Topic 3 Flashcards
What is the main statute relating to taxation in the UK?
The main statute relating to taxation in the UK is the:
Income and Corporation Taxes Act 1988
What is case law in relation to taxation?
Case law is law established by court decisions, serving as a source of tax law alongside legislation.
How are new tax measures introduced each year?
After the Budget, a Finance Bill is introduced. Once approved by Parliament, it becomes a Finance Act, and the tax measures take effect.
What is a Finance Act?
A Finance Act is a bill that becomes law after being:
- Approved by Parliament
AND
- Receiving Royal Assent
What is the time frame for the tax year in the UK?
From 6 April to 5 April of the following year.
How does the Finance Act relate to other tax legislation?
It adds to existing tax laws, like the Income and Corporation Taxes Act 1988.
What is the process for a tax law to become part of UK legislation?
A Finance Bill is introduced, approved by Parliament, and becomes a Finance Act after Royal Assent.
What role does the Budget play in UK taxation law?
It introduces the government’s tax proposals, later formalized in a Finance Bill.
What happens after a Finance Bill receives Royal Assent?
It becomes a Finance Act, and its provisions become law.
How many days must a person be present in the UK to be automatically considered UK resident for tax purposes?
At least 183 days in a tax year.
What happens if a person is not present in the UK for 183 days?
Statutory residence tests are applied to determine if they are considered UK resident for that tax year.
How is income taxed for a person who is resident and domiciled in the UK?
They are taxed on their worldwide income, both earned and unearned, whether or not the income is brought into the UK.
How is capital gains tax (CGT) applied to UK residents?
CGT is charged on the realisation of gains worldwide for UK residents.
What are double taxation agreements, and what is their purpose?
Double taxation agreements are treaties between countries to prevent individuals from being taxed twice on the same income or gains.
How is tax liability handled for a UK resident with overseas income?
Overseas tax paid is deducted from the UK tax liability under double taxation agreements.
What do reciprocal tax treaties often include?
Agreements to exchange information to combat tax evasion.
What is Capital Gains Tax?
Tax payable on the gain made when assets are disposed of, usually by selling or gifting them.
What is meant by Earned Income?
Income from employment or self-employment.
What are examples of earned income?
- Profits
- Salary
- Tips
- Commission
- Bonuses
- Pension benefits
What is meant by ‘Unearned Income’?
Income that is not derived from employment or self-employment
What are examples of unearned income?
- Interests
- Dividends from investments
- Rental income
- Trust income
What is domicile?
Domicile is the country an individual considers their permanent home, even if they are temporarily elsewhere.
What is a domicile of origin?
It is the domicile acquired at birth.
Typically, it is the domicile of the father, OR, the mother if the parents are unmarried.
Can a person change their domicile?
Yes.
When can a person change their domicile?
By moving to another country with the intent to stay permanently and severing ties with their former country, they acquire a domicile of choice.
What is a domicile of choice?
It is a domicile that a person chooses by moving to a new country, intending to make it their permanent home.
Is there a formal process to change domicile?
No.
Changing domicile is based on actions and intent, therefore NOT a formal process.
Why is domicile important for tax purposes?
Domicile primarily affects liability to inheritance tax (IHT)
How does domicile affect IHT liability for UK-domiciled individuals?
UK-domiciled individuals are liable for IHT on their assets worldwide.
How is IHT applied to non-UK-domiciled individuals?
Non-UK-domiciled are only liable for IHT on their UK-based assets
What is deemed domicile for IHT purposes?
A person is deemed UK-domiciled if they have been a UK resident for at least 15 of the last 20 years.
Which of the following people would be most likely to be a ‘UK resident’?
a) Susan, who normally lives in Spain but spends three months a
year working for the family business in England.
b) Antoine, a French surveyor, whose eight‑month contract in
Devon with a construction company started in May.
c) Max, who moved to London from Cologne on 6 January for a
seven‑month teaching contract.
d) Brenda, who spends 180 days a year in the UK and the remainder
in the USA.
Answer: B
EXPLANATION:
To be a UK resident, you have to be present in the UK for min. 183 days from the current tax-year.
Tax years start from the 6th of April, to the 5th of April the following year.
Antoine has a 8-month contract starting in May, 1-month before the new tax year.
Therefore, he will based in Devon for 7-month of the new tax year, which is c.210 days.
As a result, he will be spending more than 183 days in the UK for the upcoming fiscal year.
Which of the following will NOT be subject to UK inheritance tax
upon death?
a) UK property owned by Paolo, who has lived in the UK for three
years but is not UK domiciled.
b) Overseas property owned by Kavita, who was born in the US (to
American parents) but has lived in the UK for the past 18 years.
c) Overseas property owned by Helena, who is UK resident but
not UK domiciled nor deemed domiciled.
d) Overseas property owned by David, who is UK domiciled but
resident in France.
Answer: C
EXPLANATION:
One’s residency mainly impacts income tax and capital gains tax (CGT).
Whereas, domicile mainly impacts inheritance tax (IHT).
IF an individual is not UK domiciled, they will ONLY have to pay IHT on their UK assets.
On the other hand, IF an individual is UK domiciled, they will have to pay IHT on their WORLDWIDE assets.
Helena owns overseas property, but is NOT UK domiciled. So she will only have to pay IHT on her UK assets. Therefore NOT paying IHT on her overseas property.
What is income tax based on?
Based on income received during a tax year.
What types of income are subject to income tax?
Income from:
- Employment
- Self-Employment
- Pensions
- Rental income
- Interest
- Dividends
Are children subject to income tax in the UK?
Yes.
Children may be subject to income tax depending on the type and amount of income they receive.
How is a child’s income from a parental settlement taxed?
- It is treated as the parents’ income for tax purposes;
- The child’s allowances CANNOT be used against it.
What types of employment income are assessable to tax?
- Salary
- Wages
- Bonuses
- Commissions
- Taxable employee benefits
- Pension income
- Profits from a trade or profession
- Inventor’s income from a copyright or patent
- Interest on bank and building society deposits
- Dividends from companies
- Income from government stocks, local authority stocks and corporate bonds.
- Income from trusts
- Rents and other income from land and property
Is pension income subject to tax?
Yes.
Pension income, including state pension benefits, is assessable to tax.
Are profits from a trade or profession taxable?
Yes.
Profits from a trade or profession are subject to tax.
Is interest earned from bank deposits taxable?
Yes.
Interest on bank and building society deposits is taxable.
Are dividends from companies taxable?
Yes.
Dividends from companies are assessable to tax.
Is income from land and property taxable?
Yes.
Rents and other income from land and property are taxable.
Is income from government and corporate bonds taxable?
Yes.
Income from government stocks, local authority stocks and corporate bonds is assessable to tax.
Is income from trusts taxable?
Yes, income from trusts is taxable.
Are redundancy payments taxable?
It depends.
Redundancy payments are not taxable up to a certain threshold; Any excess IS taxable.
Also, payments in lieu of notice are FULLY TAXABLE.
Under what circumstances is an employee’s redundancy payment taxed?
If they were given notice, they will receive payments in lieu of notice.
Receiving redundancy payment in lieu of notice is fully taxable.
Are shares given to an employee as part of a Share Incentive Plan taxable?
It depends.
Some shares in a ‘Share Incentive Plan’ are not taxable.
Is interest on NS&I Savings Certificates taxable?
No.
Interest on NS&I Savings Certificates is not taxable.
Is income from ISAs taxable?
No.
Income from ISAs is generally not taxable.
Are gambling profits taxable?
No.
Casual gambling profits are not taxable.
Are lottery prizes taxable?
No.
Lottery prizes are not taxable.
Are wedding presents from an employer taxable?
No.
Wedding presents from an employer, IF not given in return for service, are not taxable.
