Summary Notes 2

Question 1

What are the basis periods for an on-going business?

Answer 1

Current year basis – tax 12 month accounting period ending in tax year

Question 2

How do you deal with basis periods at the commencement of trade?

Answer 2

• First tax (year in which trade commences) – tax from commencement of trade to following 5 April
• Second tax year onwards:

Is there a period of account ending in 2nd tax year?
No: Tax actual tax year i.e 6 April to following 5 April
Yes:
How long is the POA?
- Exactly 12 months = tax that 12 month period of account = CYB
- Less than 12 months: Tax first 12 months of TRADING i.e., from date of commencement
- More than 12 months: tax LAST moths of long POA

Question 3

What are the basis periods when ceasing to trade?

Answer 3

Last tax year (year in which trade ceases) – tax everything not yet taxed less overlap profits.

Question 4

How do you deal with a change of accounting date? (Sole trader)

Answer 4

In the tax year of change:
– Tax the profits not yet taxed up to the new accounting date within the tax year
– If this is < 12 months’ profit, go back to make it up to 12 months (creates overlap profits)
– If this is > 12 months’ profit, deduct overlap profits from commencement to bring the profits being taxed down to 12 mo

Question 5

How do you use opening year relief and cy relief and/or prior year relief for an unincorporated business?

Answer 5

Opening year relief and current year and/or prior year relief are optional claims and can be utilised in any order.

Question 6

What are the options for opening year relief (unincorporated business)?

Answer 6

 Loss in one of first 4 tax years of trade
 Set against total income in the previous 3 tax years (FIFO).

Opening Year Loss Relief: trade loss that arises in the first four tax years

• Only available for individuals
• Carry back three years on a FIFO basis against total income
• Could waste PA

Question 7

What are the options for current year/prior year relief (unincorporated business)?

Answer 7

 Set against total income
 Current tax year and/or previous tax year.
- CY claim is against TOTAL INCOME (subject to restriction). Could waste PA
- PY claims is against TOTAL INCOME (subject to restriction). Could waste PA

Question 8

What are the options for extended carry back relief (unincorporated business)?

Answer 8

 An s64 claim needs to be made (but not for both CY & PY)
 Set against trading income of the last 36 months on a LIFO basis
 The offset of losses against the trading income of the two tax years preceding the prior year is capped at £2m.
- Against trading income

Question 9

How do you use a loss converted into a capital loss?

Answer 9

 Extension claim of s64 therefore must make s64 claim first
 Set excess loss against gains
 Current tax year and/or previous tax year.

Question 10

How do you deal with c/f relief and TLR unincorporated business?

Answer 10

C/fwd relief (s83)
 Loss c/fwd against future trading profits from the same trade.

TLR (s89)
 Terminal loss from last 12 months of trade can be offset against trading profit of the 3 preceding tax years (LIFO).

Question 11

What are the restrictions or losses for a sole trader?

Answer 11

 Any losses set against total income – there is a restriction for relief against nontrading income or if offsetting against income from a different trade.
 The limit is the higher of £50,000 and 25% of adjusted total income (total income less GPPC plus payments deducted under payroll giving schemes)

Question 12

How do you deal with trading losses for companies?

Answer 12

• CF: against TOTAL profits. Partial claim available to preserve QCDs
• CY: claim is against total income. Could waste QCDs
• PY claim is against total income. Could waste QCDs
• Extended carry back is against total profits
• Terminal loss relief: carry back for 3 years against total profits. LIFO basis.

Question 13

What assets are exempt from cgt?

Answer 13

• Gifts and QCBs
• Wasting chattels
• Non-wasting chattels < £6,000
• Motor cars
• NSc and Premium Bonds
• Cash
• Cash
• Shares in ISA

Question 14

What is a chargeable disposal for cgt?

Answer 14

• Sale
• Gift
• Sale at undervalue

(proceeds deemed as market value if gift/undervalue)

Question 15

Who is a chargeable person for cgt?

Answer 15

• UK resident taxed on worldwide gains
• Not resident: no UK CGT (apart from UK residential property post 5 April 2015 and non-residential property post 5 April 2019)

Question 16

What are the rules for chattels?

Answer 16

• Cost more than 6,000 but sold for less, allowable loss but gross proceeds are deemed 6k
• Cost more than 6k and sold for more, chargeable in full
• Cost less than 6k but sold for more. Gain is lower of normal gain, 5/3 x (gross proceeds - 6,000)

Question 17

How do you treat transfers between married couples/civil partners?

Answer 17

No gain, no loss.

Any future disposal cost is treated as that when acquired by original spouse/partner

Question 18

If selling shares, what are the matching rules for individuals?

Answer 18

1. same day
2. Next 30 days (FIFO basis)
3. s104 pool (shares acquired prior to date of disposal)

Question 19

Who is gift relief available for? (CGT)

Answer 19

 Available to individuals on the outright gift / sale at undervalue of qualifying business asset
 Sales at an undervalue – relief restricted by proceeds in excess of donor’s original cost.

Question 20

What are the conditions for gift relief? (CGT)

Answer 20

 Qualifying assets
– Assets used in the trade of the donor’s business
– Assets used in the trade of the donor’s personal trading company (≥ 5%)
– Unquoted trading shares
– Shares in donor’s personal trading company (≥ 5%)
 Joint claim required.

Question 21

What is the procedure for gift relief (CGT)?

Answer 21

 Calculate gain on donor (proceeds = MV at date of gift)
 Defer gain
 Calculate base cost for donee.

Question 22

What are the conditions for rollover relief (CGT)?

Answer 22

 Available to individuals and companies.

Conditions
 Qualifying assets:
– Land and buildings used in trade
– Goodwill (not companies)
– Fixed plant and machinery
 Time limit:
– Reinvest within 12 months before  3 years after original disposal.

Procedure
1 Calculate gain on seller
2 Defer gain
3 Calculate base cost
NB if partial reinvestment of proceeds, only partial ROR available
Amount that cannot be deferred = lower of
(i) gain
(ii) proceeds not reinvested.

Question 23

How do you treat depreciating assets (CGT)?

Answer 23

 When replacement is a depreciating asset i.e. life < 60 years
 Calculate gain on the original asset = deferred
 This gain crystallises on the earliest of the following 3 dates:
– Disposal of replacement asset
– 10th anniversary of acquisition of replacement asset
– Date replacement asset ceases to be used in the trade.

Question 24

What are the conditions for BADR (CGT)?

Answer 24

 Available to individuals who sell one of the following:
– All/part unincorporated trading business
– Assets of business following cessation
– Shares in their personal trading co (≥ 5%) if they are also an employee.

Conditions
 Must have owned for ≥ 2 year ending with date of disposal.

Procedure
 Qualifying gain taxed at 10%
 Lifetime limit £1m.

Question 25

What is Investors’ Relief?

Answer 25

 Available to individuals who sell unlisted ordinary shares in a trading company
with the following conditions:
– Subscribed for after 17 March 2016
– Held for a minimum of 3 years
– Not an employee or officer of the company
 Lifetime limit £10m.

Question 26

What is PRR?

Answer 26

Private Residence Relief (PRR)
 Exempt if occupied for whole period of ownership
 Otherwise:
(1) Calculate gain
(2) Calculate total period of ownership
(3) Calculate periods of actual and deemed occupation (see below)
(4) Exemption = Gain × Periods of actual and deemed occupation
Total period of ownership
 Periods of deemed occupation:
(a) Last 9 months of ownership
(b) 3 years any reason
(c) Working abroad*
(d) 4 years working in UK*
 *If prevented from returning to residence due to work related reasons the requirement to reoccupy is waived

If business use throughout, not available for PRR

Question 27

When does letting relief apply?

Answer 27

Letting relief applies when the owner lets part of the property whilst still occupying the remainder (i.e. shared occupation)  letting relief is the lower of:
– PRR given
– Maximum (£40,000)
– Part of the gain after PRR relating to periods of letting.