Section 9 - Direct Investments Flashcards
Cash
Bank/building society interest/NS&I - paid gross
Taxable at starting, basic, higher, or additional rate
Starting rate of 0% only applies if saving income falls within first £5,000 of taxable income
Personal Savings Allowance:
- £1,000 for basic rate taxpayers
- £500 higher rate
- None for additional rate
- Tax charged at 0%
- Must not have any income taxable at higher rate to be eligible for £1,000 PSA
- Nor at additional rate for £500 PSA
Help to Save
Targeted at low earners (working tax credit / universal credit)
Every £1 saved in 4 years, 50p tax-free bonus
Save up to £50 per month
Bonus pays out end of year 2 and 4
National Savings & Investments
Premium bonds:
- Min £25, Max £50,000
- Tax-free prizes
Junior ISA:
- Min £1, Max £9,000
- Fixed interest, tax-free
Income Bonds:
- Min £500, Max £1m (£2m joint)
- Monthly interest at variable rates
- Taxable
Direct ISA:
- CAT standard cash ISA
- Variable interest rates
- Interest credited tax-free on 5 April
Direct Saver:
- Available from age 16
- No withdrawal penalties
- Interest paid gross but taxable
- Minimum balance of £1, Max £2m (£4m joint)
Investment account:
- Available from age 16, but can be opened for child under 16
- No withdrawal penalties
- Interest paid gross but taxable
- Min £20, max £1m (£2m joint)
Guaranteed income / growth bonds:
- Fixed rate of interest either paid monthly or re-invested
- Both available in 1 and 3-year bonds
- Not available to new customers
-Min £500, max £10,000 (£20,000 joint)
Savings certificates:
- Not available for new customers
- Max holding £15,000 per individual per issue
- Fixed interest issues - bought with lump sum and interest accumulated, free of income tax and CGT
- Index-linked issues - return linked to rate of inflation, 3 and 5-year terms, free of income tax and CGT
Green savings bonds:
- Fixed rate
- 3 years
- £100 - £100,000
Fixed Interest Securities
Individuals not liable to CGT on disposal of gilts/qualifying corporate bonds
Losses not allowable
Income taxable as savings income therefore PSA can be used
Gilts:
- Loans to government
- Fixed rate of interest paid twice yearly
- Interest paid gross but taxable (can elect to have 20% tax deducted)
- Can hold till maturity or sell via stock exchange
Corporate Bonds:
- Loans to companies
- Interest paid gross but taxable
- Traded on stock exchange if qualifying then CGT exempt
- Discounted securities: securities where issue price is less than amount payable on redemption by 15%. Relevant discounted securities are exempt from CGT
Local Authority Bonds:
- Loans to local government authorities
- Interest paid gross but taxable
- Qualifying corporate bonds so CGT exempt
Building Society Demutualisation
(process by which a private, member-owned company legally changes its structure, in order to become a public-traded company owned by shareholders)
Cash bonus: disposal for CGT purposes (payment for giving up membership rights)
Free shares: not subject to income tax or CGT, but subject to CGT liability on sale
Shares
Shareholders - part-owners in company
Offers income (dividends) and capital growth
Gains potentially subject to CGT, losses normally allowable
Share prices fall and rise according to fortunes of company
Spread exposure through investing in collectives
Dividends paid gross
First £2,000 taxed at 0% under dividend allowance
Thereafter basic rate taxpayers – 8.75%
Higher rate taxpayers – 33.75%
Additional rate taxpayers - 39.35%
Property
Let Property:
- Tax charged on profits in tax year they arise
- Income from all UK property is pooled
- Overseas property income is taxed separately
- Accruals basis used, unless income before expenses £150,000 or less, then cash basis used (unless opt-out)
- £1,000 property allowance
- Income is treated as investment income
- Not ‘relevant earnings’ for pension contributions (except from furnished holiday lets)
- Loss in year of assessment automatically carried forward and set against future property letting
- Cannot offset property letting losses against other income
- Disposal of let property is liable to CGT
- If lettings are trade, then may qualify for rollover relief, holdover relief or business asset disposal relief
Property Trading Income
Where landlord provides substantial services in connection with the lettings, then letting income can be taxed as a trade
Advantages:
- More scope for losses
- Relevant earnings for pension contributions
- CGT rollover and holdover relief
Property Partnerships
Taxed in the same way as trading partnerships under self-assessment
Substantial business activity required for property letting to be taxed as partnership business (not merely jointly owning a property)
Deductible Expenses:
- Repairs and maintenance allowed but not alterations/improvements
-Interest paid on loans/overdraft for purposes of property letting. But, finance costs in relation to residential property restricted to a basic rate reduction, e.g. finance costs £1,000, reduction in tax bill is £1,000 @ 20% = £200. Restriction does not apply to furnished holiday lettings / commercial properties.
Other Expenses:
- Legal fees - e.g., short lease renewals
- Professional charges - e.g., rent collection
- Buildings insurance, water rates, council tax - if paid by landlord
- Cost of services paid by landlord e.g., cleaning
Capital Allowances (for non-residential lets):
- Plant and machinery - available for capital expenditure on equipment installed in let property or used in maintaining it
- Furniture and other equipment used in a commercial property is eligible for capital allowances
- Annual investment allowance - 100% of up to £1m to 31 Mar 2023
- Expenditure in excess of AIA limit qualifies for 18% writing down allowance
Replacement furniture relief:
- Landlords can claim deduction for replacement of furnishings in residential dwelling: cost of replacement plus cost of disposal of old one minus any proceeds of selling old one
Premiums on Short Leases
If lease/sub-lease is granted for less than 50 years, then premium is treated as rent
Amount taxable = amount of premium reduced by 1/50th for each year of lease (other than 1st year)
Reverse premiums - sum paid by landlords to induce potential tenant to take out a lease
Tenant taxable on premium
Premium not deductible from landlord’s letting income, but allowable enhancement expenditure on disposal of property
Letting Part of Home
CGT exemption for owner’s own or main residence
Any part of home that is let is not covered by exemption
If part of the property is let and the landlord is in shared occupancy, then special exemption - gain arising on part that is let is reduced by lowest of:
- £40,000
- Amount of gain exempt because house is main residence
- Gain attributable to the let part or period of letting
£40,000 limit is available to each individual whose main residence it is
Rent-a-Room Relief
For people who let part of their only/main residence
Up to £7,500 tax-free
For above £7,500 landlords have a choice:
- Normal basis (income less expenses) or,
- Taxed on amount by which gross receipts exceed £7,500 with no expenses
Accommodation must be furnished and for residential use only
Furnished Holiday Lettings
Qualify for certain tax advantages if:
- Furnished and let on a commercial basis
- Available for letting for at least 210 days in tax year
- Should be let for at least 105 days
- Not let on a continuous basis of more than 155 days in any tax year
If qualify:
- Income for pension contributions
- CGT rollover relief, holdover relief and business asset disposal relief available on disposal (but remember gains charged at 18% and 28% on residential property)
Woodlands
Profits exempt from income tax
IHT - postpone as long as owned for 5 years
CGT exempt
Investment Income Tax Planning
Non-taxpayers and starting rate taxpayers - produce income to maximise tax allowances
Tax-free returns; compare tax advantages with costs/choice
Control and spread income
