Tax Reliefs, Exemptions and Penalties

Question 1

What is hold over relief?

Answer 1

This defers the CGT payable when the donee eventually sells the gift.

It effectively allows the gift to be made tax free, with the CGT payable on the chargeable gain following

Question 2

When is first payment on account due for self-assessed income tax?

Answer 2

Jan 31st.

Question 3

What is dividend income?

Answer 3

Income received from dividends on shares.

Question 4

When its second payment on account due for self assessed income tax?

Answer 4

July 31st.

Question 5

What is non-savings income?

Answer 5

salaries, bonuses, pensions and non-cash benefits.

Question 6

What is savings income?

Answer 6

Interest on money in banks, also gov and company bonds.

Question 7

List income exempt from income tax

Answer 7

Interest from national savings certificates;

Betting income, winnings on premium bonds (etc);

Child benefit;

Child tax credit;

Working tax credit.

Universal credit;

Housing benefit.

Question 8

How much can taxpayer invest in ISAs per year?

Answer 8

20K.

Question 9

What is marriage allowance?

Answer 9

£1,260 of personal allowance transferable to spouse if following satisfied:

1) couple married/ civil partnership;

2) transferor income less than personal allowance;

3) recipient spouse = basic rate taxpayer

Question 10

What is the blind person allowance?

Answer 10

Blind people get extra allowance of £2,870 p/a, deducible from any kind of income.

Question 11

Give formula for calculating adjusted personal allowance for those earning over 100k.

Answer 11

(net income - 100k)
Adjusted PA = 12,570 - ——————————————
2

Question 12

what are the savings allowance for the different categories of tax payer?

Answer 12

1k - basic rate;

500 - higher rate;

No allowance - additional rate.

Question 13

What are the bottom, middle and top slices of income?

Answer 13

NDSI - always bottom slice;

Interest + savings income - always middle slice (taxed after NDSI);

Top Slice is always dividends.

Question 13

What are the dividend rates?

Answer 13

Ordinary rate (falling in basic tax payer threshold) - 8.75%;

Dividend upper rate (falling in higher rate threshold) - 33.75%;

Dividend income falling in additional rate - 39.35%.

Question 14

What is GAAR and the double reasonableness test?

Answer 14

GAAR is legislation metering payers from entering controversial tax schemes.

Double reasonableness test allows HMRC to set aside legal, but unreasonable, tax schemes (however this is high threshold to clear).

HMRC will make an adjustment accordingly if they find a scheme to be unreasonable.

Question 14

When is business asset disposal relief available on the sale of a sole tradership/ partnership?

Answer 14

Where the business being sold is a sole readership or partnership for at least 2 years before disposal.

Question 15

When is BDPR available on sale of shares in a trading company?

Answer 15

When seller owns 5% or more of ordinary voting shares, and was employed or an officer of the company for at least 2 years before (and on the run up to) disposal continuously.

Question 16

What is the reduced rate of CGT payable on BDPR qualifying asserts?

Answer 16

10%.

Question 17

Summarise replacement of business assets (roll over) relief.

Answer 17

Available to sole traders/ partnerships/ companies when they dispose of qualifying business assets (eg land, buildings, plant and machinery) so long as proceeds are invested in another qualifying asset.

Reinvestment must be within 1 year before asset is sold, or within 3 years after asset is sold. CGT deferred until new asset is disposed of.

Question 18

What is incorporation relief?

Answer 18

Applies when individual transfers their business or partnership interest as going concern to a company.

Gain is deferred by reducing acquisition cost of the shares being received as consideration for the interest transferred to the company.

CGT liability deferred until a later disposal of the shares.

Question 19

What is enterprise investment scheme reinvestment relief?

Answer 19

Individuals can defer payment of CGT on any chargeable gain by investing in shares in a qualifying unquoted trading company, either up to 1 year prior to gain being made, or 3 years after it is made.

Deferred gain becomes chargeable what those shares are later sold.

Question 20

Do capital losses get offset against capital gains?

Answer 20

Yes.

Question 21

Explain automatic offset.

Answer 21

Capital losses must be set off capital gains in same tax year (this is automatic).

Annual exemption is then applied to any remaining gains.

Question 22

Explain excess losses being carried forward.

Answer 22

If losses in year exceed gains in the year, excess loss carried forward to reduce CGT for future years.

Chargeable gains for the year which have been offset against cannot be subject to the annual exemption. If annual exemption is not used, it cannot be carried forward/transferred to another person.

Question 23

Explain current year/prior year loss relief.

Answer 23

Losses can e set against taxpayers net income from current year, or from prior year (total income less deductible payments, but before personal allowance).

If loss is equal to or greater than all of taxpayers other net income, personal allowance is wasted.

Eg loss made in 2020/2021 can be offset against net income of 2020/2021 and/or 2019/2020.

Question 24

What is the all or nothing rule (re current year/prior year loss relief)?

Answer 24

Taxpayer must either use all loss available for relief, or relieve all of their available income.

No partial claims are permitted, however if all of loss is not used, the remainder can be offset against capital gains to use up the loss balance.

Question 25

What is carry forward loss relief?

Answer 25

losses may be carried forward and set against future profits of the same trade.

Last resort as it delays relief for losses.

Once claim has been made, carried forward loss must be set off against next available trading income (not against other forms of income).

Question 26

what is early trade loss relief?

Answer 26

Applies to opening year of trade.

Applies to all losses sustained in first four tax years of trading.

Early trade loss relief carries loss back against net income of the three preceding tax years, taking earlier years first (first in first out rule).

Question 27

What is terminal loss relief?

Answer 27

When trader ceasing trading, terminal loss relief is available.

This allows loss to be deducted from trading profits in tax year of cessation (if there are any) and then to be carried back to three preceding tax years (taking later years first).

Losses set against profits of the trade.

Only applies against trading income not net income.

Question 28

What is carry forward relief on incorporation of a business?

Answer 28

When sole trader or partner transfers business to company and receives shares in return, they can set off any unused trading losses remaining against salary or dividend payments received from company for any year in which they own those shares.

Question 29

Give the three available options available to a company in respect of a trading loss.

Answer 29

1) Set it against total profits in current accounting period (if there are any other profits);

2) Carry it back and set against total profits in preceding 12 months (this can only be done after current period is offset);

3) Carrying it forward to set it against total profits of a later accounting period.

Question 30

What is a close company?

Answer 30

company resident in the UK and controlled by either:

1) five or fewer participants (shareholders); or

2) any number of directors who are also shareholders.

Control means over 50% of the shares or voting shares, or over 50% of the share capital of the company. shares and rights of associates (ie parents, siblings spouses) also count.

Question 31

What is a group for the purposes of group relief?

Answer 31

One company must be the 75% subsidiary of the other, or both companies must be 75% subsidiaries of a third company.

Test for being 75% subsidiary means holding company must own, directly or indirectly, 75% or more of subsidiaries ordinary shares.

Question 32

How do you work out indirect ownership of a subsidiary of a subsidiary?

Answer 32

Company A owns 80% of B, B owns 80% of C.

A and C are not in same group as A does not indirectly own 75% or more of shares in company C (80% x 80% = 64% which is under the threshold).

Question 32

What is group relief?

Answer 32

Allows company to transfer certain losses and expenses to a mother company within the same qualifying group.

Transferee will then use loss or expense to reduce taxable profit. Both companies must fit description of group in order for this relief to be used.

Question 33

How does group relief work?

Answer 33

Once two companies deemed in same group, one can surrender certain items (eg trading losses and management expenses) to the other.

Loss or expense must have been incurred in an accounting period which overlaps with the accounting period of the transferee (who will be using loss or expense form other company to reduce its profits).

It does not apply to capital losses, only income losses.

Question 33

What is a group for the purposes of chargeable gains?

Answer 33

Group consists of company, its direct 75% subs, and direct 75% subs of those subs (etc).

All subs in same group must be effective 51% subs of principle company.

This means principle company must be beneficially entitled to more than 50% of available profits and assets of the sub.

Group only permitted to have one principle company.

Once two companies deemed in same group for chargeable gains purposes one can transfer a chargeable asset to the other on tax neutral basis (disposal is treated as giving rise to neither a loss nor a gain).