Summary 3

Question 1

When is an individual ‘deemed domicile’?

Answer 1

 An individual’s domicile is usually the country in which he/she has his/her ‘permanent home’.
 Deemed domicile applies if the individual has been resident for at least 15 of the previous 20 years (it won’t apply if they are not resident in the tax year and have not been resident in any tax year since 2017/18) or the individual was born in the UK, had a domicile of origin in the UK and is UK resident in the tax year.

Question 2

What is the remittance basis?

Answer 2

 Applies to non-domiciled UK resident individuals either by election or automatically – UK tax is only due on overseas income/gains actually remitted into the UK.
 Applies automatically if unremitted income and gains is < £2,000.
 If a taxpayer elects to be taxed under the remittance basis, he/she will lose the PA and AEA and may be subject to the RBC.
 Remittance basis charge = £30,000/£60,000 depending on length of UK residency

Question 3

How do you determine DTR?

Answer 3

 Include the overseas income gross in the UK IT computation
 Calculate UK IT liability (before DTR) including all sources of income
 Exclude the overseas source of income suffering the highest rate of overseas tax
 Recompute the UK IT liability – the difference between this IT calculation and the first one is the UK tax on the overseas source of income that has been excluded
 Where > 1 source of overseas income: exclude the next source of overseas income with the highest rate of tax and repeat
 Determine DTR on a source by source basis as the lower of:
– UK tax on overseas income
– Foreign tax suffered on overseas income
 Deduct DTR from the original IT liability calculation

Question 4

Where there are both UK and overseas gains, how do you set off the AEA and the lower percentage taxes?

Answer 4

 Where there are both UK and overseas gains, AEA and 10/18% tax rate band always set against UK gains in priority
 DTR given for lower of:
– Overseas tax suffered
– UK tax on gain.

Question 5

What are Class 1 contributions due on?

Answer 5

 Class 1 NICs are due on cash earnings:
– Gross pay (salary, bonus, commissions, taxable vouchers) BEFORE any allowable deductions
– Includes payments in excess of SMRS but for NICs the SMR is the higher rate of 45ppm only
– Excludes taxable benefits
– The earnings period for a director is always the tax year.

Question 6

Are employer’s NICs an allowable deduction from trading income?

Answer 6

Employer’s NICs are an allowable deduction from trading income

Question 7

What is the employment allowance?

Answer 7

 £4,000 (per employer not per employee)
 Set against class 1 secondary NICs only
 Not available to companies with a single director and no other employees and/or businesses which had a class 1 secondary NICs liability of ≥ £100,000 in the previous tax year.

Question 8

What are class 1A deductions and class 1B?

Answer 8

Class 1A
 Employers pays on benefits in kind at a flat rate of 13.8%
 Allowable deduction from trading income.
Class 1B
 Employer pays @13.8% of grossed up payments in a PAYE settlement agreement.

Question 9

What NICs do the self-employed and those in partnerships pay?

Answer 9

Class 2
 £3.05 per week (subject to small earnings exception limit of £6,515).

Class 4
 9% on taxable trading profits between £9,568 and £50,270
 2% thereafter.

Question 10

What is step 1 in the IHT pro-forma?

Answer 10

-Value of transfer
Less:
- BPR
- Small gifts exemption (less than 250)
- Marriage exemption: 5,000 from parent to one of those getting married, 2,500 from grandparent or from partner to partner, 1,000 otherwise (i.e., uncle)
- Annual exemption CY, PY
=
Chargeable amount

Question 11

What is step 2 in the IHT pro-forma?

Answer 11

Calculating lifetime tax (CLT only: made on gifts into a relevant property trust so a discretionary trust or an interest in possession trust. Gifts to an individual (other than their spouse/civil partner) or to a bare trust have no LT)

• Chargeable amount (from part 1)
• ## NRB available (working)Taxable amount
  ——–
  Lifetime tax @20%/25% (discretionary trust = 25% unless the transferee’s pay in which case it is 20%)
  (if the donees pay the tax, the GCT is the chargeable amount from part 1)

= GCT

Question 12

What is step 3 in the IHT pro-forma?

Answer 12

Calculating death tax (gifts 7 years pre death and death only)

• GCT
• Fall in value relief (deduct)
• Residence nil rate band (not above £2.35m or not to direct descendant)
• ## NRB availableTaxable amount
• Tax @40%
  Less:
• Taper relief (gifts within 7 years)
• QSR
• Lifetime tax paid

Death tax

Question 13

What are exempt transfers for IHT purposes?

Answer 13

Lifetime and death:
- Transfer to spouse/civil partner
- Transfer to charity
- Transfer to qualifying political party (in the last general election before the transfer of value was made, had: two members in the HoC OR one in HoC and more than 150,000 votes given to candidates who were members of the party)

Lifetime only:
- Gifts in consideration of marriage
- Small gifts (Less than £250)
- Normal expenditure out of income
- Annual exemptions b/f and CY

Question 14

How do you value IHT transfers?

Answer 14

• General rule: open market value at date of transfer
• Quoted shares valued at the lower of: the quarter-up rule and the average of the highest and lowest marked bargains on the day of the transfer
• Life assurance policy (own life) - include proceeds in death estate
• Life insurance policy (held in trust) - don’t include in death estate
• Deduct any outstanding debts and funeral expenses when calculating the value of the death estate

Question 15

How does the NRB of a dead spouse pass on?

Answer 15

Any nil rate band remaining on a person’s death transfers on a proportionate basis to his/her surviving spouse

Question 16

What should you watch out for in an IHT question?

Answer 16

• A home and if it is left to direct descendants: trigger to include the RNRB
• Any spouse/civil partner that has previously died: clue there could be NRB/RNRB to claim on the second death

Question 17

How do you calculate QSR?

Answer 17

• Available on the death estate if deceased received a gift within 5 years prior to death on which IHT was due
• QSR = tax paid on first transfer x (net transfer/gross transfer) x relevant %

Question 18

What is fall in value relief?

Answer 18

• Available where value of a gift in 7 years pre death has fallen
• Can reduce value of chargeable gift at death by the fall in value

Question 19

How does business property relief work?

Answer 19

 Automatic relief applied to lifetime and death transfers
 100%
– Sole trader business/partnership share
– Shares in unquoted trading company (any %)
 50%
– Shares in quoted trading company (> 50%)
– Land/buildings/P&M owned separately by an individual, used by
partnership/company he controls
 No BPR on investments
 2 year minimum ownership by donor
 Donee must still own at donor’s death

Question 20

Why is basis of assessment relevant for IHT?

Answer 20

 If UK domiciled or deemed domiciled – pay UK IHT on worldwide property
 If non-domiciled – pay UK IHT on UK property only.
Double tax relief
 DTR given for lower of:
– Overseas tax suffered
– UK tax (at average rate) on the asset.
If you see an overseas asset and overseas tax mentioned this is a trigger to calculate DTR. Make a note that you will need to look at this when calculating the IHT.

Question 21

How do you deem an individual domicile for IHT purposes?

Answer 21

 An individual’s domicile is usually the country in which he/she has his/her permanent home.

 An individual can acquire a UK deemed domicile in any of the following cases:
– The individual was domiciled in the UK under general law at any time in the previous three years
– The individual has been resident in the UK for at least 15 out of the previous 20 years and including at least one of the four tax years ending with the current tax year
– The individual is a formerly domiciled resident for the tax year if:
 was born in the UK with a UK domicile of origin
 is resident in the current tax year and
 was resident in the UK in at least one of the two tax years prior to the current year.

Question 22

How do you deal with long accounting periods (corporation tax)?

Answer 22

Do 2 corporation tax computations:
– First 12 months
– Remainder of period

Allocate profits on following basis:
Trading income (before CA) = Calculate tax adjusted profits before capital allowances for long accounting period, then time apportion
Capital allowances 2 computations:
 first 12m
 remaining months
Property income = Time apportion
NTLR = Accruals basis
Chargeable gains = Date of disposal
Qualifying donations = Date paid

Question 23

How do large/very large companies pay corporation tax?

Answer 23

 Large/very large companies pay corporation tax in instalments
 A company is large if augmented profits exceed £1,500,000 (this is the ‘upper limit’ for a single company with a 12 month accounting period)
 A company is a very large company if augmented profits exceed £20 million for a 12 month accounting period.

Question 24

What are augmented profits?

Answer 24

£
TTP X
Add: Dividends from non-related
companies that are exempt X
–––
Augmented profits X
–––
 Augmented profits are used to determine the method of payment of corporation tax: remember to tax TTP not augmented profits
 The upper limits of £1,500,000 and £20,000,000 must be adjusted as follows:
(1) Scaled down if the POA < 12 months
(2) Divided by the number of related 51% group companies.

Question 25

What are related 51% companies?

Answer 25

 Two companies are ‘related 51% group companies’ if either:
– one of the companies is a 51% subsidiary of the other, or
– they are both 51% subsidiaries of the same company
 Both UK resident and overseas companies are included
 Dormant companies are excluded
 Companies are only included if they were related 51% group companies at the end of the previous accounting period i.e. include leavers but not joiners.

Question 26

How do you calculate trading income for corporation companies?

Answer 26

 Same working as for a sole trader – tax adjusted profit after capital allowances (but no private use restrictions).
 No add back of amortisation apart from on goodwill.
 Large companies have to add back 13% of qualifying revenue R&D expenditure but can then take off the 13% as a credit against their corporation tax liability.

Question 27

What do you ADD to the net profit per accounts for corporation tax purposes?

Answer 27

• Loss on disposal of NCA
• Depreciation
• Amortisation of goodwill ONLY
• Capital expenditure
• Write-off of non-trade debt
• Client entertaining
• Gifts (unless cost ≤ £50, advertise business, not food drink or tobacco)
• Gift aid donations
• Non-trade subscriptions
• Fines (unless parking fines incurred by employee)
• Legal fees re capital items (unless registering patent or renewing short lease)
• 15% × leased car payments if CO2 emissions > 50g/km
• Accrued pension contributions
• Non-trade interest expense

Question 28

What do you DEDUCT from the net profit per accounts for corporation tax purposes?

Answer 28

Less: Non-trading income
- Profit on disposal of NCA
- Rental income
- Non-trade interest received (X)
Less: Extra deduction for R&D revenue expenditure (SME = 130%) (X)
Less: Capital allowances (FYA @ 100% on all R&D capital expenditure apart from land. Note: temporary FYA @ 130% is also available on qualifying P&M and will be preferable)

Question 29

How do you calculate capital allowances for corporation tax purposes?

Answer 29

 130% super deduction for qualifying main pool additions

 50% FYA for qualifying SRP additions (claim AIA first if available as gives 100% relief).

 Disposals of assets that qualified for the 130% super deduction will trigger an immediate balancing charge of 1.3 × lower of disposal proceeds and cost.

 For assets on which the 50% special rate allowance has been claimed, the balancing charge is equal to 50% of the lower of disposal proceeds and cost.

The remaining 50% is deducted from the special rate pool.

Question 30

In the capital allowances computation, how do you treat balancing charges/allowances?

Answer 30

You add a balancing allowance but you deduct a balancing charge from the total allowances.

If it is a PUA, you apportion it for business use

There is no PUA for companies

Question 31

How do you treat the amortisation of goodwill?

Answer 31

This is specifically disallowed and must be added back if not accounted for correctly

Question 32

What IFA income and expenses are allowable?

Answer 32

Trading income:
- Receipt of a royalty payment
- Profit on the sale of an IFA
- Revaluing an IFA

Trading expenses:
- Payment of a royalty
- Loss on the sale of an IFA
- Amortisation of an IFA (except goodwill)

Question 33

How do you treat property income in the corporation tax computation?

Answer 33

Property income (accruals basis only)
£
Rental income X
Less: Rental expenses (no finance costs) (X)
–––
X

Question 34

How do you calculate non-trade interest income?

Answer 34

Non-trade interest income
e.g. any interest received (unless a bank) X
Profit on disposal of qualifying corporate bonds
Non-trade interest expense
e.g. interest on a loan to buy shares/investment property/underpaid ctax (X)
w/off of employee loans (X)
–––
X

Question 35

When do you use indexation?

Answer 35

CHARGEABLE GAINS FOR COMPANIES.

Question 36

When is SSE available? (Corporation tax)?

Answer 36

 The SSE is available on the sale of shares by a company as long as it is out of
a holding of 10% or more. The company being sold must be a trading company
and the substantial holding must have been held for a continuous period of 12 months out of the last 6 years.

 Matching rules for shares disposed of that are not covered by the substantial shareholding exemption are as follows (different from individuals):
1 Same day
2 Previous 9 days (FIFO)
3 S104 pool (shares acquired on or after 1 April 1982) – index pool before bringing in an acquisition, rights issue or disposal.

When you see that a company is disposing of shares the first thing you should think about is whether SSE applies. If it does then explain why, otherwise calculate a gain. Don’t waste time calculating a gain that is
eligible for SSE!

Question 37

How do you treat QCDs for companies?

Answer 37

 Paid gross by companies
 Deductible from total profits (must be paid before the end of the AP)

Question 38

How do you deal with DTR for companies?

Answer 38

Double tax relief (credit/unilateral relief)
 UK resident company pays UK corporation tax on worldwide income
 Overseas income included gross of overseas tax already paid in UK corporation tax computation
 Tax profits as normal
 On a source by source basis deduct DTR as the lower of:
– Overseas tax suffered
– UK tax attributable to overseas income