TAX Flashcards
What is the starting rate for savings?
A tax threshold on income from savings.
- £5000
- This is reduced by the amount earned above the personal allowance.
So if you earn £14,570, your starting rate for savings is reduced by £2000.
Essentially, if you earn £17,570 or more, you will have no Starting rate, and would only benefit from the PSA.
Works alongside the Personal savings allowance:
- £1000 for basic rate taxpayers
- £500 for higher
- £0 for additional rate
IHT Threshold
£325,000 Nil rate band
£175,000 Residence Nil rate band
= £500,000 maximum individual Nil rate band
Any unused nil rate band can be inherited by spouse/civil partner so absolute max is £1m.
PET and rates
Potentially exempt transfer - a transfer that may fall out of the estate for IHT purposes.
Death after 3 years - 4 years rate is 32%
Death after 4 years - 5 years rate is 24%
Death after 5 years - 6 years rate is 16%
Death after 6 years - 7 years rate is 8%
Tax treatment of assets in trust.
Typically, exempt from IHT.
Inherited pension income is subject to individuals marginal tax rate unless deceased aged 75 or less
CGT - transfers into trusts can be CLT (immediate IHT charge at half the death rate)
What is CGT? Rates? Allowance?
Capital gains tax is a tax on gains made upon the disposal of an asset that has risen in value.
Here, disposal can mean destruction, sale, gift, etc.
For a basic rate tax payer, CGT:
- Property = 10%
- Other chargeable assets = 18%
For Higher rate taxpayer:
- Property = 20%
- Other chargeable assets = 24%
CGT Tax Free allowance:
- £3000
- £1500 for assets in trust
What is exempt from CGT?
- Transfers between married partners
- Sale of primary private residence
- Private motor cars, including vintage cars
- Gifts to UK registered charities
- Some government securities
- Prizes and betting winnings
- Cash
- Gains on assets held in ISAs, JISAs, and Child Trust Funds
- Foreign currency held for your own use.
- Pension Funds
- Shares in Venture Capital Trusts that qualify for income tax relief.
- Switches between different share classes within the same fund
CGT tax-free allowance?
£3000
£1500 for assets in trust
Annual Gift allowance
For each tax year, you can gift up £3000 to an individual, or £3000 divided up between many.
You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person
Unused Gift allowance from the previous year can be brought forward.
What does ‘at arm’s length’ mean?
The sale of property or asset where buyers and sellers act independently without one party influencing the other. Here, the transaction is fair and equitable - accurately represents market conditions. Example, real estate.
In contrast, ‘not at arm’s’ length or ‘arm-in-arm’ could be a sale between family members, employer and employee. Example, mother selling car to son at a discounted price. More important examples include PLC engaging in nepotism - appointing family member in an important position over more qualified candidates (this decision could harm company shareholder’s)
What is the current dividend allowance? (2024)
£500
What are some of the main types of income that are not taxable?
- Interest and capital gains from ISAs
- Interest from national savings certificates
- Lottery winnings
- Proceeds from a qualifying life policy
- Redundancy payments up to £30,000
What are the tax implications when withdrawing funds from a life policy?
The policy satisfies basic rate tax, meaning if you are a basic rate taxpayer you do not pay tax.
If you are a higher or additional rate taxpayer, you pay the difference (So, 20% or 25%)
Who pays Class 2 NICs?
- No longer in force as of 2024
- The Self employed
- It was paid at a flat rate if you earned above the lower earnings limit.
Who pays Class 1A NICs? Rate?
- Employers only
- Paid on taxable benefits held by the employee
- Rate is 13.8% (2024)
Who pays Class 1 NICs?
- Employees (Earnings dependant)
- Employers (13.8% 2024)
Who pays Class 4 NICs? Threshold?
- Self-employed
- You must pay if your profits are greater than £12,570
Lower profits limit
- £12,570 to £50,270 (9%)
Earnings above the upper profits limit:
- 2%
What is a benefit in kind? Examples?
- Refers to taxable, non-cash benefits, that are not necessary for business purposes.
- Examples: PMI, Dental, gym memberships, discounts, use of company car
- A P11D form is required to report taxable benefits
- Class 1A
Who pays Class 3 NICs?
- These are additional voluntary contributions for those who wish to fill a gap in their NIC history
How many qualifying years of NIC contributions is required for the full state pension?
35 Years, 30 if retired before April 2016
What 3 main deductions can be made to somebody’s gross salary before tax is calculated?
(excluding allowances)
- Pension contributions
- Charitable donations
- Allowable expenses (Self-employed tax relief)
What is an allowable expense? And examples…
Costs that incurred that are made wholly and exclusively for the running of the business.
- Office costs: Stationary, phone bills
- Uniform
- Travel costs
- Advertising
- Staff costs: Wages, pensions, bonuses
What is a P45, when would you receive and what must it contain?
Details:
- Name
- District reference
- Tax code
- Week or month of last entries
- Total gross pay to date
- Total tax due to date
Transfer of personal allowance?
Yes, but:
- Only between married and civil partners
- Can only be 10% (no more or less)
- The receiving party must be a basic rate taxpayer.
Particularly useful if the donating party earns 90% of the personal allowance or less - as they will still not have tax to pay after donation.
- Will save £252
When is an individual’s personal allowance reduced?
- When earning over £100,000
- It is reduced by £1 for every £2 their income is above this amount
- So, if you earn £125,140 or more you will have no personal allowance
Blind person’s allowance
- Currently £3,070
- Added to your tax-free personal allowance
- Can be transferred to spouse (even if they are not blind)
Order of Taxation
- Employment income/Pension income
- Rental income/ Savings interest
- Dividends
- Gains from life policy.
Dividend taxation
- Annual dividend allowance = £500
- Taxed after savings income
- 8.75% for basic rate taxpayers
- 33.75% for higher rate
- 39.35% for additional rate
Can you transfer any unused dividend allowance to the next financial year?
No
Taxation from proceeds from a unit trust
- Depends on classifcation: Accumulation units are reinvested. Income units pay out dividends and interest
- So tax will be due on amounts exceeding the dividend allowance, starting rate for savings, and personal savings allowance
What is the taxation of a company car based on?
- It’s emissions
- Tax is equal to a proportion of the vehicles list price.
Taxation of company cars is shown on a P11D form.
Taxable employee benefit examples
- Readily convertible assets (such as company shares)
- Vouchers, credit cards and other credit tokens
- Non‑cash vouchers
- Meeting an employee’s private expenses and living accommodation
- PMI
- Loans made by employers to employees at beneficial rates of interest
How would an individual see how much state pension they are entitled to?
- Complete and send of BR11 form
- If they have a government gateway account, access through there.
P60 details
Sent at the end of each tax year to employees. Holds details of:
- Total tax deducted
- NICs contributed
- Final tax code
P45 details
Received upon leaving an employer. Holds details fp:
- District reference
- Code number
- Last entries on the employee’s deductions working sheet
- Total gross pay to date
- Total tax due to date.
Collection of tax - Self employed
- Self-assessment
- Must complete a tax return and pay by 31st January of the following year
- Self-employed people usually pay their income tax (plus class 4 NICs) in equal parts, 6 months apart.
- A final balancing payment is due on the following 31st Jan (if they have underpaid or overpaid.)
When is deemed the date of disposal for an asset due CGT?
When the sale becomes legally binding. This may be different to the date in which money is changed hands.
Can the annual exempt amount for CGT be carried forwards?
- No
- Capital losses can be brought forward.
What is the ‘trading allowance’?
The trading allowance is a tax exemption of up to £1,000 a year for individuals with trading income from:
- self-employment
- casual services, for example, babysitting or gardening
This also applies to income from property.
If you have both forms of income, you can claim the allowance for both.
CGT and Private residences
Sale of your primary private residence is exempt from CGT under Primary Residence Relief.
If you have more than one property, you must nominate one as your primary.
- The election can be changed, but not backdated more than 2 years.
- Properties that are wholly let cannot be nominated.
Periods of absence can affect exemption.
How to calculate CGT.
- Determine the disposal proceeds (actual or market value)
- Deduct the cost of purchasing the asset
- Deduct any costs incurred in arranging the purchase and sale and any enhancement costs.
- Set off any capital losses
- Deduct the annual exempt amount.
- The rate of CGT is based on the individual’s income tax band, so the gain is added as the last part of income.
Capital losses key points for CGT
If an individual makes a loss on disposal of an asset, this can be offset against gains made elsewhere.
- The loss must be offset first against gains in the tax year the loss occurred.
- Residual losses may then be carried forward to future tax years and set off against gains in excess of the annual exempt amount.
- A capital loss cannot, however, be carried back to a previous tax year.
- One spouse cannot offset their losses against the other’s gains.
Bed & Breakfasting
A complaint about the CGT regime is that the gain is treated to have happened in the year of disposal, when in fact the gain could be made over many years.
B&B was a practice where shareholders would sell their shares and then buy them back the next day, thus realising a smaller gain that could be covered by the annual exemption amount.
Now not legal
Life Policies and CGT
Payments from life policies are normally exempt from CGT.
In certain circumstances where qualifying rules are broken it may be payable.
Fringe Benefits and examples
These are non-statutory benefits that help with employee satisfaction. They are taxable:
- Gym Memberships
- Remote working stipend.
Statutory are mandatory by law:
- Medical insurance
- Time off
- Pension
Capital gains tax reliefs
- Business roll‑over relief
- Hold‑over relief
- Reinvestment relief
- Business asset disposal relief
- Investors’ relief
Other investments liable to CGT
- Unit Trusts
- Open-ended Investment companies (OEICs)
- Investment trusts
Roll-over relief for CGT
A deferral of CGT where a company sells assets used for business and use the proceeds to purchase new assets for the business.
Hold-over relief for CGT
This relief allows individuals to hold over any gain on disposal by the way of gift. As with roll‑over relief, it merely defers the CGT on any gain until the recipient disposes of it.
Gains may be wholly or partly passed on to the recipient in the case of gifts (or sale at undervalue).
Where hold‑over relief is claimed, no CGT is payable at the time of the gift, but the acquisition costs of the recipient are reduced by the amount of the gain.
This increases the amount of any gain made by the recipient on a future disposal.
Reinvestment relief for CGT
Reinvesting a gain on a non‑business asset does not defer CGT.
However, a gain may be deferred if it is reinvested under the enterprise investment scheme (EIS). These are high‑risk investments.
The EIS investment may also qualify for income tax relief at 30 per cent.
Business asset disposal relief for CGT
This relief applies to gains arising on the disposal of a business.
The relief is available in respect of:
- Gains made on the disposal of all or part of a business;
- Gains made on disposals of assets following the cessation of a business.
Assets must have been owned for two years to be eligible for the relief.
Individuals must:
- Work in the company and own at least 5% in ordinary share capital
IHT and domiciled/ non-domiciled in the UK?
UK domiciled:
- All assets subject to IHT, even if their assets are not in the UK.
Domiciled elsewhere:
- IHT only applied to assets situated in the UK.
IHT Rates
40%
Seven year period is known as the ‘cumulative period’ - whereby IHT is charged if total transfers exceed NRB.
Death after 3 years - 4 years rate is 32%
Death after 4 years - 5 years rate is 24%
Death after 5 years - 6 years rate is 16%
Death after 6 years - 7 years rate is 8%
After 7 years, 0%
Ways to reduce IHT liability
- Donate 10% of your estate (reduces rate to 36%).
- Make sure of Gifting allowances (the previous years unused allowance can be brought forward.)
- Contribute into Pension (Pension sits outside of estate).
- Transfer into trust (PET may be subject to immediate IHT charge at half the death rate)
RNRB
Residential Nil-rate Band - £175,000
Reduced when estate is above £2m. Reduced by £1 for every £2 over.
Property ownership and IHT
Joint tenancy - 100% of the property and it’s value passes to the surviving partner. The spouse exemption means there is no IHT on the share passed to the survivor.
Tenancy in common - Owners may not have an equal share in the property. Where the share is 50% a discount of 15% is applied. A higher discount is applied where the share reflects a minority ownership.
Exempt transfers for IHT
- Transfers between spouses or civil partners
- Small gifts
- Annual exemptions
- Donations to charity, political parties or for the nation
- Wedding and civil ceremony gift
- Gifts that are made on a regular basis out of income
- Family maintenance
- Death in active service/emergency circumstances
Small gifts exemption for IHT
Individual gifts of £250 can be made during a tax year and will be exempt.
- Can make this gift as many times as they like in a tax year IF to different donees
- A donee cannot be in receipt of both the annual exempt amount and Small Gift
-
Annual exemption for IHT
Transfers up to £3000 are exempt. Exceeding this value the transfer becomes a PET.
This exemption can be carried forward to the following tax year but no further.
Wedding and Ceremony Gifts and IHT
Gifts in consideration of marriage/civil partnership are exempt. Amount is dependant on relationship to the couple.
- £5,000 if parent
- £2,500 if grandparent or remoter ancestor
- £2,500 between spouses before the marriage
- £1,000 anyone else
Gifts out of regular income and IHT
Gifts that form part of the donor’s regular expenditure are exempt. Exemption is unlimited. Conditions:
- must be made out of income
- part of a regular pattern of expenditure
- not affect the donor’s standard of living
Gifts with reservation and example
Gifts in which the donor continues to benefit
A gift with reservation is added back to the donor’s estate on death, as if it had never been made.
The gift with reservation rules do not alter the fact that the donee is the new legal owner.
Example:
- Gifting a house, but continuing to live in it.
- Gifting money, but continuing to take interest from it.
Should any tax due on the initial gift have already been paid, this can be offset against any IHT due at death to prevent double taxation.
What is a CLT?
Chargeable lifetime transfer
Some gifts, notably ones made to companies, are not PET, they are CLT. These are liable for an immediate tax charge at half the death rate (20%).
As with PETs, the full amount of IHT is due if the donor dies within seven years, subject to the same taper relief, and any excess over the 20 per cent already paid then becomes payable.
The CLT can be thought of as a ‘deposit’ on the full IHT charge’
IHT reliefs
(not exemptions/allowances)
- Quick succession relief
- Business relief
- Agricultural relief
- Woodlands relief
Quick succession relief for IHT
Relief given if a beneficiary from the original inheritance passes away with 5 years.
Business relief for IHT
Previously Owned Assets Tax (POAT)
Limit? What does it apply to? What is the charge based on?
An income tax charge on individuals that continue to receive benefits from an asset sold or gifted.
- Charge does not apply where the deemed income is less that £5,000
This applies to:
- Land
- Chattels
- Intangible property
The charge is based on a notional market rent for the property
For chattels and intangible assets, the cash value of the benefit is normally a percentage of the open market value, the percentage being equal to the official interest rate for income tax purposes.
Exclusions and Exemptions for POAT
Exclusions
- Between spouses and civil partners
- Between former spouses where ordered by court.
- Where the spouse has an interest in possession from the outset.
- Assets sold at arm’s length for cash if the price is similar to market value.
Exempt
- was gifted before 18 March 1986;
- was transferred for the purposes of maintaining the family in accordance with the ‘maintenance of family’ IHT exemption;
- was an outright gift to an individual that was covered by the annual exemption or small gifts exemption;
- was acquired with funds from an earlier gift of the donor that itself would have fallen within any of the exemptions listed above
- already forms part of the donor’s estate due to the gifts with reservation rule.
Grossing up (CLTs and IHT)
CLTs must be grossed up if the IHT is being paid by the transferor. This is because the IHT is based on the loss to the transferor’s estate.
Therefore, if the transferor pays the IHT, their estate is reduced by the value of the transferred asset and the IHT on it.
When is IHT due and what happens if it is not paid on time?
- IHT is due 6 months after death
- Interest is charged if not paid by the due date
IHT summary to view ->
Parties to a will
- Testator (the person creating the will)
- Executor (the administrator of the estate - acts out the desires listed in the will
- Beneficiary
- Witness.
Witness must be 18 years old, of sound mind, and of no relation to the beneficiaries.
Should the partner of a beneficiary act as a witness, the will is valid, but they will lose their benefit.
