U1: T4 - UK TAXATION II Flashcards
In the context of CGT, define ‘Disposal’?
For CGT purposes, a disposal can be the sale of an asset, transferring ownership to another party, giving it away, or receiving compensation for its loss or destruction.
In the context of IHT, define ‘Nil-Rate Band’?
The amount on which a nil rate of IHT applies; in other words, the amount is liable to tax but the rate that applies is 0 per cent.
In July 2016, Joan made a gift to her daughter of £350,000. She has made no other gifts in her lifetime. Joan died in October 2020 leaving a total estate worth £420,000. Let’s say the full rate of IHT is 40 per cent on estates over the nil-rate band of £325,000.
How much IHT is applied to the value of the gift that is in excess of the nil‑rate band?
a) £5,000
b) £6,000
c) £8,000
d) £10,000
The answer is b) £6,000.
In the first instance, the gift uses the available nil-rate band of £325,000, there is then an excess of £25,000 above the nil-rate band.
Joan died between four and five years after the gift, so the £25,000 excess is
liable for IHT at 60 per cent of the full rate (i.e. 40% × 60%).
Melanie bought a painting in a charity shop for £40. It turned out to be by a well‑known artist, and she sold it three years later for £2,000. She had to pay CGT on the gain she made.
True or false?
False.
Gains made on ‘chattels’ (movable objects such as jewellery, antiques
and paintings) are exempt from CGT if their value is £6,000 or less.
For how many years can the annual exempt amount for CGT be carried forward?
The CGT annual exempt amount cannot be carried forward at all.
To qualify for roll‑over relief, a business must replace an asset not more than five years from the date of disposal.
True or false?
False.
Assets must be replaced within three years after the date of disposal
Inheritance tax would be charged on which of the following?
a) The total value of the deceased’s estate.
b) The total value of the estate above the
available nil‑rate band.
c) The value of the estate less any gifts that have been made in the previous seven years.
Answer is b.
Inheritance tax would be payable on the total value of the estate above
the available nil-rate band.
Tax on a chargeable lifetime transfer in excess of the available nil‑rate band is payable:
a) immediately, at the full rate.
b) only if the transferor dies within seven years of the transfer.
c) immediately, at a reduced rate.
Answer is c.
Immediately, at a reduced rate of 20 per cent.
What kind of tax is payable when shares are purchased electronically?
Stamp duty reserve tax.
Sanjay, a basic‑rate taxpayer with taxable income of £12,000, purchased UK listed company shares for £11,300 in May 2015.
He sold them for £25,400 in August 2021. He has no other gains or losses (current or carried forward) in the tax year 2021/22.
Ignoring any costs, calculate his capital gains tax liability assuming an annual exempt amount of £12,300 and a
basic rate of 10%.
Answer is £180.
Gain: £25,400 – £11,300 = £14,100
Taxable gain: £14,100 – £12,300 = £1,800
Capital gains tax payable: £1,800 × 10% = £180
Sarah, a basic‑rate taxpayer with taxable income of £17,000, bought some shares in May 2016 for £15,000 and sold them in October 2016 for £10,100, making her a loss of £4,900 in the tax year 2016/17. She made no gains in the same tax year. In the current tax year she sold her holiday flat in Devon, which made her a profit of £47,600.
She had spent £14,000 on renovations,
and it cost her £3,500 in estate agent’s commission to sell it. Calculate the capital gains tax due for the current tax year assuming an annual exempt amount of £12,300 and a rate of 18% for gains on residential property.
Answer is £2,322.
Gain on flat £47,600
Less cost of renovations (£14,000)
Less cost of disposal (commission) (£3,500)
Less annual exempt amount (£12,300)
Less carried-forward loss from 2016/17 (£4,900)
Taxable gain = 12,900 × 18% = £2,322 capital gains tax
Luis sold his house, which has been his main residence since he bought the house in 2020, and downsized to a one-bedroom flat, making a gain of £325,000. Is the capital gain made from this sale eligible for private residence relief?
a) Yes, because the house was Luis’s main residence the gain from the property’s sale will be eligible for private residence relief.
b) No, because Luis has not lived in the house long enough to qualify for private residence relief.
c) We do not have enough information to decide if the gain is eligible for private residence relief or not.
Answer is c.
In this instance, we do not have enough information to decide if the
gain is eligible for private residence relief.
For example, the gain may
not be eligible for private residence relief if:
- Luis has spent money renovating the house and is now selling it to
release a profit; - Luis sold some or all of the grounds that originally came with the house
after he sold the house; - Any part of the house has been used exclusively for business purposes
while Luis has owned it.
A company makes an annual profit of £1.2m. When would the company’s corporation tax normally be payable?
Nine months after the end of the relevant accounting period.
What are the 4 types of CGT relief?
- Private residence relief
- Business asset disposal relief
- Roll-over relief
- Hold-over relief
What gifts and transfers are exempt from Inheritance tax?
- Transfers between spouses and between civil partners both during their lifetime and on death, provided that the receiving spouse/civil partner is UK domiciled;
- Small gifts of up to £250 (cash or value) per recipient in each tax year;
- donations to charity, to political parties and to the nation;
- Wedding gifts of up to £1,000 (increased to £5,000 for gifts from parents or £2,500 from grandparents);
- Gifts that are made on a regular basis out of income and which do not affect the donor’s standard of living;
- Up to £3,000 per tax year for gifts not covered by other exemptions. Any part of the £3,000 that is not used in a given tax year can be carried forward for one tax year, but no further.
Define VAT?
Value added tax (VAT) is an indirect tax levied on the sale of most goods and the supply of most services in the UK.
Define Stamp Duty?
Stamp duty is payable on paper documents that transfer the ownership of financial assets, such as shares and bearer instruments over a certain amount. It is important to ensure that the documents are stamped by HMRC within the permitted time period.
Define Stamp Duty Reserve Tax?
Stamp duty reserve tax (SDRT) is charged on transfers that are completed electronically. If the transaction is carried out through CREST, which is an electronic settlement and registration system, SDRT is deducted automatically and passed to HMRC. For other transactions, the buyer has to notify HMRC and make the payment.
Define Stamp Duty Land Tax?
Stamp duty land tax (SDLT) is paid by the purchaser of property and there are different rates of SDLT which apply to different portions of the purchase.
Define Corporation Tax?
Corporation tax is paid by limited companies on their profits. It is also payable by clubs, societies and associations, by trade associations and housing associations, and by co operatives.
