Tax Flashcards
1
Q
Income tax
A
Paid by individuals (sole traders, partners in a partnership, personal representatives and trustees)
2
Q
Capital profits
A
Not recurring
From sale of assets e.g. machine sold from business
3
Q
Tax year
A
6th April to 5th April
4
Q
Collection of tax: PAYE
A
PAYE = pay as you earn
Employers or pension providers deduct income tax from payments made by employees or pensioners
Employers retain tax from employees making more than £184 per week
Submit full payment submission (FPS) on or before each payday
Money retained must be received from HMRC at least monthly - by the 22nd (along with FPS)
5
Q
Self-assessment: registration
A
Within 3 months of opening
6
Q
When are self-assessment returns due?
A
Paper returns: 31 October after tax year
Electronic returns: 31 January after tax year end
7
Q
When are taxes due?
A
First instalment: 31 January
Second instalment: 31 July
Balancing instalment: 31 January
8
Q
Categories of income
A
- Non-saving income
- Employment income
- Pensions
- Trading income from running own business
- Property income - Savings income
- Interest from bank deposits and corporate and government bonds - Dividend income
- Money paid to shareholders of a company
9
Q
Income from individual savings accounts and premium bonds is tax free
A
10
Q
Calculating business profit
A
Gross revenue - (revenue expenses + annual investment allowance + writing down allowances)
11
Q
Revenue expenses
A
Wholly and exclusively incurred for business purposes
Typically reoccurring:
- Salaries of employees
- Rent
- Advertising
- Utility bills
- Cost of goods/services sold
12
Q
If revenue expenses are incurred for both business and personal purposes you can deduct the proportion that is related wholly and exclusively to the business
A
13
Q
Income derived from an ISA are exempt form tax
A
14
Q
Annual investment allowance (AIA)
A
- Full deduction cost
- For plant and machinery
- Up to annual investment amount
- Not cars, land or buildings
15
Q
Costs within the AIA are 100% deductible
A
16
Q
Do not need to memorise AIA as it changes regularly and will be given figure in exam
A
17
Q
Unused AIA cannot be carried forward into future tax years
A
18
Q
Writing down allowances
A
An allowance of a set percentage of capital asset acquisition costs each year
19
Q
Writing down pools
A
Main pool: 18% per annum
Special pool - 6% per annum
(excludes land)
20
Q
Adjust the value of the pool to reflect the write down
A
21
Q
Partners
A
- Partners must claim their share of the profit whether or not the money is actually distributed to them
- Partners must nominate one parter to file a partnership tax return on behalf of the partnership (informational only as the partnership does not pay income tax but rather the partners individually do)
22
Q
Overlap profit problem
A
The period in which a business makes up its account = accounting period
If a businesses’ accounting period does not end on 5th April some of the profits in the first accounting period will be taxed twice
Some profits WILL be taxed twice = overlap profit
There is no relief from the double taxation UNTIL the business ceases trade or it aligns their accounting period to the tax year
23
Q
Income tax formula
A
Gross income - qualifying loan interest
net income
net income - allowances and other reliefs = taxable income
24
Q
Qualifying loan interest
A
Interests on loans that were taken to fund capital contributions or loans to a partnership, investments in a close trading company (small business) or interest on loans taken by a personal representative to pay inheritance tax
25
Personal allowance
Individuals only pay tax on income over personal allowance amount
Exception: any individual who has an income in excess of £100,000 they are entitled to a personal allowance reduced by £1 i.e. the personal allowance is tapered by £1
Example: if personal allowance is £12,570 the personal allowance would disappear at £125,140
26
Marriage allowance
Permits one spouse to transfer part of their personal allowance to the other spouse in order to give them a credit against tax owed (it is 20% of the amount and not the full amount)
The amount that can be transferred changes e.g. tax year 21-22 = £1,260
27
Marriage allowance: requirements
1. Married or in a civil partnership
2. Transferor's income less than personal allowance
3. Recipient a basic rate taxpayer
28
Non-savings tax bands
(Personal allowance)
Basic rate band: 20%
Higher rate band: 40%
Additional rate band: 45%
29
Savings income: personal savings allowance
- Interest from bank, building society etc.
- It isn't an allowance or exemption it's a nil rate band that is taxed at 0%
Basic rate taxpayer: PSA of £1,000
Higher rate taxpayer: PSA of £500
Additional rate taxpayer: no PSA
30
Dividend income
Dividend allowance = £2,000
Don't need to know the dividend tax rates
31
Trading losses
The taxpayer who made the loss can claim the relief and cannot transfer the loss
Unless a partnership agreements says otherwise a partners share in the loss is in the same proportion as their share of the profit
32
Options for offsetting trade losses
- Set loss against taxpayer's net income from current or prior tax year
- All or nothing claim i.e. can't choose how much to use
- Can offset remaining loss against capital gains in same year
- Carry forward against future trading profits
- Use to offset company dividend or salary upon incorpration
- Use to offset final year gains or back up to three years
33
Anti-avoidance: double reasonableness test
Cannot reasonably be regarded as a reasonable course of action
High threshold for HMRC
An independent advisor panel has to agree that the arrangements are abusive before HMRC can proceed
The taxpayer will face a penalty of 60% of the tax advantage
34
Trade losses may be set off against a taxpayer’s total income in the current year and/or carried back into a prior year, but this must be done before personal allowances are applied.
35
Trade loss must be applied to income before applying the personal allowance
36
Capital gains tax
A tax on profit: sale price - acquisition cost = capital gain
Payable on gain made when an individual, trustee or partnership disposes of a capital asset
Separate from income tax
Almost any type of property can be a capital asset: land, property, antiques, property shares etc.
37
Companies do not pay capital gains tax BUT if a company makes a gain on the disposal of an asset, the gain will be included ion the company's profits for purposes of calculating corporation tax
38
Gifts: fair market value when the gift was given
39
Effect of residence
UK residents are chargeable to CGT regardless of where asset was located when it was sold
Non-UK residents are not chargeable to CGT regardless of location of asset
EXCEPTION: non-UK residents are chargeable to CGT if they dispose of interest in land situated in the UK
40
Assets exempt from CGT
- Cash
- Shared held in an ISA
- Gilts (government bonds)
- Wasting chattels (tangible moveable property with a life of less than 50 years) e.g. machines not used in business, cars, watches, animals etc.
- Non-wasting chattels worth less than £6,000 e.g. jewellery, antiques,
41
Exempted disposals
- Transfer of property on death
- Transfers between spouses (assets are transferred at your acquisition cost and not at present market value)
42
Probate value
All gains are washed out at death
Beneficiaries receive assets at the market value as of the date of death
43
When must CGT be paid?
31st January following end of tax year
EXCEPTION: land and buildings within 30 days of completion
44
Capital gains formulae
Disposal proceeds = costs of acquisition = capital gain or loss
Deduct allowable costs from disposal proceeds e.g. cost of renovations which added value to property
45
Calculating CGT
If the asset is gifted or the transaction is with a connected person (close family member or the company connected with the transferor) the proceeds are deemed to be the assets market value at that point i.e. day of gift
46
CGT relief: principle private residence relief
1. Principle private residence relief: do not pay CGT on any or part of any gain made from the sale of house
Calculation:
Gain on principle residence X
Time of owner's occupation divided by length of ownership
Deemed occupation:
- Last 9 months always deemed occupied regardless if owner was present in property as long as it was owners primary residence
- Absence for any reason (up to 3 years)
- Time working overseas (any amount of time as long as when they return they return to their property)
- Time working elsewhere in UK (up to 4 years)
- All of the above can be combined e.g. absence for any reason + time working elsewhere in UK
47
Capital gains relief: business asset disposal relief - requirement
1. Business asset owned for at least 2 years AND one of the following:
a. Trading business or
b. Shares in trading company
48
Capital gains relief: business asset disposal relief
Pay only 10% capital gains tax on gain
49
Hold over (gift) relief
Allows deferral of gain
50
Capital gains relief: hold over relief: assets that qualify when gifting to an individual
- Assets used in trade/profession
- Shares in unquoted trading company
- Shares in transferor's company
- Assets qualifying for agricultural property relief
51
Gift of an asset will likely lead to a chargeable gain arising on the donor as proceeds are deemed to be market value
52
Capital gains relief: replacement of business assets relief (rollover relief)
- Business owner who sells building
- Then buys replacement premises
- Can roll sale profit into new premises
- And reduce acquisition cost of new premises by gain realised
- Replacement asset must be purchased in a 4 year window between 1 year before and 3 years after disposal
- Both assets must be qualifying e.g. land and building or fixed plant and machinery
- Can be used by companies also
53
Capital gains relief: incorporation relief
- Applies when individual transfers business/partnership interest to company
- Defers basis in company by reducing owner's acquisition cost of company shares by gain realised
54
Capital gains relief: enterprise investment relief
- Encourages investment in small companies
- By allowing CGT deference on gain made by investing that gain in small company
- Same time frame restriction as rollover relief
55
Calculation of CGT
- Any gains made up to the annual exempt amount are tax free = £12,300 (companies don't get an annual exemption)
- (Business asset disposal relief)
- Apply CGT reliefs first
- Tax what remains
56
CGT rate variables
- Individual's taxable income
- Disposed asset's nature
- If there is any basic rate band remaining after taxing income then gains that fall within the remaining band are taxed at 10% otherwise taxed at 20%
Basic rate: 10%
All others: 20%
Residential property (UK or overseas):
Basic rate: 18%
All others: 28%
57
Capital losses
Can offset capital loss against gain to reduce amount of gain subject to capital gains tax
58
Inheritance tax nil rate band
£325,000
59
Nil rate band = amount of wealth taxed at 0%
60
A person domiciled in the UK is subject to IHT on all assets no matter where in the world the assets are
61
A non-UK domiciled individual is subject to IHT only on their UK assets
62
Loss to donor rule
The size of a gift is measured by how much it reduces the donor's estate
63
Outside IHT scope
- No gratuitous benefit
- Expenditure for family maintenance
64
Probate value
Market value of property just before it is transferred
65
Related property rule
If an individual owns certain property and their spouse owns related property and the value of the asset would be higher taking into account their spouse's property, spouse's property is taken into account for valuing property
66
Exempt transfers
1. Gifts to spouse during lifetime or at death (if a spouse is not domiciled in UK they have a limited exemption of £325,000)
2. Gifts to charities (UK or European economic area)
3. Gifts made on death via will or deed of variation
4. Small gifts up to £250 per person per year without a limit on the number (sll-or-nothing exemption i.e. £500 gift would not be £250 exempt and £250 not exempt the full £500 would not be exempt)
5. Gifts on marriage: each parent can give their child £5,000, grandparents can given £2,500 and each party to marriage can give £2,500 to each other and anyone else can give £1,000 to each spouse (partially exempt gifts can be gifted on marriage i.e. parent gifts £10,000 then £5,000 will be exempt)
6. Exemption for normal expenditure out of income:
- Gifts that are regular in nature
- Out of surplus income; and
- Do not affect the standard of living of the person making them
- No monetary limit
7. Annual exemption for IHT
- £3,000 annual exemption to reduce IHT of lifetime transfers
- Exempts part of larger transfer
- Applied to first gift in a tax year which is not otherwise exempt
- The exemption or any unused part can be carried forward 1 tax year and used in the next tax year after that years exemption has been used first
67
IHT: potentially exempt transfer (PET)
- Gift by one individual to another individual as opposed to a trust
- Are not immediately chargeable to IHT
- For many lifetime transfers that are not exempt a 7 year clock starts
- If donor survives at least 7 years from the PET then it becomes fully exempt from IHT
- If donor dies within 7 years then gift becomes chargeable
68
Chargeable lifetime transfers (CLT)
Predominately concerned with lifetime gifts to a trust
A transfer to a trust is immediately chargeable to IHT to the extent it exceeds any available annual exemption and any available nil rate band (currently £325,000)
Gifts to a BARE trust are not CLT'S but instead PET's
Gifts to charitable trusts are exempt
Gifts of assets or cash to a company are CLT's
When calculating how much annual exemption to offset CLT we count prior potentially exempt transfers first even though no gift tax was owed on PET at time of transfer
69
Bare trust
Trusts under which beneficiaries decide when assets are distributed
70
CLT tax rates
Trustees paying tax: 20%
Donor paying tax: 25%
71
Inheritance tax on CLT's is cumulative
72
Procedure for calculating lifetime tax
1. Identify the 'value transferred' using the 'loss to donor' principle
2. Deduct annual exemption(s) to arrive at CLT
3. Identify nil rate band for year of transfer
4. Deduct other chargeable transfers made within the 7 years before gift to arrive at the NRB remaining; and
5. Pay the excess lifetime transfer over the nil rate band at 20% or 25%
73
Tax is only owed if donor dies within 7 years of making gift to individual recipient
74
Death tax on PETS
- Nil rate band at date of death (£325,000)
- Inheritance rax rates at date of death (40%)
- Value of PET when made (if value of asset increased this is ignored)
- Look for chargeable lifetime transfers made within the 7 years prior to the PET being made (not just 7 years from date of death)
75
The recipient has to pay the IHT due on a PET
76
Death tax on PETs: taper relief
Time between date of gift and date of death:
0-3 years: nil
3-4 years: 20% (owe 80% of tax due)
4-5 years: 40% (owe 60% of tax due)
5-6 years: 60% (owe 40% of tax due)
6-7 years: 80% (owe 20% of tax due)
77
Additional death tax on CLTs
CLTs made within 7 years of death are subject to death tax
Taper relief can apply to CLTs made within 7 years of death
78
Tax reliefs for lifetime transfers
1. Business property relief: reduces value of business property given as a lifetime gift to a trust or on death by either 100% or 50%
- 100% applies to sole trader business or an interest in a partnership and any shareholding in an unquoted trading company
- 50% applies to company with shares of more than 50% interest or a partnership in which individual is a partner, shareholdings in a quoted company
2. Agricultural property
Both reliefs are applicable to lifetime transfers and transfers on death
For lifetime gifts the reliefs are given before any annual exemption
79
Requirements for agricultural relief
- Property must be in the UK, Crown dependencies or European Economic Area State
- Applies only to property's agricultural value
- If owner-occupies, transferor must own property for 2 years
- If not owner-occupied, transferor must own property for 7 years
Both agricultural and business relief can be applied to to a farm business but cannot be applied to agricultural property the taxpayers lets to another as this is then regarded as an investment asset
Reduced by appropriate reliefs
There is no partial relief
80
CLTs have an immediate charge to IHT
81
Calculating death tax
Demmed to make chargeable transfer of net value of assets at date of death
Net value = assets - debts and liabilities
No annual exemption is given
Starting point:
- Nil rate band from date of death
- Deduct value of any PETs that have now become charebale
- Deduct CTLs that were made in the 7 years prior to death
- Remaining nil rate band dedicated from death estate
- IHT charged at 40% on balance
82
Valuing the estate
Open market value of the assets
83
Calculating tax on death: allowable liabilities
- Mortgages
- Credit debts
- Tax owed by deceased
- Reasonable funeral expenses
- UK probate costs are NOT deductible
84
Tax on death is 40% BUT a lower rate is applied by giving 10% or more of the deceased's baseline amount to charity
Baseline amount: value of estate charged to IHT after deducting all available reliefs, exemptions and available nil rate band BUT excluding exemption for charitable legacy itself
Gifts to charity is exempt
85
Transferable nil rate band
Increased nil rate band for IHT calculations if spouse dies without using full NRM
If someone has lost two or more spouses they can benefit from an uplift from each but only by a maximum of 100% i.e 200%
Applies only to married spouses
86
Residence nil rate band conditions
1. A home which has at some point been used as deceased's private residence
2. Home or proceeds of home were left to lineal descendants (includes step-children, foster children etc.) but not available to person or couple without children
3. Applies to death estate only and not lifetime transfers
4. Amount limited to lesser of value of home or the statutory RNRM amount (£175,000)
5. Offset against total estate in priority to general nil rate band
6. RNRB is deducted first and then nil rate band
7. If deceased's net estate is greater than 2 million the RNRB is tapered off (rate of taper is £1 for every £2 over £2 million so at £2.35 million the RNRB is lost entirely)
Any unused RNRB can be transferred to a surviving spouse
87
Quick succession relief
Recognises that is harsh for the same asset to be taxed twice in a short period od time (5 years)
Applies when someone dies within 5 years of paying IHT on some inheritance
Decreased by 20% for each year between donor and recipient's deaths
Property that was inherited need to be in recipients estate at their death
88
Post-mortem reliefs
If the PRs of an estate sell some or all of the assets for less than their probate value
For certain assets the PRs can make a claim to substitute lower value for probate value to reduce amount of inheritance tax payable
Assets post-mortem reliefs:
- Quoted shares
- Land/buildings
89
Woodlands relief
90
Anti-avoidance provisions
Gifts with reservation: gifts treated as part of donor's estate at date of death as donor still benefits from gift e.g. gift of property but donor lives rent free
Exceptions:
- Paying market value rent after giving property as a gift
- If donor moves out of property at later date then would no longer be part of estate for IHT on death but release of reserved benefit is treated as PET and 7 year period starts running
Pre-owned asset tax:
- Impose income tax charge on benefits received by former owner of property if transfer is not within gift with reservations rule
91
Payment of IHT: CLTs
Tax is due whatever is later:
- 6 months from end of the month in which CLT is made OR
- 30 April following end of tax year of the gift
Who pays?
- Donor or trustees out of trust funds
- If donor dies within 7 years, additional tax is paid by trustees
92
Payment of IHT: PETs
Tax is due 6 months from enf of the month in which donor dies
Who pays? Recipient of gift
93
Payment of IHT: death estate
Tax is due 6 months from end of month of death but normally paid before to obtain grant of probate or letters of administration
Who pays? It varies (CHECK WORKBOOK)
94
IHT can be made in 10 equal annual instalments
95
Taxation of estates in administration
- PR must complete deceased's tax return from 6th April to date of death and pay income tax and capital gains tax
- Any tax owed if a deductible liability for IHT purposes
- PRs liable to pay income tax on any income producing assets during period until sold or distributed to beneficiaries
- PRs liable to pay capital gains tax if they sell any assets for a gain comparing sale proceeds and market rate at date of death
- Tax returns have to filed each year of the administration with the normal due dates and penalty provisions applicable BUT PRs can make a payment of total liability for whole period of administration dn submit a single income tax and capital gains tax computasion
- Basic rate 20% applicable to non savings income on interest
- Ordinary rate of 7.5% applies to dividends
96
Collection of tax
Corporate tax rate = 19%
Large companies (profits greater than £1.5 million) exception
Tax due: 9 months and 1 day from end of accounting period
Tax return due: 12 months from the period's end
Large companies have to pay tax in quarterly instalments
97
Corporation tax formula
Trade profit
+ other income
+ chargeable gains
- charitable deductions
= taxable income x 19% = tax
98
When a company distributed dividends to its shareholders there are no tax consequences for the company
99
There is no annual exemption for companies
100
Chargeable gains for companies
- Companies do not pay capital gains tax
- Capital gains charged as income
- No annual exemption
- Replacement of business assets relief is available.
101
Loss relief options for companies
1. Offset loss against profits (before qualifying charitable deductions) of same accounting period
2. Offset loss against total profits (before qualifying charitable deductions) of prior 12 months
3. Carry loss forward against future profits
102
Close company anti-avoidance rules
Controlled by 5 or fewer shareholders or any number of shareholders who are the companies directors
Control = ownership of greater than 50%
1. Income tax due on no or low interest loans - tax is on unpaid interest
2. Company pays penalty tax of 32.5% on loan
3. Due 9 months, 1 day after accounting period end
4. Refunded when load repaid or waived
5. If waived, borrower owes tax on amount forgiven
103
Value added tax (VAT)
Charged when a business supplies goods or services
Includes supplies of utilities such as electricity
Output tax: VAT charged to customers
Input tax: paid on goods and services received - reclaimed on items purchased
Output - input = net VAT
Net VAT: owed to HMRC or due to HMRC if a negative figure
104
VAT: exemptions
1. Land
2. Insurance services
3. Financial services
4. Education
5. Health services
6. Postal services
105
VAT rates
20%
Exceptions: lowers rates
5%
Installation of energy saving material
Child car seats
Domestic fuel
0%
Food
Books
Newspapers
Water
Seweage services
Transport
Residential construction
106
VAT exemptions
Sale of company shares
Sale of companya s going concern
107
VAT registration: complusory registratiion
1. Historic test
- If the value of taxable supplies made by business in previous 12 months exceeds VAT registration threshold (currently £85,000) it must register for VAT (rolling, businesses have to check every month)
Value of taxable supplies in previous 12 months > £85,000
2. Future test
- Are there reasonable grounds for believing that the value of taxable supplies to be made in the next 30 days alone ignoring any sales to date will exceed the VAT registration threshold
Value of taxable supplies made in next 30 days is likely > £85,000
If either of the two tests are satisfied then the business must register for VAT
108
Timing of registration
1. Historic test: within 30 days from the time the threshold is crossed
2. Future test: within 30 day period during which the threshold is expected to be exceeded
109
VAT registration: voluntary registration
If a company is unregistered it can't recover input tax
110
VAT deregistration
Required - stops trading
Required - stops making taxable supplies
Voluntary - taxable supplies fall below £83,000 in 12 month period
111
Option to tax
Sale or lease of land and building are exempt
Owners of commercial land and building may opt to charge VAT so they can recover input tax
Purchase of a commercial building that is less than 3 years old is a standard rated supply i.e. purchased must pay VAT at 20%
Option to tax is on a building to building basis
Once the option to tax has been made it can be revoked within 6 months provided no VAT has been charged on rent during that period otherwise it is irrevocable for 20 years but if building is sold before then the new owner can decide whether to tax
112
Accounting for VAT
A registered business must account for VAT one month after the end of each VAT quarter
Basic tax point: date of supply or delivery but can arise earlier if customer pays in advance or invoiced ina advance or could be. later date if invoice issued after
113
VAT invoices
Must include:
1. Supplier VAT number
2. Tax point
3. Value of supply
4. Rate of tax charged
Can be used to recover input tax
Must be issued to all customers
114
A business can deduct input tax to the extent the goods or services were used for business activity i.e. the deduction is proportional to the business use but VAT on cars or business entertaining cannot be reclaimed
115
Businesses are required to keep VAT records
116
Stamp duty land tax (SDLT)
Must be paid within 14 days of transaction
A return must be filed even if SDLT is not owed
117
Transaction exempt from SDLT
1. Property transferred as a gift
2. Property transferred to a spouse or former spouse upon divorce
3. Property transferred under a variation of a will within 2 years of the decedent's death
118
If a person already owns a residential property and buys an additional residential property an additional 3% SDLT is charged in each band on the purchase of the additional residential properties if the consideration is not less than £40,000 i.e. 3% charged on nil rate band
119
Leases
1. Lease premium
2. Net present value of rent payable
120
First time buyer relief
0% rate on first £300,000
5% rate on excess up to £500,000
Normal rates if greater than £500,000
121
Linked transactions - multiple dwellings reliefs:
SDLT calculated on average price paid
SDLT multiplied by number of properties purchased
When 6 ore more properties are purchased ina single transaction then non-residential SDLT applies
