Taxation Flashcards
Income receipts and expenditure?
A receipt is money that is paid TO the business an expense is money the business pays OUT.
Income expenditure can only be deducted from income receipts and capital expenditure can only be deducted by from capital receipts to reduce overall tax bill.
INCOME RECIPETS - How the taxpayer egenrates money on regular basis
INCOME EXPENDITURE - an expense incurred as integral part of day-to-day trading/ Heating, marketing. - Staff wages
- Interest payable on loans is also an expenditure as it will be paid to lender on a regular basis
Capital receipts and expenditure?
CAPITAL RECIPETS
money is from a transaction that is not part of regular activity – classified as capital receipt. One off transaction.
CAPITAL EXPENDITURE
An expense brings into existence a capital asset as part of the infrastructure of the business or enduring benefit of business.
Capital allowances
- Tax relied for capital expenditure is usually only given at the time when the capital asset is sold or otherwise disposes of.
- Depreciation – whereby cost of an asset is deducted in accounts over time.
- Capital allowances spread the cost of capital expenditure on certain capital items over a period of time. Allows certain capital expenditure to be deducted from income receipts over time.
Income tax?
HMRC collect it in two ways.
Self-assessment
- Up to individual to calculate tax bill and not HMRC – normal individuals would not have
- Directors, and self-employed people are examples of individuals who are always required to complete a self-assessment tax return
Deduction at source
- Where the payer of a taxable sum is obliged to deduct tax and account for it to HMRC. The recipient of the taxable sum receives it ‘net of tax’
Income tax calculation? Step 1.
Step 1- Calculate total income
- Need to add together all receipts from all sources of incomes of that individual. DON’T USE CAPITAL RECIEPTS.
- EXAMPLES – RENT coming in, of a fairly regular basis, trading profits, interest on savings. Dividend income, salary.
- Where income has been received by a taxpayer after deduction of tax at source – need to include the gross amount in calculation
- Savings income and dividend income are received gross
- Savings
- Interest received by individual on savings in subject to income tax but some taxpayers will have benefit of a personal savings allowance. basic rate taxpayers are entitled to their first 1000 at savings nil rate.
- Dividends – effect of this allowance is that no individual pays any tax on the first 1,000 of dividend income.
Income tax calculation? Step 2.
Deduct available reliefs = net income
- Only TWO relevant for this module
- Interest paid OUT on qualifying loans from the bank. If you pay interest out on loan, can deduct all that interest
- NOT INTEREST RECEIVED BY INDIVIDUALS FROM A BANK ON SAVINGS HELD AT THE BANK
- Amount of interest paid on these loans must be deducted from tax payers’ total income – reduces amount of income subject to income tax.
o Lands to buy an interest in a partnership
o Loans to contribute capital or make a loan to a partnership
o Loans to buy shares in a claose company
o Loans to buy shares in an employee-controlled company
- Pension scheme contributions – benefit of relief from income tax, subject to certain limits.
Income tax calculation? Step 3.
Deduct personal allowance = taxable income
- Personal allowance each year is £12,570 – reduced by £1 for every £2 of net income above £100,000 – this means that individuals who have a net income of £125,140 and above will lose the benefit of personal allowance completely.
- IF YOU EARN LESS THAN 100,000 YOU GET IT FULLY
- IF IN TEWEEN 100,000 AND 125,140 – THEN HAVE TO DO CALCULATIONS
Income tax calculation? Step 4. and STEP 5.
- split taxable income into non-savings, savings and dividend net income
- It is critical that the different types of income are separates – MUST be taxed in order of non-savings, savings and then dividenen income as different tax rates apply.
- Non-savings income – deduct savings and dividend income figures
Step 5 – calculate whether the personal savings allowance is available
- PSA allows for tax relief by virtue of a nil rate 0% for first 1000 or the first 500 if higher rate band.
Income tax calculation? Step 6 AND 7.
Basic
0-37,700 - Non savings - 20% - Savings 20% and Dividends 8.75
Higher
37,701 -125,140 - Non savings - 40% - Savings 40% and Dividends 33.75
Additional
+ 125,140 - Non savings and savings 45% AND Dividends 39.35.
The cake method – ‘Never Say Die or Never Squash Donuts’
- Non- savings income is the base tier
- Savings income is the middle layer
- Dividnend income is the top tier
Capital gains tax?
A chargeable disposal –
- Sale of an asset
- Gift of an asset
- NO CHARGEABLE DISPOSAL AT DEATH
Of a chargeable asset
- ALL forms of property included unless specifically excluded
- Assets which are excluded:
- Principal private residence – if they have occupied the PPR as their only or main residence during period of ownership
- Motor cars for private use – vintage cars
- Certain investments – government securities, shares and securities held in ISAs and life insurance polices
By a chargeable person
Which gives rise to a chargeable gain
- Needs to have been made – disposals to charities are treats as no gain nor loss basis
- Doesn’t apply to spouses
- Consideration receives
- Disposal between connected persons – irrespective of actual price, HMRC will deem the seller to have received market value irrespective of actual sale proceed
- Disposals at undervalue will be treated at market price unless the seller has simply made a bad bargain
- Gifts – where they’re made, donor is deemed to have received market value of the asset from done at date of the gift
The tax is payable on or before 31st January following the tax year in which the disposal occurs
Capital gains calculation?
disposal expenditure
- initial expenditure
- Subsequent expenditure
= Total chargeable gain
- Carried forwards or across losses
less annual exemption 6000.
= Taxable chargeable gain
Using capital losses
- Any capital losses made in the same year can be carried across and deducted from any gains made in the same year
Annual exemption –
- AE for current year is 6000
- Companies DO NOT benefit from AE
Tax payable on gain
- Total chargeable gain – after deductions application of AE is calculated and losses taken away – all gains added together to find total taxable chargeable gains
- Companies – DO NOT PAY CGT They pay corporation tax
Individual
- Two rates of CGT 10% and 20%
- Broadly basic tax payer pays 10% CGT and higher and additional rate taxpayers pay 20% - WHICH IS WHY YOU HAVE TO CALCULATE INCOMETAX BEFORE IT
Business asset relief for CGT?
- It reduces the higher rate of CGT from 20 to 10 for gains arising on qualifying disposals, includes:
- All or part of a trading business
- Assets in business that used to trade
- Shares in a trading company
- Shares in a company that used to trade
The conditions are as follows:
Where someone disposes of all or part of the business:
- The business must be a trading business
- The business must have been owned for at least 2 years prior to date of disposal
Where someone dispose of assets used in a business that used to trade
- The business must have been owned for at least 2 years before it ceased to trade
- Asset must have been used in business when it ceases to trade
- Asset must have been disposed of within 3 years of business ceasing trade.
Where someone disposes of shares in a company
- Company must be and have been for at least 2 years before date of disposal of a trading company
- Shares must have been held for at least 2 years before date of disposal
- Person disposing shares must have been an office or employee of the company who holds at least 5% of ordinary voting shares for at least two years before date of disposal
This relief is not automatic, have to apply before the first anniversary of 31st January following the tax year it was made
Business asset disposal relief – lifetime allowance
- Set at £1million – so first 1million of qualifying gains can be charged at reduced rate of 10%
- Not applicable to buy-to-let investments or other non-trading business
Investors relief?
- ON OR AFTER 2006
- Benefit investors in UNLISTED companies who hold their shares for at least 3 years
- Reduced the CGT to 10% subject to a lifetime limit of 10million
- Following conditions:
- Shares are fully paid ordinary shares
- Company is a trading company of the holding company of a trading group none of the company’s shares were listed on a recognised stock exchange
- Helf for at least 3 years
- Individual is NOT an officer or employee of the company
Business replacement of assets relief? - Holdover relief?
- A taxpayer can elect to postpone the CGT liability that arises on sale of such an asset by rolling over the gain into a qualifying replacement asset.
- Applies to land and buildings, fixed plant and machinery and goodwill. New asset simply needs to be within list of qualifying assets.
- Effect of relief is that any gain arising from a disposal of qualifying asset is carried forward and rolled into the cost of a qualifying replacement asset
Gifts of business assets relief
- When an individual gives way a business asset, the person making the gift (donor) and done can claim hold-over relief.
- n effect the CGT liability is postponed until the donee ultimately disposes of the asset (although
- further hold-over relief can be claimed if the donee then gives away the asset).
- As in the case of roll-over relief, the whole chargeable gain must be held over if a claim for holdover relief is made. The donor cannot use their AE to reduce the gain held over.
- Hold-over relief may also be claimed where an asset is sold at undervalue but the hold-over relief
- will only be available on the gift element, i.e., the difference between the price paid and the market
- value.
Inheritance tax and business relief exemption?
Business property relief
BPR is an exemption which applies to value of qualifying business assets and is available to lifetime transfers and the death estates. Business property includes
- A business or interest in a business
- Share in an unquoted company
- Share in quote company
- Land or buildings owned by transferor but used for business purposes
MUST BE OWEND FOR AT LEAST 2 YEARS IMMEDIATELY PRIOR TO TRANSFER.
Rate of relief
100% relief available in respect of transfers of a business or interest in a business or shares in an unquoted company
50% applies to shares in a quoted company – but only is shareholder has control of the company and to the land or buildings category on previous slide.
