R03 Flashcards
What is the 6-step process for an income tax calculation?
- Add up all income that could be subject to income tax in the tax year (gross income)
- Deduct any reliefs (net income)
- Deduct personal allowance (taxable income)
- Extend the basic and higher rate bands (personal
pension contributions/gift aid donations) - Calculate tax
- Deduct any tax reducers
What are the 4 groups that HMRC split income into, in the correct order they are taxed?
- Non-savings income (earnings, pensions and rental income)
- Savings income (interest from banks/building societies, interest from fixed interest-securities and mutual funds)
- Dividend income
- Chargeable gains under non-qualifying life
policies
How can employment status be tested to determine whether an individual is employed or self- employed?
Contract of services Vs. contract for services
The degree of control the ‘employer’ has over the worker
Set hours or holiday pay indicates employed
Ability to take business risk indicates self-employed
Working wholly/mainly for one employer indicates employed
How are expenses treated for both self-employment and employment?
Self-employed expenses only have to be deemed wholly and exclusively for the purpose of business
Whereas employee expenses must be wholly, exclusively and necessarily incurred in the performance of the employee’s duties
A salaried member of limited liability partnership is taxed as an employee unless what?
Taxed under self-assessment if more than 20% remuneration is based on profits of LLP or they have a significant say in the running of the business or they have made a significant capital contribution to the business
What is the basis of assessment for self- employed people in their first tax year?
E.g. started trading on 1/07/2019 and have a 30th June accounting year end?
First year is based on the profits for that tax year
In the example, the first tax year is 19/20 and you would be taxed on everything from 01/07/2019 to 05/04/2020
What are the rules for overseas property income?
UK residents are taxed on global property income, whereas non-UK residents are taxed only on UK property income
What is the basis of assessment for property income and what expenses are allowable (deductions)?
Property accounts must be drawn up to the 5th April or 31st March
Deductions must be wholly and exclusively incurred for the property.
Allowable expenses include maintenance and repairs and furnishings provided by the tenant, but you cannot deduct home improvement expenses (e.g. a loft conversion)
Are interest payments normally paid gross or net?
Normally, interest payments and dividends are paid gross (i.e. no tax is deducted)
When must tax be deducted from annuity payments?
If the money used is not deemed to have had income tax charged to it then the payer must inform HMRC and make the payment net of 20% tax
If an individual receives income, where basic rate tax (20%) has been deducted at source, how is this dealt with on their tax return?
Where basic rate has been deducted at source, the gross income must be included in the individual’s self-assessment
The net amount is entered on the tax return, whereas the gross is used to calculate the individuals tax liability
What is the tax treatment of dividends?
All dividend income is received gross
Everyone is entitled to a dividend allowance of £2,000 Anything more than this, is taxed as follows:
7.5% for basic rate taxpayers
32.5% for higher rate taxpayers
38.1% for additional rate taxpayers
For which amounts is tax relief given by a reduction in an individual’s income?
Qualifying interest payments
Allowable business losses
Gifts to charities of shares and securities
Qualifying contributions to occupational pension plans (if relief not given at source)
Some retirement annuity plans (if relief not given at source)
Interest on qualifying loans can be deducted from income for tax purposes. What are these qualifying purposes?
Purchasing shares in the borrower’s company or to finance loans for the company
Investing in a partnership
Purchasing plant/machinery to use in a partnership
To pay inheritance tax
What is the maximum amount of interest and allowable business losses that can be deducted from total income?
Capped at the higher of £50,000 or 25% of a person’s adjusted total income
Can interest on loans used to purchase or develop land/buildings be deducted from total income in order to give tax relief?
Interest on a loan used to purchase or develop land/buildings is not a deduction from total income
If the property is non-residential and is let, interest is an allowable deduction for the property letting account
What are the 3 main tax-efficient ways of making charitable donations?
Gift aid
Payroll giving
Gifts of certain assets
How does tax relief for gift aid donations work?
The donation to charity is treated as a payment on which the donor has already paid tax at the basic rate (20%), the charity can then reclaim this tax
The value of the gift is grossed up (divide by 0.8) and the individuals basic and higher rate tax limits are extended by this amount
If a gift has been made to charity via gift aid what are the limits of any reciprocal benefits that can be received by the donor?
Any benefit received by the donor from the charity cannot exceed 25% of the first £100 donated and 5% of anything over, capped at a maximum of £2,500
How does payroll giving work?
It allows the donor to make donations directly from their salary to a charity. The employer deducts the donation from gross pay, so no tax is paid on the donation
What 3 ways can tax relief for relievable pensions be given?
Relief at source
Net pay arrangement
Relief by making a claim
What is classed as relevant UK earnings?
Profits from a UK self-employment or partnership
Earnings from a UK employment
Earnings from certain overseas crown employments
Earnings that have been subjected to UK tax
An individual is a relevant UK individual if they have what?
Have relevant UK earnings for the year
Are resident in the UK at some point in the tax year
Resident at some point during the 5 previous tax years and were UK resident when they joined the pension scheme
Who can contribute to a registered pension scheme?
Anyone who has relevant UK earnings can contribute to a registered pension scheme
Relevant UK individuals who have no relevant UK earnings can contribute up to £3,600 per year
Individuals who have relevant UK earnings can get tax relief on contributions up to the lower of 100% of their relevant UK earnings or £40,000
For how many years can the annual allowance for pension contributions be carried forward?
3 years
What is the lifetime allowance on an individual’s tax-exempt pension fund?
£1,073,100
How does relief at source work for pension contributions?
Contributions are deducted from an employee’s net salary
The employer deducts only 80% of the total contribution from the employee’s salary, the scheme then adds an amount equal to basic rate tax relief
Higher and additional rate tax relief is given by extending the respective tax bands by the gross pension contribution (done via self-assessment)
How does a net pay arrangement work?
Contributions are deducted from an employee’s gross salary (i.e. before tax has been deducted). The employee then pays tax only on salary ‘net’ of the contribution
This means the employee automatically receives tax relief at their highest rate of income tax
Unless employee benefits have been payrolled, what is the name of the form that employers must complete for HMRC?
P11D
How are employee benefits taxed?
Employees are taxed on the cash equivalent of a benefit rather than on its second-hand value
This is the cost to the employer of providing benefit
Contributions made by the employee towards the cost are deducted
If an employee has use of an asset, how is the cash equivalent calculated?
The cash equivalent is the annual value of the use of the asset plus any maintenance costs
The annual value is 20% of market value when the asset was first provided
If benefit is rented by employer, the benefit is the higher of the annual value or rent paid
Name three examples of ‘in-house’ benefits?
Goods and services sold by the business that are provided free or at a discount to employees
Services and facilities provided in house
Assets used in the business made available for
For use of a company car, how is the taxable benefit calculated?
The benefit is calculated as a percentage of the list price of the car
The percentage is determined by the cars carbon dioxide emissions
Any discounts given to the employer are ignored but accessories are added
Are pooled cars classed an employee benefit?
Not classed an employee benefit as they are used by several people and not normally kept at employees’ home
How is the taxable benefit for free fuel for private use calculated?
The benefit is a percentage of a set figure announced each tax year, currently £24,600
The percentage that is used is the same as those for the car benefit charge
For ultra-low-emission cars, where CO2 emissions are between 1-50g/km and they have a fully electric range of over 130 miles, what is the percentage charge?
2%
What are the statutory mileage rates for an employee who uses their own car for business mileage?
For income tax purposes, the mileage rates that can be paid free of tax is 45p per mile for the first 10,000 miles, then 25p per mile thereafter
For NIC purposes, there is a flat rate 45p for all business miles
What is the basic rule for calculating the taxable benefit of employers providing living accommodation?
Employees incur a tax charge if the employer provides low-rent or rent-free accommodation
The assessment is based on the annual value. This is the rent that would be reasonably expected to be paid if the property were let, or the rent paid by the employer if this is greater
What are 3 ways an employee can avoid being taxed on the benefit of living accommodation?
The accommodation is necessary for the performance of the employee’s duties
If it helps the employee to perform their duties better
There is a threat to the employee’s security
What are 3 other taxable benefits?
Cash vouchers
Non-cash vouchers
Credit tokens (company credit cards)
Medical insurance
What are 5 benefits exempt from tax?
Group income protection
Provision of meals
Mobile phones
Long service awards
Suggestion schemes
Workplace childcare
What is the current personal allowance, and when is it reduced?
All qualifying individuals have an annual PA of £12,570 (there is no minimum age requirement)
It is reduced by £1 for every £2 an individual’s adjusted net income exceeds £100,000
If adjusted net income over £125,140 PA fully removed
What is adjusted net income (ANI)?
Adjusted net income is net income (total income less deductions for loss relief and interest payments) less the gross amount of personal pension contributions and gift aid contributions
How does the Marriage Allowance work?
An individual can transfer 10% of their personal allowance to their spouse/civil partner. The transferable amount is therefore £1,257
This is beneficial where one partner is a low earner and does not utilise their full PA
It can only be used if the receiving spouse/civil partner is a basic rate taxpayer
Those individuals with adjusted net income of between £100,000 - £125,000 fall into the ‘personal allowance trap’, how can this be avoided?
This can be avoided by reducing adjusted net income. The methods to do this are:
Use tax free investments, such as ISA’s, to turn taxable investment income into non-taxable income
Making pension payments (subject to relief at source) and making donations under gift aid
How much is the blind person’s allowance and how is it applied?
£2,520 is available to registered blind people resident in the UK. It is deducted from income the same way as the personal allowance
What are the 2 ways an individual can extend their basic and higher rate tax bands?
They can be extended by the addition of the gross value of payments into pension schemes (subject to relief at source) and donations to charity under gift aid
How much is the personal savings allowance?
For basic rate taxpayers, the personal savings allowance is £1,000, and for higher rate taxpayers, it is £500
Additional rate taxpayers are not entitled to a personal savings allowance
For the purposes of the personal savings allowance, what does savings income include?
Interest
Interest from purchased life annuity payments
Gains from life assurance contracts
Is tax relief given for maintenance payments made to a spouse/ civil partner?
No tax relief is given for most maintenance payments made to divorced spouses or children with one exception
When either spouse was born before 6th April 1935 and the payments are made to a divorced spouse, not the children
The relief is given at 10% on payments up to £3,510 per year
What is the £100 rule when thinking about the taxation of children’s income?
The £100 rule applies on income derived from an asset that the parent has given the child
Any income earned over £100, will be taxed as the parents (unless held in a JISA or a Child Trust Fund)
The rule only applies to parents, therefore investments provided by anyone else escape the rule, e.g. grandparents
How does the high-income child benefit charge work?
If one parent’s adjusted net income exceeds £50,000 and they or their partner is in receipt of the child benefit an income tax charge will apply
If one income is over £50,000, the charge is 1% of the family’s child benefit for every complete £100 of income over this
What is the current child benefit rate for the first and subsequent children in 2021/22?
£21.15 a week for the first child and £14 a week for each subsequent child
What are the three parties to a trust?
The settlor is the individual who creates the trust
The trustees are the legal owners of the trust property, who hold and administer it for the benefit of the beneficiaries
The beneficiaries are those who benefit from the trust once it has been established
What is the tax treatment of a bare/absolute trust?
The income is taxable as the beneficiary’s income at their marginal rate
The beneficiary is liable for the tax and has access to all their normal allowances
They must include the trust income on their self-assessment
How is a bare trust treated for a minor?
If a parent gifts money to an unmarried minor child (under 18) through a trust, the trust is treated as a settlor-interested trust. This means that the trust income is usually taxed as the parent’s income
The £100 rule applies
What are the two categories of vulnerable beneficiaries?
Disabled persons and relevant minors
A ‘disabled person’ is somebody who is eligible for some form of disability benefits (e.g. attendance allowance, disability living allowance etc.)
A relevant minor is a child who has not yet reached 18 and at least one parent has died
What is the income tax treatment for trustees with respect to life interest and IIP trusts?
Although the beneficiary entitled to the trust income is taxed on that income as it arises, the trustees are liable for basic rate tax on any income they actually receive (paid on behalf of the beneficiary)
Savings income is taxed at 20% without the personal savings allowance
Dividend income is taxed at 7.5% without the use of the dividend allowance
Any other income received is taxed at 20%
Trust expenses for an IIP trust have the effect of reducing the income paid to beneficiaries. Expenses are set against income in what order?
- UK dividends
- Foreign dividends
- Savings income
- Other income
What form must the trustees of an interest in possession trust complete which details the income and tax that has been deducted?
R185
What is the tax treatment for a beneficiary of a life interest or interest in possession trust?
Any income on the R185 form, must be added to their other income for the tax year
If the beneficiary is a non-taxpayer, they can reclaim some or all of the tax that has been deducted
If they are a basic rate taxpayer, they will have no further tax to pay
If they are a higher or additional taxpayer, they will have to pay any additional tax due
What is the standard rate band for discretionary trusts and how does it work?
Trustees have a standard rate band of £1,000
The band is first applied to non-savings income, then savings income and finally dividend income
Any income received within the standard rate band is liable to income tax at the basic rates (7.5%/20%), after this income is taxed at the highest rates (38.1%/45%)
Trustees unable to use personal savings allowance and dividend allowance
What are the rules if a settlor receives a capital sum from a trust?
If a settlor receives a capital sum from the trust this is charged to income tax
Income tax will be charged at a maximum level of the undistributed income
If the capital sum received is more than the level of undistributed income, then the balance can be carried forward for up to 10 years to match against future undistributed income
What are the four classes of NICs and who pays them?
Class 1 – payable by employees and their employers (percentage rates)
Class 2 – paid by the self-employed at a flat rate of £3.05
Class 3 – voluntary contributions paid at a flat rate of £15.30
Class 4 – paid by the self-employed as a percentage of their profits
The entitlement to which state benefits depends on NICs?
State pension
New style Jobseeker’s Allowance
Bereavement payments
Contribution based Employment and Support Allowance
Maternity allowance
What do employees pay NICs on?
They can be calculated on: regular wages, bonuses, overtime, holiday pay, incentive payments, maternity/ paternity pay, adoption pay, sick pay, lump sums for joining/leaving employment, payments to meet personal debts and payments in
Are contributions made to an occupational pension scheme liable to NICs?
Any contributions made into an occupational pension scheme are free of NICs as they are not classed as earnings
Between what ages do employees and employers pay NICs?
Employees pay NICs between the age of 16 and State pension age (66)
Employers still pay secondary class 1 NICs beyond the employees State Pension age
What are the three thresholds that determine an employee’s NIC liability?
Lower Earnings Level (LEL) - £120/week, £520/month, £6,240/year
Primary Threshold Contribution (PCT) - £184/week, £797/month, £9,568/year
Upper Earnings Limit (UEL) - £967/week, £4,189/month, £50,270/year
When do employees start to pay Class 1 NICs and what are the rates?
Employees don’t pay NICs until their weekly or monthly income is above the PCT
Once PCT is exceeded employees NIC is payable at the main rate of 12%
Once UEL is exceeded employees NIC is payable at the additional rate of 2%
What are the NIC rules for employees under the age of 21 and apprentices?
For employees under the age of 21, employers pay 0% on NICs on earnings up to the Upper Secondary Threshold (UST) (£50,270)
The same rule applies for apprentices aged under 25 on earnings up to the Apprentice Upper Secondary Threshold (AUST) (£50,270)
An employee does not start paying Class 1 NICs until they reach the PCT, what are they entitled to if they earn between the LEL and PCT?
If employees earn between the LEL and the PCT they don’t pay NI but get a credit for the State Pension
When do employers have to start paying NICs?
Employers have nothing to pay up to the Secondary Contribution Threshold, and 13.8% on anything above this with no upper limit
What is the employment allowance for businesses?
Businesses can deduct £4,000 from their total NIC liability if their NIC liability in the previous tax year was less than £100,000
What are Class 1A contributions and who pays them?
These are paid by employers in relation to most benefits in kind (fringe benefits) e.g., company car
There is a single rate of 13.8%
How are NICs collected?
Collected through PAYE with income tax
When are Class 1A contributions due?
Due on 22nd July of the end of the tax year in which they relate (19th July if not electronic)
If this date falls on the weekend, payment must be made the previous working day unless it’s made through ‘faster payments’
What are the NIC rules for UK individuals working in an EEA state?
UK individuals working in an EEA state or Norway, they can get a certificate from HMRC to pay UK contributions for up to 2 years (3 if Norway)
How are NI liabilities calculated for company directors?
They may pay themselves irregular amounts at irregular intervals as opposed to a regular monthly pattern
So their total earnings within a tax year are used when calculating NICs
Income taken as dividends, rather than salary is not subject to NICs
Name 5 special categories of employment where workers will be treated as employees (they might not be for income tax purposes)?
Domestic workers and office cleaners
Agency workers
Lecturers and instructors
Ministers of religion
Workers in the film and television industry
Labour-only subcontractors
What is the NIC situation for oil rig workers, aircrew and mariners?
Their employment may not be within UK territory and therefore not liable to Class 1 NICs. As a result, they may lose entitlement to State benefits
Under what circumstances can an individual who has not been paying NICs be credited as if they had been making minimum contributions?
Where the individual has been in full-time training
During periods of unemployment and sickness
During periods of entitlement to statutory maternity/paternity pay
Where income is below PCT but above LEL
When do self-employed people start paying Class 2 NICs?
Class 2 is a flat rate of £3.05 a week that is payable once their profits are over the Small Profits Threshold of £6,568
How are Class 2 NICs collected?
Although it shows as a weekly payment of £3.05, the National Insurance Contribution Office (NICO) will collect these by direct debit at regular intervals throughout the tax year, they are collected 4 months in arrears
When do self-employed individuals have to pay Class 4 NICs and what is the rate?
They have to pay Class 4 NICs when profit exceeds £9,569
The rate is 9% until profits reach £50,270 when the additional rat of 2% becomes chargeable
This is paid direct to HMRC via self-assessment
What is the special rate of Class 2 NICs for share fisherman?
If a fisherman is self-employed and shares the profits of a fishing boat registered in GB, they are liable to Class 2 and 4 NICs, even they work outside of the UK
A special rate of £3.70 per week applies for Class 2 NICs
What are the NICs rules for sub-postmasters?
Class 1 NICs are deducted from their salary, however this is not always taxed under PAYE
Liable to class 2 and 4 NICs from trading profits from the shop
Salary from the Post Office is not included in the small profits threshold for class 2’s or when assessing profits for class 4
The liability may be limited due to the annual maximum
When is an individual liable to pay CGT?
It is a tax on the gain arising from the disposal of certain assets
The starting point for calculating the gain is the disposal proceeds less the acquisition costs
What are the disposal rules for assets transferred between spouses and civil partners?
Disposals between spouses and civil partners are not chargeable gains
When the receiving spouse disposes of the transferred asset, they will be liable to pay CGT
The first spouses acquisition cost will be used to calculate the gain
When a disposal is not on a fully commercial basis, what is the disposal consideration deemed to be?
The market value of the asset
‘Disposals not at arm’s length’ can occur in what two circumstances?
Occurs when disposals are made between individuals with a close connection (family) or when market value of the asset can be used instead of the sale price for disposals between unconnected parties (between friends)
What is deferred consideration and what is the difference between fixed and variable?
Consideration is deferred if it is not paid at time of sale
If the amount is fixed it is called ascertainable deferred consideration
If the amount is variable it is called unascertainable deferred consideration
Any ascertainable deferred consideration must be included in the disposal proceeds
Not every gain is chargeable under CGT, what are the exemptions?
Annual exempt amount
Chattels and wasting assets
Principal Private Residence (PPR)
Life insurance policies in the hands of the original owner
ISAs
Gilts and corporate bonds
What is the current annual exempt amount and at what point is it deducted from the chargeable gain?
All individuals are entitled to £12,300 exempt amount for 2021/22. It is deducted from chargeable gains after deducting losses and all reliefs
The exempt amount cannot be carried forward
In what circumstances are periods of absence ignored?
Last 9 months of ownership
Up to a year between buying the property and living in the property
Periods totalling 3 years, if the periods were preceded and followed by residence and no other residence was exempt
Periods totalling 4 years, where the owner was employed elsewhere in the UK, if the periods were preceded and followed by residence and no other residence was exempt
Periods of living in job related accommodation
If a property was purchased prior to 1st April 1982, what is the rule regarding acquisition cost?
The period prior to April 1st 1982 is ignored, so if a property was purchased before then, the acquisition price is the value on this date and the period of ownership starts from then
What are the letting exemption rules that apply to the gains for a property?
There is a letting exemption where part of the property is let as residential accommodation and the other part is occupied by the owner
The gain on the let part of property is exempt up to the lesser of £40,000 and the exemption on the part occupied by the owner
What is the six-step process to calculate CGT?
1 – determine the disposal proceeds
2 – deduct the acquisition cost
3 – deduct costs of arranging the purchase and sale and any enhancement costs
4 – offset allowable losses allocated against gains taxable at the highest rate
5 – deduct the annual exempt amount in a way that minimises the tax due
6 – calculate tax at the appropriate rate
If a loss and a gain are made in the same tax year, how is this treated for CGT purposes?
The rule is that the total loss must be deducted against any gain made in the same tax year before you apply the annual exempt amount
Only if the gains in the tax year are insufficient to absorb the loss, can the excess loss be carried forward and set against gains in future years
What rate is given for business asset disposal relief and how long must assets have been held for to qualify?
For gains made on or after 11th March 2020, the relief covers the first £1,000,000 of qualifying gains within an individual’s lifetime
The gains are taxed at 10%, regardless of the individuals tax status
Anything above the £1,000,000, normal CGT rules apply
Assets must have been owned for two years before the
What is investor’s relief?
This extends business asset disposal relief to external investors in unlisted trading companies
This gives a separate £10,000,000 lifetime limit
Qualifying investments within the limit are charged at 10%, regardless of the individual’s tax band
What is holdover relief?
This can be claimed against gains on disposal of particular assets by way of a gift (mainly those that are chargeable to IHT or trading assets)
If holdover relief is claimed, no CGT is payable at the time of the gift
The donee is deemed to have acquired the assets at the donor’s base cost, rather than the value at the time of the gift
What is the definition of a trading asset?
Holdover relief is available on gifts of trading assets. A trading asset is:
An asset used in the trade of the donor or their personal company
Can include shares and securities of trading companies, provided they are not quoted on a recognised stock exchange and the donor holds at least 5% of the total
What is business asset rollover relief?
When an asset is sold CGT becomes payable even if all the proceeds are reinvested. Rollover relief allows a business to sell assets and reinvest them into trade or business assets and defer the CGT liability until the new assets are sold
What is incorporation relief?
If a self-employed person incorporates the business and receives shares, technically this is a disposal. Claiming incorporation relief defers CGT until the new company is sold
How does reinvestment relief work for EIS and SEIS shares?
For EIS shares, the gain on the original disposal is deferred until disposal of EIS shares
For SEIS reinvested gains are not deferred. Instead, 50% of reinvested capital gains are exempt and the other 50% of reinvested gains are chargeable to CGT. Relief is restricted to a limit of £100,00 of gains reinvested in each tax year
How are disposals of shares identified with acquisitions?
- Acquisitions on the same day (the same day rule)
- Acquisitions within the following 30 days (the bed and breakfast rules)
- Acquisitions of all other shares on an average cost basis
What is meant by the term ‘bed and breakfasting’?
It is a method of realising a gain or loss on an investment without changing the size of the investment. It involves selling shares or units one day and buying them back the next
How is a bonus issue of shares treated in terms of CGT?
A Bonus (or scrip) issue are distributions of free shares among existing shareholders
The new shares are treated as being acquired on the same date as the original holding
There are no extra acquisition costs
How is a capital gain calculated in a discretionary trust?
A capital gain is calculated in the same way for a trust as it would be for an individual
The CGT rate for these trusts is 20%, unless it is residential property which is 28%
Transfer of assets to a beneficiary is treated as a disposal, whereby the market value is used to calculate the gain
How much is the CGT annual exempt amount for trusts?
The trusts have an annual exemption, usually half of the individual exemption (£6,150)
If the settlor has created a trust for a disabled person, regardless of how many trusts the settlor has created, they will have access to the full individual exemption (£12,300)
What is the IHT rate on transfers on or within seven years of death?
£0 to £325,000 – 0%
Over £325,000 – 40%
When does the reduced rate of 36% apply?
Where at least 10% of the net estate is left to charity
What is the IHT rate on other chargeable transfers, e.g., payments into discretionary trusts?
£0 to £325,000 – 0%
Over £325,000 – 20%
How much is the residence nil rate band and what is its purpose?
In addition to the normal £325,000 NRB, £175,000 is available when a family home is inherited by a direct descendent
Protects the home (partially or fully) from IHT
What are the rules regarding the transfer of any unused NRB and RNRB to a surviving spouse/civil partner?
Any unused NRB and RNRB can be transferred to surviving spouse/ civil partner
It is the proportion of the unused band from the first death that is transferred to the survivor
Is the RNRB available when property is left to a trust?
The RNRB is not available when property is left to a discretionary trust, as the trustees will be the legal owners rather than a direct descendent
The RNRB will be available if a property passes to a trust with an immediate post death interest (IPDI) if direct descendants are beneficiaries
What can lifetime transfers be classed as?
Exempt transfers: no tax is ever payable
Potentially exempt transfers (PET): no tax is payable when gift is made. They become exempt if the donor survives seven years
Chargeable lifetime transfers (CLT): tax may be payable when the gift is made. They will become exempt if the donor survives seven years
When are transfers deemed to be PETs or CLTs? I.e. who are the transfers made to?
Transfers are deemed to be PETs if made to an individual or a specified trust (bare trust)
Transfers are deemed to be CLTs if made to an interest in possession or discretionary trust or the donor retains interest
What is the liability to IHT for those domiciled in the UK and those domiciled outside the UK?
Individuals domiciled in the UK are liable to pay IHT on their worldwide property
For those domiciled outside the UK, they are only liable to IHT on UK property
Are government securities e.g. gilts liable to IHT?
Government securities are not liable to IHT if the owner is not a UK resident, regardless of domiciled status
Name 5 transfers that are exempt from IHT
Transfers between spouses and civil partners
Gifts to charities
Gifts to qualifying political parties
Gifts for national purposes
Gifts of land to housing associations
What does IHT seek to tax?
IHT will always seek to tax the reduction in the donor’s wealth (the loss to the donor’s estate of making a transfer) rather than the increase in the wealth of the recipient
What is meant by gratuitous intent?
IHT is only charged on dispositions that are gifts (or part gifts)
There can be no IHT on commercial transactions if full consideration is received, as there would be no loss to the estate
How much is the annual exemption, and can it be carried forward?
£3,000
If the whole or part of the annual exemption has not been used in the previous tax year it can be carried forward
Only applies to lifetime gifts
Normally deducted from a PET or CLT
How much is the small gifts exemption and how does it apply?
An individual can make unlimited outright lifetime gifts to any person up to £250 without giving rise to IHT liability
It cannot be combined with the annual exemption
It is not applicable for gifts into trusts or as part of a larger gift
What is the rule on lifetime transfers if they are made out of normal expenditure?
If a lifetime transfer is made out of normal expenditure, from an individual’s income, and does not affect their ability to maintain their usual standard of living, then these transfers are exempt from IHT
What are the rules for wedding gifts?
Lifetime gifts for marriages/civil partnerships are exempt if they are within:
£5,000 for a parent
£2,500 for a remote ancestor e.g., grandparent
£1,000 for anyone else
What are the rules on making gifts for education and maintenance purposes?
Payments for a child’s maintenance, education or training are exempt, until the later of the child turning 18 or the child leaving full-time education
Does an individual who dies during active service or responding to an emergency call-out have an IHT liability?
Estates are tax free for those who die as a result of wounds or diseases contracted on active service or whilst on duty
What is the IHT treatment if the donor of a PET dies within seven years of making the gift?
The gift becomes chargeable
The donee is liable to pay any tax
Tax is chargeable on value of PET at the date it was made
Calculation takes into account 7-year cumulation at date of gift with taper relief
What are the taper relief rates?
If the donor has survived for at least 3 years after the PET was made a reduced parentage is used:
3-4 years 20% reduction
4-5 years 40% reduction
5-6 years 60% reduction
6-7 years 80% reduction
What trusts that receive gifts are classed as PETs?
A gift into a bare trust is a PET as the beneficiary is absolutely entitled to the assets, therefore in effect is a gift to the individual
Gifts to a disabled trust are also PETs, even though a disabled trust is broadly a discretionary trust
