4 - Taxation of Investors and Investments (16/80)

Question 1

Income Tax Bands

Answer 1

Personal allowance = £12,500
(Tapered at 50% above £100,000)

20% on £0 to £37,500
40% on £37,501 to £150,000
45% on >£150,000

Question 2

Charity Tax

Answer 2

Exempt from tax

May have to become VAT-registered if trading profits >£85,000

Question 3

Trust Taxation

Answer 3

Trustees pay tax based on their position -> pay out of trust assets

CGT = 20% on investments, 28% on property

CGT allowance = £6,150 (half of an individual’s)

Dividend = 38.1% rate

Question 4

Types of Trust

Answer 4

Bare/Absolute
Discretionary
Interest in possession (income only)
Accumulation

Question 5

Taxation of Savings Income

Answer 5

Saving Allowance
Basic rate = £1000
Higher rate = £500
Additional rate = £0

Starting Rate = £5000 over personal allowance

i.e. can earn £12,500 income and £5,000 savings before paying taxes

Question 6

Dividend Taxes

Answer 6

Basic = 7.5%
Higher = 32.5%
Additional/Trust = 38.1%

Fund income counts as dividend if bonds < 60%

Question 7

Rental Income Taxes

Answer 7

Taxed as business income

Income = revenue - expenses

20% tax relief on mortgage interest

Question 8

Fund Income Taxation

Answer 8

If bonds > 60%, counts as saving income

If bonds < 60%, counts as dividend income

Question 9

Equalisation Payment

Answer 9

Received to make up for paying extra for a fund that has already priced in income payments

The first income payout of any fund includes regular income and an equalisation payment

EP is not taxable, as it is ‘returning’ part of your initial investment

Question 10

Franked Income

Answer 10

Post-tax dividend income received

Businesses receiving this pay no extra corporation tax on it

Question 11

REIT Taxation

Answer 11

No CGT or corporate tax as long as they:

• Payout 90% of profits
• > 75% of NAV is in property
• Must have more than 5 owners

20% withholding tax

Taxed either as dividend or normal income (up to REIT)

Question 12

National Insurance

Answer 12

Class 1 (employed)

• £184-967 / week = 12%
• > £967 / week = 2%

Class 2 (self-employed)

• Threshold = £6,515 / year
• £3.05 / week

Class 3
- £15.30 / week

Class 4 (self-employed/business)

• £9,569-50,270 / year = 9%
• > £50,270 / year = 2%

Voluntary Contributions - can pay in to get full benefits if unemployed

Question 13

Capital Gains Tax

Answer 13

‘Chargeable Event’ = Disposal Value - Incidental Costs - Allowable Costs
Incidental = valuation, agency, advertising
Allowable = acquisition, CAPEX

£12,300 allowance
10% basic (18% for property)
20% higher and additional (28% for property)

Product exemptions:

• Primary residence
• Gilts and corporate bonds
• Collectibles

Question 14

Inheritance Tax - Nil Rate Band

Answer 14

NRB = £325,000
Additional £175,000 for primary residence (Tapered by 50% above £2m)

Can be transferred to spouse on death

Question 15

Inheritance Tax - Potentially Exempt Transfers

Answer 15

Gift will be exempt from IHT if the gifter survives for 7 more years

Question 16

Inheritance Tax - Lifetime Transfer Allowances

Answer 16

Annual = £3000

Small gifts = £250 per person

Out of income (w/o diminishing standard of life) or for under 18 = Unlimited

Spouse, charities, political = Unlimited

Question 17

Inheritance Tax - Gifts with Reservation

Answer 17

Gifting an asset but still getting income/other benefits from it
Counts as a transfer and will be subject to IHT if gifter dies within 7 years

Question 18

Inheritance Tax - Estate Valuation

Answer 18

Shares = ‘quarter up’ = bid + (spread / 4)
Unit trusts = bid price
OIECs = company rules

Question 19

Dying Intestate

Answer 19

Married, Children -> £250k to spouse + half, half to children
Married, No children -> All to spouse

Single, Children -> All to children
Single, No children -> Next of kin

Question 20

Residency Tests

Answer 20

Automatic Overseas Test

• Not UK resident for past 3 years
• Less than 16 days in last year
• Works <30 days in the UK

Automatic Resident Test

• Spend at least 183 days per year in the UK
• Only/main home is the UK
• Work full time in the UK for whole year

Sufficient Ties Test

• Family tie
• Accommodation tie
• Work tie
• 90-day tie

Ties needed to be declared a resident, depending on stay length:
16-45 = 4 ties
46-90 = 3 ties
91-120 = 2 ties
>120 = 1 tie

Question 21

Tax resident vs Non-tax resident taxation

Answer 21

Tax resident = ARISING tax = pay tax on UK income as it arises (can’t hold on until lower tax band)

Non-tax resident = REMITTANCE tax = pay tax on foreign income when it is brought into the UK (REMITTED)

Question 22

Income and CGT Depending on Residency/Domicile

Answer 22

UK resident and tax resident = ARISING on income and CGT

UK tax resident and NOT domiciled = REMITTANCE for income and CGT

Domiciled but NOT a tax resident = remittance for income, arising for CGT

Question 23

Double Taxation Agreements and Withholding Tax

Answer 23

DTA = some countries won’t tax your income and apply UK taxes at the same time

WH = some countries hold a % before the funds are remitted to the UK

Question 24

Remittance Basis Charge

Answer 24

£30-60,000 annually if

• Income is over £2,000
• Willing to give up personal allowances

Question 25

Types of Domicile

Answer 25

Origin (birth/father)
Choice (move to)
Dependency (children inherit)
Deemed (resident for 15 years)

Question 26

Stamp Duty

Answer 26

0.5% on shares and options

Not payable on UTs, OIECs, gilts, corporate bonds, ETFs

Question 27

Stamp Duty Land Tax Bands

Answer 27

Payable on land and property

0% on first £125,000
2% on £125,000 to £250,000
5% on £250,000 to £975,000
10% on £975,000 to £1,500,000
12% on >£1,500,000

15% for investment companies if >£500,000

Must sell house within 3 years of buying another or pay 3% extra SDLT

Question 28

Value Added Tax

Answer 28

Charged when a business buys or sells something (can reclaim when buying)

Standard = 20%
Reduced = 5%

Have to VAT register if revenue >£85,000

Exemptions

• Insurance
• Education
• Credit
• Charity
• Subscriptions
• Medical
• Renting

Question 29

Corporation Tax

Answer 29

Standard = 20%
UTs/OIECs = 19%

Question 30

Pension Relief

Answer 30

£40,000 annual allowance
£3,600 for non-earners

Can carry forward 4 years (£160k max)

Tapered above £240,000 ‘threshold’ income at 50% reducing rate, up to £312,000
Allowance at £312,000 income becomes £4,000

Question 31

Life Policy Taxation

Answer 31

Can take out 5% of premiums paid so far (annually)

Question 32

Inheritance Tax - Charges

Answer 32

Instant chargeable action over £325k

Must be worked out to be PET or not

Question 33

Withholding Tax

Answer 33

Tax deducted ‘at source’ (fund etc.) rather than gross paid out to investors who then pay the tax themselves

Foreign countries withhold certain taxes before income is remitted - DTAs reduce this or offset against UK tax liabilities

Question 34

Calculating Income/CGT Tax

Answer 34

1. Subtract allowances (e.g. £12,570) to get ‘taxable income/disposal’
2. Split into bands (e.g. £0-37,500, £37,500-150,000)
3. Calculate individually and add up