TC/BPT Flashcards
1
Q
How do you value quoted shares?
A
In general, all transfers are valued at their open market value at time of transfer.
Shares listed on the Stock Exchange are valued at the lower of:
the quarter up rule:
lower quoted price + ¼ × (higher quoted price – lower quoted price), and
the average of the highest and lowest marked bargains on the day of the
transfer.
For capital gains tax the proceeds would be valued using the formula:
Lower quoted price + ½ (higher quoted price – lower quoted price)
2
Q
What is in IHT stage 1:
A
transfer
BPR
specific exemptions
annual exemptions (CY/PY)
chargeable amount
3
Q
What is in IHT stage 2:
A
chargeable amount (from stage 1)
nil rate band
taxable amount
tax 20/25%
GCT (note if trustEE pays twentEE then GCT is just the chargeable amount if donAR pays quartAR-default-then GCT is chargeable amount+tax paid-think there is more tax and more GCT)
4
Q
Qualifying R&D expenditure includes. (5)
A
-consumable/transformable materials
computer software
power, water, fuel
salaries of staff directly engaged on R&D work (e.g. engineers)
payments to subcontractors (see 4.3)
Any R&D capital expenditure (except land) qualifies for a 100% FYA (or
130% super deduction if qualifying plant and machinery) but not any
additional R&D relief (see below).
5
Q
Payments to subcon under R&D.(2)
A
The amounts paid to a subcontractor which qualify as R&D expenditure,
and therefore eligible for the additional 130% relief available to SMEs,
depend on whether the company is connected with the company to
which the work has been subcontracted:
if the provider is an unconnected company only 65% of the
payment made is qualifying expenditure (i.e. only 65% of the cost
is eligible for the additional 130% relief available to SMEs).
if the provider is a connected company then the qualifying
expenditure will be the amount paid, but this is capped at the
provider’s own relevant expenditure in providing the staff (i.e. the
profit element charged by the subcontractor is not eligible for the
additional 130% relief available to SMEs).
The company can elect for any subcontractor to be treated as a connected company.
6
Q
RDEC.(3)
A
13% above the line for large companies or SMEs who have work subcon from large.
The RDEC is a tax credit:
it is included in the calculation of trading income, and
it is deducted from the corporation tax liability to calculate corporation tax
payable.
7
Q
Examples of allowable IFA trading expenses (debits) include:
Examples of taxable IFA trading income (credits) include:
A
payment of a royalty
loss on the sale of an IFA
amortisation of an IFA (except goodwill)
receipt of a royalty payment
profit on the sale of an IFA
revaluing an IFA.
8
Q
Incidental costs of loan finance. (2)
A
-Incidental costs of loan finance (e.g. expenses in relation to raising the loan finance) follow the treatment of the loan itself:
if the loan is for non-trade purposes (e.g. to buy shares or an investment property) the incidental costs are treated as an NTLR debit.
if the loan is for trade purposes (e.g. to buy plant and machinery or a building used in the trade) the incidental costs are treated as a trading income debit.
-As interest paid to buy or improve a property is dealt with under the loan relationship rules above, it is not an allowable expense against property income.
9
Q
Capital profits and losses on disposal. (2)
A
-The profit or loss on the disposal of a debt instrument (e.g. debentures, loan stock, gilts) is taxable as NTLR under the loan relationship rules, rather than as a chargeable gain or loss.
-The profit or loss on disposal is calculated as proceeds less cost (indexation is not available). This is not always the same as the accounting profit or loss on disposal which is calculated as proceeds less amortised cost.
10
Q
Cars with 1-50 emissions enter the…
A
main pool, as do second hand zero emission cars (in OBT)
11
Q
Enhanced capital allowances
A
130% of 100% FYA assets in main pool, 50% if special pool on qualifying plant and machinery
For expenditure on main pool qualifying assets:
– claim 130% super-deduction instead of the AIA
– keep asset separate (do not put in main pool).
For special rate pool expenditure:
– claim AIA first (gives 100% relief)
– then FYA = 50% × remaining cost
– balance to special rate pool: 6% WDA from following AP
Second hand assets, cars and expenditure in the period of cessation will not be
eligible for these temporary reliefs
12
Q
Short life assets (SLA).
A
-Short life assets are main pool assets that are expected to be used for not more than eight years.
-A depooling election may be made to put a short life asset in its own pool (rather than the main pool) to enable the calculation of a balancing allowance on disposal.
-If the short life asset is not disposed of by end of eight years after the end of the basis period (or AP for companies) in which the expenditure was incurred it is transferred to the main pool at TWDV.
Time limits on depooling election in OBT
13
Q
Super deduction is for
A
new and unused plant and machinery!!-shouldnt inc in R&D cacl for rdec or allowance if R&D but should be inc in 130% CA in comp
14
Q
How to calc annual adjustments for partially exempt traders
A
The tests are usually performed once per quarter however at the end of the year will be performed on the total first with 2 basic tests and then the full if these are failed eg calc the full calc and perfrom tests on this
If the amount calculated is the same as is paid then no adj needed, however otherwise calc the difference based on what has been paid vs what should have , if final test on full annual amount is passed also no adj
See q2 sep 20 for more info on calc as was an exam q
15
Q
How to treat entertainment expenses as employee
A
3 situations
Specific allowance-add to income and deduct amount actually spent
General/round sum allowance-include income but no deduction
Reimbursed directly-dont include in EE comp
16
Q
How to treat entertainment expenses as employer
A
Speciifc allowance-not allowable deduction for employer
General-allowable deduction
Reimbursed directly-reimbursed amount is disallowable deduction
17
Q
How to calc PPS vs OPS in employemnt income calcs
A
PPS treat like gift aid, OPS is a deduction from income
Gross PPS contributions are also deducted from net income when calculating
adjusted net income (see Income tax computation chapter)
However, this deduction can only be made on a paid basis i.e. any accrued pension
contributions at the end of the employer’s accounting period are disallowed expenses
but should get deducted in a subsequent period, when they are physically paid.
Max indivudal contributions the max you can deduct is higher of 3600 or relevant earnings (taxable trading income/employment income) but overall for both is 40k allowance (ie employee and employer) can cf 3 years unused FIFO after cy annual allowance (OBT)
18
Q
What is the benefit for flat with annual value of 8700 rented for 4 months with rent paid of 900 per month.
A
Its actually the higher of the annual value or rent paid in this case it woul dhave been 87004/12=2900 or 9004=3600
Therefore benefit is 3600
Any bills paid should also be added and payment made by employee deducted.
19
Q
What is the capital contribution cap on the list price of the car?
A
5k
20
Q
What to do with trading income <1k in income tax
A
exempt
21
Q
Property allowance
A
For indivudal only basically if expenses <1k then deduct 1k from property income instead, the owner can disapply if they wanted to create a loss but need to elect for this
22
Q
How are finance costs for RESIDENTIAL treat in property income? (1)
A
Tax reducer:
Cant produce a refund
The relief is calculated based on 20% of the lowest of:
-finance costs for the tax year plus any finance costs brought forward (see
below)
-property business profits: the profits of the property business in the tax year
(after using any brought forward losses)
-adjusted total income: non-savings income (after losses and reliefs) after deducting the personal allowance (£12,570 for 2022/23).
If the lowest is property business profits or adjusted total income then the difference
between that figure and finance costs is carried forward to calculate the basic rate tax
reduction in the following years.
Finance costs for non res property is an allowable deduction
23
Q
Capex in property income
A
Capital allowances are available only on plant and machinery used for repairs and
maintenance, not for plant and machinery used in the rental property (e.g. furniture).
Capital allowances may also be claimed for motor vehicles used in the property
businesses, unless a fixed rate deduction has been claimed (see Trading income
chapter).
24
Q
Replacement furniture relief in property income. (4)
A
-There is no relief for the initial expense of purchasing domestic items used by a tenant (e.g. beds, fridges, floor coverings, crockery); but the cost of later replacing them is allowable, even if the property is not fully furnished.
-The amount of relief available is reduced by any proceeds from the sale of the asset being replaced, but increased by any costs of disposal of the old item. The old item must no longer be available for use by the tenant.
-Relief is only available for a like for like replacement: no deduction is available for any element of improvement (e.g. if a washing machine is replaced with a washer dryer, only the cost of a replacement washing machine would qualify for relief).
-Expenditure on a replacement asset that is improved purely because of advances in technology is allowable in full.
25
fixtures in property income
The cost of replacing fixtures which are integral to the property and not normally removed if sold (e.g. sanitary ware, light fittings, boilers) is deductible as a repair to the property
26
Allowable property income deductions
Examples of allowable deductions include:
insurance e.g. buildings insurance
finance costs relating to non-residential properties e.g. mortgage interest (see
below for treatment of finance costs relating to residential properties)
legal and professional costs e.g. agent's fees
rates and taxes paid by landlord e.g. council tax, water rates
ancillary services provided by landlord e.g. cleaning, gardening
repairs and maintenance e.g. painting and decorating
fixed rate deductions for motor vehicles used in the property business (unless
capital allowances have been claimed - see Trading income chapter).
Only deduct expenses relating to periods where the property is rented out or
available for rent (e.g. time apportion expenses if the landlord lives in the property for
part of tax year).
27
What is fall in value relief and how is it applied
If something eg is put into a trust for 270k and then sold for 267k then 3k FIV is available off the GCT for the purpose of calcuating the IHT
However DOESNT impact the NRB remaining for treansfers (just use GCT at end of stage 2)
This relief does not apply to chattels with a life of no more than 50 years, or plant and
machinery.
28
RNRB cap
Estates over 2m reduced by £1 for every £2 over
29
How to handle life assurance policies in IHT
-If the policy relates to the individual’s own life, include the proceeds (not the market value) of the policy in the death estate calculation
-If the policy is held in trust do not include it in death estate: no inheritance tax will be due on the proceeds.
-If the policy relates to someone else’s life include the market value of the policy in the death estate calculation.
30
rent a room relief.(2)
ON PROPERTY INCOME (if less than limit then the incme would be exempt)
normal expenses or 7500, if more than persion is 3750 per person
An individual cannot claim the property allowance on income qualifying for rent-aroom relief, therefore the income qualifying for rent-a-room relief is not included in the
rental income figure used to determine if the income exceeds the property allowance-ie the allowance of 1k if rental receipts arent greater than this
31
private residence relief.(3)
exempt if occupied whole time
partially exempt for deemed occupation:
3 years for any reason
4 years whilst working in the UK
Any period working abroad
However,
-must not have another private residence during this time.
-can let out the property during the period of absence (but this will not qualify for letting relief – see below).
32
letting relief. (3)
CGT
-Letting relief applies when the owner lets part of the property whilst
still occupying the remainder (i.e. shared occupation).
-If the owner has one lodger, living as a member of the family, sharing the home and meals with them, full PRR is available and letting relief is not considered.
-Letting relief is the lowest of:
- £40,000
- the PRR given
- the part of the gain after PRR attributable to the letting period:
gain after PRR × chargeable months due to letting/total
chargeable months. -this part is in OBT
33
how is mortgage interest for companies treat
deductible in full but at NTLR instead
Remember as sole trader cannot deduct mortgage interest but get a tax reducer which is the lower of the remaining interest, cy propery income less cy properyy losses, taxble NSI (ie less PA)
Instead these only gain relief as a basic rate tax reducer, meaning for higher rate and additional rate taxpayers relief is granted at 20% rather than 40% or 45%. UNLESS FHA in which case interest fully deductable
Remember this is onyl for let properties development properties ie flips are allowable
34
SDLT on company property purchase
+3% always unless high value then 15% but dont add 3% to this, if high value also subject to ATED
35
Do companies get rent a room relief? wb property allowance?
nope
36
Can FHA get relief on white goods
yes unlike normal they can, or full capital allowances if accruals basis
37
What is RPDT
residential proeprty development tax-companies only
on those over 25m taxed 4% and finance costs not deductibel before calc
38
Company rental of cars
As you have seen in your previous studies, if a business rents a car for the purposes of its trade a deduction can be made for tax purposes.
If the car has emissions not exceeding 50g / km, the full cost is allowable.
For emissions greater than 50g / km (110g/km prior to April 2021), a flat 15% disallowance is made.
These rules only apply to cars and not other vehicles.
39
Lesee tax
depreciation and interest allowable expenses
40
Bankruptcy
Deregister for VAT
Closing year rules for cessation of trade
CGT on gains
Losses: offset against total income (cap) and gains if elect in CY, against PY (cap), TLR but if 20/21 or 21/22 dont claim as can get extended carry abck relief for 3 years
41
What is a PECL and tax implications
Pre entry capital loss ie loss made before joining loss group-actual realised losses not those that have fallen in value but still owned
joiner can use PECL against assets owned before joining the group or on gains arising on disposal of assets bought since joining group only if bought from outside the group and used only in own business ie not used by other group members
The rest of the group cannot use the PECL
42
What happens when a capital asset is transferred in a gains group and is then used as inventory by the other company eg transfer of lorry to a company whos trade is then to sell on lorries?
The transfer for the selling company is on NGNL as in gains group
For the purchaser a gain will arise of MV less cost to original company (the indexed cost), inventory treat as purchased for MV and this would then be used in calculation of trading profit
43
What happens when inventory is transferred to capital asset in a new company
The selling company down as selling for MV eg if cost 10k but sold for 8k seen as selling at a loss of 2k
The 8k lorry is then treat as if its at MV of 8k but is now a NCA and this is transferred on NGNL as in gorup so no gain on the transfer arises, the purchaser is seen as purchasing the asset for 8k going forward.
44
benefits of a gains group and what are the requirements to join
NGNL transfer
group rollover relief-th
reallocation of gains and losses only on CY! -have to elect within 2 years of chargeable
Have to be 75% direct or 50% indirect
can only be in one CGT group
45
What is a degrouping charge (DGC)
If the company leaves the gains group in 6 years of receiving the asset and still owns it then a DGC will arise
This is essentially the gain that should have arose on the initial transfer
May be exempt by SSE
OR 3 years if Stamp duty
46
roll over relief is
lower of
gain itself OR
proceeds not reinvested eg if sell factory for 580k and buying one costing 560k you havent reinvested all so would only be relief of 20k difference
47
group paying
can pay corp together if 51% companies and one is paying by installments, means interest repayment/payment can be netted off-still have to prepare each corp tax return
48
loss relief group
members of 75% group direct or indirectly of assets on winding or distributable profits this also applies if two UK linked by an o/s (though the os itself cant participate)
A UK PE can be included though!
49
Brought forward losses restriction and how to calculate the max number of losses
5m+50% excess profits ie profits less 5m
If in group can choose how to allocate the 5m allowance so may have anywhere between 0 to 5m+the 50%*profits -0
This is calculated to detemrine how much of its own losses a company can use, then you would look for losses of other group members after this
eg
Pluto has 18.5m profit and bf losses of 14m and has been allocated the full alowance for his group, the max amount of its own losses it can claim is therefore: 5m+(18.5m-5m)*50%=11.75m
Before surrendering losses to the group they must use their max limit on their own losses therefore of the 14m would be 11.75 therefore Pluto would have 14m-11.75m=2.25m to surrender
Now say Pluto is in a gorup with Saturn who has 11.5m profits and 5.5m losses
How much can they utilise?
Need to calculate their max use of their own profits as rmemeber companies must max out their losses first
As the allowance was fully allocated to Pluto this would mean 0 allowance thus max is: 0+50%*(11.5-0m)=5.75m can be used
However Saturn has 5.5m losses itself and must use these as under the limit meaning a remaining loss of (5.75m-5.5m) 250k is left
Therefore out of the available 2.25m loss only 250k can actually be used by Saturn and PLuto will cf the other 2m
50
What happens in loss relief groups if accounting periods dont match?
Can only claim relief for the matching months eg time apportion by the numbers
51
What about losses on entering leaving
Imagine V owns O and D is buying
On the date V agrees to sell to D V&O can no longer share losses
It is not until the date of purchase/sale when D&O can now share losses
52
Changes of group structure and losses
Have to be in the group 5 years to surrender bf losses but say a new company joined existing members could still surender to them even if new
53
Consortium
>75% owned by >2 or more companies who themselves cant have 75% and have more than 5%
Think joint venture
Os can join but cant participate
The consortium members can share losses w the consortium company (the joint venture) but not between eachother
If individuals are involved ignore them for the % of 75% as this would mean no consortium if it brings the total of the companies shareholding behlow this
If the consortium company shares a loss this can only be claimed by the memebrs for their shareholding %*the loss capped at their TTP
IF the consortium member has a loss this will only be surrendered to the consortium company at the lower of the lsos incurred of their shareholding%*the consortium company TTP
54
What are the 3 main parts to a company for purpose of reorganisation? How could one company acquire another from another company?
P&M
L&B
Goodwill
Could purchase the shares-this may be covered by SSE for the gain by the selling company, no VAT on sale and would leave all the gorups (loss relief on date of arrangement to sell/gains on date of sale/51% on next period), any contingent liabiltirs will be carried forward, losses can also be cf subject to MCINOCOT restrictions
Could purchase the assets and trade-meaning gains on sale of these individually eg IFAs getting trading profit, balancing charges on P&M, charegable assets having gains, no cnahge of ownership so remain in groups and as such any losses remain with the selling company/gorup, if VAT registered then VAT will be charged unless deemed TOGC, contingent liabilties also remain with OG
55
How is interest on loans treat, wb os what if interest isnt apid immediately?
As Faster Food Ltd has used the loan to purchase assets for its trade, associated debits will in principle be deductible in the calculation of Faster Food’s trading profit. The amount allowable for tax would usually follow the accounting treatment.
However, as interest is not being paid for the first 5 years of the loan and Lithium is not subject to UK corporation tax, tax relief may be delayed until actual payment.
This will be the case if Atlantica is classified as a tax haven.
Where interest is paid to Lithium 20% income tax must be deducted by Faster Food as Lithium is not a UK company
56
What are classed as CLTS
Transfer to discretionary trusts
Creation of a non qualifying interest in possession trust (IIP)
All other transfers are PETs
57
Fred owns 75% of K ltd and gives his son Max a 20% shareholding in his life the following vlaues have been agreed with HMRC:
75% 150k
55% 80k
20% 35k
What will be the value of the shares for CGT purposes? Wb IHT?
Diminution of value principle applies for IHT (value of estate before the gift-value after)=dimunition of value ie the transfer of value
so 150k-80k=70k for IHT purposes
For CGT its just MV of the gift therefore 35k
58
What are the related property rules and how do they apply
Related property includes spuse/civil partner or chairty/political party held within last 5 years
value is value of whole*transferors/tranferors+value of relared property
In the exam, calculate both the valuation as if there is no related property and the related property valuation and then select the higher valuation.
DOESNT APPLY FOR CGT
Mike and Rob (civil partners) own land in the proportion of 55%:45%.
Rob gives his share of the land to his daughter.
Values of 55% 110k, 45% 80k total 220k
Therefore for Robs interest IHT would be 220*80k/110k+80k=92632 OR 80k (not applied) therefore 92632 is higher
For CGT itd just be 80k
59
Jointly owned propety valuation
Where property is owned jointly and it is not possible to dispose of one individual’s interest freely, a discount of between 5 – 15% may be allowed from the full value of the interest.
The discount does not apply where related property is held.
IHTonly
60
Unit trusts valuation
Value units in a unit trust at their bid price (lowest price).
61
Life assurance policies valuation
-If the policy relates to the individual’s own life, include the proceeds (not the market value) of the policy in the death estate calculation
-If the policy is held in trust do not include it in death estate: no inheritance tax will be due on the proceeds.
-If the policy relates to someone else’s life include the market value of the policy in the death estate calculation.
62
Transfer of unused NRB and RNRB
The unused proportion of the nil rate band (NRB) at the death of a spouse or civil partner can be transferred to the surviving spouse or civil partner when he, she or they die.
The increased NRB can be used on calculations of death tax for both lifetime transfers and the death estate.
RNRB
The surviving spouse or civil partner:
leaves a home to direct descendants, and
includes the home in the estate.
The home in the estate does not have to be the same home that the survivor lived in
with the first of the couple to die, but the survivor must have lived in it at some stage.
For the survivor the residence nil rate band (RNRB) is limited to the lower of:
the net value of the property left to direct descendants, and
the available band (£175,000 for the tax year 2022/23) × (100% + unused %).
If the first of the couple died before 6 April 2017 the death estate would not have
used any of the RNRB as it was not available, so 100% of the RNRB will be unused
(unless the first estate was worth more than £2 million
63
rnrb
The residence nil rate band (RNRB) is limited to the lower of:
the net value of the property left to direct descendants (the open market value
less any liabilities secured on it e.g. a mortgage), and
the available band.
64
Employment related loans
2%
Average method
Uses the average of the loan outstanding at the beginning and end of the tax year.
-If the loan was taken out or redeemed during the tax year that balance is used instead of the balance outstanding at the beginning or end of the tax year.
Strict method
Calculates the monthly benefit on the balance actually outstanding at the end of each month.
The average method applies unless the taxpayer or HMRC elect to use the strict method.
The taxable benefit is given by: loan amount * 2% less interest paid
There is no taxable benefit where:
total loans to an employee < £10,000 throughout the tax year (see above), or
the loan is made on normal commercial terms in the course of a money lending
business.
If all or part of a loan to an employee is written off, the amount written off is treated as
a benefit and charged to income tax (and class 1 NICs) in full at the time of write-off.
65
How to allocate notional profit/loss
shared by profits initially allocated rather than the PSR
In a limited liability partnership (LLP) the liability of the partners is
limited to the amount of capital introduced to the partnership
66
Qualifying interest payments. (3)
-If an individual takes out a loan for a qualifying purpose, the interest paid during the tax year is deductible from total income.
Qualifying purpose includes:
- loans to buy plant/machinery for use in a partnership/employment (interest deductible for 3 years)
-loans to buy an interest in a close company/employee controlled
company/cooperative
-loans to invest in a partnership or make a loan to a partnership
-loans to pay inheritance tax.
-Reliefs are subject to a cap at the higher of £50,000 and 25% of
adjusted total income (total income less gross PPS conts plus payroll giving)
67
Optional remuneration arrangement benefit calc
Taxabl ebenefit is the higher of taxable value and value of cash sacrificed
Taxable amount treat as a benefit so class1A NI rather than class 1, NI saving for receiving benefits over cash but no saving for company on this
68
What are exceptions under the cash basis with regards to allowable expenses?(6)
-Payments to acquire plant and machinery (except cars) are allowable
expenses; no capital allowances will be claimed on these purchases. This includes the cost of vans and motorcycles.
-If plant and machinery (except cars) is bought under a hire purchase
agreement, a deduction is allowed for each payment. Note that capital expenditure on non-depreciating assets (e.g. land and buildings) is still not an allowable expense.
-Payments to acquire cars are not allowable expenses Capital allowances are claimed on cars in the normal way. Alternatively, the fixed rate mileage allowance may be claimed (with no other deductions e.g. capital allowances, maintenance).
-For leased cars the 15% restriction for high emission cars does not apply.
-Interest paid on a loan is an allowable expense (even if the loan was not wholly and exclusively for the purpose of trade) subject to a maximum of £500 p.a.
-Bad debts are not an allowable expense as income is only taxed when cash is received from the customer.
69
Conditions for joingin the cash basis.(5)
-To start using the cash basis the business must have cash receipts for the tax year not exceeding the limit.
-The limit for joining the cash basis is £150,000. (£300,000 for recipients of Universal Credit). also 300k to start accruals
-This limits are proportionately reduced for accounting periods shorter than 12 months.
-A trader must use the combined receipts of all businesses to decide if he, she or they is below these limits for joining.
-A trader elects to use the cash basis by ticking the relevant box on the selfassessment tax return. Once made, this election applies to all of the individual’s sole trader businesses.
70
Changing from accruals to cash basis. (4)
If the fixed rate mileage allowance has previously been claimed it must continue to be claimed.
In the first year of using the cash basis a deduction is made for the proportion of any tax written down value on capital allowance pools which relates to plant and machinery (other than cars). Capital allowances will continue to be claimed on cars (unless using the fixed rate mileage allowance). The CAs are then no longer claim
A net adjustment income/expenditure figure is added to/deducted from profits to avoid double counting income and expenditure that was accrued but not yet paid in the previous year. This is calculated as:
opening debtors + opening stock – opening creditors = adjustment
expense/(income). eg someone has outstanding receivable which comes in then this amoutn shoukd be deducted to avoid double counting
71
Impact of cash basis on other taxes.(4)
4.1 Partnerships
If a partnership is using the cash basis, no partner can deduct from total income the interest paid on a loan to invest in the partnership or buy plant and machinery.
4.2 Capital gains tax
As proceeds from the sale of plant and machinery are taxable as trading receipts under the cash basis they are exempt for capital gains tax purposes.
4.3 VAT
If a trader using the cash basis is registered for VAT they must also use the VAT cash accounting scheme.
4.4 NICs
When calculating class 4 NICs a cash basis trader should use tax adjusted profits as calculated under the cash basis.
72
Allowable deductions from property income.(7)
Examples of allowable deductions include:
- insurance e.g. buildings insurance
- finance costs relating to non-residential properties e.g. mortgage interest (if residential will be a tax reducer)
- legal and professional costs e.g. agent's fees
- rates and taxes paid by landlord e.g. council tax, water rates
-ancillary services provided by landlord e.g. cleaning, gardening
-repairs and maintenance e.g. painting and decorating
-fixed rate deductions for motor vehicles used in the property business (unless capital allowances have been claimed - see Trading income chapter).
Only deduct expenses relating to periods where the property is rented out or available for rent (e.g. time apportion expenses if the landlord lives in the property for part of tax year).
73
Are pension contributions an allowable expense for employers?
Yes can reduce corp tax bill
However, this deduction can only be made on a paid basis i.e. any accrued pension contributions at the end of the employer’s accounting period are disallowed expenses but should get deducted in a subsequent period, when they are physically paid.
74
Jointly owned assets (marriage)
Each spouse or civil partner prepares his, her or their own tax computation.
If property is owned jointly, the income from that asset is split equally. Property
includes:
shares (from which dividend income is received)
buildings (from which rental income is received)
bank accounts (from which interest income is received).
However, except in the case of joint bank accounts, the couple can elect to split
assets, and therefore the related income, in accordance with actual ownership.
75
A spouse or civil partner can transfer £1,260 of personal allowance to
his, her or their spouse or civil partner if:
the transferor has no tax liability (or will be a basic rate taxpayer
after the transfer),
the recipient is a basic rate tax payer.
The transferred allowance reduces the recipient’s income tax liability at the basic rate
of 20%.
The transferor must make an election but if it is made it must be transferred regardless
It comes off as a reduction at calc of tax eg 1260*20% to give IT liab
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Child benefi
Mainly in OBT
If both partners have ANI below £50,000 there is no charge; if the higher earner has
ANI over £60,000 the charge is the full amount of child benefit received in the tax
year.
To avoid the charge being levied the recipient can opt to not receive child benefit.
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Class 1 NICs are due on cash earnings which includes. (3)
gross pay (e.g. salary, bonus, commission) before any allowable deductions.
vouchers exchangeable for cash, goods or services.
payments in excess of SMRS. For NICs the mileage allowance rate is 45p per mile only and payments below that limit are not allowable deductions.
Things subject to class 1 and secondary also include:
-Write off of a beneficial loan
Employee personal bills paid by employer and phone rental and private calls where employee is subscriber (not mobile phone)
and profit element of of round sum/general allowance
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When should the NICs annual limits be used. (3)
The annual limits should be used if:
earnings accrue evenly over the year
the individual is a director (even if he ceases during the tax year) the exam question requires you to compare annual positions in a tax planning
scenario (e.g. employee vs. self-employed).
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What is the employment allowance
Are there any restrictions?
on Class 1 secondary NICs per employer is 5k a year unless single director with no other employees in whcih cae cant have
There are restrictions on large employers
>100k liability in PY
For connected companies the total of their class 1 secondary NICs is used to
compare to the £100,000 limit. If the limit is exceeded none of the companies are
eligible to claim the employment allowance.
Where connected companies combined liability does not exceed the limit only one
company is eligible to claim the employment allowance.
Companies are connected where:
One company controls another, or
Both companies are under common control of a third part
Assume less than 100k unless told btw
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Benefits liable to Class 1A – noncash earnings
-Car, van and fuel benefits
Beneficial loan interest
-Phone rental and private calls where
employer is subscriber (not mobile
phone)
-relocation expenses in excess of 8k
-Private medical insurance and taxable benefits under the salary sacrifice rules
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What is a paye settlement agreement (PSA) and what is its impact?(4)
A PAYE settlement agreement (PSA) can be used by an employer to
settle any PAYE and NICs due to HMRC on certain expenses or
benefits in relation to an employee.
Where a PSA has been made no entries are required on the employee’s P11D form
(and therefore the employee will not be taxed on the benefits or pay class 1 primary NICs in relation to cash benefits), and no class 1A NIC is payable by the employer.
Instead, the employer pays:
- the income tax that would have been due by the employee on an equivalent of the expense or benefit, grossed up by the marginal rate of tax paid by that employee.
- Class 1B NICs on the grossed up value of these expenses or benefits.
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Sole traders as employers and NICs
Employers can deduct their Class 1, Class 1A and Class 1B contributions from
trading profits. Therefore for sole traders who are employers this will reduce the
amount of income tax and Class 4 NIC payable on their profits
83
CGT exempt assets
Exempt assets include:
cash
cars
gilt edged securities and qualifying corporate bonds
National Savings Certificates
Premium Bonds
prizes and betting winnings
assets held in Individual Savings Accounts (ISAs)
wasting chattels (life ≤ 50 years)
non-wasting chattels bought and sold for ≤ £6,000
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The acquisition cost of the asset for CGT is:
the purchase price if bought
the market value if gifted (unless gift relief was claimed – see Capital gains tax
– reliefs chapter)
the probate value if inherited (MV at the death of the donor).
Incidental costs of acquisition may be included (e.g. legal fees, surveyor’s fees).
Enhancement expenditure is also allowable (e.g. new extensions, architect’s fees).
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An election may be made to pay capital gains in 10 equal yearly instalments starting
on normal due date, but only if the gain arose from a gift of:
Land, or an estate or interest in land
Shares in a company out of a controlling holding
Any shares in an unquoted company.
Interest will normally be chargeable on the outstanding balance.
86
How to calculate augmented profits and what are exempt ABGH distributions?(2)
TTP less exempt ABGH distributions=augmented profits
Exempt ABGH are all dividends received by a company other than divdends from 51% companies or foreign dividends which is not exempt (stated in the q)
When including exempt foreign dividends in the augmented profits calculation the dividend is not grossed up for any overseas tax suffered.
87
How to adjust the 1.5m limit for large company determination
Scaled down for POA <12 months
Divided by number of 51% companies
88
How to determine financial year?
the year number relates to the year it starts in eg FY23 starts 1 April 2023 and ends 31st March 2024
89
DTR on foreign taxable dividends and how to calculate.(3)
-Will be told this in the question as most are exempt however DTR will be available in respect of the WHT and UT, DTR on UT only if the Uk company controls at least 10% of the overseas company
-When grossing up the dividend for inclusion in TTP ensure you gross up both the WHT and UT.
The calc UT 1) Gross up the dividend for WHT 2) Calcualte UT as: (dividend gorss of WHT/distrubutable profits)*overseas corp tax paid
Remmeber WHT is bored tax so on remittance, UT is just the os tax paid by the os company pre dividend
Example:
D plc received £2090000 dividend from E (o/s) which was not exdempt dand were received after deduction of 5% WHT/ The dividends were paid out of profits which had distributable profits of £2640000 and the tax return showed tax payable of £960k
To calc the corp tax payable by D plc on the dividend:
Calculate the WHT grossed up so £2090000/0.95=2.2m therefore 2.2-2.09=£110k WHT
The get UT you do dividend gorss of WHT so 2.2m/2.64 dist profits*960k tax paid=800k UT
Therefore the corp tax comp would have dividend income 2.09m +800k+110k=3m TTP then tax this @19%=570k
HOWEVER would then get DTR which is lower of the UK or os tax therefore either 570k or 910k hence is 570k and thus we are left with 0 corp tax liabiliity assuming this is D's only income
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interactions of deductions with DTR
Where qualifying donations (or other allowable deductions such as losses) have been made, they can be set off in the most beneficial manner as follows:
- first against UK income
- then against overseas income.
If there is more than one source of overseas income, the qualifying donations should be offset against the source suffering the lowest rate of overseas tax first.
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Depreciating assets and roll over relief.(3)
A depreciating asset is an asset with an expected life of no more than
60 years, for example fixed plant and machinery, or a lease with no
more than 60 years left to run.
If a gain is rolled over into a depreciating asset the gain is not deducted from the cost of the asset acquired, it is simply deferred until the earliest of:
- the disposal of the depreciating asset
- ten years from the acquisition of the depreciating asset
- the date the depreciating asset ceases to be used in the trade.
A deferred gain rolled over against the cost of a depreciating asset can be rolled into a non-depreciating asset if the non-depreciating asset is acquired before the gain becomes chargeable.
92
Personla use and ROR for indivuduals.(1)
If an asset has been used for business and non-business purposes, only the gain
relating to the business proportion is eligible for rollover relief.
Similarly, if the replacement asset is used partly for business purposes and partly for
non-business purposes, the relevant replacement cost is only the business proportion
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Gift relief is available on... for individuals.(3)
Assets used in the trade of the donor (i.e. where the donor is a sole trader or a partner in a partnership); or the donor’s personal company (>5%)
-Unquoted trading shares/securities.
-Quoted shares/securities of donor’s personal company, where it is a trading company.
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PRR and business use.(3)
No PRR is available for a part of a property which has been used
exclusively for business purposes.
No final period (last 9 months) exemption is available if the business
part of the property has always been used for business purposes.
However, if the business part has in the past been used for non-business use, the
final period exemption does apply even if that part of the property was used for
business purposes during the last 9 months of ownership.
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Sales at an undervalue.(3)
Gift relief applies but for sales at undervalue the market value is still used as the proceeds, but the relief is
modified as follows:
- any actual proceeds received which exceed the original cost of the asset are
chargeable to CGT at the date of the gift.
- the gift relief available is reduced by the amount chargeable
Example G sold a freehold shop to his grandson P for 180k, the cost 5 years ago was 150k and has been used for trade, the current MV is 480k
The chargeable gain arising would be the proceeds less orignal cost so 180k-150k=30k chargeable
The gift relief available which would be on the gain of the gift therefore 480k less the 150k cost =330k however this is then reduced by the 30k therefore 300k gift relief is available
96
What is the restriction on gift relief of gifting shares in a personal company?
Total gain *CBA/CA
CBA=chargebable business assets so assets used in trade
CA=all chargeable assets at MV
97
BADR/gift relief interaction.(1)
Where both gift relief and BADR are available and gift relief is to be claimed, then gift relief must be claimed first.
If the gain left in charge to tax after gift relief is covered by the AEA and BRB, BADR should not be claimed as no tax will be saved, but the gain will count towards the lifetime limit
98
What happens when BADR ceases to be on a personal company (eg company issues new shares so now shareholding below 5%)?(4)
ESSENTIALLY-calc gain at time that lose the 5% this is not at a gain at the time but is deferred, upon sale of all shares this will trigger two gains 1 will be the deferred gain (this will get BADR as at this time they were 5%), the remainder will be regular gain with a base cost of the shares MV at the time of this deferral
THINK-two gains one till reissue, then imagine he sells and rebuys the shares and a new gian and all become charegable at the same time (one gettin g BADR bc qualifies but essentially the "new" shares dont so regular gain)
Eg D had 10k shares for £1, the company then reissues shares for £10 a share therefore £100k MV at this point. D doesnt want anymore shares so a gain is calculated based on this change therefore 100k-10k=90k gain, this is not charegable now
Now imagine a few years later D wants to sell his shares and gets 130k. The new cost on this gain will be 100k from mv at new gain calc therefore 30k regular gain and the 90k becomes charegable now under BADR
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Exempt benefits for o/s employees.(4)
-the cost of board and lodging abroad
-travel home (any number of return visits)
-for absences of 60 days or more, travelling expenses for a spouse
and minor children (up to two return visits per person per tax year)
-overseas medical treatment and insurance when working abroad.
100
What is domicile?
An individual’s domicile is the country in which he, she or they has his, her or their permanent home
101
The remittance basis applies automatically to a non-domiciled UK
resident individual if he, she or they:
<2k unremitted foreign income
If the remittance basis applies automatically the non-domiciled UK resident individual remains entitled to a personal allowance and the overseas income is taxed when remitted to the UK.
102
Multiple sources of foreign income
Essentially work out total with all income and UK tax, then exclude highest rated foreign income (the difference between these is the UK tax on this element)
Repeat this highest to lowest until you have all the Uk tax comparisons to the o/s tax then you can deduct
Dont have to do if obviously more or less than Uk tax
103
Overseas purchase of asset
Where an asset is bought/sold in an overseas currency the cost/proceeds must be
translated into sterling using the rate applicable at the time of purchase/sale
104
Disposal of UK residential property by non-UK resident individuals.What about non res?(3)
Only taxable from 5th April 2015 therefore use mv at this time as cost
Alternatively, the individual can elect to calculate the gain as normal
(from purchase date to disposal date – this is useful where there is a
loss) or make a second election to time apportion the gain for the period after 5 April 2015.
Where a non-UK resident individual disposes of UK residential property the capital gains tax due must be paid within 60 days of the disposal being completed
For non res the same applies but for 5th April 2019 BUT cannot time apportion teh gain if election made (see above)
105
BPR ownership period.(1)
To qualify for BPR, the property transferred must have been owned by the transferor for the two years immediately prior to the transfer.
This includes replacement of previous BPR, from spouse on death or successive transfers which on transfer qualfieid.
106
What is BPR available on?What is it not on?(3)
100/50%- reduction in value transfer
100% on unquoted tradin company shares inc AIM, shares not just asste
50%
shares >50% in quoted company
business assets (not just shares) of business where had control or was partner
Not available on except assets (Excepted assets are those which have not been used wholly/mainly for business purposes throughout the two years prior to the transfer and are not required for future use in the business (e.g. large cash balances or investments).
Note:
The business of the sole trader, partnership or company must be a trading business.
When considering control, related property is taken into account.
Relevant business property can be located anywhere in the world.
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How to calculate the value eligble for BPR if there are excepted assets?
net assets-excepted/net assets*transfer of value
108
Fuel mileage rates
10k 45p
25p thereafter
109
Professional subscriptions in employment income
Exempt if company pay
If you pay allowable deductions
110
Rule for SMRS and NICS
Calculated as p given to 45p only don’t stagger!
111
For PAYE settlement agreements how would this be calculated?
Employee doesnt pay it but employer would (whether ST business or not)
To find the amount added to tax adj trading profit you need to gross up the amount given by the tax that wouldve been paid (eg 100/80 for basic 100/60 for higher) you then calc nics on the gorss up amount and then this NICs and the tax found from gorssing is the amount you add to the tax adj trading profit in comp
