Tax Flashcards
By whom is income tax payable?
Individuals and Trusts resident in the UK on their Worldwide income.
Non residents on income derived from the country
When is the tax year?
6th April -5th April
What are the main types of income?
employment income (earings) savings income including interest and dividends investment income including property
What are examples of tax free income?
NS+I NS+I children bonds bonus ISA Existing CTF Qualifying life assurance policies in hands or original owner SAYE scheme NS+I premium bonds Gambling redundancies up to £30,000 life assurance bond withdrawals of up to 5% of original premium
In what order is income taxed.
Non savings
Interest
Dividend
How much is the personal tax free allowance?
£10,000
What is the basic rate band are how is it taxed?
£31,865 @ 20%
What is the higher rate band and how is it taxed?
£150,000 @ 40%
What is the additional rate band and how is it taxed?
£150,000+ @ 45%
When is PAYE deducted?
Before earnings are received?
How are self employment and property income dealt with for tax?
They are both self assessed
When doing tax sums how should PAYE be treated?
It should be ignored until the end where it is deducted
What is the starting rate for Interest?
10% for first £2,880 is savings income is below the starting rate limit
How is Interest Paid?
Net of 20% tax
When calculating interest how is it dealt with?
Increase the sum at the start then minus off the interest at the end
How are Dividends paid?
Net of 10% tax
How are Dividends taxed?
basic rate of 10%
Higher rate of 32.5%
Additional rate of 37.5%
Can the 10% from dividends be repaid?
no as it isn’t a real tax however it can be deducted from tax liability
What happens if your income is over £100,000?
Your personal allowance is reduced by £1 for every £2 over £100,000
What loan interest payments can be deducted from total income? i.e. a person who pays interest is entitled to relief in that uear
Loans to buy
- plant or machinery for partnership or employment use (interest allowed for 3 years)
- buy interest in unquoted employee-controlled company
- invest in a partnership or co-operative
Basically any interest paid is deducted from a persons income, in usual order of non -savings, interest, dividends
What does the payroll giving scheme enable?
Employees can authorise their employee to deduct charitable donations from their gross salary before calculating PAYE
How are gifts of shares to charities dealt with?
You minus the market value. Shares must be on Recognised stock exchange
How are cash donations under the gilt aid scheme treated?
cash donations are deemed to have been paid net of 20% meaning a charity can reclaim this from HMRC.
If you are a higher or additional rate tax payer your basic rate is extended by the gross amount of the gift
What are tax reductions?
These reduce the amount of tax calculated on income
What are the relevant tax reductions?
VCT and EIS, these qualify for tax deduction up to the lower of a % (30%) of the amount subscribed for qualifying investments or an individuals tax liability
SEIS = 50%
In what order are VCT and EIS decucted?
VCT first if both are illegible
What is the process for determining residence?
- Automatic Overseas Test - if any criteria is met they are a non resident
- Automatic UK-resident test - if any criteria is met they are a resident
- Full time UK work test-if all criteria is met - Satisfy sufficient ties test - any criteria is met they are a resident if not they are a non resident
What is the criteria for the Automatic Overseas Test?
- resident in the UK for 1 or more of the last 3 tax years and spends fewer than 16 days in the UK in the current tax year.
- Not resident for any of the previous 3 tax years and spends less than 46 days in the UK this tax year
- Leaves the UK for fulltime overseas work
- Dies in current tax year but spent less than 46 days in the UK
What is the criteria for the Automatic UK-resident test?
- resident in the UK for 183 days (6 months) or more that tax year
- 90 day period, part of which is this tax year, where he has a home in the UK and no home overseas where he spends 30+ days that year
- dies that year if he was a previous UK resident in the previous year or meets full-time UK work test
What is the Full Time UK work test criteria?
Only satisfied if all the criteria are met
- 365 day period of 35 hour weeks with breaks no longer than 30+ days
- 75% of the 365 must be worked in the UK
- one day in the year he works 3+hours in the UK
What is the sufficient ties test criteria?
- UK-resident family
- Substantive UK work
- UK accommodation
- More than 90 days in either of the previous 2 year in the UK
For the purposes of establishing residence, how is a day defined?
Location at the end of the day unless you are in transit or leave the day after arriving
What is a domicile?
The permanent home of a person
How is a domicile obtained?
only 1 can be possessed and is usually that of your father. However, if the parents are unmarried or he dies before your birth then it is your mother.
How can you change you domicile?
Your domicile will change if your fathers does or after 16 when you can change it yourself. For the latter there must be evidence of a clear intention of making a new permanent home and the person must sever ties with their previous domicile
On what income is a resident liable to tax on?
Normally both UK income and overseas income
How is someone taxed who is both a resident and domiciled?
general earnings on a receipts basis
How is an non-resident taxed?
liable to tax on a receipts basis on UK income only
Who is allowed to claim UK personal allowance?
EEA Isle of Man Channel Islands Crown employees Those allowed to by a double taxation treaty
What may non-doms claim with regards to tax?
Claim for a year to be taxed on overseas income on the remittance basis meaning they are only charged on overseas income brought to the UK. Unless it applies automatically where unremitted income is less than £2000
How is the remittance basis taxed?
Taxed like earnings at 20%, 40% and 45% even for dividends
Who is liable to the remittance basis charge?
over 18’s if they claim the remittance basis for a tax year subject to residence rule.
- Been a UK resident for 7/9 of the previous tax years the remittance basis charge payable is £30,000 annually
- UK resident for 12/14 “” is £50,000 annually
Can resident non doms who have been less than 7 years elect for remittance basis of tax?
yes and there is no annual charge
Who pays national insurance?
employers and employees who are over 16. Certain benefits are only paid is sufficient NIC have been made
What are the types of national insurance?
Class 1 - paid by both employee and employer, relates to employee earnings. Primary class 1’s are paid by employees under state pension age on part of their earnings deducted from their pay. Secondary Class 1’s are paid by employer who remits the total to HMRC
Class 1A - payable on most benefits in kind-paid by employer and don’t count toward state benefit
Class 1B - employer if they entered into PSA with HMRC
Class 2 - flat rate paid by self employed unless profits are below the small earning exception
Class 3 - voluntary contributions paid by those without compulsory NIC
Class 4 - paid by the self employed and is based on the level of taxable business profits
Who pays CGT?
UK domiciled residents on the chargeable disposal of a chargeable asset
Who or what are chargeable assets with relation to CGT?
people
partnerships
companies
trusts
What assets are exempt from CGT?
NS+I certificates and bonds Gambling Foreign currency for private use EIS and SEIS held for 3 years VCT for 5 years Gilt edged securities like treasury stock QCB Single chattels i.e. tangible moveable property up to £6,000 gross proceeds per item Wasting chattels i.e. a predictable life of 50 years or less Private Cars ISA + CTF PPR of an individual in a relationship
When does chargeable disposal occur?
when an asset is sold, given away or received upon liquidation of the company
How are disposals to spouses treated for CGT?
They are tax neutral
For what period of time does a new arrival not have to pay CGT?
5 years
How do Uk domiciled people pay CGT?
they pay it on assets over the world if for part of the year they are a UK resident
How are non-doms taxed for CG?
Only taxable on the amount remitted to the UK if they have claimed the remittance basis or it applies automatically as it is under £2,000
What is the exempt amount for CGT?
£11,000
What is the exempt amount of CGT for trustees?
half the normal amount so £5,500
What are the deductables when calculating CGT?
purchase price, SDLT, legal fees and commission
How are losses dealt with for CGT?
they are deducted from gains before exempt amount is deducted
When must any unused loss be brought forward?
ASAP, losses can be brought forward so as to get gains to the level of the annual exempt amount
What are the rate for CGT?
Basic rate of 18% and the above this is 28%
What rate of CGT do trusts pay?
28%
What is the lifetime limit for Entrepreneurs relief?
£10,000,000
What is the purpose of entrepreneurs relief?
To reduce gains on a material disposal of business assets
What must be done with losses that occur in the same year as gains?
They must be fully relieved against gains regardless of this causing gains to be below the exempt amount
At what rate are gains which qualify for entrepreneurs relief taxed?
10% - this will result in a lifetime savings of £1,800,000
How are gains above the lifetime limit taxed for CGT?
Usually 28% as entrepreneurs relief is set against any unused basic rate band
What qualifies for entrepreneurs relief?
disposal of-
whole or part of a trading business
assets used in a business which has ceased
shares in a company where an individual holds 5% plus
assets used in a partnership
certain disposals by trustees
What is the deadline for claiming entrepreneurs relief?
First Anniversary of jan 31st following the end of tax year disposal. 2014/15 disposal the deadline will be jan 31 2017
On what is IHT payable?
transfers of value by a chargeable person done directly or by a trust
tax on wealth left on death
gifts within 7 years of death
certain lifetime transfers of wealth to trusts
On what IHT are UK domiciled charged?
worldwide assets
How are people not domiciled charge for IHT?
On the transfer of UK assets, broadly this refers to assets in the UK
What is the exempt amount for IHT?
£325,000 - called the nil-rate band
At what rate is IHT charged?
40%
How much of an estate needs to be left to charity to get the reduced rate and what is the reduced rate?
10% of the estate leads to 36% IHT
How is any unused amount of the nil-rate band transferred to spouse?
The survivors nil-rate band is increased by the unused proportion of the the dead
When is a potentially exempt gift exempt of IHT?
If the donor dies 7 years or more after making it
What is the only type of transfer into a trust treated as PET?
When the trust is for the disabled
What are the exemptions to IHT?
some apply only to lifetime transfers
other exemptions apply to both lifetime gifts and property passed on death
-small gifts exemption - £250 per annun. However, if more is given the whole amount if charged
-annual exemption - first £3,000 is exempt - this is used only after all other exemptions. if several gifts are made it is applied in time order. This annual exemption is used by PET and CLT. The annual exemption can be carried forward one year
What are the other exemptions for IHT?
If it is-
made as normal expenditure
out of income and leaves the transferer with sufficient income to maintain standard of living. This exemption mainly covers things such as grandparents paying school fees
Wedding gifts - £5,000 from parents
£2,500 from relations
£1,000 from others
What are the exemptions applying to both lifetime transfers and transfers on death?
Gifts to charities
Spouse gifts if donor is UK domiciled. this covers lifetime gifts and death transfers. if the donor is domiciled the limit is £325,000. if neither is domiciled there is no limit on the exemption any amount over will be a PET
IHT rules look back 7 years for transfers
Excess over the nil rate band is taxed at 20%
on death you need to look back 14 years
How is lifetime transfers taxed?
<7 years - 80% reduction = 8% tax
How pays IHT on a lifetime transfer on death?
the reciever
What is an Interest in possession Trust?
a trust where the beneficiaries are automatically entitled to receive all income as it arises?
What is a discretionary trust?
a trust where the trustee determines which beneficiaries to make payments to and how much they are
How are IIP Trusts taxed for income?
interest income is taxed at 20%
Dividends is taxed at 10%
as these are the how the two are usually p[aid no tax is due
The beneficiary or life tenant recieves income after the tax has been paid
beneficiary will also recieve a statement and will use for own tax calculation. Income retains its nature e.g. dividends will stay dividends.
How is a discretionary trust taxed?
It has a basic rate band of £1,000 where interest and other income is taxed at 20% and dividends at 10%. applied in the same order as for individuals. remaining income is taxed at additional tax rates
45% for interest and others
37.5% for dividends
How is income from a discretionary trust received?
payments are made to them net of 45%. Therefore basic and higher rate tax payers will be able to reclaim the money. the trustee will provide a statement to the beneficiary showing the relevant figures
Who usually completes a self assessed tax return?
Those who are self employed and trustees with more complicated affairs.
When must HMRC be notified for self assessed tax returns?
6 months before the end of the tax year if they chargeable income or CGT and haven’t received a notice
What is the latest date for filing a self assessed tax return?
31 october in the next tax year for a paper copy
31 january in the nex tax year for e copy
How can tax be calculated for self assessed tax returns?
for paper copies either you calculate or HMRC will do it for you.
online the calculation is made automatically
How many payments may be needed by a self assesed person and when will they be?
3 payments due
1st payment of account by 31 Jan in that tax year
2nd payment by 31 July after the end of the tax year
final settlement on 31Jan after tax year
Why do payments of account occur?
when income and class 4 NIC due in the previous year exceeded the amount of income tax deducted at source. the excess is known as the relevant amount
What are deductions at source with regards to self assessed tax returns and payments of accounts?
PAYE
tax credit on dividends
tax suffered e.g. 20% on interest
What amount of the relevant amount are each payments?
50% each
When may payments on account not be required?
when relevant amount is below de minimis limit of £1,000
when taxpayers paid 80% of tax last year through PAYE or deduction at source arrangments
What and when are the late fees for tax returns?
Interest is calculated from the due date to the day before the payment date.
if tax is unpaid at 30 days, 6 months and 12 months there are penalties of 5% of the unpaid tax at these time
How long must Individuals and the self employed keep records relating to tax?
individuals must keep records 1 year after the online tax return deadline of 31 jan
Self-employed must keep 5 years after the online tax return deadline of 31 Jan.
the same deadline applies whether paper of online applications where submitted
What is PAYE?
method where income tax and national insurance contributions are deducted from employee earnings
When must employers pay PAYE
they pay on pay days falling between the 5th of a month and the 6th of the next within 14 days of the end of tax month.
electronic payments have an extended date of 3 days
With regards to PAYE what must an employer do at the end of the year?
Give the employee a P60 by 31 of MAY following the tax year. this contains info regarding total taxable earnings, deductions, tax code, NI number and employers name and address
What is tax avoidance?
Legal way to ensure tax payer doesn’t pay more than is legally due
What is tax evasion?
illegal method of reducing tax e.g. not reporting
What are the basic principles of SDLT?
is payable on the transfer of land
payable as % of consideration paid for land and on the premium for a lease or the assignment of an existing lease
What are the SDLT rates
residential non-residential
0% £0-£125,000 £0-£150,000
1% £125,001- £250,000 £150,001-£250,000
3% £250,001-£500,000 £250,000-£500,000
4% £500,000-£1,000,000 £500,000+
5% £1,000,001-£2,000,000
7% £2,000,001+
rent for non-residential land up to £150,000 is 1% if annual rent is above £1,000
What is the rule about enveloped dwellings for SDLT?
residential property over £500,000 is bought by a company an anti-avoidance rate of 15% applies as a deterrent against SDLT avoidance
What is ATED?
where residential properties over £2,000,000 owned by companies are subject to ATED at a banded rate from £15,400 up to £143,750 depending on property value.
Properties between £500,000 and £2,000,000 will come into this in 15/16
Who or what is exempt from ATED?
buy-to-let and property developers
What land transactions are exempt from SDLT?
- transfer to charity if land is used for a charitable purpose
- variations of will made within 2 years of death for non consideration
- transfer on separation
- transfer for no chargeable consideration(except to connected parties
What is SDRT
tax on electronic share transactions of 0.5%
No SDRT is payable on purchasing shares in a UK domiciled ETF
From 28th April 2014 it is not payable for recognised growth markets such as AIM and ASDX
What is corporation tax?
A tax on the worldwide profits (subject to an opt out for non-uk branches) and on capital gains in the accounting period
What is the accounting period?
period for which crop tax is charged and can’t be more than 12 months
How are non UK firms taxed for corp tax?
They are taxed on profits derived from the UK
What determines the accounting period?
the period of accounts which is the period for which a company prepares financial accounts. The period of account is normally 12 months but can be shorter or longer. if longer the period of accounts must be split into 2 accounting periods. The first accounting period will always be 12 months
When do most firms pay their corp tax?
nine months and a day after after the end of their accounting period. However, large firms pay in four quarterly instalments which are based on estimate of the current tax year
How is Corp tax paid?
it is self-assessed and as there is scope to manipulate profit e.g. using depreciation rates for assets, certain adjustments must be made to profit figure
How do you determine the trading profit for corp tax?
Certain disallowed expenses which are deducted from profit in financial accounts can’t for corp tax such as client/supplier entertainment and provisions for uncertain debts (although bad debts are allowed)
Depreciation charged in financial accounts isnt allowable expenditure for tax as the firm chooses the rate. Capital allowances can be deducted
How is interest received for companies?
it is received gross
as it is investment and not trading income it must be deducted from the profit before tac shown in accounts when calculating taxable profit. It is then added to the rest of the companies income and gains to arrive at total profits.
Interest paid on a company e.g. bonds is deductible for tax purposes and doesn’t normally need to be adjusted for
How are dividends received for companies?
When they are received from other companies they are tax free and are not part of taxable profits.
Although dividends are exempt from corp tax, the gross dividend is added to profits to arrive at augmented profits which determine corp tax rate
How are company capital gains treated for tax purposes?
they are chargeable to corp tax as only individuals pay CGT
What are the corp tax rates?
main rate of 21%
small profits rate of 20%
they are set for the financial year - 1st april to 31 march and are identified by the calendar year it begins
What qualifies firms for main or small profits rate corp tax?
Firms with augmented profits (total profit plus gross dividends) of £1,500,000 pay the main rate
firms with less than £300,000 profit pay the small rate
inbetween these firms pay inbetween.
for 2015 20% for both rate
What is VAT?
tax based on sale turnover and should be born by the final consumer
What is the VAT rate?
20%
How are companies losses dealt with for tax?
They pay be carried back (usually a year) to offset against profits and get a refund. They can also be carried forward indefinitely.
How long must records be kept for corporation tax?
6 years
Who receives a lower VAT rate and what is it?
Energy product and services and it is 5%
What is a zero rated supplier?
someone who doesn’t have to pay VAT e.g. supplier of books. a taxable supplier can obtain repayments if outputs are zero rated and inputs are standard rated.
What are inputs for VAT?
VAT paid to suppliers
What are outputs for VAT?
Output is what goes to the customer
What is an exempt supply for VAT?
e.g. supplier of financial services or insurance. an exempt supplier can’t recover VAT inputs and thus shoulder the burden usually through higher prices
What is the impact of VAT on investment services?
commissions - exempt
advisory services - standard rate if invoiced seperately, otherwise exempt
nominee services - exempt
portfolio management services - standard rate.
What are the two types of savings accounts offered by NS&I?
Direct Saver and the Investment Account
What are examples of cash investments?
- Banks and Building Societies
- NS&I savings accounts
- Time deposits (or term accounts)
- Money Market accounts, which allow deposits for period ranging from overnight to 5 years
- Foreign currency accounts
Income received from cash investments will be in what form?
interest
How is interest paid for NS&I savings accounts?
It is paid gross but can be taxed
Why don’t NS&I Savings Certificates and Childrens Bonds pay tax?
No certificate issues are currently on sale and children’s bonds are tax free
What are the features of fixed interest securities?
- Fixed redemption value
- Fixed rate of interest (usually paid every 6 months)
- Pre-specified redemption date
How is interest from gilts paid?
Gross unless the investor elects to have 20% tax deducted from it or the gilt was purchased before 6 april 98 and the investor has not elected for gross payments
What are the names for fixed interest securities or types of bonds?
Gilts Corporate Bonds Loan Stock Debentures Loan notes
How is interest on corporate bonds or debentures usually paid?
net of 20% tax
Do Gilts and corporate bonds pay CGT on their disposal?
Gilts don’t
Neither do qualifying corporate bonds (most company loan stock and debentures). The gains on such disposal are exempt and losses aren’t allowed to be set against gains
What are the main costs of buying shares?
Purchase cost
Broker’s commission
SDRT - 0.5 on electronic purchase of UK equities
How can a person get entrepreneurs relief for shares?
If they hold at least 5% in a firm they work for and has owned the shares for at least 1 year. Then they can get entrepreneurs relief up to the lifetime limit and reduces the effective tax rate to 10%
How is property income taxed?
The same as non-savings income i.e. 20%, 40% and 45%
What costs on property are normally deductible when calculating profit?
- Mortgage interest on the let property
- Maintenance Costs
- 10% (* the rental income) ‘wear and tear’ allowance or, alternatively the cost of replacing (but not the original purchase price) of furniture, fixtures and fittings
- Estate agent’s commission
- Management expenses
Improvement expenditure e.g. extension is not normally deductibe
What happens if a land-lord is a non-UK resident?
The tenant or letting agent must deduct basic rate tax from the property income before paying the rent to the non-resident landlord. The landlord may apply to HMRC to be allowed to receive gross payments of rent, if he completes a self-assessment tac return and keeps his tax affairs up to date.
What determines whether you pay CGT on the disposal of a property?
If the property has ever been the PPR, that he has lived in at any time. the gains may be fully or partially exempt from CGT. This depends on how long he has owned the property and how long it was the investor’s PPR. A married couple or civil partnership can only have one PPR.
If the property has never been a PPR it is taxable in full
What expenses of sale can be deducted from CGT on property?
legal fees
What are the main costs of originally investing in property that can be deducted when calculating gain?
Purchase Cost
Legal Fees
SDLT
Property will not usually qualify for entrepreneurs relief
How will a pension be tax free?
If the pension plan is registered with HMRC?
What are the ways a person can make pension provisions?
Personal Pension scheme - these are DC - this means the level of money which be drawn depends on the performance of investment
Occupational pension schemes- set up by employer for employee - used to be DB where his time at the firm and final salary come into it. However many are now DC
Those under the age of 75 may make what tax-relievable contributions to pension schemes?
Up to the higher of his earnings and £3,600
What is the annual allowance limit for pensions?
£40,000
How can unused allowances in a pension be carried forward for?
unused allowances from the previous 3 years so long as the pension is registered with HMRC
How are pension contributions taxed when over the annual allowance?
The amount which is over is added to net income and taxed like that
How are all contributions to personal pensions paid?
net of basic rate tax - 20%
How do higher and additional taxpayers get tax relief on person contributions?
Their basic rate limit for that year is increased by the gross amount of contributions for which the taxpayer is entitled to relief.
How do employers normally pay into pensions?
Through a ‘net pay’ arrangement. The employer will deduct the gross pension contribution from earning before calculating PAYE
What is the normal minimum age for taking benefits?
55 years
What enables someone to to receive pension payments before the normal minimum age for taking benefits?
If the person is incapacitated by ill health.
At this stage a person may take a pension income and or a lump sum
What % of a pension can be drawn as a tax free lump sum?
25%, subject to the lifetime limit. The remainder must be used to provide pension income
At what rate are any withdrawal excess of the 25% taxed at?
55%
What is the proposed change to how the excess pension withdrawals are to be taxed?
from 6 april 2015, those with DC will have complete flexibility in how they withdraw their money from their on and after 55. Any withdrawals over the 25% would be taxed at the persons marginal tax rate
How is pension income taxed?
Like non-savings income
What is the pension life time allowance?
£1,250,000 - there is a maximum value for the pension fund (for money purchase arrangements) or for the value of benefits (for defined benefit arrangements)
How will income be taxed if the a pension fund exceeds the lifetime limit?
The excess, will be taxed
55% for a lump sum
25% for pension income
What are the two types of ISA’s?
Cash, including all kinds of bank and building society accounts as well as NS&I products and similar
Stocks and shares
What can be included in a stocks and shares ISA?
- shares and corporate bonds issued by companies listed a RIE anywhere in the world (aim is included)
- gilts and other EEA gov bonds and ‘strips’ of all these securities
- Units or share in FCA authorised trusts (unit trusts and OEIC) and similar UCITS European funds
- Units or shares in non-UCITS retail schemes authorised by the FCA for sale to UK retail investors
- Shares and securities in investment trusts
- Shares which have been transferred from an HMRC-approved SAYE share option scheme or Share Incentive Plan
- Life insurance policies
- Stakeholder medium-term products
Who can invest in ISA?
18 + UK residents can invest into two ISA each year, one for each type of account, so long as they keep within investment limits
Trustees cannot invest in ISA
What are the main features of an ISA?
- up to 30 June 2014 there was a year subscription limit of £11,800 with a maximum of £5,940 being invested in the cash account. The full amount may be invested in stocks and shares
- there is no statutory lock-in period or minimum subscription
- There is no lifetime limit
What is the subscription limit for ISA?
£11,800
How much of subscription limit may be in a cash isa?
£5,940
What can those under the age of 18 do with regards to ISA’s?
Those above the age of 16 may subscribe to a cash-only ISA account
What were the changes for the NISA?
tax year contribution limit was increased to £15,000 from 1 July 2014.
Investors can invest their money in the two accounts however they want but only one of each type of NISA can be opened each year.
Previous year’s fund from ISA’s can be transferred into a NISA
Once the maximum amount has been subscribed into any ISA for a year it is not possible to make further investment, even if funds have previously been withdrawn
How is an ISA taxed?
An ISA receives no tax on any of its investments
What happens with regards to ISA’s when an individual becomes a non resident?
All benefits are retained of ISA’s held up to that time. However, no further subscriptions may be made unless they become a resident again!
What are the key features of a JISA?
It replaced CTF and are open to UK-resident under 18 who were born after 2 January 2011 and therefore can’t have a CTF
Single overall limit for each child of £3,480 per tax year. However, this increase to £4,000 from the 1st of July 2014
Both cash and stocks and shares JISA’ exist and can be invested in any combination
Anyone can put money into a JISA which is in the child’s name. The opener of the account is the ‘registered contact’ who is responsible for managing it. Child can choose to become the registered contact from 16 and can withdraw money at 18 when the JISA becomes and ISA
What is the limit for a JISA?
£4,000 from the 1st of July 2014.
It was previous £3840 for each child per year.
What are 3 types of collective Investment schemes?
Unit trusts
Investment trusts
OEIC
How is a Unit Trust or OEIC which is an equity fund taxed?
It receives its income (dividends) net of 10% so has no further tax to pay
How is a Unit Trust or OEIC which is a non-equity fund taxed?
Its receives income (e.g. interest or rental) gross and pays corp tax of 20% which is equivalent to basic rate of income tax
How are Unit Trusts and OEIC taxed regardless of their type?
they are exempt CGT on disposal meaning they can trade in and out of shares without concern for the implications
How are HMRC approved investment trusts taxed?
Exempt from CGT
non-dividend income is subject to corporation tax
How are investors into unit trusts and OEIC taxed on the income they receive?
Dividends received are taxed as normal e.g. 10%, 32.5%, 37.5%
Interest from a ‘bond fund’ i.e. 60% of its investments are interest-bearing securities are deemed interest income at have 20% tax deducted at source unless the funds are in an ISA
Pay CGT on disposal of units and shares
How are investors into investment trusts taxed on the income they receive?
Only ever receive dividends which are taxed the same way as normal dividends
Pay CGT on disposals of shares
What determines the taxation of an individual investor in an offshore fund?
Whether the fund is granted reporting or non-reporting status by HMRC.
These rules replaced the previous distributor, non-distributor status rules when the Offshore Funds (tax) Regulations in 2009 came into force in December 2009
Do offshore funds pay tax?
Generally no, but a small local tax may be payable in some jurisdictions
What is the intention of the offshore fund rules?
to prevent the roll-up of income in pooled investment arrangements, with a subsequent realisation at (or nearly at) net asset value, or (by reference to an indexed value)in capital form
What is the relevance of being a reporting or non-reporting offshore fund?
A reporting fund - gains on disposal will be charged like CGT i.e. 18% and 28%
A non-reporting fund - gains on disposal treated like income i.e. 20%, 40%, 45% and losses can’t be set against gains
What is the purpose of the income tax charge for non-reporting funds?
penalise investors in such funds (which report little by way of dividends) in order to turn income (taxed at income tax rates) into capital growth (taxed at lower CGT rates)
These funds are sometimes termed ‘roll-up’ funds as income is accumulated in the fund
How are monies received by UK investors in all offshore funds taxed?
Like usual rules for UK income tax, dividends and interest are taxed at different rates
What must UK investors of reporting funds do?
declare as income their share of the fund’s reportable income, as well as their distributed income, which is paid gross
What must an offshore fund do in order to maintain its reporting status?
- Prepare accounts in accordance with an acceptable accounting policy
- Provide reports of their ‘reportable income’, which is the accounts figure for the total return of the fund adjusted in accordance with certain rules set out in Offshore Funds (Tax) Regulations 2009. (They must provide reports to both HMRC, to include a computation showing their reportable income, and to participants (investors) that show their proportionate share of that income)
- Make certain info available to HMRC when requested to do so
What are the types of life assurance policy?
- Contracts for protection (insurance) purposes only
- Contracts with both protection and investment elements, which are the focus of this section
How is a qualifying life assurance policy taxed?
20% on both its incomes and its gains
As a result payouts from these policies are often completely tax free
What is a qualifying life assurance policy?
One where premiums have been paid for a minimum of one of the following
- Life of the life assured
- 10 years
- 3 quarters of the term
What happens to a non qualifying life assurance policy?
There may be income tax charge on encashment of the policy.
What is a non-qualifying policy?
single premium bond where a lump sum is invested in a life fund a small part of which covers in the event of death with the balance being invested. These are also known as investment bonds or property bonds
What is the encashment of a non qualifying life assurance policy?
the enchasment or partial exchange (withdrawal) of such a policy, is a chargeable event for income tax purposes. Depending on circumtances, this event may produce an additional income tax charge in the year which the event occurs
A chargeable event may occur when an encashment is received by higher or additional rate taxpayer.
For such a bond up to 5% of the original premium each year of the bond’s life (including the year of the chargeable event) may be withdrawn from the bond with no immediate tax implications until 100% is reached. For withdrawals above this 5% level the excess will be taxable
what is another name for an offshore life policy?
an offshore bond
What is the difference between an offshore bond and a UK-non qualifying policy?
offshore bond - the underlying life funds suffer little or no tac(gross roll up) compared with UK life funds which are taxed at 20%
How withdrawals dealt with for offshore life policies?
up to 5% of original investment may be taken each year for 20 years. the allowance can be carried forward
How is the encashment of offshore life policies treated?
More stringently than than for onshore products. chargeable gain on the bond is subject to basic, higher and additional tax
How do you find the slice of gain for offshore life policies?
use the number of years since the beginning of the bond rather than years since last chargeable event like on onshore bond
What happens to an investor in an offshore life policy if for part of the time they were a non-UK resident?
he receives relief for the time he wasn’t a resident. If he is a non-resident when the bond is encashed there are no UK tax consequences
What is an REIT?
a listed company, owning managing and earning rental income from commercial or residentil property
How is an REIT taxed?
they can elect for their property income and gains to be exempt for corp tax and must without a basic rate(20%) from distributions paid to shareholders out of these profits.
A shareholder can’t own more than 10%
The distributions are taxed as property income rather than dividends. However distributions out of other income are taxed as dividends
REIT may be held within ISA and existing CTF.
If there is a capital gain on the disposal of REIT shares it may be subject to capital gains tax
What is the EIS?
scheme designed to promote enterprise and investment by helping high risk, unlisted companies raise finance through issuing shares to individuals.
The company must be an unquoted trading company that carries on a qualifying business activity for at least 3 years.
It must not be an subsid or be controlled by another company. Any subsids it has must be at least 90% owned and the group taken as a whole must qualify
How can individuals invest in an EIS?
Either directly or through an EIS fund
What are the non qualifiying businesses for EIS?
- Banking
- Dealing in commodities
- Property development
What must a firm do or have to be an EIS?
The company must be an unquoted trading company that carries on a qualifying business activity for at least 3 years.
It must not be an subsid or be controlled by another company. Any subsids it has must be at least 90% owned and the group taken as a whole must qualify.
fewer than 250 employees aand raise no more than £5,000,000 through EIS, VCT and similar schemes in a 12 month period
Assets of the company must not exceed, £15,000,000 immediately before the share issues and £16,000,000 immediately after
What is SEIS?
Like an EIS but focuses on smaller, early stage companies carrying on or preparing to carry on new business in qualifying trade. The scheme make available up to 50% income tax relief, plus rollover of capitgal gains, to investors who subscribe up to £100,000 for shares and have a stake of less than 30% in the company
How is A EIS taxed for income?
any amount subscribed is a tax reduction, saving income tax at 30%.
The maximum total that can qualify for this is per year £1,000,000 resulting in a maximum saving of £300,000
A 14/15 investment will attract relief against the tax liability for that year. However, the taxpayer can claim to carry back all or part of the investment in the previous years using an unused part of the limit.
Relieif may be withdrain in certain events such as the sale of shares occuring with three years
Dividends from EIS shares are taxable under normal rules
Trustees cannot obtain any income tax relief
How are EIS and SEIS taxed for CGT?
CGT is payable when an investor sells his shares.
- the disposal of shares after a 3 year period, gains are exempt from CGT however if before, gains are computed in the normal way.
- if disposed at a loss, the loss is allowable but the acquisition cost of shares is reduced by the amount of EIS or SEIS relief attrivuted to the shares. The loss can be set against capital gains, as normal, and can also be set against the investor’s income
What is EIS CGT reinvestment or ‘deferral’ relief?
It allows the taxpayer to defer chargeable gains arising on the disposal of any asset if he invests in EIS shares in the period starting one year before and ending three years after the disposal of the asset.
How are EIS taxed for IHT?
EIS investments that have been held for at least two years are normally exempt from IHT
What is a VCT?
listed company that invest in unquoted trading companies and meet certain conditions. The VCT scheme differs from EIS in that the individual investor may spread his risk over a number of individually higher-risk, unquoted companies
What are the rules for an VCT?
- each company must have fewer than 250 employees
- each qualifying company may raise no more than £5,000,000 through EIS and CGT in the 12 months ending on the date of the relevant investment
- assets of the company must not exceed £15,000,000 immediately before the share issue or £16,000,000 immediately after
How does a VCT pay income tax.
Receives income tax benefits
- a tax reduction of 30% of the amount invested. There is a withdrawal of relief if the shares are disposed of within five years of if the VCT ceases to qualify
- dividens received are tax-free income.
There is a maximum qualifying investment of £200,000
No relief is available for trustees
Income tax relief is not given where individuals make investments into VCT within 6 months of disposing of shares in the same VCT, and where the investment is conditionally linked to a VCT share buy-back
How is a VCT taxed for CGT
CG on the sale of shares in the VCT are exempt and loses aren’t allowable. CG which the VCT makes itself are also exempt from corp tac
from 6 april 2014, HMRC can withdraw the CGT exemption in all cases if VCT shares are sold within 5 years of their acquisition. Previously, there was no minimum holding period
What is the social investment tax relief?
Modelled on EIS, a tax relief is available from 6 april 2014 for investments made in qualfiying social enterprise. These may include charities, community interest companies and community benefit societies. As well as for equity investments, relief is available on loans to social enterprises and for investments into social impact bond. As for EIS, relief is available at 30%, on investments up to £1,000,000
What rules exists regarding transfer of assets to children?
Rules prevent parents transferring wealth to children for tax reasons. However, these rules only govern parents so other relatives e.g. grandparents can make gifts. However, these rules don’t apply to income from CTF and JISA
