delegation can be for a period of not more than one year
Under trustee act 2000, can delegate powers to an agent with exception of distribution of trust assets, how fees are dealt with, appointment of new trustees or delegation of trustee powers
Provided a duty of care has been exercised when appointing an agent, the trustee is not liable for loss
Describe in detail the duties of the trustees with regards to the investment of monies in the trust
If any cash comes into the trust the trustees have a duty to invest it wisely and appropriately
Under the Trustee Act 2000 trustees can make the same type of investment as if they owned the property outright
Trustees must make sure that they invest trust money properly and monitor the investments regularly
The trustees are in breach of their duties
In exercising their investment powers trustees must take account of the standard investment criteria
Suitability of the investment
Need for the diversification
Obtain proper advice
Chargeable life time transfer does not reduce NRB when?
When calculating tax on the estate of transfer was more than seven years ago
Explain who is responsible for the reporting and payment of IHT and when this must be done to avoid any penalties.
The personal representatives estate must make an IHT return to HM
Revenue & Customs
within 12 months of death.
The personal representatives are responsible for paying the tax on the estate.
IHT must be paid by the end of the 6th month after Aled died.
The personal representatives will be liable to pay the tax on the PET if not paid
When to register trust that are not taxable with trustee registration service
On/before 6 oct 2020 - on or before 1 sep 2022
After 6 oct 2020 - register within 90 days being registered
When to register taxable trusts for trustee registration service
On/after 6 April 2021 - within 90 days
Before 6 April 2021 - on or before 5 October
State the factors the trustees should consider when investing the cash held within a trust.
• Trust provisions/rules.
• Tax position of the trust/beneficiaries.
• Timescales/age of beneficiaries.
• Income/capital requirements.
• Attitude to risk (ATR).
• Trustee Act 2000/standard investment criteria/diversification.
• Ethical preferences.
• Economic/market conditions.
Describe how exit charge calculate if capital distributions made within first ten years of being created
An exit charge will be payable on any distributions after 2 years of the date
death.
The effective rate of tax is calculated first on the basis of 30% of the lifetime rate/20% charged on a hypothetical transfer on the date of death l
• The exit charge is the amount of the distribution multiplied by the effective rate Reduced by number of quarters since trust was created
Tax advantages using a FHL compared to buy to let
• Profits count as UK relevant earnings when making pension contributions.
• CGT rollover relief/holdover relief may be available.
• Business asset disposal relief may be available on disposal.
• IHT Business Relief (BR) may be available after 2 years if ‘additional services’ are provided.
• Full mortgage interest relief available for FHL
• compared to buy to let (BTL) which is limited to a basic rate deduction.
Averaging election FHL
If you let more than one property as a FHL, and they don’t meet the letting condition you can average it out over the properties
Implications of divorce on a will
Will remains valid
Ex partner treated as if they died on date marriage legally ended
They can’t benefit from the Will
Unless clause that states they can
Estate distributed with rules of intestacy
Ex can’t be a executor
Options for a Child trust fund if they don’t take control at age 18
CTF provide must place in a protected account
With tax advantages status
Can be matured CTF or ISA
Offered by the original CTF provider
No new subscriptions accepted
Explain options if a child takes control of child trust fund at age 18
Can en cash the account
Transfer account to ISA
Transfer amount disregarded for ISA subscription limit
Consequences of losing mental capacity with no LPA
• It would not be possible to set up new LPAs for Arnold once he has lost mental capacity.
• There would be no one who had legal rights to make decisions about his financial affairs or health and welfare.
• If Tom/Betty wished to make decisions about Arnold’s financial affairs or health and welfare they would have to apply to the Court of Protection (COP) for the power to make decisions.
•
•
The COP will grant a financial affairs deputyship
Benefits of setting up LPA
Will be valid / can’t be challenged
Can specify who they want as attorney
Can state any instructions to be placed on attorneys
Attorneys have legal right to make decisions
Attorneys only have right to make decisions after they loose mental capacity
How a claim for special taxation treatment is made for vulnerable beneficiary trust
Complete a VPE1 form
Send to HMRC
All affected must sign
Rules for CGT deferral to SEIS
Reinvestment must take place in same year the gain arises
Relief can be carried back to the year of gain
50% CGT exemption on gains that are reinvested in SEIS
Relief restricted to 100,000 of gains re invested in each tax year
Explain responsibilities representatives have for reporting and payment of IHT on estate
Calculate net value of estate
Report to HMRC
By completing IHT400
Within 12 months of death
Any tax paid by end of 6th month after death
Explain the impact of death on tax treatment of their ISA
le ISA will become a continuing ISA
til it is closed by the executorsr
Or the administration of the estate is completed
otherwise the ISA provider will close the account 3 years and 1 day after died.
The account will retain its tax advantages
lthough the value will still be included in estate for IHT purposes.
How to use a power of attorney to delegate powers whilst abroad
He could appoint an attorney under a General Power of Attorney
in accordance with S25 Trustee Act 1925
to delegate some or all of his trustee functions for a maximum of 1 year.
Notice must be served within 7 days of its execution
to the appointor/other trustees
with details of the reason for the delegation.
Implications on trustee if become non resident
Can continue to act as a trustee unless remain outside UK for longer than 12 months
In which case other trustees could remove and replace as trustee
Under s36 trustee act 1925
Process followed by a bond provider when reporting a chargeable gain
Chargeable event date is day of surrender
Bond provider send details of any gain they calculate and informs
Bond provider informs HMRC
How are chargeable bond gains reported and process to calculate any tax due
Reports gain via self assessing
Is taxable in tax year it occurs
Tax paid by 31 January in the following tax year
State when a loss following a disposal needs to be reported to HMRC
Disposal proceeds are more than 4x the annual exempt amount
The tax payer wishes to set the loss off against chargeable gains
Five advantages and disadvantage of a discounted gift trust
Advantages
Ability to make immediate gift for IHT purposes
Retain a regular payment stream / could take withdrawals up to 5%
Without the GWR/POAT rules applying
Investment growth outside estate
Entire gift outside of estate after 7 years
Disadvantages
Loss of access to capital
Inflexibility with payments
Fund could be exhausted before dead
Withdrawals become chargeable after 20 years if in bond
Periodic/exit charges could apply
Explain how loan trust will be dealt with following death
Outstanding loan would form part of the estate
Trustees of estate must pay back the outstanding loan
The growth outside the estate can be distributed / can continue
Conditions for MIP to be classed as qualifying policy
Term must be 10 years or more
Premiums must be paid yearly or more frequently
Premiums paid in any 12 months period must not exceed twice the premiums in any other period
Sun assured must not be less than 75% of premiums payable during the policy term
Gain realised on enchantment would be tax free
Explain how state pension entitlement will be calculated
Entitlement is based on national insurance record
Max is 35 years
Subject to a minimum of 10 qualifying years
Be based on a starting amount
Explain why you would recommend they set up spousal bypass trusts to receive the pension fund on first death, rather than rely on a nomination form to direct the death benefits.
- Spousal bypass trusts allow the member to be sure that the surviving spouse is provided for via withdrawals and/or loans.
- The member can choose the trustees, one of which could be the surviving spouse.
- Spousal bypass trusts ensure that the member’s child can receive the benefits on second death (the spouse cannot take the whole payment as a lump sum).
- Nomination forms can be changed after the first death by the survivor.
- Trustees /scheme administrators are not obliged to follow the instructions on a nomination form and as a result the funds could be paid to someone other than the surviving spouse/child.
Describe the tax treatment of the pension funds at the point they are paid into a spousal bypass trust, at whatever age the member may die.
- If the member dies before age 75 funds will be paid into the spousal by-pass trust tax free if the payment is made within the two-year window (if not the payment is taxable at 45%)
- If the member dies after reaching age 75 the funds are subject to a 45% tax charge.
Explain how any Inheritance Tax due could be met if insufficient liquid assets are immediately available and what the consequences are of delayed payment.
Borrow against the value of assets/use own assets.
* Apply to investment provider/Debt Management Office to use assets to pay IHT directly to HMRC.
* IHT may be paid by transferring national heritage property (the artwork) to the Crown.
* It could be paid in instalments over 10 years/10% each year if house is kept and lived in.
* If it is not paid by the due date interest will be charged/financial penalties.
Explain how bankruptcy would effect individual from limited company
Limited liability to value oft heir shareholding
personal assets protected as long do not give any personal guarantee or negligent
restrictions imposed on them as director
Describe the treatment of reporting and non reporting offshore funds
Reporting funds
must report details of all income (both distributed and accumulated) to HM Revenue & Customs.
must include all types of income on her return.
Dividends are taxed at dividend rates - &75%, 33.75%, 39.35%.
The 2,000 dividend allowance can be used.
Interest distributions are taxed at 0% starting rate, 20%, 40% and 45%.
The Personal Savings Allowance/Personal Allowance can be used.
When disposes of the fund, growth is subject to CT in the normal way at10% or 20%.
Non reporting funds
Non reporting funds do not report any income to HM Revenue & Customs.
On disposal of the non-reporting fund the gain (plus any accumulated incon treated as an offshore income gain/subject to Income Tax.
The gain is calculated on CT principles, but the annual CGT exempt amount is not available.
Two ways to report CGT gain
Via the real time CGT service or via self assessment returb
Explain how to defer state pensions and what you’d receive
Must defer for at least 9 weeks to receive increase
Rate of increase is 1% for every 9 weeks deferred (5.8% a year)
Cannot take the deferred amount as a lump sum
State requirements that must be met for property to be considered a furnished holiday let
• It must be available for rent on a commercial basis.
• It must be available to rent to the public for a minimum of 210 days per tax year and let for a minimum of 105 days.
• It cannot be in longer term occupation for more than 155 days with longer term occupation being periods of more than 31 days.
• The property must be furnished.
Explain in detail the potential benefits of letting the property as a furnished holiday let
• Profits are considered relevant earnings for pension purposes.
• A loss in a tax year can be offset against FHL profits in future tax years.
• If sells the property, can claim business asset disposal relief;
• if owned the property and it has met the conditions to qualify for at least;
• two years.
• CGT will be at a rate of 10% even if she is still a higher rate taxpayer.
• Holdover relief may be available.
• can claim business asset rollover relief;
• and defer the gain by reinvesting the proceeds of the sale into another qualifying asset.
• can claim plant and machinery capital allowances for furniture, equipment, fixtures etc.
Income tax relief is available on all borrowing costs.
Potential tax benefits of trustees and beneficiaries of payments from trust are made using OEICS
Benefits to the trustees:
• Trustees can apply for holdover relief on transfer of capital to a beneficiary avoiding the need to pay CGT within the trust.
Benefits to the beneficiaries:
• Capital payments can be offset against beneficiary’s CGT annual exempt amount;
• Beneficiaries can use their personal allowance against income paid from the trust.
• Within these allowances the payments from the trust are tax free/tax paid within the trust can be reclaimed.
Explain how the tax pool operates within discretionary trust
(il) • The tax pool is a record that the trustees need to keep, to show the difference
between the total income tax entering the tax pool that tax year and the total value of the 45% tax credits attached to income payments to beneficiaries that year.
• Tax paid by the trustees enters the pool - this can vary between 8.75% and 39.35%.
When the trustees pay income to beneficiaries the amount in the tax pool is reduced by the value of the 45% tax credit for each payment.
• The tax pool is what’s left at the end of the tax year of the tax paid by the trustees.
• This is after the 45% tax credits on any payments to beneficiaries have been deducted.
• Any balance is carried forward to the next tax year and can be offset against payments then.
• A shortfall can arise where the amount of tax credits on payments to beneficiaries exceeds the amount available in the tax pool.
• This can happen when some of the income received falls within the standard rate band and is taxed at 8.75%.
• If the pool is in debit, then the trustees must make a payment to HMRC to cover the difference.
SDLT for discretionary trust buying property
If a trustee of a discretionary trust buys a property, the purchase is treated as if it were made by a company (rather than an individual).
The trustees will be liable for the SDLT.
The higher rates of SDLT will apply to the purchase price of £180,000; up to £125,000 x 3% and £55,000 × 5%
To avoid higher rates could buy through bare trust
To avoid the higher rates of SDLT the property should be bought through a bare trust for Miles.
Outline circumstances which employee could petition employer for bankruptcy
Employees would have to prove that individual is unable to pay his debts and that they are owed at least £5,000 in unsecured debt/unpaid wages.
They would also have to demonstrate that they had not complied within 3 weeks with a ‘statutory demand’ or they have obtained a judgement and are still unable to recover either in full or in part the money owed.
State the impact of insolvency on someone, had they originally established the business as a limited company.
They would have limited liability to the value of the shareholding.
The personal assets would be protected as long as they had not given any personal guarantees or been negligent.
They would have restrictions imposed on them following the failure of the business.
Describe briefly, the disclosure of tax avoidance schemes rules that will apply to both John and the provider of the scheme.
The provider must disclose the arrangement to HM Revenue & Customs (HMRC).
HMRC will give the provider a reference number for the scheme.
The provider must give HMRC quarterly lists of clients using the scheme.
John must show the scheme reference number on his UK tax return.
The reference number does not mean that the scheme is approved by HMRC; but it brings it to the attention of HMRC early, so it can block it.
Explain the steps that Elizabeth must follow in order to set up and register a charitable trust.
abeth must apply to register with the Charity Commission if its income will be at st £5,000 per year (or it’s a charitable incorporated organisation (CIO)). ide on the charitable purpose and write a governing document to explain how the rity is run.
d and appoint trustees.
cide how the charity will be funded e.g. investments.
• charity can be registered with HMRC to get tax back on things like Gift Aid nations.
(d)
Explain to Amy how an interest-free employer loan is treated for Income Tax purposes, should she decide to take this to help lan re-train. No calculation is required.
• Amy will be taxed on the benefit she receives/treated as benefit-in-kind.
• Based upon official rate given by HM Revenue & Customs;
• as Amy will not pay any interest she will be taxed on the amount borrowed at 2%.
• If the loan does not exceed £10,000 it is not taxable.
State the conditions that need to apply to enable Carol to use a disclaimer on her share of her mother’s estate.
• Carol must not have already accepted the inheritance.
• Carol has 15 months to do so (must be done within two years of death).
• There must be no consideration for money or money’s worth.
• Carol must sign the disclaimer.
• It must contain a statement that the disclaimer affects Inheritance Tax as if the disclaimed benefit had never been conferred.
• The disclaimer is not treated as a transfer of value.
• The property is not treated as passing to Carol and passes back into the residue of the estate.
• The disclaimed inheritance will go to Amy and not Carol’s children.
Compare taxation treatment of a reporting fund with a non reporting fund
Reporting fund
• Subject to Income Tax on any income arising whether distributed or not.
• Dividends are treated in the same way as UK based funds/use of dividend allowance/same tax rates.
• Interest is treated in the same way as UK based funds.
• Any capital gains on sale are subject to the usual Capital Gains Tax (CGT) rules.
Non-reporting fund
• Gains on disposal, which includes accumulated income, calculated on CGT principles.
• But the annual exempt amount is not available.
The gain is taxed as income at 20%, 40% or 45%.
• The starting rate for savings income, the dividend allowance and the personal savings allowance are not available.
The process for establishing an Individual Voluntary Arrangement (IVA)
lan makes a formal proposal to his creditors that he will repay part or all debt.
lan must apply to the court,
and must be helped by an Insolvency practitioner.
Creditors meeting held and if 75% of creditors by value agree proposals an accepted.
All creditors are then legally bound by the lindividual Voluntary Arrangemen
(IVAL
The insolvency practitioner oversees repayments/ supervises him. lan may apply to the court for the grant of an interim order, this prevents creditors from proceeding with a bankruptcy petition.
An IVA usually lasts five years.
Explain how HM Revenue & Customs may treat a failure to report accurately a capital gain.
May charge a penalty/fine;
if they believe the inaccurate reporting is due to lack of reasonable care.
The penalty will be a percentage of the correct/tax due;
and will be increased if they believe the inaccurate reporting was deliberate.
Penalty may be reduced/waived if the individual concerned tells HM Revenue &
Customs about the error;
and cooperates with HM Revenue & Customs in establishing the correct tax payable
The tax due must be paid.
Implications of transferring portfolio into discretionary trust and subsequently for beneficiary
Candidates would have gained full marks for any seven of the following:
• Transferring unit trusts to a discretionary trust is a disposal for CT purposes on the settlor;
• taxed at their marginal rate of either 10% or 20%.
• A settlor can elect for holdover relief;
• as the gift is into a discretionary trust/is a chargeable lifetime transfer.
• Gain is held over instead of being charged to tax/CGT deferred.
• The trustees would be liable to CGT at 20% unless;
• they elect for holdover relief on the transfer out of the trust;
• with the beneficiaries agreement.
Effect of tax of a vulnerable person within a trust
Effectively both income and gains become taxed on beneficiary’s own position
Trusts qualifying for special treatment
Assets must only be capable of being used to benefit the minor child/disabled person whilst alive
Person must be entitled to income from trust if not entitled
Four advantages of an individual voluntary agreement (IVA)
- Debtor closely involved in process
- Bankruptcy restrictions avoided
- Avoid stigma and disqualifications of bankruptcy
4. - Cheaper than bankruptcy
Give five examples of dishonest or blameworthy conduct that may lead to a bankruptcy restriction orders (BRO) or undertaking (BRO).
- Not keeping proper accounts
- Excessive pension contributions
- Preferences and transactions at undervalue
- Speculation
- Failure to co-operate with OR / TIB
State how and when Hayden would register as self-employed for tax purposes.
• Hayden must register with HM Revenue & Customs for self-assessment
• and Class 2 National Insurance Contributions (NICs)
• by 5 October following the end of the tax year of his first year of self-employment/5 October 2022.
• Consider voluntary registration for VAT.
How Will IIP trust be treated in event of death of beneficiary for CGT and IHT
CGT
No CGT liability if not sold
Base cost of assets would be reset to market value - On date of death
If trustees sell assets within trust after death
Would be subject to CGT
IHT
Value of trust forms part of their estate
If exceeds NRB then subject to IHT and payable by trustees
How to make a reasonable financial provision on a will
• An application to the courts would be required
• on the grounds the Will did not make reasonable financial provision for them.
It would need to be made within six months of the Grant of Probate being issued.
Describe impact of pre owned asset tax
A charge to income tax would apply
Cash value of benefit
Added to income
Subject to a de minimum of 5000
Unless she elects for a gift with reservation
Process of gifting shares to charity
• Harish should first contact the charity to ensure it can accept the gift.
• If it agrees, he will need to sign a stock transfer form to put the shares in the charity’s name.
.
Tax relief/gift aid is available on this gift.
Rules if someone sells and try’s to buy back shares in short period
The disposal would be matched with any acquisition of the same shares within the same 30-day period.
The gain that would have been realised by Harish on the sale of the shares is treated as if it had not been made.
To be effective for tax purposes, the sale and repurchase must be separated by at least 30 days.
Is EIS income taxableb
Yes
Is VCT income taxable
No - dividends tax free
Is EIS IHT free
BPR relief 100% if held 2 years
Is VCT IHT free?
No, included in estate
Allowable loss selling EIS early
Value bought - value sold x 30% = tax relief that is not withdrawn
Allowable loss = disposal value - (value bought reduced by relief not withdrawn)
Do you pay CGT on AIM shares?
Yes
Are gilts IHT free
No
How is QSR applied on IHT estate question?
It is deducted off the total IHT liability at end
Explain how a period of grace election can be made and requirements to meet to qualify as a furnished holiday let
• As long as the pattern of occupation and availability conditions were met;
• You had a genuine intention to let the property in the year.
• It must have met the letting condition in the year before.
• You can make a second period of grace election if the property does not need the letting condition for the second year.
Debt relief order factors (updated)
The fact she cannot pay her debts.
She owes less than £30,000.
She does not own a vehicle worth £2,000 or more.
Her disposable income must be no more than £75 a month after tax, NICs and normal household expenses.
That she has lived or worked in England or Wales (within the last 3 years).
Whether she has been subject to another debt relief order (DRO) within the last 6 years (if so, she cannot apply for a DRO).
Factors to make property as main residence nomination succesful
A joint written nomination must be made, signed by them both.
It must be made within two years of their marriage/by 6 February 2024.
Factors HMRC take into account determining property regarded as main residence
• Where do they spend the majority of their time?
• Where are they registered to vote?
• Where are their places of work?
• How is each residence furnished?
.
Which address is used for correspondence with banks credit cards etc?
• Where are they registered with a doctor/dentist?
• Where are their cars registered/insured?
• Which address is the main residence for Council Tax?
What happens if a trustee tris to pay someone who is not a beneficiary of a trust
As Elsa is not a potential beneficiary/in the class of beneficiaries, this would be a breach of trust.
The beneficiaries (Anna and Becca) can take legal action against Sasha/the trustees.
The Court could order the trustees to compensate the beneficiaries for the appropriate amount plus interest or they could order the return of the money given to Elsa.
The trustees are personally liable.
Sasha could be removed as a trustee.
Anna is under 18 so does not have capacity to decide or contract/cannot buy the property with her mother.
AIM shares IHT?
Qualify for BPR relief held for 2 years
When to register taxable trusts created on or after 6 April 2021
Register your trust within 90 days of becoming liable for tax or on or before 1 sep 222
When to register taxable trust created before 6 April 2021
Register on or before 5 October in tax year after the one in which the trust both starts to receive income/ gains or becomes liable
Fine for not registering a trust on time
May have to pay a £5000 fine if fail to register on time / do not keep up to date
Retiring as trustees
• If Harry retains mental capacity; they can both retire as trustees;
• by executing a deed of retirement.
If Harry lacks mental capacity, Don can remove and replace;
• under powers given under Section 36 of the Trustee Act 1925 or;
• •
failing that a new trustee can be appointed by the Court.
Don would need to ensure he does not leave the trust without a tri
.
he would need to appoint new trustees/or a corporate trustee.
Vulnerable beneficiary income, CGT and IHT
Income tax - work out trustees income tax as if no special treatment then work out income tax vulnerable person would have paid if it was directly to them - the difference between these two is the amount they pay
CGT - as above, claim difference between amounts
IHT - treated as part of their estate
When must register for VAT
Must register if value of taxable supplies in last 12 months is more than £85,000 (or likely to be within 30 days)
Once registered can reclaim VAT on business purchases
Flat rate scheme
Allows small businesses to account for VAT as percent of taxable turnover
Keep difference between what they charged and customers pay to HMRC
Turnover must be less then £150,000
Collecting vat
Submitted and paid every 3 months
If regularly reclaim can submit and pay monthly
If annual value of supplies is 1.35mil or less can elect for annual return
