Tax Flashcards
When is the tax year
6th April - 5th April
When are tax changes made? (2)
- In the autumn pre-budget by the Chancellor
- Finalised in March budget
Why are tax years important?
- To calculate income tax
- Capital gains tax
- Tax allowance changes/refreshes
- Changes to financial products are often made and come into effect in the new tax year
When is the financial year?
1st April to 31st March
What are the 3 tests for automatic overseas residents?
- There are 3 tests but only 1 needs to be met
1. In the UK for fewer than 16 days in a fiscal year
2. Not a resident in the UK during the previous 3 years - in the UK < 46 days a year
3. Works full time overseas and visits the UK < 91 days a year (working no more than 30 days in the UK)
What are the 3 tests for an automatic UK resident?
- In the UK for at least 183 days a fiscal year
- Only home is in the UK - 91 days or more
- An individual works full time in the UK
What is the sufficient ties test? (3)
- A tie that grants eligibility to residency:
- Family tie
- Accommodation tie
- Work tie
What is the concept of residency based on? (4)
- Nationality
- Place of residence
- Citizenship
- Work
What is domicile?
- Where an individual chooses to belong
E.g. someone can have multiple residency but can only be domiciled in one place
What are the 3 different types of domicile under UK tax law?
- Domicile or origin - acquired at birth, normally from the individuals father - does not have to be where the individual was born.
- Domicile of choice - cannot be chosen until the individual is 16 years of age - changing domicile is not easy, it means the person has to cut ties with their previous domicile
- Deemed domicile - an individual is deemed a UK domicile if they are a resident for 15 out of 20 consecutive fiscal years
Why is domicile important?
- For determining income tax liability, especially inheritance tax liability
How are UK residents, UK res non-doms and overseas residents’ income taxed? (3)
- UK resident - worldwide income and gains taxed on an arising basis
- UK resident non-dom - UK income and gains on an arising basis. Overseas income is taxed on an arising or remittance basis if above £2,000. Remittance basis if below £2,000 a fiscal year
- Overseas resident - UK income on an arising basis. Overseas income is not subject to tax
All income earned in the UK is taxed, regardless of status
What is a remittance basis? (2)
- Overseas income will be taxed on a remittance basis when it is bought to the UK
- If income and gains are over £2,000 there is a choice of between being taxed on an arising or remittance basis - if remittance basis is chosen, tax allowances are lost
How much is the Remittance Basis Charge and when does a UK res non dom pay this?
- Individual is living in the UK 7 out of 9 years - £30,000
- Individual is living in the UK for 12 out of 14 years - £60,000
What are the 3 ways income tax is collected for employees, self employed and savings/dividends?
- Non-savings income - PAYE
- Self employed - payments on accounts in 31 Jan in tax year and 31 July after tax year (50% of previous tax year liability)
- Savings, dividends and rental income - self assessment - free calculation from HMRC before 31st Oct. Deadline for submitting tax returns in 31st Jan.
How long must tax self assessment be kept on record?
- 5 years after 31st Jan following the end of the tax year
What 2 ways can statutory income be reduced?
- Charity - donating with gift aid can allow claiming back tax
- Pension contribution - basic amount of £3,600 and maximum of £60,000 a year. If pension allowances are unused, they can be bought forward for 3 years only. For those earning over £260,000 the pension allowance falls by £1 for every £2 earned.
- If net income (after pensions and charity donations) is £200,000 person is exempt from tapered allowance
What is the personal allowance for non-savings income?
£12,570, however this is reduced once an individual starts earnings £100,000 at the rate of £1 for every £2 earned. Anyone earning £125,140 or more will not have a personal allowance
What is the marriage allowance?
- When a person earns less than £12,570, they can transfer 10% of their personal allowance to their spouse if they are a basic rate tax payer up to £50,000.
What are the bands and allowances for savings income? (2)
- £5,000 tax free allowance on savings income
- Allowance is reduced by £1 for every £1 of non-savings income above the personal allowance
Once savings and non savings income is above £17,570 following allowances apply:
- Basic rate - £1,000
- Higher - £500
- Additional - £0
What is the allowance for dividend income and the marginal rates? (1)
- 0% tax paid on first £1,000. Anything above that is taxed at marginal rates
Basic - 8.75%
Higher - 33.75%
Additional - 39.35%
How is a discretionary trust taxed? (6)
- Trusts are liable to income tax
- The first £1,000 is taxed at a basic rate - 20% and 8.75%. This is called the Standard Rate Band
- Above £1,000 is taxed at an additional rate - 45% and 39.75%. This is called the Trust Rate
- It is the Trustees legal duty to ensure tax liabilities are paid from the trust
- Like individuals, non savings income is taxed first, then savings income and then dividend income
- £1,000 is based on the settlor. If the settlor has 2 trusts, this will be £500 for each
What are the 6 features of National Insurance?
- Paid by employees and self employed people aged 16 and over earning above a certain level
- State benefits are linked to NI contributions - ‘contributory benefits’
- Employees - NI is deducted via PAYE income or tax benefits such as a company car
- Self employed people are paid at a flat rate if profits is above threshold or as a percentage of annual taxable profits
- Prior to 1977, married women are eligible to a reduced rate - while this is positive, unlikely to reach minimum contributions to receive state pension
- 35 years of NI contributions must be made to qualify for a full state pension
Who is liable to CGT? And how is CGT calculated? (5)
- A UK resident is liable to CGT on gains arising anywhere in the world
- Proceeds on disposal
- Minus cost of purchase
- Minus other costs
- Minus £6,000 allowance
- Minus losses (losses can be carried forward indefinitely)
= Gains realised
What are the 3 types of IHT transfers and their features?
- Potentially exempt transfers - donors (giver) of asset in excess of £325,000 NRB must survive 7 year rule
- Chargeable lifetime transfers - a discretionary trust that exceeds NRB - charged at 20% or higher is donor does not survive 7 year rule
- Exempt transfers - £3,000 allowance which can be carried forward one year only (£6,000 in any given year if so). £5,000 gift allowance for marriage - bride and groom. Transfers between spouses - fully exempt unless one spouse is non-UK domicile (£55,000 transfer limit). Charities - if 10% is left to charity, 36% IHT rate.
How is IHT calculated?
- Each UK domiciled individual receives a £325,000 nil rate band charged at 0%
- Anything above the NRB is charged at 40%
- An additional NRB of £175,000 on main residence passed down to next of kin
- Unused NRB and additional main residence NRB can be transferred between spouses and civil partners
E.g. 2 x £352,000 and 2 x £175,000
What is a gift with reservation? (2)
When an asset e.g. a family home has been gifted but the donor still benefits from it e.g., parents still live in the home. The 7 year clock will not start until.
They must leave or pay market rate rent to stay for 7 yr rule to begin.
What is SDLT? (4)
- A transaction tax on the transfer of ownership of residential UK land or property
- The buyer is responsible for paying this within 30 days of the transaction
- First time buyers pay 0% SDLT up to £425,000 for properties valued up to £625,000. The remaining is charged at 2%
- Paid rounded down to the nearest pound
What is the SDLT rate bands for main residence vs additional property?
Main residence
0% - £250,000
5% - £250,001 - £925,000
10% - £925,001 - £1.5m
12% - £1.5m+
Additional property
3%
8%
13%
15%
What is SDLT on property bought by corporate bodies?
Flat rate of 15% on properties valued more than £500,000
Non UK residents may pay an extra 2%
How is corporation tax paid? (3)
- Self assessed
- Paid 9 months and 1 day after the accounting period
- If profit is more than £1.5m then it is paid quarterly in 4 instalments
What are the VAT rates for stockbrokers
Discretionary - 20%
Executions only - 0%
What are the tax benefits of pensions?
- Income and CGT tax free
- 25% lump sum can be withdrawn on retirement tax free
What are the different ways of accessing pensions savings?
- Lifetime annuity
- Flexi access drawdown - reduces personal allowance to 4,000
- Lump sum
What are some tax wrappers? (6)
- ISAs
- EIS
- Pension contributions
- VCTs
- JISAs
- Life company funds
What is the income bands for non-savings income?
Personal allowance - £12,570 - 0%
Basic - 20% - £12,570-£37,700
Higher - 40% - £37,700-£125,140
Additional - 45% - £125,140+
Interest can be offset against income if money is borrowed for what qualifying activities? (5)
- Buying machinery for employment
- Interest in unquoted employee controlled company
- Investing in a partnership
- Investing in a co-operative
- Buying ordinary shares or lending money to a close company
Interest paid on buy to let mortgages can no longer offset against tax - 20% tax credit is received
How is a bare trust taxed?
- At the beneficiaries marginal rate
What are the rates for CGT? And what is the exemption for married couples?
- 10% Basic
- 20% Higher and additional
On secondary property
- 18% Basic
- 28% Higher and additional
Married couples can transfer assets across to eachother without incurring CGT to get 2 x £6,000 allowance. E.g. one client opens a portfolio to transfer assets
What assets are liable to CGT?
- Equities
- Chattels (e.g. paintings, cars, antiques, wines, stamps) above £6,000
- Secondary property
- Currency bought and sold for gain
- Units in CIS
Why is domicile and residency important in tax?
Residency - determines income and CGT
Domicile - determines IHT
What indirect assets are taxed and how?
Equity CIS (60%+ fund is equities) - dividend income, CGT
Debt CIS (60%+ of fund is debt) - savings income, CGT
ITC - dividend income and CGT
REIT- non-savings income, withholding tax (20%), CGT and stamp duty
VCT - stamp duty
What is stamp duty? (2)
- A tax on the transfer of assets such as real estate and share purchases over £1,000
- This is 0.5% - both SDRT and stamp duty
What is stamp duty reserve tax and on what assets is SDRT paid?
- A 0.5% tax on the transfer of securities in electronic form (CREST) such as:
1. Shares in a company
2. UK convertible loan stock
It is only the buyer who is liable to pay
What assets are exempt from SDRT? (6)
- Gilts
- Bonds
- Units in OEIC and unit trusts
- Shares traded on AIM, high growth segment of LSE or AQSE
- Overseas securities
- New issues
What is the rate of stamp duty and stamp duty reserve tax?
0.5%
Stamp duty - paid up to the nearest £5
SDRT - paid to the nearest penny
What is SDLT on commercial properties?
0% - £0 - £150,000
2% £150,001 - £250,000
5% - £250,000 +
When is SDLT paid on new leased property? (2)
Residential property above £250k / commercial property above £150k = additional 1% is applied.
Anything above £5m it is additional 2%.
What is the rate of corporation tax?
- 19% on £50k or below (small company)
- 26.5% above £50k (medium company)
- 25% above £250k (large company)
What is the annual savings ISA allowance?
£20,000
What is a Help to Buy ISA? (6)
- £1,200 minimum deposit
- £200 a month
- Interest is accumulated (£3,000 max)
- Government adds 25% to this
- Money can only be used to buy a house or for retirement
- Ended in Nov 2019
What is a Lifetime ISA? (4)
‘LISA’
- Max £4,000 contribution a year
- Government matches 25%
- For under 40s only
- Can only be drawn on retirement or buying a house
What is a JISA/Trust Fund? (2)
- For under 18s - no access until child turns 18
- £9,000 allowance per year
When must a business report to HMRC?
When it generate £85k in income
What is an offshore fund? (6)
- A unit trust that is domiciled overseas
- Reporting status and income to HMRC; income focused.
- Income paid in gross - 85% of income is distributed.
- Any subsequent disposal of units are subject to CGT
- Non-reporting ‘roll up funds’: distribute less than 85% of income. Income is reinvested and don’t pay dividends.
- Gains are subject to income tax not CGT; capital focused.
What is a life company fund? (5)
- Taxed at 20%
- Offer life protection and investments
- Life company bonds (bond linked to a portfolio of assets - liable to income and CGT)
Qualifying fund - meets the rules - no more tax to pay
Non-qualifying fund - extra income tax to pay for higher and additional rate taxpayers
What is a qualifying policy rules? (4)
- Be a regular premium policy - at least annual premium
- Have an initial term of at least 10 years - must be kept for 75% of the term or 10 years whichever is lower)
- Premiums restricted to £3,600 per year
- Most common time of this policy is an endowment policy - can suffer from shortfall risk
What are the rules for a single premium/non-qualifying policy? (4)
- Any profits made from this policy are taxable
- Portfolio linked investment that tries to maximise return over long term
- 20% tax charge
- Should the holder die or cash in the bond - the return sum will be net of the 20%. Higher and additional rate tax payers will pay 40% or 45%
- 20% corporation tax on the fund
E.g. - Investment bonds/insurance bonds
- Unit linked bonds with profit bonds
- Distribution bonds
What is the 5% withdrawal rule for life funds/OIBs? (4)
- Withdrawals of up to 5% can be made per year on a tax deferred basis
- Only applies to lump sum payments
- If more than 5% is withdrawn, this is a taxable event - extra 20% and 25% tax for higher and additional rate tax payers
- When bond is cashed in, withdrawals and any gains are taxed as income
What are the tax benefits of VCTs? (4)
- Max £200,000 investment per year
- Income tax relief is 30% if held for 5 yrs - paid immediately - max tax relief is £60k (30% of £200,000)
- Income and CGT tax free
- Losses are not allowable to offset gains
What are the tax benefit of EIS? (8)
- Provides tax relief in UK unquoted companies
- EIS can only invest in companies with assets no greater than £15m before the issue of shares
- Max investment per year £1,000,000
- £500 minimum investment per tax year
- Income tax relief of 30% if held for 3 years
- No CGT if held for 3 yrs
- Losses can be offset by gains
- EIS is exempt from IHT
What is a Seed EIS?
- Runs alongside EIS
- 50% of income tax relief up to £200,000 investment per year
- Up to 50% of gains can be reinvested into SEIS exempt of CGT
