Unit 1 - Topic 4 Taxation

Question 1

What is capital gains tax?

Answer 1

Capital Gains Tax (CGT) is payable on a gain made on the disposal of certain assets (usually by selling them).

Question 2

What is Capital Gains Tax (CGT) payable on?

Answer 2

1) Personal property worth more than £6,000 2) A property or land that is not the individual’s main home 3) The individual’s main home if it has been let out or used for business, or if it very large. 4) The sale of shares - if they are not held in an ISA 5) Business assets, such as land, buildings, machinery or registered trademarks.

Question 3

What is the annual CGT allowance and can it be carried forward?

Answer 3

For 2020/21 it is £12,300 and no.

Question 4

What happens if a loss is made on disposal of an asset?

Answer 4

The loss can generally be offset against gains made elsewhere. It must first be offset against gains made in the year the loss occurred. Residual losses may then be carried forward to future years.

Question 5

What are the rules relating to the calculation of taxable gain?

Answer 5

1) the cost of purchase can be added to the purchase price and the selling costs can be deducted from the sale price (therefore reducing the size of the gain)
2) The cost of improvements to an asset can be treated as part of its purchase price (repairs and maintenance cannot)
3) Capital gains made before March 1982 are not taxed so, anything acquired before that date must be valued and this submitted as the actual purchase price
4) CGT is charged on the gains arising from disposals in a tax year

Question 6

What are the steps involved in calculating CGT?

Answer 6

1) Calculate the amount of the gain
2) Deduct the CGT annual exempt amount (if this has not already been used on other gains)
3) Deduct any losses that can be offset against the gain
4) What remains is the taxable gain
5) Add taxable gain to the taxable income to establish what rate(s) of CGT should be paid
6) Apply tax at appropriate rates: 10% for basic rate, 20% otherwise, with an 8% supplement where the gain results from the sale of a property not subject to private residence relief.

Question 7

What is private residence relief?

Answer 7

This relief is available for CGT if somebody sells the property that they have lived in as their main home. If somebody has more than one residence, they can nominate their primary residence that they wish to claim private residence relief.

Question 8

What is entrepreneurs’ relief?

Answer 8

This means a lower rate of CGT (10%) is applied to a lifetime limit of £1m on cumulative gains arising from the disposal of trading businesses and from certain disposals of shares in trading companies. In order to claim this relief, the individual must generally own at least 5% of the ordinary share capital of the business.

Question 9

What is Roll-Over relief?

Answer 9

This can be claimed if business assets are disposed of and then replaced by other business assets. Instead of CGT falling due on the original disposal, it is deferred until a final disposal is made. The replacement asset must be bought within a period of one year before and three years after the sale of the original asset.

Question 10

What is Hold-Over relief?

Answer 10

(Gift Hold-Over relief) means that if you gift an asset to somebody, you do not pay CGT on it, however the recipient will when they dispose of it.

Question 11

What is Inheritance Tax?

Answer 11

IHT is levied on the estate of a deceased persons and is charged following an individual’s death. This tax is charged on the amount by which the value of the estate exceeds the available nil-rate band at the date of the death.

Question 12

What is Nil-Rate Band (NRB)

Answer 12

The amount on which a nil rate of IHT applied, in other words, the amount is liable to tax but the rate that applied is 0%.

Question 13

Surviving spouses and civil partners can increase their own nil-rate band by the proportion of unused nil-rate band from the earlier death of their spouse/civil partner. True or False?

Answer 13

True. It is the unused percentage that is carried forward, not the unused amount. This can then be applied on the current thresholds as a percentage.

Question 14

What is the Residence Nil-rate Band?

Answer 14

Where part of a deceased person’s estate includes a residence, and is being left to a direct descendent, an additional residence nil-rate band can be applied. This is in addition to the nil-rate band.

Question 15

What is a potentially exempt Transfer?

Answer 15

PETs are where gifts made during one’s lifetime are potentially exempt transfers and are not subject to tax. If the donor dies within 7 years of gifting, then the gift could be liable to tax unless the gift is exempt.

Question 16

How are gifts taxed if the donor dies within 7 years of gifting?

Answer 16

The gifts are offset against the nil-rate band first. If there is any nil-rate band left, this is offset against the remainder of the estate. If the value of the gifts alone exceeds the nil-rate band, the portion of the gifts that exceeds the threshold is taxed along with the remainder of the estate. The amount of tax paid on the gifts however is scaled down by taper relief up to 7 years.

Question 17

What is a chargeable lifetime transfer?

Answer 17

Where an individual makes a lifetime gift to a company, other organisation or certain trusts, on which tax is immediately due at a reduced rate of 20%. The 20% is only applied to the excess over the nil-rate band. If the donor dies within 7 years of the gift being made, full tax is due (subject to taper relief), and any excess over the 20% already paid then becomes payable.

Question 18

What 6 gifts and transfers are exempt from IHT?

Answer 18

1) Transfers between spouses/civil partners - during lifetime and death
2) Small gifts of up to £250 per recipient per tax year
3) Donations to charity, political parties and to the nation
4) Wedding gifts of up to £1,000 (increased to £5,000 from parents and £2,500 from grandparents)
5) Gifts made on a regular basis from income, which do not affect the quality of life of the recipient.
6) Up to £3,000 per tax year of gifts not already covered by other exemptions. This can be carried forward from the previous year but no further.

Question 19

What is VAT?

Answer 19

Value added tax is an indirect tax levied on the sale of most goods and services

Question 20

What goods and services are exempt from VAT?

Answer 20

Certain financial transactions, such as loans and insurance, the supply of health services, the supply of education services, e-books

Question 21

What items are charged at a 0% VAT rate?

Answer 21

Food, books, children’s clothes, domestic water supply and medicines.

Question 22

Name 1 advantage and 2 disadvantages of registering a business for VAT

Answer 22

Advantage: VAT paid out on business expenses can be reclaimed.
Disadvantages: goods and services will be more expensive to customers, the additional administration work involved in collecting, accounting and paying VAT.

Question 23

What is Stamp Duty?

Answer 23

Stamp duty is a tax imposed on the documents that give effect to a transaction of the purchases of security or land. It is chargeable on transactions over £1,000.

Question 24

What is the difference between Stamp Duty and Stamp Duty Reserve Tax?

Answer 24

Stamp Duty is payable on paper documents, and must be physically stamped by HMRC within a permitted time period. Stamp Duty Reserved Tax is charged on transfers that are completed electronically.

Question 25

What is Stamp Duty Land Tax?

Answer 25

Stamp Duty Land Tax (SDLT) is paid by the purchaser of property and ther are different rates which apply to different portions of the purchase price.

Question 26

What is Stamp Duty Land Tax Relief for first time buyers?

Answer 26

First-time buyers can claim a discount (relief) and do not pay any SDLT where their residential property costs less than £300,000. If the house is between £300,000-£500,000 then they pay 5% on the excess of the £300,000 only. The relief is not available on properties over £500,000.

Question 27

What is Corporation Tax?

Answer 27

Tax paid by limited companies on their profits. Also payable by clubs, societies and associations, trading associations, housing associations and by co-operatives. It is not paid by conventional business partnerships, limited liability partnerships or self-employed.

Question 28

what is withholding tax?

Answer 28

This refers to any income that is levied at source before that income is received.

Question 29

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?

Answer 29

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.

Question 30

For how many years can the annual exempt amount for CGT be carried forward?

Answer 30

It cannot be carried forward.

Question 31

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?

Answer 31

False - Assets must be replaced within 3 years of the date of disposal.

Question 32

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 7 years.

Answer 32

b) inheritance tax would be payable on the total value of the estate above the available nil-rate band.

Question 33

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 7 years of the transfer
c) Immediately, at the reduced rate.

Answer 33

c) immediately at the reduced rate of 20%

Question 34

What kind of tax is payable when shares are purchased electronically?

Answer 34

Stamp Duty Reserve Tax

Question 35

A company makes an annual profit of £1.2m. When would the corporation tax usually be payable?

Answer 35

Nine months after the end of the relevant accounting period.