UPI AND CT Exam Prep Flashcards
Define Property Business
Exploits an interest in land or property and receives rent or other receipts.
That person is then treated as carrying on a property business.
Who can carry on a property business?
an individual
a partnership
a trustee of a trust
a personal representative
a company.
What is not property income?
-farming
-mining
-commercial fishing
-Profits made from sales of land or property are excluded. (Capital gains)
Is a Premium Lease Property income?
> 50 years are chargeable to CGT,
< 50 years charged as property income.
What happens to receipts and expenditure for property businesses and overseas?
Receipts (income) and expenditure (expenses) are pooled for UK property income
Similarly, if one property in a property business makes a loss, and another property in the same property business makes a profit in the same year, the loss is pooled with the profit.
When does a property business start?
When entered into the first transaction, which exploits their interest and will generate receipts of some sort.
Once a property business has started, all activities are treated as carried out in the course of one property business.
When does a property business cease?
- when ast of the properties they are renting is disposed of.
- Or used for non-business purpose
Explain the cash basis and when it can be used
Cash basis:
run by individuals or partnerships
with property income of £150,000 or less for the tax year
Explain when the cash basis can’t be used (5)
- The property business is run by a Company/LLP/trustees
- Income exceeds £150,000 in a year (proportionately if trading < year)
- If jointly ran and GAAP used. Can’t mix
- Business premises renovation allowance has been claimed, and a balancing event in the tax year gives rise to a balancing adjustment, or
- Election to use accruals
Cash basis: when are income and expenses recognised?
- income when it is received, and
- expenditure when it is paid.
GAAP/Accruals: when are income and expenses recognised?
- receipts are recognised when the income is earned, regardless of whether it has been received, and
- expenditure is recognised when it is incurred, regardless of whether it has been paid.
Cash basis: expenditure on mortgages?
property businesses can claim a deduction for the cost of finance (eg mortgage interest) used wholly and exclusively for the business and any relevant costings (Advertising/fees etc)
Gurjit owns a commercial property. Which of the follow items of expenditure can Gurjit claim as a deduction under the cash basis? Explain the basis of your answer.
- Lease premium £30,000
- Carpeting £3,500
- Window blinds £10,000
- External security door shutters £4,500
- Fire doors £9,000
- Lease premium £30,000 is not a deduction.
Legislation specifically excludes a deduction for lease premiums. - Carpeting £3,500 is a deduction.
This is a depreciating asset with an expected life of less than 20 years so Gurjit can claim a cash basis deduction. - Window blinds £10,000 are a deduction.
This is a depreciating asset with an expected life of less than 20 years so Gurjit can claim a cash basis deduction. - External security door shutters £4,500 are not a deduction.
Legislation specifically excludes a deduction for shutters. - Fire doors £9,000 are not a deduction.
Legislation specifically excludes a deduction for doors.
Property business in the UK. Where is tax payed?
If the property is in the UK, it does not matter whether the landlord lives in the UK or abroad, as they have a UK property business.
Company Property business not UK resident.
Where is tax paid for UK property and Overseas property?
UK property: Chargeable to IT (unless premises of trade in UK, then CT)
Overseas = Nothing to do with us”
Company Property business resident in the UK. Where is tax paid for UK property and overseas
UK property = CT in UK
Overseas = CT in UK
Examples of property income
- a residential property to tenants, either furnished or unfurnished
- a warehouse for storage
- an office block to a business
- a field to individuals or organisations to use as a venue for sporting events
- a stretch of river to a fishing club.”
Cash basis and capital expenditure. How does this work? Allowed/Disallowed?
“From 2017/18, most property businesses can no longer claim capital allowances. Any capital expenditure incurred is generally allowed as a deduction when using the cash basis (through a scheme usually)
Allowed:
a. On depreciating assets of lifespan of < 20 years (or will be of negligible value aftret this time)
b. Examples Furniture, beds, sofas, computer equipment
Not allowed:
c. Assets used in connection with land, alteration or disporal (eg extensions/lifts )
d. Cars - can claim running costs”
Difference between starting business and starting a trade
Starting a business is wider than trade. Eg property income is starting a business
AP Question
What if a business gets a business bank account, then starts trade a few days later?
This is a start of an AP (S9 -source of income - bank account), followed by a S10 (start or cease of trade= end of AP). First AP will be short.
AP Question
What is COTAX’s assumption of first AP length?
Will be 1 year from incorporation
What if a CT603 is sent covering several AP’s but the last AP to be covered hasn’t ended?
Company to submit returns for AP’s completed
What happens to APE if first source of income is banking on 01 April 2019 and on 01 May 2019 starts their trade?
FIRST AP: 01 April 2019
Second AP: 01 May 2019
What are Chargeable Gains?
Companies are not chargeable to CGT.
Chargeable gains of companies are computed using CGT rules
Obligation to deliver CT return?
Has to receive CT603, but if a company hasn’t received one they have to tell HMRC within 12 months of their obligation to notify chargeability. Otherwise FTN penalty to be considered.
What is a Dormant company?
Not trading and don’t need to submit CT returns (unless CT603 notice to file sent)
Loan Relationship - what is it? Examples?
Borrowing money and creating a debt as part of businesses trade
What needs to happen to the accounts to find PCTCT?
1) Net Profits (GAAP)
Addbacks and Deductions that are dealt with differently for Tax
2)Trading profit
Addback all other income streams (eg. NTLR, property income, chargeable gains)
3) PCTCT
Tax it! 19%/25%/MRR
Pre-Trading expense: Criteria for Pre-trading NTLR to TLR
1) The election must be made within 2 years after the end of the accounting period in which the non-trading loan relationship debit arose.
2) The company must start trading with seven years of the accounting period in which the non-trading expenses was incurred. and
3) Must have been trading loan relationship debit had if it had been incurred in the first period of trading.
Pre-Trading Expenditure - NTLR or TLR: Why do I care? (2)
- Some reliefs are allowed only against certain profits.
- pre 2017, relief may have been more limited, because NTLR deficit brought forward could not be set against trading profits.
TLR is treated as expenses of business. NTLR is pooled with other NTLRs.
CT tax rates (3)
- 19% for taxable profits below £50,000 - the small profit rate
- 25% for taxable profits above £250,000 - the main rate.
- In between these, marginal rate relief (April 2023 onwards
How can losses be claimed?
- on a return
- on an amended return
- on a written claim (2 years from loss APE)
What’s a Loan Relationship?
- Borrowing of money and creating a debt.
- Either trade related (TLR) and treated as an expense, or
- Non-trade related (NTLR) and pooled with other NTLRS
Property relief examples (3)
- Domestic Items Relief
- Property Allowance
- Rent a room scheme
What are Management Expenses
Examples? (2)
Company with investment business. Expenses of “management” allowable deduction
Examples:
- Staff expenses
- fees fpr property evaluations
Reliefs for Trade Loss (and in order)
- Sideways (37(3)a
- Group Relief (75% subsidiary test)
- Carry Back - 37(3)b (has to go sideways first) and have to be same trade
- Carry Back Terminal loss S39 - 3 years from loss making
- Carry forward S45 (don’t need a claim for anything else)
Define: Subsidiary for Group relief
Not less than 75% of ordinary share capital is owned directly or indirectly
Doesn’t have to be UK companies
Reliefs for property loss (UK)
- What can’t they do?
- Carried sideways first
- Group Relief
- Carried Forward
- NOT BACKWARDS
Relief on NTLR deficits:
Relief on NTLR deficits:
- Carried sideways
- Group Relief
- Carried forward
- Carried back 12 months (only on NTLR profts)
Relief on Overseas Property Interest?
- Only carry forward against overseas
How to charge CT for dividends on other companies?
You don’t. They’re exempt from CT (already paid CT)
When can’t you deduct remunerations from expenses?
- remuneration unpaid nine months after the end of the AP
Deductions which are specifically forbidden by provisions in the Corporation Tax Act 2009.
- items of a capital nature
- expenses not wholly and exclusively for the purposes of the trade
- remuneration unpaid nine months after the end of the AP
- expenditure on business entertainment and gifts.
Define: Remuneration
Can it be deducted from CT computations?
Payments made to Directors outside dividends and wages.
Must operate PAYE to deduct income tax and national insurance contributions (NICs).
Yes, it’s an expense of the business
Define: Dividend
A payment voted to a shareholder.
Shows on DLA as Credit when not paid, and debit when paid
Dividends are after profits, so is not deducted as an expense when calculating its profits chargeable to tax.
Can you deduct dividends halfway through the AP
Yes as “interim dividends”.
Reliefs for CT?
indexation allowance (frozen)
MArginal Rate Relief
Loss Relief
Group loss relief
What happens when loans are written off?
Treated instead as dividend income
8.75%/ 33.75%
dividend income is to be charged as the highest part of a person’s income (i.e. upper tax bracket)
Associate of particpator. What are they?
Associates of participators
- Relatives (not include step family,
Relatives do not include step-family, in-laws, common-law spouses, or remoter blood-relatives such as aunts, uncles, and cousins.
Associates also include business partners and trustees of certain settlements in which the participator is the settlor.
Who needs to pay CT?
- Incorporated companies
- Unincorporated charities, clubs and societies
What are ordinary shares
- They provide for a dividend but only the company makes a profit.
- Preferred ordinary shares – take precedence when dividends are paid
What’s a Participator
Any person with share or interest in the capital or income of the company
