Taxation Of Individuals IT CGT And IHT Flashcards
What are the main types of taxes covered in the BLP module?
The main types of taxes covered are Income Tax, Capital Gains Tax (CGT), Value Added Tax (VAT), and Corporation Tax.
What distinguishes direct taxes from indirect taxes?
Direct taxes are imposed based on a taxpayer’s circumstances, while indirect taxes are imposed based on transactions.
What is an example of a direct tax?
Examples of direct taxes include Income Tax, CGT, and Corporation Tax.
What is an example of an indirect tax?
Value Added Tax (VAT) is an example of an indirect tax.
How are income receipts defined?
Income receipts are money received on a regular basis, such as trading profits, interest from savings, and rent received.
What are capital receipts?
Capital receipts are from transactions that are not part of regular activity, often considered ‘one-off’ transactions.
What constitutes income expenditure?
Income expenditure includes money spent as part of day-to-day trading, such as bills, marketing, and staff wages.
What is capital expenditure?
Capital expenditure is money spent to purchase a capital asset or enhance a capital asset, seen as a ‘one-off’ transaction.
When can capital expenditure be deducted for tax purposes?
Capital expenditure can generally only be deducted from the proceeds realized when a capital asset is disposed of.
What are capital allowances?
Capital allowances are tax reliefs for capital expenditure that allow certain types of capital expenditure to be deducted from income receipts.
What is the PAYE system?
The PAYE system is where income tax is deducted at source by the employer from an employee’s wages and accounted for to HMRC.
What is the tax year for individuals?
The tax year for individuals runs from 6 April in one calendar year to 5 April in the next.
What is the financial year for companies?
The financial year for companies runs from 1 April in one calendar year to 31 March in the next.
What is the first step in calculating an individual’s income tax liability?
The first step is to calculate Total Income, which is the taxpayer’s gross income from all sources.
What is Net Income?
Net Income is Total Income less available tax reliefs.
What is Taxable Income?
Taxable Income is Net Income less the personal allowance.
What is the purpose of the personal allowance?
The personal allowance allows a band of tax-free income for individuals.
What is the Dividend Allowance?
The Dividend Allowance is a band of tax-free dividend income available to individuals for income tax purposes.
What is the definition of Total Income?
Total Income is a taxpayer’s gross income from all sources before any deductions.
What does ‘grossing up’ refer to?
Grossing up refers to including the gross amount in the calculation of Total Income when income has been received net of tax.
What is ‘grossing up’ in tax calculation?
Grossing up is the process of including the gross amount in the calculation of Total Income after tax has been deducted at source.
How is savings income taxed for basic and higher rate taxpayers?
Basic rate taxpayers are entitled to the first £1,000 of interest received on savings tax-free, while higher rate taxpayers are entitled to the first £500 tax-free.
What is the dividend allowance?
The dividend allowance allows individuals to receive the first £500 of dividend income tax-free (prior to 6 April 2024, it was £1,000).
Are benefits in kind subject to PAYE?
Benefits in kind are subject to income tax but are NOT subject to deduction of tax under PAYE.
What tax reliefs can be deducted to calculate Net Income?
The tax reliefs that can be deducted are interest paid on qualifying loans and pension scheme contributions.
What qualifies for interest tax relief?
Interest on qualifying loans includes loans for buying an interest in a partnership, contributing capital to a partnership, buying shares in a ‘close’ company, or investing in a co-operative.
How are pension scheme contributions treated for tax relief?
Pension scheme contributions are deducted from Total Income for the tax year, providing relief from income tax.
What is the personal allowance for the tax year 2024/25?
The personal allowance for the tax year 2024/25 is £12,570.
How is the personal allowance reduced for high earners?
The personal allowance is reduced by £1 for every £2 of Net Income above £100,000.
What is the order of taxing different types of income?
Income must be taxed in the order of non-savings, then savings, and then dividend income.
What are the tax rates for the 2024/25 tax year?
Basic rate: 20%, Higher rate: 40%, Additional rate: 45% for non-savings income. Savings and dividend rates vary.
What is the personal savings allowance?
The personal savings allowance allows savings income to be taxed at 0% for the first £1,000 (basic rate) or £500 (higher rate).
Who losses the benefit of personal allowance on savings income
Additional rate tax payers - over 125,140
How do you work out reduced personal allowance for over £100,000 income
12,570 - [(net income - £100,000)/2] = reduced allowance
What are the tax rates for savings income
Basic = 20%
Higher = 40%
Additional = 45%
What are the tax rates for dividend income
Basic = 8,75%
Higher = 33.75%
Additional = 39.35%
What are the taxable income amounts for each band
Basic = 0-37,700
Higher = 37,701 - 125,140
Additional = 125,140
What is Capital Gains Tax (CGT)?
CGT is a tax on the profit made from disposing of a capital asset that has appreciated in value during ownership.
What are the conditions for CGT to be charged?
CGT is charged where there is a Chargeable Disposal of a Chargeable Asset by a Chargeable Person which gives rise to a Chargeable Gain.
What is a Chargeable Disposal?
The two main instances of disposal are the sale of an asset and the gift of an asset during the taxpayer’s lifetime.
Is there a chargeable disposal on death?
No, the personal representatives of the deceased’s estate acquire the estate at its then market value, known as ‘a free uplift on death’.
What types of assets are excluded from CGT?
Excluded assets include Principal Private Residence (PPR), motor cars for private use, certain investments, and UK sterling or foreign currency for personal use.
How is a Chargeable Gain calculated?
A gain is calculated based on the consideration received minus allowable expenditures.
How are disposals between spouses treated for CGT?
Disposals between spouses are treated as neither a gain nor a loss, so no CGT is payable.
What is the consideration received in a disposal at arm’s length?
The consideration received is the price paid by the buyer when the asset is sold.
What happens in disposals between connected persons?
The seller is deemed to have received market value, irrespective of the actual sale proceeds.
What is the basic calculation of the gain?
The basic calculation is: Consideration Received - Allowable Expenditure = Gain.
What types of allowable expenditure can be deducted?
Allowable expenditure includes disposal expenditure, initial expenditure, and subsequent expenditure.
How can capital losses be used?
Capital losses can be deducted from capital gains in the same tax year or carried forward to future years.
What is the Annual Exemption (AE) for CGT?
The annual exemption for the current tax year is £3,000, allowing individuals to make gains up to this amount tax-free.
What are the CGT rates for individuals?
The rates are 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers.
What is Business Asset Disposal Relief?
It reduces the higher rate of CGT from 20% to 10% for qualifying disposals of business assets.
What is the lifetime allowance for Business Asset Disposal Relief?
The lifetime allowance is set at £1 million, allowing gains up to this amount to be taxed at a reduced rate of 10%.
What is Investors’ Relief (IR)?
IR reduces the higher rate of CGT from 20% to 10% for gains on disposals of qualifying shares held for at least three years.
What is the impact of disposing of a buy-to-let property investment on Business Asset Disposal Relief?
The disposal of a buy-to-let property investment or other non-trading business will not qualify for Business Asset Disposal Relief.
What is Investors’ Relief (IR)?
IR was introduced to benefit investors in unlisted trading companies who hold their shares for at least three years.
What does Investors’ Relief (IR) reduce the higher rate of CGT to?
IR reduces the higher rate of CGT from 20% to 10% for gains arising on disposals of qualifying shares, subject to a lifetime limit of £10 million.
What conditions must be met for shares to qualify for Investors’ Relief?
Shares are qualifying if:
1. They are fully paid ordinary shares issued for cash consideration on or after 17 March 2016.
2. The company is a trading company or the holding company of a trading group.
3. None of the company’s shares were listed on a recognised stock exchange at the time of issue.
4. The shares are held for at least three years from 6 April 2016.
5. The individual (or connected person) is not an officer or employee of the company.
What are the two main business reliefs that defer CGT liability?
The two main business reliefs are:
1. Replacement of business assets relief (‘Rollover Relief’)
2. Gift of business assets relief (‘Hold-over relief’)
What is Replacement of business assets relief (Rollover Relief)?
Rollover Relief allows a taxpayer to postpone CGT liability on the sale of certain business assets by ‘rolling over’ the gain into the replacement asset.
What types of assets qualify for Rollover Relief?
Qualifying assets include land and buildings, fixed plant and machinery, and goodwill.
What is the effect of Rollover Relief on the acquisition cost of a replacement asset?
The acquisition cost of the replacement asset is reduced by the amount of the gain being rolled over.
What is Gift of business assets relief (Hold-over relief)?
Hold-over relief allows the donor and donee to postpone CGT liability when a business asset is given away, with the donee’s acquisition cost reduced by the donor’s deemed gain.
What happens to CGT liability under Hold-over relief?
The CGT liability is postponed until the donee ultimately disposes of the asset.
What types of business assets can qualify for Hold-over relief?
Business assets include goodwill, assets used in the business, and shares in a trading company not quoted on a stock market.
What triggers CGT liability?
CGT is charged when there is a chargeable disposal of a chargeable asset by a chargeable person, resulting in a chargeable gain.
What are the two main types of disposal for CGT?
The two main types of disposal are a gift and a sale of an asset.
What is the starting point for CGT calculation?
The starting point is establishing the consideration or proceeds received by the seller on the disposal of the asset.
What are the CGT rates for different taxpayers?
CGT is charged at 20% for higher and additional rate taxpayers, 10% for basic rate taxpayers, and 10% for those benefiting from Business Asset Disposal Relief or Investors’ Relief.
What are some ways to mitigate CGT liability?
Ways to mitigate CGT liability include allowable expenditure, Business Asset Disposal Relief, Investors’ Relief (if conditions are met), losses, and an annual exemption.
What is needed for business asset disposal relief to apply
Need to be an officer or employee of the company who holds at least 5% of the ordinary voting shares and is entitled to at least 5% of the profits available for distribution and 5% of the net assets on a winding up, for at least two years before the date of disposal.
