Basis Periods, Property Income and Capital Allowances Flashcards
(33 cards)
What is an individuals Current Year Basis (CYB)
Under CYB rules, an individual’s basis period for each tax year is usually the 12 months ending on their accounting date within the business accounts
What does CYB align
CYB aligns taxation with business accounts
What are the special rules for year 1 commencement of trade
Year 1 commencement of trade: Actual basis - from start date to the following 5 April
What is the special rule for year 2 commencement of trade
Year 2: Depends on the length of the first accounting period. Options include:
- 12 months to a chosen accounting date in TY2
- First 12 months of trading
- Actual tax year (6 April - 5 April)
What is the special rule for year 3 commencement of trade
Year 3 onwards: Current Year Basis applies
When do overlap profits occur
Overlap profits occur when part of a profit period is taxed more than once in opening years
When does overlap profit typically happen
Overlap profits typically happens with accounting date isn’t 5 April
How are overlap profits dealt with
Overlap profits are dealt with via Overlap Relief on cessation or accounting date change
What does Overlap Relief ensure
Overlap Relief ensures over the life of a business, the total tax paid = actual total profits
What can advising clients to align accounting year with tax year minimuse
Advising clients to align accounting year with tax year can minimise complexity and avoid overlap profits
What happens when a business ceases trade
When a business ceases trade:
- The final tax year is the one in which the business ends
- The basis period:
- From the end of the previous basis period to the cessation date
- May be shorter or include overlap relief
- Terminal Loss Relied (ITA 2007 s.89)
What does Terminal Loss Relief (ITA 2007 s.89) allow
Terminal Loss Relief (ITA 2007 s.89): Allows loss to be carried back up to 3 years against profits
When does HMRC allow a change in accounting date
HMRC allows a change in accounting date if:
- The new period doesn’t exceed 18 months
- The basis period depends on whether the relevant period (RP) is shorter or longer than 12 months
What happens if the relevant period is longer than 12 months
If the relevant period is longer than 12 months - part of the overlap profits may be relieve using:
- Overlap Relief Formula
What is the Overlap Relief Formula
Relief = A X (B-12)/D
Where:
- A = Total overlap profits
- B = RP length in months
- D = Original overlap period
What is property income
Property income is income from residential or commercial property not used in trading is assessed as property income, under Part 3 of ITTOIA 2005
What are distinctions to property income
Notable distinctions to property income are:
- Hotels and guesthouses
- Furnished holiday lettings (FHLs)
What is the basis of assessment for property income
The basis of assessment for property income are:
- Profits must be calculated using GAAP unless overridden by statute
- Rules mirror those for trading income
What is a lease premium
A lease premium is a capital sum paid by a tenant for the grant of a lease
How are short leases treated for income tax
Income tax treatment for short leases (≤ 50 years) - part of the premium is taxed as income
How are long leases treated for income tax
Long leases (> 50 years) - premium nit subject to income tax
Chargeable Slice =
Chargeable Slice = Lease Premium - (2% X LP X (Years after the first))
What happens to the chargeable slice for leases
The chargeable slice is spread over the lease term and is deductible as rent
What are capital allowances used to give
Capital Allowances are used to give tax relief on capital expenditure
