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
When does a CLT result in a tax charge?
If it takes the donor’s seven-year cumulation is over the NRB
Tax is payable at 20% on the excess over the NRB and there will be no further IHT to pay if the donor survives the next seven years
Is the IHT paid at the time of a CLT allowed as credit against the tax payable at the death rates?
Yes, any tax that was paid at the time of the CLT can be deducted from the IHT liability on death
When is IHT chargeable on death?
IHT is chargeable, if the value of the estate on death, plus any CLTs or PETs, in the last 7-years exceeds the NRB/RNRB
What is classed as excluded property when valuing a person’s estate at death?
Pension funds
Property outside the UK
Holdings in authorised unit trusts and shares in OEICs where the beneficial owner is not domiciled in the UK
What is quick succession relief and what are the rates?
If the deceased received a chargeable transfer, in the 5 years before death, the tax charged on death is reduced
Less than 1 year:100%
1 to 2 years: 80%
2 to 3 years: 60%
3 to 4 years: 40%
4 to 5 years: 20%
What is the IHT situation for individuals that die simultaneously?
When impossible to say who died first, general law presumes the eldest was the first person to die
If elder person left property to the younger one, there is potentially two successive tax charges
For IHT purposes, it is presumed they died at the same time, avoiding the double charge
What are the three main IHT reliefs that reduce the value of a transfer?
Business relief
Agricultural relief
Relief for woodlands
What types of businesses do not qualify for business relief?
It is not available for businesses that mainly deal with investments, including land and property investments
Any business property that is subject to a binding contract of sale at the time of transfer, is not eligible for relief
What property is subject to 100% business relief?
Must be owned for 2 years to qualify
Available on lifetime transfers and death
100% relief for unincorporated businesses (sole trader and partnerships) and shareholdings in unquoted and AIM companies
What property is subject to 50% business relief?
Must be owned for 2 years to qualify
Available on lifetime transfers and death
50% relief for controlling shareholdings in fully listed companies and for land, buildings, plant and machinery used in connection with a company controlled by the transferor or they were in connection with a partnership
What is agricultural relief?
Relief for agricultural property in the UK, Channel Islands, Isle of Man or EEA
Available on lifetime transfers and death
Agricultural property includes land, growing crops and farm buildings but not animals or equipment
What is woodlands relief?
Relief for growing timber in UK or EEA
Only available on death and defers the tax until the timber is disposed of
The relief does not apply to the land, just the timber itself
What is a gift with reservation?
A gift where the donor retains a beneficial interest
Most common example is gifting a house but continuing to live in it without paying full market rent
How are gifts with reservation treated for IHT purposes?
If the donor still retains a benefit, its value is treated as remaining in the donor’s estate and is taxed accordingly
What is pre-owned assets tax (POAT)?
Income tax is charged on the benefit people get by having free or low-cost enjoyment or use of certain assets that they used to own
It is treated as an addition to their taxable income in the year in which they enjoy the benefit
No tax if benefit is less than £5,000 per year
How can a person avoid POAT?
The charge can be avoided if the donor elects for the asset to be included in their estate on death
This is done by completing the IHT500 form
Election deadline is 31st January following end of first tax year in which income arises
If the form is completed, the gift is subject to the gifts with reservation rules
Do expenses incurred during an asset transfer e.g., legal costs reduce the value of the transfer?
Any expenses of the transfer are disregarded if they are paid by the transferor, but they reduce the value of the transfer if they are paid by the transferee
How is a transfer of value to a bare trust treated for IHT purposes?
These are subject to the same rules as all other PETs
Any IHT due is paid by the beneficiary
How is a transfer of value to a trust for vulnerable beneficiaries treated?
Although these are discretionary trusts, they are treated as PETs and are subject to the same rules as all other PETs
The IHT due is paid by the trustees
There are no periodic or exit charges that would normally apply to discretionary trusts
From March 2006 onwards, what changed with regard to IHT and the creation of interest in possession (IIP) trusts?
If an IIP trust is created when the settlor is alive, it is now called a relevant property trust
They are now subject to the same treatment as discretionary trusts
An IIP trust created on the death of a settlor is called an Immediate Post Death Interest Trust (IPDI)
When thinking about relevant property trusts, how is the transfer of value treated if the settlor was alive as opposed to dead?
If it was created when the settlor was alive, that is a CLT as normal
If it is created on the death of the settlor, then the assets are part of the death estate
What happens every 10 years in a relevant property trust?
Every 10 years the trustees have to pay a periodic charge
The assets are revalued every 10 years and there is normally a 6% charge of the market value of the assets for everything over the NRB
When is there an exit charge payable for relevant property trusts?
When a capital distribution is made
How are trusts for bereaved minors treated for IHT purposes?
The minor must have an absolute interest to the income and capital at the age of 18
Once they reach 18, the property is treated as their own for IHT purposes
No periodic and exit charges apply to income that accumulated or any capital distributions made at the age of 18
How are trusts for 18-25-year olds treated for IHT purposes?
The minor must have an absolute interest to the income and capital no later than the age of 25
Once they reach 18, the property is treated as their own for IHT purposes
Exit charges apply when the beneficiary becomes absolutely entitled to the trust property, based on the period since their 18th birthday
Who is required to complete a self-assessment tax return?
Mainly self-employed people, most company directors and people who are liable to tax on property or investment income
Those who need to declare a high-income child benefit tax charge
What are the taxes and NICs that a person has to pay under self-assessment?
Income tax on all types of income
Class 2 and Class 4 NICs
Capital gains tax
High-income child benefit charge and collection of student loan repayments for the self employed
What happens if an individual does not submit their tax return?
Taxpayers can choose whether to calculate the tax themselves or leave it to HMRC
If no tax return is filed, HMRC will make a judgement on the tax due
What are the different deadlines for tax returns filed on paper and online?
Online tax returns
31st January following end of tax year in which it relates
Paper tax returns
31st October following end of tax year to which it relates
Can taxpayers, subject to PAYE, have a balancing payment for any liability collected through their PAYE?
If a taxpayer is usually taxed under PAYE, they can have a balancing payment of less than £3,000 collected via their PAYE for a later year if they file the return by 30th December
How many instalments is income tax and Class 4 NICs paid in?
Usually in three instalments
Two payments on account and one balancing payment
What are the due dates for the first and second payment on account?
The first payment on account is due on 31st January
in the tax year concerned
The second payment on account is due on 31st July
after the end of the tax year concerned
What is each payment on
account usually based on?
Each payment on account is based on half of the
previous year’s liability
What are the payments on
account calculated to include?
Income tax
Class 4 NICs
Child benefit income tax charge
They DO NOT include Class 2 NICs, CGT and student
loan repayments
What is the balancing payment
and when is it due?
Due on the 31st January after the end of tax year
It is an adjustment to reflect actual liability due
compared with amount paid on account
The balancing payment also includes Class 2 NICs,
CGT and student loan repayments
How is it possible for a soletrader to reduce payments on
account?
If they believe it would result in an overpayment of tax
This could be because of:
Lower income
Higher deductions
A higher proportion of tax deducted at source or
under PAYE
Do carried back tax reliefs e.g.,
gift donations reduce payment
on accounts?
Payments carried back do not change the previous
year’s assessment and therefore do not reduce the
payment on account
Are taxpayers charged interest on
late payments and underpayments
of tax through self-assessment?
Automatically charged on late and underpayments
Currently, the interest rate charged on late income
tax payments is 2.6% and for repayments, the rate is
0.5%
5% penalty for unpaid tax more than 30 days after
balancing payment due
What is the fixed penalty
amount for not submitting a tax
return by 31st January?
A fixed £100 is due for any returns not submitted by
31st January
If the return is more than 3 months late, a £10 daily
penalty will be charged for a maximum of 90 days
This is payable even if not tax is outstanding
Can amendments be made to a
tax return once it is filed?
Taxpayers can amend their returns for 12 months
after 31st January following the tax year
Amendments may be necessary if the taxpayer made
a mistake or if estimates were used on the return
What are the rules on
compliance checks for tax
returns?
HMRC can carry out random or targeted compliance
checks
HMRC can start an enquiry within 12 months of
receiving a tax return
What is included in PAYE and
how does HMRC receive the tax
due?
Employers deduct income tax and Class 1 NICs under
PAYE from all payments made to employees and
directors
This is normally paid monthly to HMRC
Employers are given a PAYE code for each of their
employees
What is the PAYE code designed
to do?
Designed to deduct the correct amount of tax/avoid
the need to complete a self-assessment
Can employer’s payroll benefits
in kind?
Employers can choose to put the taxable value of
benefits in kind through their payroll
They are then treated the same as cash earnings and
do not need to be reported on a P11D form
Are employers charged
penalties for late submissions of
PAYE?
Employer charged penalties on a monthly basis if
their submissions are late
There is no penalty for the first late submission
during a tax year, following this a monthly late filing
penalty of £100-£400
What payments does the PAYE
system cover?
Wages and salaries
Fees
Bonuses and commissions
Holiday pay
Pensions
Payments under profit sharing schemes
Most benefits and some expense allowances
SSP, SMP, SPP, ShPP, SAP
When is the date of payment
under PAYE?
For employees, PAYE is operated employee is entitled to
receive payment
For directors, PAYE is generally operated on the earliest
of:
Date payment is made
Date director becomes entitled to be paid
Date amount is credited in company’s books
Date remuneration is fixed or agreed
What is tax evasion?
Tax evasion involves falling to provide full and
accurate information to the relevant taxing
authorities
It is illegal and wholly unacceptable
What was the general rule about the
legality of tax mitigation and what did the
case of MacNiven v. Westmoreland
Investments Ltd (2001) change?
The general rule was that tax mitigation is
acceptable, but tax avoidance (even if legal) was not
The rule was overturned after this case, they
deemed it irrelevant as to whether the purpose of a
series of transactions or any scheme aimed at saving
tax was to mitigate tax or to avoid tax
How long does HMRC have to
investigate offshore noncompliance?
12 years
What type of people does the
Affluent Compliance Team
target?
Habitual users of avoidance schemes
Those with a low effective rate across total income
Those who have bank accounts in Switzerland
Those that appear to be understanding their tax
liability
Those who fail to submit their self-assessment on
time
What did the Criminal Finance
Act 2007 bring about?
It made it a criminal offence for firms to fail to
prevent tax evasion
Particularly relevant for businesses that advise or
asset clients who evade tax as a result of that
advice/assistance
A business can face unlimited financial penalties
What does GAAR stand for and
who does it apply to?
General Anti-Abuse Rules
Applies to abusive tax arrangements entered into on
or after 17th July 2013
It acts as a deterrent and to counteract tax
advantages
What does DOTAS stand for and
where must those who use
registered schemes declare this?
Disclosure of Tax Avoidance schemes
Firms in the UK that market tax avoidance schemes
must register with HMRC, who will give each scheme
a number
Those using a scheme must include the scheme
number on their tax returns
What is an APN?
Accelerated Payment Notices
If the courts have found a tax arrangement that fails,
HMRC can now requires users of the scheme to
make upfront payments of disputed tax
What are disguised
remuneration schemes?
These schemes avoided income tax and NICs by
paying the users income as loans with no intention of
repayment
A loan charge applies to outstanding balances of
disguised remuneration loans made from 9th
December 2010 to 5th April 2019
What is the difference between
residence and domicile?
Residence- the status of an individual in anyone one
tax year and is primarily based on the time someone
spends in the UK each tax ear
Domicile – the country that an individual regards as
their permanent home and tends to be quite hard to
change
What are the three statutory
residence tests used to determine
residency status?
Applied in the correct order
Automatically not resident in the UK
Automatically resident in the UK
Sufficient UK ties test
An individual will be automatically
non-resident if they meet any of
which three criteria?
Spent less than 16 days in the UK during the tax year
Those that were not a UK resident for the 3 previous
tax years and have spent less than 46 days in the UK
in the current tax year
Those who work fulltime outside the UK with no
significant breaks
An individual will be automatically
resident if they meet any of which
three criteria?
Spent 183 days or more in the UK
Those who have a home in the UK for 91 consecutive
days and have been present in that home for a
minimum of 30 days in the tax year
Those who work fulltime in the UK with no
significant breaks
What is counted as a day of
presence in the UK?
When a person is present in the UK at midnight, this
is counted as a day of presence
This does not apply for people in transit between
two places outside the UK (connecting flights)
Under what circumstances
might an individual be subject
to split year residency?
When a person leaves the UK to work fulltime
overseas
When a person comes to the UK to work fulltime
When a person leaves the UK to live overseas and
ceases to have a UK home
When is the sufficient UK ties
test used?
If an individual does not meet any of the automatic
tests, then their residence status is determined by
the sufficient UK ties test
What are the five potential UK
ties?
- Family tie
- Accommodation tie
- Work tie
- Spending more than 90 days in the UK during
either of the two previous years - Country tie
How is the sufficient UK ties test applied
differently to those who have been resident
in the UK for any of the three previous tax
years and those who have not?
For a person who has been resident in any of the
three previous tax years (normally someone leaving
the UK), all five UK ties are relevant
For a person who has not been resident (normally
someone arriving in the UK), the first 4 UK ties are
relevant
What types of domicile are
there?
Domicile of origin
Domicile of choice
Deemed domicile
What are the domicile of origin
rules?
Determined by the country of birth of the father
Illegitimate children or those born after the death of
their father take their mother’s domicile
The domicile follows that of the parent until they
reach the age of 16
What are some of the actions that
would be considered if someone is
seeking a new domicile of choice?
Physically residing there
An expressed intention to stay there
Buying a house there
Establishing a business or getting a job
Acquiring citizenship or nationality there
Making a local will
Having family, friends or business interests there
When can a domicile of choice
be abandoned?
If the individual no longer lives in the ‘new’ country
Intends to live elsewhere permanently
If a domicile of choice is abandoned, the individual’s
domicile will revert to the domicile of origin
When does a non-domicile
living in the UK become
‘deemed domicile’?
They are resident in the UK for at least 15 out of the
previous 20 tax years (deemed domicile will apply
from the 16th year)
For individuals who have become
‘deemed domiciled’, how long would
they remain deemed domicile for
income tax and CGT purposes?
6 years
What is the liability to income tax,
CGT and IHT of a UK domiciled
individual residing in the UK?
Income tax is charged on worldwide earned income
and investment income
CGT is charged on worldwide chargeable gains
If an individual is UK domiciled
but not resident in the UK, what
is the income tax treatment?
No UK income tax for any employment income or
profits made outside the UK
Employment income or profits made within the UK is
still subject to UK income tax
There is no liability on overseas investment income
or income from British Government securities
What is the CGT liability for a
UK domiciled person who is not
resident in the UK?
Non-residents are not usually liable to CGT unless
they are only temporary non-residents
Any individual who leaves the UK must be a non-resident for more than 5 years for disposal of assets acquired before leaving the UK to be CGT free
What does it mean to be taxed
on a remittance basis?
Individuals domiciled outside the UK but are a UK
resident can elect to be taxed on a remittance basis
There is remittance if you have foreign income or
proceeds from foreign gains and bring them directly
or indirectly to the UK so you or a relevant person
can enjoy the benefits in the UK
Who would be classed as a ‘relevant
person’ when thinking about foreign
money entering the UK?
Non-residents are not usually liable to CGT unless
they are only temporary non-residents
Any individual who leaves the UK must be a non- resident for more than 5 years for disposal of assets acquired before leaving the UK to be CGT free
How much is the annual
Remittance Basis Charge and
when is it applied?
Once a non-domicile becomes resident, they can elect to
pay tax on the remittance basis without paying any
charge
Once resident for 7 out of the previous 9 years, they will
be taxed on the arising basis unless they pay an annual
charge of £30,000
This becomes £60,000 for individuals who have been
resident in the UK for at least 12 out of the previous 14
When does the remittance tax
charge not apply?
If the individual is under 18
Where unremitted foreign income and gains are less
than £2,000 for the tax year
The charge can be avoided by not claiming the
remittance basis for any particular year
For non-domiciles living in the
UK what is the CGT treatment?
Gains on UK assets are automatically subject to CGT
Gains that arise outside the UK are taxed on the
remittance basis, where the claim is made
What taxes are individuals who are
neither resident in the UK nor
domiciled in the UK subject to?
Individuals neither domiciled or resident in the UK are
only subject to:
Income tax from any UK investment or
employment income
IHT on gifts of assets situated in the UK
No CGT to pay unless in relation to property
What is double taxation relief?
If an individual has income and gains from a source in
one country and are resident in another, they may be
liable for tax in both countries
A double taxation treaty is designed to reduce the
total tax payable where one transaction would
produce a tax liability in two different countries
When can an overseas trust be
subject to UK income tax?
If there is one UK resident trustee
Who pays Stamp Duty Land Tax
(SDLT) and when must it be
paid?
It is a tax on land transactions
Paid by the purchaser within 14 days of the
‘effective date’ of the transaction, normally the
completion date
Solicitors normally complete the forms
How much has the nil rate band for
SDLT increased by, as a result of the
temporary COVID-19 measures?
For residential land and property, the 0% band now
stops at £500,000 until 1st July 2021 and up to
£250,000 till 30th September 2021
What is the SDLT relief for first time buyers?
First-time buyers do not pay SDLT on purchases of
residential property costing under £300,000
Purchases between £300,000 and £500,000 SDLT at a
rate of 5% is paid on excess over £300,000
No relief if property’s purchase price exceeds
£500,000
For residential leasehold
property, how is SDLT charged?
SDLT is charged for residential leasehold property at
1% of the present value of the lease, if it exceeds
£125,000
For non-residential leasehold
property, how is SDLT charged?
SDLT is charged for non-residential leasehold
property at 1% for leases between £150,001 and
£5m, then 2% on anything above this
Is SDLT payable on part of the
purchase price that is
attributable to appliances?
No, SDLT is not payable on any of the purchase price
attributable to interiors left by the seller
How much is the surcharge for
additional residential properties
in excess of £40,000?
If the property is a second home or purchased with
the intention of letting it out, then there is 3%
surcharge for each band
What rate of SDLT is payable when
property is purchased by a company or
collective investment scheme (antiavoidance rate)?
An SDLT rate of 15% is charged on the entire
purchase price where companies and collective
investment schemes buy residential property with a
value over £500,000
What are the SDLT rates for
non-residential property i.e.,
commercial property?
Up to £150,000 – 0%
£150,000-£250,000 – 2%
Anything over £250,000 – 5%
What is Stamp Duty payable
on?
Stamp Duty is levied on the purchaser of shares, not
on their sale
Stamp Duty is payable on documents (such as stock
transfer forms) that transfer ownership of shares,
stocks and unit trusts
When is Stamp Duty Reserve
Tax (SDRT) payable and what is
the rate?
Charged on all electronic transactions at 0.5% and
rounded to the nearest penny
When is Stamp Duty payable
and what is the rate?
Charged on paper transactions at a rate of 0.5% and
rounded to the nearest £5
Stamp duty is only charged on transactions in excess
of £1,000
What transactions are exempt
from SD and SDRT?
Share transactions for companies listed on growth
markets (AIM and NEX Exchange) and UK domiciled
Exchange Traded Funds (ETFs)
Can SD and SDRT be deducted
for CGT purposes?
Yes, it’s the acquisition cost and therefore can be
deducted on calculating chargeable gain on any
subsequent disposal
If two people exchange houses
without a cash payment how is
SDLT calculated?
Each pays SDLT on the market value of the property
acquired
Who administers VAT?
HMRC
What are the 4 rates of VAT?
Exempt, 0%, 5% and 20%
What is the difference between
input and output VAT?
Input VAT – VAT payable on goods and services
purchased
Output VAT – VAT payable on goods and services
sold
Businesses can offset input VAT against output VAT
and pay excess to HMRC and reclaim any excess VAT
paid
How often are VAT returns
usually completed?
Usually quarterly
When must businesses register
for VAT?
Businesses must register for VAT if the value of
taxable supplies in the previous twelve months is
more than £85,000
The trader has 30 days to notify HMRC
Input VAT cannot be reclaimed
on what purchases and
expenses?
Purchases of motor cars, unless wholly used for
business purposes and business entertainment
expenses
When does a business officially
become registered for VAT after
notifying HMRC?
Businesses will become registered from the first day
of the second month after exceeding the limit
What are zero-rated supplies,
and can you name 5 examples?
If a business makes zero-rated supplies, they do not charge
VAT on supplies, but can still reclaim input VAT
Most food and drinks (not catering), domestic supplies of
water and sewage, books and most other publications (hardcopy
and electronic), sales of new residential buildings, public
transport, drugs and medicines for the disabled, clothing and
footwear for children, women’s sanitary products
What is the difference between
zero-rated and exempt items?
Exempt items do not come into any VAT
computation and will not be included in the input or
output amounts
Zero-rated items will be included in both input and
output amounts
What is a partially exempt
business?
Where a business makes exempt and taxable
supplies
What is the VAT Flat Rate
Scheme?
Allows small businesses to account for VAT as a
percentage of their taxable turnover
Flat rate percentage used varies according to the
main trade sector in which the business works
Only for businesses with a maximum taxable
turnover of £150,000
What are the possible
advantages of using a VAT Flat
Rate Scheme?
Simplified administration and possible reduction in
VAT payable
What are margin schemes?
Margin schemes are used by dealers in second-hand
goods
Second-hand dealers only account for VAT on the
difference between the price paid for an item and
the price at which it is sold, rather than the full
selling price
What is the cash accounting
scheme and what are the
relevant rules?
If taxable supplies are less than £1.35m a year – can join
cash accounting scheme
Output VAT is only due to HMRC when the customer has
paid for the goods or services rather than when they are
invoiced
This helps with cashflow for small businesses and if the
customer defaults on the debt
What is bad debt relief?
Traders can usually claim a VAT refund if debt owed
by customer is at least 6 months overdue and it has
been written off in business accounts
How often do registered traders
have to submit VAT returns?
Normally VAT returns submitted, and VAT paid every
3 months i.e., quarterly
If a business regularly reclaims VAT from HMRC they
can submit and pay quarterly
What is the name given to the
software through which companies
keep their accounting records for VAT
purposes?
Making Tax Digital (MTD)
Unless annual accounting is used, returns to be
submitted under MTD by 7th day of the month after
the month following VAT period
When is tax paid on imports
from outside the UK?
At the time of importation
Who pays corporations tax?
Paid by companies on their trading profits,
investment income and chargeable gains
When is corporation tax
payable?
For most companies, corporation tax is due and
payable 9 months and one day after the end of the
accounting period
How can a company relieve
trading losses?
Loss relief must be reclaimed within 2 years
Trading losses can be offset against other income
Excess losses can be carried back to profits of preceding 12
months
Losses must be set against current accounting period before
they can be carried back
Any remaining losses are carried forward and relieved
How often must large companies
make payments of their corporation
tax liability and what is classed as a
large company?
Quarterly
A large company is one with profits over £1.5m
What is the definition of a close
company?
One that is controlled by 5 or fewer shareholders
Or by its shareholder- directors regardless of their
number
Can close companies make
loans to its participators?
Yes, but there is a tax charge
Without a tax charge, participators could enjoy
income from their close company without paying any
income tax on it
When is a company that was
incorporated overseas, treated as a
UK resident for tax purposes?
If their central management and control is exercised
in the UK
What investments are held
directly?
Cash deposits
Gilts and other fixed-interest securities
Individual properties
Individual shares or equities
What investments are held
indirectly?
Individual savings accounts (ISAs)
Collective investments
Life assurance policies
Pensions
Which individuals benefit from
the 0% starting rate band?
Up to £5,000 of savings income can be taxed at the
starting rate of 0%
Only applies if savings income falls within first £5,000
of taxable income after deducting reliefs and
allowances
What are the features of NS&I
income bonds?
Pays interest monthly at a variable rate
Interest is taxable
No withdrawal notice necessary
Available from 16 years old
Minimum £500 and maximum £1m or £2m if joint
What are the features of NS&I
premium bonds?
Pays prizes rather than a fixed return
Monthly prizes range from £25 to £1m and are tax
free
Prizes can either be paid or reinvested into premium
bonds
Minimum £25 and maximum £50,000
What are the features of NS&I
guaranteed income and growth
bonds?
Fixed rate of interest either paid monthly (income) or
reinvested (growth)
Interest is taxable as savings income
What are the features of an
NS&I Direct ISA?
Variable interest is credited annually on 5th April and
is tax free
Minimum opening deposit £1
What is the CGT position when an
individual disposes of gilts and
qualifying corporate bonds?
They are exempt from CGT
Losses are not allowable
Income taxable as savings income and therefore PSA
can be used
What are the features of gilts?
Effectively loans to the government
Pays a fixed rate of interest twice yearly
Interest is paid gross but is taxable (can elect to have
20% income tax deducted at source)
Gilts can be held till maturity or sold for a on stock
exchange
What are the features of a
corporate bond?
Effectively loans to companies
Interest is paid gross but is taxable as savings income
Bonds traded on the stock exchange
If qualifying corporate bond, then free of CGT
What return do shares offer an
investor?
And how can investors spread their
exposure to shares?
As investments, shares offer income in the form of
dividends, and capital growth if they are sold at a
profit
By investing in collectives (unit trusts, OEICs and
investment trusts)
What is the tax treatment of
dividends?
Dividends paid gross
Everyone has £2,000 dividend allowance
After which:
Basic rate taxpayers – 7.5%
Higher rate taxpayers – 32.5%
Additional rater taxpayers – 38.1%
What is a stock dividend?
Where a company offers shareholders the choice
between receiving cash dividends or new shares
Shareholder treated as having received income equal
to the cash dividend (taxed in the same way)
Outline investment trusts, and
what is the tax treatment of
interest distributions?
A limited company that invests its shareholders’ money
in other shares
Investment trust’s shares are listed on stock exchange
and investor can sell at any time
Taxation of income and gains is the same as for shares
Interest distributions are treated as savings income
What is the default basis of
calculating property income?
Default basis is the cash basis – where the rental
income does not exceed £150,000. The landlord can
opt for accruals basis
After this accruals basis used
Does property income count as
‘relevant earnings’?
No, the income is classed as investment income and
not earned income
Therefore, it does not count as ‘relevant earnings’
for pension contributions (except for furnished
holiday lets)
How much is the annual
property allowance?
£1,000
If property income is more than £1,000, then £1,000
can be claimed against income – instead of
deducting actual expenses
What is considered a deductible
expense with regard to rental
income?
Repairs and maintenance are allowed but alterations or
improvements are not
Interest payments on loans for the purpose of property
letting. Tax relief for finance costs is restricted to a basic
rate tax deduction, e.g., if finance costs were £1,000, the
reduction in tax bill is £200 (£1,000 @20%). Restriction
does not apply to furnished holiday lettings or nonresidential
property
What is the basis of assessment
for income from let property?
Letting income is taxable in the year it arises
Accounts must be prepared for the actual tax year,
although HMRC usually accepts accounts to 31st
March instead of 5th April
Tax paid via self-assessment along with income from
other sources
How are premiums on short
leases taxed?
If a lease is granted for less than 50 years, then part
of the premium paid (an upfront amount) is treated
as rent and must be included in the property income
accounts
What is a reverse premium?
A sum paid by landlords to induce potential tenant to
take out lease
The tenant is taxable on the premium
When can property income be
treated as trade income and what
are the advantages of this?
When landlords provide substantial services in
connection with the letting, then letting income can be
taxed as trade income
Advantages include:
More scope to set off losses
Counts as relevant earnings for pension
contributions
CGT rollover and holdover relief
Is a disposal of let property
liable to CGT? And what reliefs,
if any, are available?
Disposal of let property is liable to CGT
Rollover relief, holdover relief and business asset
disposal relief may be available where the letting
amounts to trade
How does letting relief work for CGT
purposes for homeowners who let
part of their only/main residence?
Any part of the home that is let is not covered by the exemption
If letting relief available, the chargeable gain that would
otherwise arise on the let part of property is reduced by lowest
of:
£40,000
Amount of gain exempt because house is main
residence
Gain attributed to the let part or period of letting
How does ‘rent-a-room’ relief
work?
Applies to people who let part of their only or main residence
Up to £7,500 rental income tax free
If income is over £7,500, landlords have 2 options:
Be taxed on the normal basis (income less
expenses)
Be taxed on the amount that exceeds £7,500 with
no deduction for expenses
What conditions must be met for
furnished holiday lettings to qualify
for certain tax advantages?
Furnished and let on a commercial basis
Available to public for at least 210 days in the year
Should be let for at least 105 days
Not let on a continuous basis of more than 155 days
in any tax year
What tax advantages are
available to areas of woodland?
Profits generated are exempt from income tax
IHT can be postponed until the trees are cut and
timber sold, as long as owned for 5 years
CGT exempt
What are the tax advantages of
investing in a registered
pension scheme?
Tax relief on contributions
Tax free growth and income within the fund
Up to 25% of the fund tax free on retirement
(remainder of the fund on retirement is subject to
income tax but not NICs)
Death benefits are tax free where the deceased
member was aged under 75
What are the rules on maximum
pension contributions into registered
pension schemes?
Employees and self-employed people under 75 receive
tax relief on contributions up to 100% of their earnings
Combined employer and employee contributions up to
an annual allowance of £40,000
People with little or no earnings can contribute up to
£3,600 a year and qualify for basic rate tax relief
Can the annual pension
allowance be carried forward?
Any unused part of annual allowance from previous
3 tax years can be carried forward and added to the
annual allowance for the current tax year
How much is the lifetime limit
for an individual’s tax-exempt
pension fund?
Lifetime limit of £1,073,100
25% of the pension fund
The earliest age at which most people can start
taking their retirement benefits is 55
What are the main options for
drawing an income at
retirement?
Members of occupational defined benefit schemes
usually receive a scheme pension paid by scheme
itself
Investors in defined contributions schemes (e.g.,
personal pensions) can either purchase an annuity or
receive capped/flexi-access drawdown
What are the basic investment
rules applying to pension
schemes?
Investments in residential property and tangible
assets trigger a tax charge
Borrowing to fund an investment cannot exceed 50%
of the net value of the fund
Pension funds are free of UK tax on investment
income and chargeable gains
What types of ISA can a 16-
year-old and an 18-year-old
invest in?
To invest in a stocks and shares ISA, an innovative
finance ISA or a lifetime ISA, the investor must be 18
or over
Individuals aged 16 and 17 can invest in a cash ISA
(remember £100 rule)
Who can contribute into a JISA
and who is eligible to open a
JISA?
Available to all children who did not get a CTF
Parents, family and friends can contribute up to
£9,000 for 2020/21, and for parents the £100 rule
does not apply
Money is locked away for the child, who can
withdraw the proceeds when they reach 18
What are the eligibility criteria
to open an ISA?
Must be an individual who is:
Resident in the UK; or
A non-resident Crown employee working
overseas or the spouse/ CP of such an employee
What is the annual ISA limit for
2022/23?
Various types of ISA. Generally individual savers can
invest in one of each type of ISA (cash ISA, stocks and
shares ISA, innovative finance ISA) subject to overall
limit of £20,000
Up to £4,000 of £20,000 limit can go into a lifetime
ISA
What are the rules surrounding
ISA transfers?
It is possible to transfer assets between all types of
ISA without losing tax-free status
All providers must allow investors to transfer out,
but they are not obliged to allow transfer in
What happens when the owner
of an ISA dies?
Executors can register it to be a continuing ISA, this
means it maintains its tax-free status whilst in the
estate until it is distributed to beneficiaries
What can a surviving spouse
claim where their partner has
died with an ISA?
Additional Person Subscription (APS)
ISA benefits can be passed to spouse/CP via an
additional ISA allowance
The surviving spouse/CP can invest as much as their
spouse/CP used to have invested, plus their own
annual allowance
Who was eligible for a Child Trust
Fund and how much was the initial
voucher paid in by the government?
Children born between (31/08/02 – 01/01/11)
Government used to provide an initial voucher of
between £50 and £250. A further £9,000 a year can
be added until the child’s 18th birthday
Since been replaced by JISAs (CTF accounts can be
transferred into a JISA)
Name 3 examples of a collective
investments
Investment trusts, unit trusts, OEICs and ETFs
Can be bought and sold by individual investors or
within other tax wrappers, including pensions and
ISAs
How are distributions from UK
collectives taxed?
Funds investing in corporate bonds/gilts (interest
distributions) will be classed as savings income and will
qualify for PSA and 0% band
Interest distributions are paid gross, after PSA, taxed at
20%, 40% and 45%
Distributions from equity funds are classed as dividends.
These are also paid gross and taxed in the same as
holding shares directly
Where are offshore collective
funds usually set up?
Generally set up in countries where there is little or
no taxation, e.g., Channel Islands and Isle of Man
Outline the tax treatment of an
offshore reporting fund?
Reporting status is granted if fund reports full details of
income to HMRC
UK investors are told of their share of fund’s income, so
they can include it on self-assessment
No requirement for fund to distribute income
UK investors subject to income tax on their share of
fund’s income (whether it is distributed or not)
Outline the tax treatment of an
offshore non-reporting fund?
Income accumulates normally within the fund
Income is not taxed as it arises, only on disposal of
units/shares
Gain on disposal (including death) is calculated on CGT
principles without CGT allowance, but it is subject to
income tax on the year of encashment
Therefore, gain is liable to be taxed at 20%, 40% or 45%.
The PSA, dividend allowance and the starting rate can be
used
What are the possible
advantages of investing in nonreporting
funds?
Income is accumulated in a low tax environment so can
grow faster
Investor can roll up income and take profits when they
are a lower rate taxpayer/non-taxpayer
If non-UK resident income and gains are tax free
For UK residents who are not UK domiciled, income and
gains not remitted to UK escapes UK tax liability
Offshore funds are not always
completely free of tax, what tax
could they be liable to?
Offshore funds investing in equities will be subject to
non-reclaimable withholding tax on dividends
Fixed-interest funds are usually the most tax
efficient, as they choose investments such as
Eurobonds and exempt gilts, where income is paid
gross
What is deemed a qualifying life
policy?
Life policies with regular level premiums payable at
least annually and for 10 years minimum. An
individual’s annual premium limit is £3,600
If a policy is qualifying the original policyholder will
never be subject to personal tax on the proceeds
What is deemed a nonqualifying
life policy?
Single premium investments, usually taken out
primarily as investments (e.g., investment bonds)
rather than for life cover
All gains from non-qualifying policies are taxable
Outline the tax treatment
within a life company fund
Fund pays tax at 20% on interest income, rental income
and offshore income
UK dividends exempt from tax
If fund sells any assets, gains taxed at 20%
These taxes are paid directly by the life office and cannot
be reclaimed by the policy holder if they are a nontaxpayer
Outline the tax treatment on
the policyholder of life
assurance policy
Policyholders subject to income tax on policy profits
Gains are called ‘chargeable gains’ even though they
are not subject to CGT
Qualifying policies are more favourable because only
gains arising within the first 10 years are taxable
What are the chargeable events
for non-qualifying life policies?
Death (if it gives rise to the payment of benefit)
Maturity
Surrender or certain part surrenders
Assignment for money or money’ worth
If a chargeable event has occurred,
under what circumstances does it
become a chargeable gain?
On maturity or surrender
If amount paid out (plus any earlier capital
payments) exceeds the premiums paid plus previous
chargeable gains
On death
If surrender value immediately before death (plus
any earlier capital payments) exceeds the premiums
paid plus previous chargeable gains
What is the rule on partial
withdrawals i.e., the 5% rule?
Possible to withdraw 5% of the original investment
without incurring an immediate tax charge, this can be
carried forward
Any excess is chargeable in the year of withdrawal for
higher/additional rate taxpayers
It is not tax free because when the plan is encashed, all
previous withdrawals have to be added to the gain for
the final tax calculation
What is the tax treatment of a
chargeable gain under a life
assurance policy?
If the gain falls in basic rate tax band – no tax is due
If gain falls fully in higher rate tax band – taxed at 20%
If gain falls fully in additional rate tax band- taxed at 25%
N.B. Non-taxpayers cannot reclaim this tax
Top slicing relief is available if a gain straddles 2 tax
Whenever a chargeable event
occurs, and a gain arises, what
must the life office issue?
Life office has to issue a certificate to policyholder
Certificate states the amount of chargeable gain and
allows investor to complete their self-assessment
What are the characteristics of an
offshore bond and why might they
be favourable in the long term?
Life assurance bonds set up outside the UK
No tax within the fund so the growth should be better
than an onshore bond
May be withholding tax (non-reclaimable)
When a chargeable event occurs, a UK policyholder is
liable to income tax at the highest rate on whole gain
PSA and 0% band available
How does time apportionment
relief work?
If policy holder has been non-resident for some part
of the life of the bond the gain is reduced
Time apportioned by dividing the number of days
they were resident by number of day’s policy has run
What is the job of a tax
representative for an offshore
life office?
Offshore life offices must appoint a UK tax
representative if they have UK resident policyholders
They are responsible for issuing chargeable event
certificates
What is the Overseas Life
Assurance Business (OLAB) of a
UK life office taxed on?
Taxed on profits made on writing overseas business
Not taxed on income and gains from investment in
OLAB funds (they should grow faster than ordinary
UK funds)
OLAB is only with non-UK residents
What type of life assurance
policies can a friendly society
sell?
They can sell qualifying policies with limited
premiums (£270pa or £25/month) where the funds
are free of UK tax on investment income and capital
gains
Known as exempt policies
What is a structured product?
They provide investment returns linked to
performance of equity investments, e.g., FTSE100,
with some element of the return protected or
guaranteed
Returns are achieved by a combination of a deposit
or fixed-interest investment and a derivative of the
chosen index
What is an annuity?
A contract to pay a given amount (the annuity) every
year
What is the difference between
growth and income structured
products?
Growth products generally provide a guaranteed
minimum return
Income products (no longer very common) provide a
fixed income and the return of capital at the end of
their term
What are 3 main types of
annuity and their tax
treatment?
Purchased life annuity (PLA)
Capital and interest element
Compulsory purchase annuity
All income is taxable as non-savings income
Immediate needs annuity
Paid directly to care provider and there is no income tax
What are the ways an investor
can invest indirectly in
property?
Special purpose vehicles
Shares in listed property companies
Real Estate Investment Trusts (REITs)
Insurance company property funds
Property unit trusts and OEICs
What is a special purpose
vehicle (SPV)?
Usually a limited partnership or exempt UK unit trust
or investment trust, which is setup to finance specific
projects
Efficient from a tax standpoint as they allow
investments to be made from SIPP, SSAS and
registered charities
What are the requirements of a
REIT?
Must be closed-ended UK resident company and listed
on a stock exchange
To be exempt from corporation tax:
75% of the company’s total gross profits have
to originate from property
Rental income must exceed 125% of interest
borrowings
What are the 2 types of
distribution from a REIT?
Payment from tax exempt element
Payments are paid net of 20% income tax and
treated as UK property income
Dividend payment from non-exempt element
Provides dividend income for the investor
REIT gains subject to CGT in the normal way
What are the features of
insurance company property
funds?
The values of units are linked to the underlying
properties
No gearing
They can be held through regular and single
premium life assurance policies
What is the primary purpose of
Enterprise Investment Schemes (EIS),
Seed Enterprise Investment Schemes
(SEIS) and Venture Capital Trusts (VCTs)?
They are all designed to help new start-up
companies raise capital by giving significant tax
breaks to the investor
What are the tax reliefs given to
an investor in an Enterprise
Investment Scheme (EIS)?
Income tax relief of 30% on qualifying investments up to
£1m (£2m if KI). This is given as a tax reducer. Tax relief
will be clawed back if shares disposed of within 3 years
Shares also free of CGT if held for 3 years
Investing can also defer CGT liability from previous gain if
that money was invested into EIS shares
What are the tax advantages of
investing in a Seed Enterprise
Investment Schemes (SEIS)?
Similar to EISs but target smaller start-ups
Income tax relief is given at 50% on first £100,000
(shares must be held for 3 years)
Shares also free of CGT if held for 3 years
If investor has a CGT liability on disposal of another
asset, 50% of this can become exempt if invested into EIS
shares
Do EIS and SEIS shares qualify
for Business Property Relief
(BBR)?
Both EIS and SEIS shares qualify for Business
Property Relief at 100% if shares held for 2 years,
and 50% relief if held for between 1 and 2 years
What are the tax advantages of
investing in a VCT?
30% income tax relief on first £200,000 (given as a
tax reducer). Shares must be held for 5 years
otherwise relief is clawed back
Dividends from VCTs up to £200,000 per tax year are
tax free
Shares are exempt from CGT immediately, but no
reinvestment relief is offered
What are the conditions a
company must meet to qualify
as an EIS investment?
Company cannot have gross assets over £15m prior to
investment (£16m after)
Company cannot have been trading for more than 7
years
Must have permanent establishment in UK
Must be unlisted when EIS shares issued
Fewer than 250 full-time employees (500 for KI)
What are the conditions a
company must meet to qualify
as an SEIS investment?
Company must have been trading for less than 2
years
Cannot have gross assets over £200,000
Fewer than 25 full time employees
