Topic 3 + 4 Flashcards
What is the income and corporation taxes act of 1988
This is the main statute which governs the tax system in the uk however there are other statues in the uk to help that are passed every year after the budget along with case which are rulings and interpretations of tax laws and clarify obligations.
What is the financial bill and financial act
The financial bill is one which is presented after the budget to propose tax changes which is the given the royal assent passing the bill making it the financial act.
When is the UK tax year
6th of April until the 5th of April the following year.
what makes an individual Domicile.
Domicile is the origin of an individual of their permanent home in which they reside. everyone has a origin of domicile granted to them at birth usually from the father or the mother if unmarried.
However an individual can choose their domicile by moving with the intent to stay in that country they are then given the domicile title through actions showing long term plans to stay there.
An individual is seen to be domicile in the uk if their residence has been the uk 15 out of the last 20 years. this is very important for inheritance tax as if the individual in domicile in the uk then the tax is on the worldwide income for the inheritance however if they are not they are only taxed on the uk based income.
What is the difference between residence and domicile
Under the Uk law tax on income/capital gains/inheritance is influenced by wether you are a resident of domicile.
What makes an individual a resident
This primarily affects the individual throught capital gains tax and income tax.
The individual will have to meet certain thresholds to be considered a resident such and staying in he uk for a total amount of 183 day however some tests may be carried out if an individual is below this to see if they are still eligible such as connections to the uk and length of stay.
An individual (resident or domicile) is taxed on their worldwide income regardless if it was brought into the uk or not. If the individual is a resident but not domiciled the much more complex rules will apply
There are tax treaties in place so that an individual will not be taxed twice by two countries with agreements in place however if not in place then an individual may be taxed twice.
What are the sources of taxable on and non taxable income.
The taxable income in the Uk comes from earned and unearned income such as wages, tips, pension, commission, investments in property (rent), gov bonds and saving accounts interest.
Nontaxable income in the Uk is casual gambling/lottery, certain gov benefits or pensions and redundancy payments up to a certain threshold.
Children are taxed.
what is a marriage allowance.
Marriage allowance is 10% of their unused personal allowance to their spouse or civil partner, provided the transferring spouse earns less than the personal allowance limit, and the recipient spouse is not taxed at the higher or additional rates.
What is a personal allowances.
There are many types of allowances which is the amount which is tax free.
personal allowance is the income of £12,750 tax free for individuals in the Uk however if you earn £100,000 the it can be reduced practically making all the income taxed.
What are the UK bands and tax rates.
The uk has a progressive Tax system.
Basic rate (20%) applies to income between £0 and £37,700.
Higher rate (40%) applies to income between £37,701 and £125,140.
Additional rate (45%) applies to income above £125,141.
What is the PAYE system
This is the pay as you earn scheme the gov uses to tax the taxes from the employee before they receive their income.
however the tax is calculated by each individual instead of by the government which they provide tools to help.
What is the personal saving and dividend allowance.
This is a tax free income for the individuals income from interest which can be up to £1000 or £500 for higher earners and dividends are also allowed a tax free allowance of dividends.
What is a blind persons allowance.
This is the allowance of a registered blind person but if cannot be used it can be transferred to a partners
what is a married couple allowance.
This is for couples born before 1935 which allows the couple to have a tax reduction instead of increasing the tax free income.
What will allow deductions to the tax paid.
There are three types of contributions which will help deductions.
personal being the contributions to pension schemes
charitable contributions are those which will allow charities to receive deductions through the gift aid act.
finally allowable expenses from business owners which are able to claim back wholly business purchases.
What are some examples of Tax liability.
Saira (Age 24):
o Salary: £27,430
o Personal Allowance: £12,570
o Taxable Income Calculation:
Income: £27,430
Less Personal Allowance: £12,570
Taxable Income: £14,860
Income Tax Due: £14,860 x 20% = £2,972
o Payment: Saira’s employer will collect this income tax monthly under the PAYE system.
What are tax codes as well as P60/P45 forms
Tax codes are given to each individual giving a summary of information including benefits over/under payments and the tax free income
P60 forms are for the employee given to them by the employers showing the tax contributions overall
P45 forms are given to employees when leaving the occupation to help give an overall, a copy is also sent to HMRC.
What is capital gains tax
Capital gains tax is a tax applied to an asset which has been profited on, however the tax paid is only applicable to the difference of what an individual has paid for and then sold for after deductions.
Where can capital gains be applied
- personal property that exceeds certain values e.g paintings and jewellery
2.Real estate or land that isn’t your primary residence
3.Shares if they are not held within isa or saving accounts
4.Business assets
What does disposal of asset refer to
This refers to the capital gains tax not only applying when sold but also applied once the asset has changed hands e.g a gift or exchanged for something else but the main point is that the gain is taxed not the value.
What is the annual exempt amount
The annual exempt amount for an individual in a tax year from 23/24 tax year was 6,000 for individuals and 3,000 for trustees which allow people making smaller gains to keep the majority of their profits and tax is paid for every profit after the exemption
Which assets are exempt from capital gains tax
- personal belongings which are valued under the 6000 tax threshold such as art and jewellery however if they are a part of a set they are treated as one
- personal saving accounts such as an isa and other saving acounts will not be taxed
- gains from betting, lottery, bonds and insurance policies are not taxed unless sold to a third party
- personal vehicles and property of residence, however if the vehicle is used for business then it will be taxed
How are losses handled for capital gains tax
Losses in the eye of capital gains tax is used as a deduction for other capital gains which are made in the same tax year for example if a £2000 loss was made in the same year as a £5000 gain then the total gain would be £3000
however if it is a net loss for that tax year then the deduction can be brought forward to the following year but never the previous.
How is capital gains tax calculated
The gain is calculated by subtracting the cost of the asset from the profit made from the asset along with the deductions of any enhancements such as a house extension can be deducted or the losses made on any other assets.
then the deductible amount is taken away either £6,000 or £3,000 and the appropriate rate is applied this is based on income so a basic tax payer would pay 10% and a higher tax payer would pay 20% however if the asset is a property then the tax rates would be 18% and 28%.
It is a self assessment and all of the reporting and payments must be done by january 31 unless the assset is a property then it should be completed within 60 days of the sale.
Example of capital gains tax payment
Vanessa, who earns £15,000 per year, is a basic-rate taxpayer. Ten years ago, she bought units in a unit trust for £49,900 and sold them in the current tax year for £80,900, realizing a gain of £31,000. At the same time, she sold some shares for £10,000 that she had bought for £12,000, incurring a loss of £2,000.
- Gain on unit trust: £80,900 - £49,900 = £31,000.
- Loss on shares: £12,000 - £10,000 = -£2,000.
- Net Gain: £31,000 - £2,000 = £29,000.
- Annual Exempt Amount: £3,000 (assumed).
- Taxable Gain: £29,000 - £3,000 = £26,000.
- CGT Rate: Vanessa is a basic-rate taxpayer, so the CGT rate is 10%.
- CGT Due: £26,000 x 10% = £2,600.
What are the three reliefs for capital gains tax
- Private residence relief, this is for an individuals main residence which can be anything such as a house, flat, caravan or houseboat. Even if the individual has been away with work for long periods of time or if an individuals owns multiple properties they can nominate 1 of them for relief.
2.Business asset disposal relief, this is when a business of a sole trader is part sold or fully sold they are intitled to relief or if limited companies shares and disposable profits are sold while still owning 5%.
3.Business asset rollover relief, this is when the profits from selling a business is used to purchase another company the the payment wll be withheld until the new business is sold. This must be complete 1 year before or 3 years after the sale.
what is inheritance tax
This is tax on the estate of an individual once they die which is evaluated as well as lifetime gifts. This is only paid on estate above the nil-rate band.
What is a chargeable lifetime transfers
This is some gifts given cannot be exempt such as an organisation, trust or companies.
If the company does not exceed the nil rate at the time of transfer then they are exempt and if the individual survives longer than seven years then reliefs are in place.
What is the nil rate band
This is the rate at which inheritance tax is not payed which as of 23/24 is £325,000 anything above this is taxable by 40%.
If a civil partner or spouse can handle the transfer then they are fully exempt from inheritance tax and if it is not used and both partners die then both rates can rollover doubling the rate to £650,000
What is potential exempt transfer
This is when a gift in an individuals lifetime which can be exempt from the tax if the individual giving the gift survives over 7 years from when the gift is given.
The tapering relief is a way of having to pay less inheritance tax on the gift the longer the individual survives.
1–3 years after gift: 100% IHT due.
3–4 years: 80%.
4–5 years: 60%.
5–6 years: 40%.
6–7 years: 20%.
7+ years: No IHT due.
What is residence nil rate band
This was introduced in 17/18 where a residency transfer to a direct descendant to which the limit is 175,000 however it cannot exceed the value of the property itself.
like the nil rate band any unused amount can be transfered to a spouse but only the unsed amount
also if the residence exceeds 2 million then for every £2 over the limit £1 is taken from the exemption.
What gifts are exempt completely
Spousal transfers: Gifts between spouses or civil partners are exempt from IHT, whether made during life or on death.
Small gifts: You can give up to £250 to any number of individuals in a tax year without incurring IHT.
Wedding gifts: Parents can give up to £5,000 to a child as a wedding gift, and grandparents can give up to £2,500.
Regular gifts out of income: You can make regular gifts from your income (such as from a pension or salary) as long as they do not affect your standard of living.
Annual gift exemption: You can give up to £3,000 per year without paying IHT. If you do not use the full exemption in one year, you can carry it forward to the next year, but only for one year.
An example of an assesment.
Samir dies in the current tax year, leaving an estate worth £1 million. His estate includes a house valued at £650,000 and investments worth £350,000. Samir was predeceased by his civil partner, Jamal, who died in 2016 and did not use any of his IHT allowances.
Nil-Rate Band: Since Jamal did not use his NRB, Samir’s estate can benefit from double NRBs: £325,000 from Jamal and £325,000 from Samir, for a total of £650,000.
Residence Nil-Rate Band: Jamal also did not use his RNRB, so Samir’s estate benefits from double RNRBs: £175,000 from Jamal and £175,000 from Samir, for a total of £350,000.
The total RNRB of £350,000 is deducted from the estate, leaving £650,000. The £650,000 NRB can then be applied, meaning that no IHT is payable on Samir’s estate.
How is an estate assessed for inheritance tax
The estate is looked at holistically including theif lifetime gifts their investments and any other taxable assets within the last year.
once a figure has been gathered then all liabilities such as mortgages and debts is taken away along with tax reliefs such as nil rate to then be given a figure.
