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TAX AFAT Flashcards

1
Q

What is the starting rate for savings?

A

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

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2
Q

IHT Threshold

A

£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.

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3
Q

PET and rates

A

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%

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4
Q

Tax treatment of assets in trust.

A

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)

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5
Q

What is CGT? Rates? Allowance?

A

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

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6
Q

What is exempt from CGT?

A
  • 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
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7
Q

CGT tax-free allowance?

A

£3000
£1500 for assets in trust

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8
Q

Annual Gift allowance

A

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.

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9
Q

What does ‘at arm’s length’ mean?

A

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)

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10
Q

What is the current dividend allowance? (2024)

A

£500

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11
Q

What are some of the main types of income that are not taxable?

A
  • 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
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12
Q

What are the tax implications when withdrawing funds from a life policy?

A

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%)

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13
Q

Who pays Class 2 NICs?

A
  • 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.
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14
Q

Who pays Class 1A NICs? Rate?

A
  • Employers only
  • Paid on taxable benefits held by the employee
  • Rate is 13.8% (2024)
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15
Q

Who pays Class 1 NICs?

A
  • Employees (Earnings dependant)
  • Employers (13.8% 2024)
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16
Q

Who pays Class 4 NICs? Threshold?

A
  • 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%

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17
Q

What is a benefit in kind? Examples?

A
  • 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
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18
Q

Who pays Class 3 NICs?

A
  • These are additional voluntary contributions for those who wish to fill a gap in their NIC history
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19
Q

How many qualifying years of NIC contributions is required for the full state pension?

A

35 Years, 30 if retired before April 2016

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20
Q

What 3 main deductions can be made to somebody’s gross salary before tax is calculated?

(excluding allowances)

A
  • Pension contributions
  • Charitable donations
  • Allowable expenses (Self-employed tax relief)
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21
Q

What is an allowable expense? And examples…

A

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
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22
Q

What is a P45, when would you receive and what must it contain?

A

Details:
- Name
- District reference
- Tax code
- Week or month of last entries
- Total gross pay to date
- Total tax due to date

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23
Q

Transfer of personal allowance?

A

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
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24
Q

When is an individual’s personal allowance reduced?

A
  • 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
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25
Q

Blind person’s allowance

A
  • Currently £3,070
  • Added to your tax-free personal allowance
  • Can be transferred to spouse (even if they are not blind)
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26
Q

Order of Taxation

A
  1. Employment income/Pension income
  2. Rental income/ Savings interest
  3. Dividends
  4. Gains from life policy.
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27
Q

Dividend taxation

A
  • Annual dividend allowance = £500
  • Taxed after savings income
  • 8.75% for basic rate taxpayers
  • 33.75% for higher rate
  • 39.35% for additional rate
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28
Q

Can you transfer any unused dividend allowance to the next financial year?

A

No

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29
Q

Taxation from proceeds from a unit trust

A
  • 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
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30
Q

What is the taxation of a company car based on?

A
  • It’s emissions
  • Tax is equal to a proportion of the vehicles list price.

Taxation of company cars is shown on a P11D form.

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31
Q

Taxable employee benefit examples

A
  • 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
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32
Q

How would an individual see how much state pension they are entitled to?

A
  • Complete and send of BR11 form
  • If they have a government gateway account, access through there.
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33
Q

P60 details

A

Sent at the end of each tax year to employees. Holds details of:
- Total tax deducted
- NICs contributed
- Final tax code

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34
Q

P45 details

A

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.

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35
Q

Collection of tax - Self employed

A
  • 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.)
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36
Q

When is deemed the date of disposal for an asset due CGT?

A

When the sale becomes legally binding. This may be different to the date in which money is changed hands.

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36
Q

Can the annual exempt amount for CGT be carried forwards?

A
  • No
  • Capital losses can be brought forward.
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37
Q

What is the ‘trading allowance’?

A

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.

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38
Q

CGT and Private residences

A

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.

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39
Q

How to calculate CGT.

A
  1. Determine the disposal proceeds (actual or market value)
  2. Deduct the cost of purchasing the asset
  3. Deduct any costs incurred in arranging the purchase and sale and any enhancement costs.
  4. Set off any capital losses
  5. Deduct the annual exempt amount.
  6. The rate of CGT is based on the individual’s income tax band, so the gain is added as the last part of income.
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40
Q

Capital losses key points for CGT

A

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.
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41
Q

Bed & Breakfasting

A

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

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42
Q

Life Policies and CGT

A

Payments from life policies are normally exempt from CGT.

In certain circumstances where qualifying rules are broken it may be payable.

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43
Q

Fringe Benefits and examples

A

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

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44
Q

Capital gains tax reliefs

A
  • Business roll‑over relief
  • Hold‑over relief
  • Reinvestment relief
  • Business asset disposal relief
  • Investors’ relief
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45
Q

Other investments liable to CGT

A
  • Unit Trusts
  • Open-ended Investment companies (OEICs)
  • Investment trusts
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46
Q

Roll-over relief for CGT

A

A deferral of CGT where a company sells assets used for business and use the proceeds to purchase new assets for the business.

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47
Q

Hold-over relief for CGT

A

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.

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48
Q

Reinvestment relief for CGT

A

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.

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49
Q

Business asset disposal relief for CGT

A

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

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50
Q

IHT and domiciled/ non-domiciled in the UK?

A

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.

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51
Q

IHT Rates

A

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%

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52
Q

Ways to reduce IHT liability

A
  • 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)
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53
Q

RNRB

A

Residential Nil-rate Band - £175,000

Reduced when estate is above £2m. Reduced by £1 for every £2 over.

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54
Q

Property ownership and IHT

A

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.

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55
Q

Exempt transfers for IHT

A
  • 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
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56
Q

Small gifts exemption for IHT

A

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

-

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57
Q

Annual exemption for IHT

A

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.

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58
Q

Wedding and Ceremony Gifts and IHT

A

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
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59
Q

Gifts out of regular income and IHT

A

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
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60
Q

Gifts with reservation and example

A

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.

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61
Q

What is a CLT?

A

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’

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62
Q

IHT reliefs

(not exemptions/allowances)

A
  • Quick succession relief
  • Business relief
  • Agricultural relief
  • Woodlands relief
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63
Q

Quick succession relief for IHT

A

Relief given if a beneficiary from the original inheritance passes away with 5 years.

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64
Q

Business relief for IHT

A
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65
Q

Previously Owned Assets Tax (POAT)

Limit? What does it apply to? What is the charge based on?

A

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.

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66
Q

Exclusions and Exemptions for POAT

A

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.
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67
Q

Grossing up (CLTs and IHT)

A

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.

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68
Q

When is IHT due and what happens if it is not paid on time?

A
  • IHT is due 6 months after death
  • Interest is charged if not paid by the due date
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69
Q

IHT summary to view ->

A
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70
Q

Parties to a will

A
  • 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.

71
Q

IR35

A

Tax legislation

Off-payroll working
- Broadly speaking, rules that enforce off payroll workers to pau the same income tax and NICs as pay rolled workers

The legislation is designed to tax ‘disguised’ employment at a rate similar to employment

72
Q

What is a Mirror Will?

A

Mirror wills are the most common form of will for spouses/civil partners.

  • Each partner makes a near identical will, typically leaving everything to each other first.
  • If both die, the estate is left to any children or named beneficiaries.

Incorrectly named joint will

73
Q

What is a mutual will?

A

Less common and more complex than a Mirror will.

  • Both parties create broadly similar wills with similar terms.
  • Both wills contain a clause that states they cannot revoke the will upon first death,
  • Beneficial to ensure assets go to the originally intended party. For example, if the survivor remarries, they cannot change the terms of their own will to leave their estate to their new spouse.
74
Q

Codicil

A

This is the simplest way on making a change to an existing will.

  • Must be signed by the testator in the presence of two witnesses.
  • Forms an additional page in the will.
75
Q

How long must a spouse survive in order to benefit from the estate of the deceased if no will?

A
  • 28 days.
  • Otherwise distributed via laws of intestacy as if there was no spouse
76
Q

Within the laws of intestacy, do full-blood relatives take precedence over half-blood relations?

A

Yes

77
Q

Intestacy and spouses + children

A

Spouse receives:
- Chattels
- First £322,000 of the estate absolutely.
- 50% of estate absolutely.

Children receive the remaining 50% of the estate absolutely.

78
Q

How is the estate distributed when there is no will? Explain process for a single individual with no children

A

Under the laws of intestacy.
1. If no spouse or children, the estate goes to parents
2. If no parents, it goes to sibilings
3. If no siblings, it goes to grandparents
4. If no grandparents, then goes to aunts/uncles
5. If no aunts/uncles, then the estate goes to the Crown.

79
Q

What is a Grant of probate and when is it needed?

A

When a holder of a valid will dies, the executor of the will will need to obtain a grant of probate from the Probate registry to distribute the estate.

In order to get this, any IHT must be paid first.

80
Q

When is grant of probate not needed?

A

Under the ‘small estates’ exemption.
- Estate under £5000

Also applies to estates following rules of intestacy (no will)
For banks, building societies, and investment funds, this value is higher (between £15,000 and £25,000)

81
Q

What is a Letter of administration and when is it needed?

A

When someone dies intestate, an ‘administrator’ is required to complete the formalities of winding up the estate

  • Similar to Grant of Probate but more lengthy as beneficiaries need to be identified.
  • Once IHT paid, letters of admin are granted and the admin can distribute the estate.
  • Small estates exemption applies

Administrator of the estate must be 18 years old.

82
Q

Three ways to change the terms of a Will or intestacy

A
  • Codicil
  • Deed of variation
  • Disclaimer
83
Q

What is a disclaimer in relation to Wills?

A
  • Beneficiary can reject a bequest through a written request.
  • Disclaimer needs to be written 2 years before death to be accepted as if the bequest had never been made.
  • If accepted, the bequest will go back into the estate to be distributed to other beneficiaries.
  • the beneficiary giving up their legacy has no control over what happens to it.

Common reason for this is to change the IHT position.

84
Q

What is a deed of variation in relation to Wills?

A

A collective agreement by all beneficiaries to change the terms of the will or even the law of intestacy.

All the beneficiaries adversely affected by the proposal must be agreement.

-Those beneficiaries unaffected by the variation do not have to agree and have no right to object, because their position (and their inheritance) would not change.
- Must be made within two years of death.
- Only valid if:
* it was not made in exchange for a consideration (money or goods)
* all beneficiaries adversely affected by the variation are aged 18 or over, of sound mind and in agreement.

85
Q

What is a Trust?

A

A trust is an arrangement where one party (the settlor) can give assets to another (the beneficiary) without the beneficiary gaining control of the asset.

  • Useful for IHT planning

Once a gift has been made into a trust, the property will be out
of the settlor’s estate for IHT purposes, providing the settlor does not retain any interest (ownership) in the trust property.

86
Q

What happens if the settlor of of an asset in trust still receives a benefit from it?

A

Transfer is considered a ‘Gift with reservation’

  • Asset is placed back into their estate.

For example, gifting a property to a child then living in it without rent.

However, if they pay a market value rent then it is not a Gift with reservation.

87
Q

Use of trusts with Life Assurance policies

A
  • Proceeds from life Assurance policy stays out of the deceased’s estate
  • Means beneficiaries can be paid quickly, does not require grant of probate before distributing assets held in trust
88
Q

3 uses of trusts

A

IHT planning
- Gifts to trusts are outside of the estate if the settlor dies after 7.
- Growth on assets in trust belong to the trust, not the estate.

To provide for family members in the event of the settlor’s death, and and during life:
- Trustees are in control of assets placed in trust meaning the benefiaries cannot squander the funds.
- It is also possible to put property in trust to ensure that a spouse, or children, can continue to live in the family home.

Used to arrange continuing benefits for successive benefiaries:
- For example, to provide benefit for a spouse, and then for the children on the spouse’s death

89
Q

Parties to a trust

A

The settlor
- The donor, the person creating the trust. Can also be a trustee

The Trustee
- Appointed by the donor, takes legal ownership of assets
- Acts in accordance with the trust deed
- Responsibilities may include distributing assets and managing assets

The Beneficiary
- The intended recipient of assets or income produced by the trust
- Discretionary trusts give the trustees discretion over
what to pay, in what form, when and to which beneficiaries.
- A contingent beneficiary is someone whose right to the property is dependant on something happening.

90
Q

Certainties in creating a trust

A

*Certainty of intention

*Certainty of subject matter

*Certainty of object

91
Q

Investment bond arranged in trust and IHT

what happens to growth? What happens to original investment?

A

If an investment bond is arranged in trust, the original investment will be a transfer for IHT purposes, but any growth will not form part of the settlor’s estate.

92
Q

Key points of trusts

(notes on IHT, types of trust)

A
  • Settlor loses direct control over assets once placed in trust
  • Growth on assets placed in trust will be outside of the settlor’s estate for IHT.
  • Depending on the type of trust, there may be exit or periodic charges
  • The value of gifts made to a trust will be transfers for IHT purposes

Premiums to a regular‑premium life assurance policy in trust would usually be considered to be normal expenditure from income or, if not, could be covered by the annual £3,000 gift exemption.

93
Q

Types of Trust: Will Trust

A

A trust created through a will - type of trust and beneficiaries subject to the terms of the deceased’s will.

Bequests to will trusts are treated as normal death transfers for inheritance tax purposes – the bequest will not be subject to IHT, if at all, until the settlor dies.

94
Q

Types of Trust: Absolute (bare) Trust

A
  • Simplest form of trust, though little flexibility.
  • The most common use is to ensure that assets pass to children with certainty.
95
Q

Types of trust: Interest in Possession (IIP)

A

Trust where beneficiaries will receive an income from the trust or have use of an asset in the trust for their lifetime or an event (contingency) stated in the trust deed.

IIP trusts are relevant property - any transfers in are CLT and due immediate IHT charge at half the death rate

Two types of beneficiary:
- Life tenant
- Remaindermen

96
Q

Beneficiaries: What are Remaindermen and a life tenant

A

In Interest in possession trusts:

the life tenant – the beneficiary with the interest in possession;

the remaindermen – other beneficiaries named in the trust deed who will benefit from the trust on the death of the life tenant, or the specific life event.

97
Q

What is a relevant property trust?

A

One in which transfers have been made during the settlors lifetime.

these transfers in are CLT - subject to an immediate IHT charge at half the death rate

98
Q

Types of trust: Immediate Post-death interest trusts

A

Very similar to Interest in possession trusts, with one a few key differences:

  • Trust is created upon death as instructed by Will
  • Assets are transferred into trust upon death, so not a relevant property trust, therefore, not a CLT.

-IHT charged as any normal estate

99
Q

Types of Trust: Discretionary trust

A

With a discretionary trust, the trustees are given a number of discretionary powers:
*To appoint beneficiaries from a specified category or categories set out by the settlor
*To decide whether to pay income or capital to any of the beneficiaries, or not to pay any benefits, as they see fit.

Useful for when a the settlor does not have a specific beneficiary in mind.

Not calculated in IHT for the beneficiary (as not technically allocated to them yet). Also means assets in trust cannot be taken as part of divorce or bankruptcy

Discretionary trusts are a form of ‘relevant property’ trust. Transfers in are CLT.

100
Q

Life assurance trusts - two types

A

Split trust
- Used only when life assurance is combined with CI
- The life assurance portion stays in trust, goes to beneficiaries upon death.
- Critical illness is paid out upon diagnosis

Flexible trust
- A form of discretionary trust used for IHT mitigation and life assurance
- Main benefit = trustees’ ability to vary the beneficial
interests of the trust through a ‘power of appointment’

101
Q

Types of Trust: Gift and Loan trust
- What is it?
- Why might it be used?
- Process?

A
  • Designed to reduce IHT via investment.
  • Also provides Settlor with a regular income
  1. Settlor makes a gift (usually £3000 to use allowance).
  2. Makes a 2nd larger gift as an interest-free loan. Payable on demand.
    - as this second gift is a loan, it is not treated as a transfer for IHT.
  3. Trustees use loan for investment bonds. Growth is outside of estate
  4. IB holders can withdraw 5% annually without a tax charge, trustees do this to repay loan.
  5. So long as the settlor then spends this 5% repayment, their estate will reduce by this payment.
  6. After 20 repayments the loan is repaid. The final value of the bond will be outside estate.

Whilst repayments being made it offers flexibility in emergency - more than 5% could be taken if needed (though a chargeable event).

Not recommended for younger than 55-60 (as ties up funds somewhat)

102
Q

Types of trust: Discounted gift trusts
- What is it used for?
- How is it set up/what is the process?

A
  • Used for IHT planning (Reduce estate immediately by gifting)
  • Also receive income from capital gifted.
  1. Gift purchases IB withing discounted gift trust - either absolute or discretionary trust. The 5% income from this bond is known as the settlor’s retained rights.
  2. Actuarial forecast used to assess how much settlor will withdraw during their life (health metrics used). This is known as the Donor’s fund
  3. The investment into the bond is divided into two
    parts – the settlor’s rights (donor’s fund), which is the total of retained rights (income) payable over the settlor’s expected lifetime, and the beneficiaries’ fund, which is the rest of the investment.

THEN

The value of the settlor’s rights (discounted) from the total gift – it leaves their estate at that point. The remaining investment is counted as a gift for IHT purposes – the discounted gift.

Life expectancy is an essential part of the equation,
and the value of the discount is higher for younger people; the arrangement is not suitable for those in poor health.

103
Q

IHT treatment for Discounted gift trust

A

*Absolute trust used = PET
*Discretionary trust used = CLT (1/2 death rate above nil-rate)

  • If the settlor dies after seven years, the initial investment will be outside the estate, but any lifetime transfer charge will not be refunded.
  • Growth on the bond will be outside the estate, regardless of the date of death.
  • income cannot be changed, reduced, or stopped unless an increasing income had been written as a term of the trust.
104
Q

Who must complete a tax return and pay tax for trusts?

A

The trustees

105
Q

Taxation of trusts:
- What tax are trusts liable to?
- Who pays the tax?
- Does a change of trustee change the tax position?

A
  • Income and CGT. Transfers into a trust are subject to IHT
  • The trustee, after completing a tax return. Apart from in a bare/absolute trust
  • No
106
Q

Inheritance tax and trusts (from will vs transfer)

A

Transfers on Death (from a will)
- Treated as a normal bequest
- IHT is payable if total estate is above nil-rate band.

Lifetime transfers
- If a ‘relevant property trust’ transfers are treated as CLT if the cumulative total of transfer over the last 7 years exceed the nil-rate band.
- The excess over the nil-rate band is treated as a PET, with taper relief over 7 years

Useful to think of as a deposit on the full 40% (20% due immediately, the remaining 20% is charged if donor dies within 7 years - this is known as the balancing charge)

107
Q

Trustees and IHT

A

Once relevant property trust is set up, the trustees have a separate nil-rate band of £325,000.

The trustees are required to pay periodic and exit charges when the value of the trust’s assets exceed the nil-rate band for the tax year in question.

The period charges are equal to 6% of the value exceeding the nil-rate band, assessed every 10 years.

108
Q

Periodic charges - trusts and IHT

A

A charge based on the trust’s value on the 10th anniversary, less the current nil-rate band.

Charge is 6% of the excess above the nil-rate

109
Q

Exit charges - trusts and IHT

A

an exit charge applies when any capital is paid out from the trust (less the nil‑rate band) between ten‑year anniversaries.

110
Q

IHT and the beneficiary of a trust
- If CLT
- If no CLT

A
  • No IHT due whilst assets are still in trust if lifetime transfer charge was applied when trust created. Applies to discretionary trusts, and IIP trust set up after 22 March 2006.
  • If a Lifetime transfer charge did not apply, the assets would be treated as belonging to the beneficiary on their death.

In the case of an immediate post‑death interest trust set up in a will, the assets will be included as part of the life tenant’s estate on their death. They will not be included in the estates
of any subsequent beneficiaries while the assets remain in the trust.

111
Q

Income tax on Absolute trust

A
  • Trustees must pass on income due to the beneficiary
  • Beneficiary is responsible for paying income tax on the income
  • Income is treated as their own and included in personal tax return
112
Q

Income tax on IIP trust

A
  • Income may be due to multiple beneficiaries
  • Trustees can ‘mandate’ income to be paid directly to beneficiaries (not distributed by them specifically).

If mandated:
- Trustees have no role in collecting and paying the tax.
- Income treated as beneficiaries own, can use personal savings and dividend allowance against income receive.

If not mandated:
- Income paid to trustees
- Trustees liable for basic rate income tax
- Trustees do not have a personal, savings, or dividend allowance
- Will not be liable for higher-rate tax
- The beneficiary receives the income net of basic rate tax.
- Trust income remains in its original form (to be set against the relevant allowances)

113
Q

Income tax on Discretionary trusts

A
  • Trustees here do not have to pay the income to the beneficiaries. They can let it accumulate.
  • Trustees are liable to income tax, regardless of whether they pay income to the beneficiaries.
    -The trustees pay basic‑rate tax on the first £1,000 income received each tax year, above this, is taxed at the additional rate applicable to the type of income.
    -Trustees do not qualify for the personal savings or dividend allowances.

The trustee standard‑rate band is spread across all discretionary trusts set up by the same settlor.

-The beneficiary will only have an income tax liability if they receive income from the trust

-If income is paid, the beneficiary is credited with income tax
deducted at the additional rate at source – effectively the tax paid by the trustees.

-Beneficiaries cannot use the personal savings or dividend allowances against trust income.

114
Q

Capital Gains tax and trusts

A
  • When assets are placed in trust, it is classed as a disposal
  • In trusts other than Absolute trusts, the gains can be deferred until the trustees dispose of them in the future.
  • The CGT AEA is £1500 for assets in trust
  • This is divided equally between how many trusts an individual holds. (minimum allowance £600)
  • Trust is treated as receiving assets the the settlor originally paid for them
  • Trustees are deemed to make a disposal for CGT purposes when they sell assets or pass them on to the beneficiaries
  • Only assets that would be subject to the CGT regime for an individual taxpayer, such as shares, unit trusts, antiques and so on would be subject to CGT in a trust.
  • Any property bought by the trustees and occupied as a main residence by a beneficiary would be exempt from CGT.
  • Trusts pay CGT at the standard higher rate applicable to most assets, but have half the individual’s annual exemption available, with the exception of an absolute (bare) trust where assets are regarded as belonging to the beneficiary for CGT purposes, and the full annual exemption is available.
115
Q

CGT allowance and holding multiple trusts

A

Exemption allowance is divided by number of trusts held.

116
Q

Corporation tax key points

A

*it is charged based on profits made during the company’s accounting period rather than the financial year

*individuals who are sole traders or partners, as well as individuals who hold shares in a company, pay income tax and CGT, not CT

*companies generally do not pay income tax or CGT, but pay CT on both the income and chargeable gains that they have generated in an accounting period. This is called the profits chargeable to corporation tax (PCTCT).

117
Q

What does PCTCT include?
(Profits chargeable to corporation tax)

A
  • Trading profits
  • Profits from property rentals
  • Investment income
  • Chargeable gains

All of the above are added together to give the total income.

118
Q

What can be set against PCTCT?
(Profits chargeable to corporation tax)

A
  • Charitable donations
  • Interest paid by the company on loans arising in respect of the trade - Royalty payments
  • Allowable expenses
119
Q

Calculating profits chargeable to tax for corporations

A
  1. Add back depreciation. Depreciation is not deductible but capital allowances can be claimed instead
  2. Add back other non‑deductible expenses (for example, entertainment).
  3. Add net chargeable gains (gains less allowable losses) and deduct any related capital profits shown in the accounts.
  4. Deduct losses brought forward as far as allowed and other deductions such as charitable donations.

This gives PCTCT, on which corporation tax can be calculated. Any tax paid at source is then deducted.

120
Q

Capital allowances for Corporation Tax

A
  • The expenditure from purchasing capital assets can be claimed. For plant and machinery, the depreciation shown in the accounts is not deductible
  • The full cost of capital expenditure each year (excluding cars) is deductible under the annual investment allowance up to a limit set by the government.
  • Expenditure on plant and machinery not covered by the annual investment allowance is added to the company’s capital allowances pool. A company can claim capital allowances of up to 18 per cent of the current value of the pool in each accounting period. The pool is reduced by the amount of the capital allowances claimed.

When a company sells an asset, the disposal proceeds are deducted from the pool. If the value of the pool turns negative, this can trigger a taxable balancing charge.

  • Long-life assets are kept in a separate pool and capital allowances of only 6 per cent per year may be claimed.
  • Cars used in a business count as plant and machinery and so attract capital allowances.
  • Expenditure on new industrial buildings is relieved at 3 per cent of the initial cost each year.
121
Q

R&D relief for Corporation tax

A

The expenditure must be incurred on staffing costs, consumable stores, certain overhead costs or subcontracted work and relate to a trade carried on by the company.

The reliefs available vary dependent on company size, with small and medium-sized enterprises (SMEs) benefitting from a more generous scheme.

SMEs:
- Fewer than 500 employees
- Annual turnover no more than €100m or;
- Assets no more than €85m

122
Q

Intangible assets and Corporation tax

A
  • Disposals of intangible assets will normally give rise to taxable income or an allowable deduction, calculated as the difference between the disposal proceeds and the tax written‑down value.

*A rollover relief is available where disposal proceeds are reinvested in other intangible assets within a period starting 12 months before and ending 3 years after the disposal, provided the necessary conditions are met.

123
Q

Corporation tax payments
- How and when?
- Penalties

A

Self-assessment for CT must be submitted:
- 12 months after the end of the accounting period or;
- 3 months after the notice of return has been issued

Petalites:
- £100 for filings that are 1 day late
- A further £100 for filings that are 3 months late
- A penalty of 10% of the unpaid tax at 6 months late
- Another 10% at 12 months late

124
Q

Relief for losses (except capital losses) on Corporation tax

A
  • Relief must be claimed within two years of the end of the loss‑making period.

*Losses can be deducted from total income in the current period or carried back to deduct from profits from the preceding 12 months.

  • Losses made during the final year of trading can be carried back three years.
  • Unused losses can be carried forward for use against total profits in future periods. However, brought forward losses can only be used to relieve 50 per cent of profits in excess of £5m in the current period.

*Changes of ownership or in the nature of a company’s business may prohibit that company from carrying back or carrying forward any losses.

125
Q

What is VAT?

A
  • Value added tax. Known as an output/input tax.
  • Registered business must charge customers output tax on goods/services.
  • Registered businesses are charged input tax on goods/services they purchase.

*The value of any input tax can be offset against the output tax.
*The excess output tax over input tax is paid to HMRC.
*Any excess input tax over output tax is reclaimed from HMRC.

126
Q

What input VAT cannot be reclaimed

A

*that paid in the purchase of cars, unless bought wholly for the business

*that paid as part of business entertainment expenses.

127
Q

VAT registration requirements

A
  • if a company’s TURNOVER over the last 12 months is more than the threshold
    *or the expect to surpass the threshold in the next 30 days
  • threshold is £90,000 (2024)
128
Q

Reduced rate supplies (VAT)

A

*domestic heating fuels;
*the installation of energy‑saving materials;
*contraceptive products; and
*certain property renovations or conversions.

Rate is 5%

129
Q

Zero-rated supplies (VAT)
- Examples
- Reclaim?

A

This is where 0% VAT is charged on sales, but can reclaim the input VAT on the purchase made by the business.

*most food and some drinks;
*domestic supplies of water or removal of sewage;
*hard copy and electronic books and most other publications;
*sales of new residential buildings;
*buildings for use by charities;
*renovated houses that have been empty for ten years;
*supplies and services by contractors when constructing new residential buildings or buildings for charities;
*public transport fares;
*sanitary products;
*drugs, medicines and aids for the disabled; and
*clothing/footwear for children.

130
Q

VAT exempt supplies
- Explain
- Examples

A

VAT is not charged. Input VAT applicable to these items cannot be reclaimed.

*insurance, finance and credit;
*education and training;
*fundraising events by charities;
*subscriptions to membership organisations; and
*selling, leasing and letting of commercial land and buildings – but this exemption can be waived.

131
Q

Collection of VAT and rates

How often?

A

Most businesses submit VAT returns every:
* 3 months
* Larger business every month

Standard rate = 20%
Reduced rate = 5%
Zero rate = 0%

132
Q

Inaccurate information penalties for business tax submission

A

Charge is a percentage of the extra tax that is due to be paid.

  • Careless = 0-30%
  • Deliberate, but not concealed = 20-70%
  • Deliberate, concealed = 30-100%
133
Q

Tax Planning: how to reduce income tax (earned income)

A

*Maximising pension contributions. Tax efficient way of lowering your gross income, and thus, what is paid in income tax.

-This is particularly effective for those earning above £100,000 as reduction of earnings through contributions will give back some personal allowance lost by the tapering scheme.

  • Maximum pension contributions are £60k per annum.
134
Q

Tax Planning: how to reduce income tax (savings income)

A

*Maximise investments into ISAs

  • Switch investments to accumulation only, not income producing.
  • For higher and additional-rate tax payers, consider other investments that are free from CGT (NSI certificates, Gilts, classic cars, qualifying corporate bonds)
  • Very high earners with a high risk attitude - EIS and VCT. Income tax relief for investors:
  • EIS = 30% tax relief up to £1m each tax year.
  • VCT = 30% tax relief up to £200,000 each year
  • SEIS = 50% tax relief up to £200,000 each year

*Make use of tax‑free personal savings allowance, as well
as their tax-free dividend allowance

135
Q

Taxation of onshore bond

A

Basic rate tax deducted in the fund

If a chargeable event - taking more than 5% of the cumulative total will add the gain to the individual’s income

  • Basic rate taxpayers will therefore have no liability.
  • Higher and additional tax payers pay the difference (20-25%)

For those where adding the whole gain to other income will put
them into a higher income tax band, a process called ‘top slicing’ will reduce the amount of the gain added to income to determine the rate of tax to apply. This in turn could reduce the amount of the gain that will be taxable at the higher rate.

136
Q

Taxation of offshore bond

A

Basic rate tax is not deducted in the fund.

This means that any chargeable event will be taxed at the basic rate, and then the gain will be assessed to determine if higher rates apply.

Remittance basis:
- if non-domiciled in the UK, they will not be subject to UK tax
- however, you lose personal allowances.
- tax will be paid when the income/chargeable gain is brought into the UK

137
Q

Tax Planning: investment bonds key info for higher and additional taxpayers

A

Higher and additional rate taxpayers can take 5 per cent per annum of the original capital without incurring immediate tax.

The withdrawal allowance is cumulative, which means that if less than 5 per cent is taken in one year the unused amount can be carried forward to later years.

However, the tax must be paid on the final encashment of the bond, so it is just deferred until then.

‘Topslicing relief’ may be available to allow the spreading of gains on an investment bond surrender to minimise the amount of any gains subject to income tax at the higher rates.

138
Q

What happens when a holder of an ISA dies leaving a spouse?

A
  • ISA becomes a ‘continuing ISA’
  • in the year of death, the surviving spouse can make an additional ISA subscription equal to the value of the deceased’s ISA holdings, in addition to the £20,000 allowance.
  • the isa will continue to gain interest/gains but contributions cannot be made
  • will close after 3 years, or when distribution of estate is completed
139
Q

Tax Planning: Married couples and civil partnerships

A
  • Can transfer 10% of their personal allowance each year, so long as the recipient is not a higher or additional-rate taxpayer.
  • Transfer savings so that the lower earner may be able to utilise starting saving rate and higher savings allowance afforded by basic rate tax-payers
  • when disposing of assets, it may be useful to make use of the CGT exemption of transferring between spouses. This allows the use of the spouse’s unused CGT allowance and any losses sustained in previous years
140
Q

Tax planning: IHT or estate planning

A

When looking at IHT planning, people should consider:
*making a will;
*making use of all exemptions and reliefs;
* lifetime gifting; and charitable donation of estate
* making use of trusts.
* Contributing into a pension, as this falls outside of your estate

141
Q

Tax planning: minimising CGT for individuals

A
  • Making use of exemptions
  • Makings use of reliefs
  • Use of previous losses.
  • Transferring assets between spouses (making use of their exemptions)
  • Spreading sale of assets over several tax years (Deferment by reliefs such as reinvestment, business roller, and hold-over)
  • Investing in tax-free products
  • Maximising a claim for all valid tax deductions
142
Q

Tax planning: Business tax planning for limited companies
- Some valuable ways to save tax include:

A
  • sponsoring a retirement plan;
  • writing off company assets;
  • claiming capital allowances;
  • deducting office expenses;
  • employer‑sponsored childcare resources; and
    *using a home office for the company.
143
Q

Tax planning: Business tax planning for the self-employed

A

Business tax planning for the self-employed involves the owner being aware of anything that might affect the taxes paid, such as:
* income tax for the self‑employed;
* company expenses and deductions;
* business assets;
* charitable contributions; and
* retirement planning.

144
Q

Survivorship clause in wills

A
  • Beneficiaries of a will must survive 28 days after initial death to benefit from the deceased’s estate.
  • Otherwise treated as if they were not included in the will and their share is redistributed
145
Q

An individual is deemed domiciled in the UK if they have been a resident in the UK for at least…

A

*15 of the last 20 tax years

146
Q

Personal belongings are exempt from capital gains tax on disposal, provided each item is disposed of for less than £….

A

£6000

147
Q

Employees pay NICs between…

A

Between the primary threshold and the upper earnings limit.

148
Q

What is the spousal exemption for IHT?

A

There is no IHT to pay on gifts from husband to wife and vice versa, or from one civil partner to the other.

149
Q

What is the annual tax charge for use of the remittance basis?

A

*£30,000 if they have been a resident in the UK for seven out of the previous nine years.

*£60,000 if they have been a resident in the UK for 12 out of the previous 14 years.

150
Q

Liability to tax of individuals not domiciled in
the UK - Explain the remittance basis

A

Where someone is a UK resident but is domiciled outside the UK, they may elect to be taxed on the remittance basis on income and capital gains arising outside the UK.

The remittance basis only applies if they have overseas income or gains during a tax year in which they are resident in the UK.

  • They will lose their right to personal allowances
  • They will pay UK tax on their UK income or gains as they arise or accrue.
  • They only have to account for UK tax on overseas income or gains when they bring them into the UK.
151
Q

Are gifts into bare trusts CLTs?

A

No
- They are PET

CLT
- Gifts/Transfer to businesses
- Transfers into ‘relevant property trusts’

152
Q

Basic rate tax threshold

A

£12,570 to £50,270

(20% will be due on the £37,700 between these values)

153
Q

Higher rate threshold

A

£50,271 to £125,140

154
Q

Additional rate threshold

A

Above £125,141

155
Q

A gift of shares or unit trusts is a…

A

Disposal for CGT purposes.

156
Q

Tax on interest from savings in children’s accounts

A

Usually no tax to pay

However, if the child receives more than £100 in interest from gifts given by parents, then the parent pays the tax above their personal allowance

157
Q

Domicile and IHT

A

UK domiciled individuals pay IHT on their assets worldwide.

Where an individual is neither UK domiciled nor deemed domiciled in the UK, IHT is chargeable only on assets in the UK. UK government securities will be excluded from an assessment for IHT

If an individual is not UK domiciled but has a UK‑domiciled spouse or civil partner and has elected to be treated as domiciled in the UK for the purposes of IHT, their worldwide assets will be assessed for IHT

158
Q

Gift aid - gross donation?

A

Government adds 25p for every £1 donated.

Gross addition of 25%

159
Q

Tax relief on investments into VCT

A
  • 30% on investments up to £200,000
  • Venture capital trusts
  • Investor must hold investment for 5 years in order to qualify for relief
160
Q

Tax relief on investments into EIS

A
  • 30% on investments up to £1m
  • Up to £2m if investing into KICs - Knowledge-intensive companies
    *Enterprise investment scheme
  • Investor must hold for 3 years to qualify for relief
161
Q

How is CGT calculated when a change of primary private residence has taken place?

A
  • Taxed proportionately based on period of occupation and period of ownership
162
Q

Can any unused annual gift allowance be carried forward?

A

Yes, 1 year only

163
Q

Children of differently domiciled parents. How is their domicile treated

A

*If the child is born after the parents are married, they take the fathers domicile

164
Q

Input vs output VAT calculation

A

To calculate the VAT due as payment or as refund:

  • Deduct the input values from the output values.
  • Times this by 20%, 5%, or 0% depending on the type of supplies
  • If it is positive, VAT is due to HMCR
  • If negative, VAT is due to be returned
165
Q

Other than salary, what other earnings do you pay NICs on?

A

*Holiday pay
*Sick pay

166
Q

Who is responsible for paying income tax on assets held in a Barr trust?

A

The beneficiary

167
Q

National Insurance - when is an “annual earnings period” used to calculate?

A

When you are a company director

168
Q

IHT calculation and gifts

A

*Nil rate band is applied FIRST to any PETs

*if the failed PET then exceeds the NRB the taper relief is applied (if applicable)

169
Q

Taxation of onshore bonds vs offshore

A
  • onshore bonds are treated to have paid basic rate tax at source.
    *Therefore only charged the rate above this (0.20 or 0.25 if higher or additional tax)

*offshore this is not the case
*must pay basic rate etc

170
Q

IHT - transferring unused nil-rate balance from a partner who died when the Nil rate band was lower

A

*NRB less gifts made
*Calculate the remaining NRB as a percentage of the full amount
*Times the current NRB by the percentage left
*then add this value to spouses existing NRB allowance

171
Q

Income tax rate for discretionary trusts

A
  • Basic rate is paid on income under £1000 (Standard rate band)

*Trustees then pay the additonal rate for income above the standard rate band before giving to beneficiaries
- 45% income tax
- 39.35% dividend

*they do have access to the savings allowance as it is treated as savings/interest income

*CGT is taxed as normal

172
Q

Do investments into a VCT defer CGT?

A

No, VCT investments are exempt from CGT so long as they are held for 5 years

173
Q

Does investments into an EIS defer CGT?

A

Yes, deferred if held for less than 3 years.
Exempt on disposal if held for more than 5

174
Q

How long has a company got to claim loss relief?

A

*within two years of the end of the account period of the loss

175
Q

Can unpaid tax be recovered by the trustees of a discretionary trust

A

Yes

176
Q

How much is business asset disposal relief?

A

*10%
*the first £1m qualifies. This is a lifetime allowance

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