Summary Notes 2 Flashcards
What are the basis periods for an on-going business?
Current year basis – tax 12 month accounting period ending in tax year
How do you deal with basis periods at the commencement of trade?
- 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
What are the basis periods when ceasing to trade?
Last tax year (year in which trade ceases) – tax everything not yet taxed less overlap profits.
How do you deal with a change of accounting date? (Sole trader)
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
How do you use opening year relief and cy relief and/or prior year relief for an unincorporated business?
Opening year relief and current year and/or prior year relief are optional claims and can be utilised in any order.
What are the options for opening year relief (unincorporated business)?
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
What are the options for current year/prior year relief (unincorporated business)?
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
What are the options for extended carry back relief (unincorporated business)?
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
How do you use a loss converted into a capital loss?
Extension claim of s64 therefore must make s64 claim first
Set excess loss against gains
Current tax year and/or previous tax year.
How do you deal with c/f relief and TLR unincorporated business?
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).
What are the restrictions or losses for a sole trader?
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)
How do you deal with trading losses for companies?
- 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.
What assets are exempt from cgt?
- Gifts and QCBs
- Wasting chattels
- Non-wasting chattels < £6,000
- Motor cars
- NSc and Premium Bonds
- Cash
- Cash
- Shares in ISA
What is a chargeable disposal for cgt?
- Sale
- Gift
- Sale at undervalue
(proceeds deemed as market value if gift/undervalue)
Who is a chargeable person for cgt?
- 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)
What are the rules for chattels?
- 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)
How do you treat transfers between married couples/civil partners?
No gain, no loss.
Any future disposal cost is treated as that when acquired by original spouse/partner
If selling shares, what are the matching rules for individuals?
- same day
- Next 30 days (FIFO basis)
- s104 pool (shares acquired prior to date of disposal)
Who is gift relief available for? (CGT)
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.
What are the conditions for gift relief? (CGT)
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.
What is the procedure for gift relief (CGT)?
Calculate gain on donor (proceeds = MV at date of gift)
Defer gain
Calculate base cost for donee.
What are the conditions for rollover relief (CGT)?
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.
How do you treat depreciating assets (CGT)?
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.
What are the conditions for BADR (CGT)?
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.
What is Investors’ Relief?
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.
What is PRR?
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
When does letting relief apply?
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.
