Unit 1 - Topic 4 - UK Taxation 2

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.

Question 2

Give me examples of CGT

Answer 2

Examples include: „ 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 is 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 exempt amount for CGT in 2019/2020?

Answer 3

£12,000

Question 4

True or false : The full CGT allowance also applies to a bare trust (which has a specified beneficiary who will have absolute entitlement to assets at 18), trustees of a trust for a vulnerable beneficiary, and to personal representatives.

Answer 4

True

Question 5

True or False : CGT applies to gains made since 6 April 2015 by individuals or trustees who are not UK resident on residential property located in the UK. Gains made during ownership prior to this date are ignored.

Answer 5

True

Question 6

True or False: Gains that accrue to non‐UK residents on non‐residential property have been subject to tax since 6 April 2019.

Answer 6

True

Question 7

Calculating CGT liability involves the following:

Answer 7

1) Calculate the amount of the gain. 2) Deduct the CGT annual exempt amount (if this has not been used against other gains in the same tax year). 3) Deduct any losses that can be offset against the gain. 4) What remains is the taxable gain. 5) Add taxable gain to taxable income to establish what rate(s) of CGT should be paid. 6) Apply tax at appropriate rates. In 2019/20, for example, the rates are: 10 per cent for taxable gains falling in the basic‐rate income tax band; 20 per cent otherwise, with an 8 per cent supplement where the gain results from the sale of property not subject to private residence relief.

Question 8

What do PETs stand for?

Answer 8

potentially exempt transfer

Question 9

Most gifts made during a person’s lifetime are potentially exempt transfers (PETs) and are not subject to tax at the time of the transfer. After how many years do these transactions become fully exempt and no tax is payable.?

Answer 9

7 years

Question 10

In July 2015, Joan made a gift to her daughter of £350,000. She has made no other gifts in her lifetime. Joan died in October 2019 leaving a total estate worth £420,000. The full rate of IHT in 2019/20 is 40 per cent on estates over £325,000. How much IHT is applied to the value of the gift that is in excess of the nil‐rate band (£25,000)? a) £5,000 b) £6,000 c) £8,000 d) £10,000

Answer 10

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 (ie 60% of £15,000).

Question 11

What gifts and transfers are exempt from inheritance tax?

Answer 11

1) transfers between spouses and between civil partners both during their lifetime and on death, provided that the receiving spouse/civil partner is UK domiciled 2) small gifts of up to £250 (cash or value) per recipient in each tax year; 3)donations to charity, to political parties and to the nation 4) wedding gifts of up to £1,000 (increased to £5,000 for gifts from parents or £2,500 from grandparents) 5) gifts that are made on a regular basis out of income and which do not affect the donor’s standard of living 6) up to £3,000 per tax year for gifts not covered by other exemptions. Any part of this £3,000 that is not used in a given tax year can be carried forward for one tax year, but no further.

Question 12

What is Value added tax (VAT)?

Answer 12

Value added tax (VAT) is an indirect tax levied on the sale of most goods and the supply of most services in the UK.

Question 13

What are Zero‐rated items in terms of VAT?

Answer 13

food, books, children’s clothes, domestic water supply and medicines

Question 14

True or false: certain financial transactions such as loans and insurance

Answer 14

True

Question 15

What is the advantage of registering as VAT business?

Answer 15

An advantage of registering is that VAT paid out on business expenses can be reclaimed

Question 16

Two disadvantages of VAT registered businesses are…..

Answer 16

1) the fact that the firm’s goods or services are more expensive to customers (by the amount of the VAT that the firm must charge); 2) the additional administration involved in collecting, accounting for and paying VAT.

Question 17

What is Stamp duty and stamp duty reserve tax?

Answer 17

Stamp duty is payable on paper documents that transfer the ownership of financial assets, such as shares and bearer instruments. Stamp duty reserve tax (SDRT) is charged on transfers that are completed electronically.

Question 18

What is Stamp duty land tax?

Answer 18

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 price.

Question 19

What is the STAMP DUTY LAND TAX RELIEF FOR FIRST‐TIME BUYERS?

Answer 19

First‐time buyers can claim a discount (relief) and do not pay any SDLT where their residential property costs less than £300,000. If they pay over £300,000 but under £500,000, they pay 5 per cent on the excess over £300,000 only. The relief is not available on properties worth in excess of £500,000. The relief was extended to qualifying shared ownership property purchasers in the 2018 Budget.

Question 20

What is Corporation tax?

Answer 20

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.)

Question 21

What is Withholding tax?

Answer 21

The phrase ‘withholding tax’ refers to any tax on income that is levied at source before that income is received.

Question 22

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 22

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 23

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

Answer 23

The CGT annual exempt amount cannot be carried forward at all.

Question 24

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 24

False. Assets must be replaced within three years after the date of disposal.

Question 25

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 25

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

Question 26

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 26

c) Immediately, at a reduced rate of 20 per cent.

Question 27

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

Answer 27

Stamp duty reserve tax.

Question 28

Sanjay, a basic‐rate taxpayer with taxable income of £12,000, purchased UK listed company shares for £11,300 in May 2014. He sold them for £25,400 in August 2019. He has no other gains or losses (current or carried forward) in the tax year 2019/20. Ignoring any costs, calculate his capital gains tax liability.

Answer 28

Gain: £25,400 – £11,300 = £14,100 Taxable gain: £14,100 – £12,000 = £2,100 Capital gains tax payable: £2,100 × 10% = £210

Question 29

Sarah, a basic‐rate taxpayer with earned income of £17,000 in 2019/20, 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 June 2019 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 tax year 2019/20.

Answer 29

Gain on flat Less cost of renovations Less cost of disposal (commission) Less annual exempt amount (2019/20) Less carried‐forward loss from 2016/17 £47,600 (£14,000) (£3,500) (£12,000) (£4,900) Taxable gain = £13,200 × 18% = £2,376 capital gains tax Note that a rate of 18 per cent applies as the gain arises from the disposal of property.

Question 30

Luis sold his studio flat and bought an apartment (his only property) for £325,000. How much stamp duty, if any, will he pay? a) £6,250. b) £2,500. c) £3,750. d) £0.

Answer 30

a) £6,250. No tax is payable on the first £125,000. Tax is payable at 2% on the portion between £125,001 and £250,000 (£125,000 × 2% = £2,500). Tax is payable at 5% on the portion between £250,001 and the purchase price of £325,000 (£75,000 × 5% = £3,750). Total SDLT due = £6,250.

Question 31

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

Answer 31

Nine months after the end of the relevant accounting period.

Question 32

What is a chargeable lifetime transfer?

Answer 32

Some lifetime gifts - notably those to companies, other organisations and certain trusts - are not PETs but chargeable lifetime transfers, on which tax at a reduced rate of 20% is immediately due. This ‘lifetime’ tax is only payable if the value of the chargeable lifetime transfer, when added to the cumulative total of chargeable lifetime transfers over the previous seven years, exceeds the nil-rate band at the time the transfer is made. The 20% tax is only applied to the excess over the nil-rate band. As with PETs, the full tax is due if the donor dies within seven years (subject to the same taper relief) and any excess over the 20% already paid then becomes payable.

Question 33

What are the tax rates for calculating capital gains tax liability in the 2019/2020 tax year?

Answer 33

• 10% for taxable gains falling in the basic-rate income tax band - 20% otherwise. - Additional 8% supplement where the gain results from the sale of property not subject to private residence relief

Question 34

Define Disposal with respect to taxation.

Answer 34

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.

Question 35

What is the CGT allowance for the 2019/20 tax year?

Answer 35

The annual exempt amount is £12,000.

Question 36

How is CGT treated for gains made by those that are not UK residents?

Answer 36

CGT applies to gains made since 6 April 2015 by individuals or trustees who are not UK resident on residential property located in the UK. Gains made during ownership prior to this date are ignored.

Question 37

What is Private residence relief?

Answer 37

Private residence relief is available when someone sells the property they have lived in as their main or only residence.

Question 38

What is Entrepreneur’ relief

Answer 38

A lower rate of 10% is applied to a lifetime limit of £10m of cumulative gains arising from the disposal of trading businesses and from certain disposals of shares in trading companies. The individual must generally own at least 5% of the ordinary share capital of the business. In addition they must be entitled to at least 5% of the distributable profits and net assets of the company.

Question 39

What is Roll-over relief

Answer 39

Business assets are chargeable to CGT. However, roll-over relief may be claimed if the assets disposed of are replaced by other business assets. This means that, instead of CGT falling due on the original disposal, it is deferred until a final disposal is made.

Question 40

What is Hold-over relief?

Answer 40

CGT on any gain arising on the gift of certain assets can normally be deferred until the recipient disposes of it.

Question 41

What is the Nil-rate band?

Answer 41

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

Question 42

What is inheritance tax?

Answer 42

Inheritance tax (IHT) as its name suggests, is levied mainly on the estates of deceased persons and is charged following an individuals’ death. The tax is charged on the amount by which the value of the estate exceds the available nil-rate band at the date of death.

Question 43

What are the levels of Residence nil-rate band (RNRB)?

Answer 43

IHT £650,000 If part of the estate includes a residence that is being left to a direct descendant, then since 2017/18 an additional residence nil-rate band has been applied. £175,000 in 2020/21

Question 44

What is a potentially exempt transfer?

Answer 44

Most gifts made during a person’s lifetime are potentially exempt transfers (PETs) and are not subject to tax at the time of the transfer. If the donor survives for seven years after making the gift, these transactions become fully exempt and no tax is payable. 1 - 3 years of gift - 100% of tax 3 - 4 years of gift - 80% of tax 4 - 5 years of gift - 60% of tax 5 - 6 years of gift - 40% of tax 6 - 7 years of gift - 20% of tax 7+ years - no tax

Question 45

What gifts and transfers are exempt from inheritance tax?

Answer 45

• 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 in 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 part of this £3,000 that is not used in a given tax year can be carried forward for one tax year, but no further.

Question 46

Define Profits for corporation tax purposes.

Answer 46

For corporation tax purposes, profits include: trading profits (less allowable expenses such as labour and raw materials); capital gains; income from letting; interest on deposits.

Question 47

What is Withholding tax?

Answer 47

Any tax on income that is levied at source before that income is received.So, technically, income tax paid by UK employees is a withholding tax. However, the phrase is normally understood to apply to tax that is levied in a particular country on income received in that country by those who are non-resident in that country; this could be earned income or investment income.