BLP - Week 6 Individual Taxation

Question 1

What are direct taxes?

Answer 1

Income tax, CGT, and corporation tax are direct taxes.

Direct taxes depend on the taxpayer’s circumstances.

Question 2

What is an indirect tax?

Answer 2

VAT is an indirect tax, based on transactions.

Indirect taxes are not dependent on the taxpayer’s circumstances.

Question 3

Define income receipts.

Answer 3

Money received on a regular basis classified as income receipts.

Examples include trading profits, bank interest, and rent payments.

Question 4

Define capital receipts.

Answer 4

Receipts from transactions that are not part of regular activity, considered one-off transactions.

Example: Profit from selling a property owned by a business.

Question 5

What is income expenditure?

Answer 5

Day-to-day business expenses.

Examples include bills for utilities, wages, and marketing.

Question 6

What is capital expenditure?

Answer 6

Purchasing an asset as part of the business infrastructure, considered long-term investment.

Examples include purchasing machinery or property.

Question 7

What are capital allowances?

Answer 7

Tax relief for capital expenditure, similar to depreciation, allowing certain expenses to be deducted over time.

This spreads the cost of capital assets rather than waiting for their sale.

Question 8

What is the tax year for individuals and companies?

Answer 8

Individuals are taxed from 6 April to 5 April the following year.

Companies are taxed from 1 April to 31 March.

Question 9

What are the steps to calculate income tax?

Answer 9

1. Calculate total income.
2. Deduct tax reliefs to get net income.
   (E.g., interest on qualifying loans and pension contributions).
3. Deduct personal allowance to get taxable income.
   (Reduced by £1 for every £2 of net income above £100,000).
4. Split the taxable income into non-savings, savings, dividends.
5. Apply the personal savings allowance (if applicable).
6. Apply tax rates.
7. Add tax amounts to get total liability.

Question 10

What is total income?

Answer 10

Total income is a taxpayer’s gross income from all sources.

Includes savings, benefits in kind, and dividends.

Question 11

How is net income calculated?

Answer 11

Net income is total income minus available tax reliefs.

Tax reliefs include interest on qualifying loans and pension contributions.

Question 12

Interest paid out on qualifying loans

Answer 12

This is NOT interest received by the individuals. This is the interest an individual pay TO the banks on the cost of receiving certain loans from the bank.

Question 13

What is taxable income?

Answer 13

Taxable income is net income minus personal allowance.

Question 14

How is the personal allowance reduced for high earners?

Answer 14

It is reduced by £1 for every £2 of net income over £100,000. It is fully removed at £125,140. ]
Formula: [£12,570] - [(NET INCOME - £100,000)/2]

Question 15

What must be done after you calculate taxable income?

Answer 15

Split the taxable income into non-savings, savings, and dividend income.

Non-savings income = taxable income – savings income – dividend income

This classification affects the tax rates applied.

Question 16

What are the personal savings allowances for taxpayers?

Answer 16

Basic rate taxpayers have a £1,000 allowance, higher rate taxpayers have £500, and additional rate taxpayers have none.

Question 17

What is the tax free rate for dividend income?

Answer 17

The first £500 of dividend income is tax-free.

Question 18

What is the tax rate for non-savings income and savings income?

Answer 18

0 – 37,700 - 20%
37,701 – 125,140 - 40%
+ 125,140 - 45%

Question 19

What is the tax rate for dividends?

Answer 19

0 – 37,700 - 8.75%
37,701 – 125,140 - 33.75%
+ 125,140 - 39.35%

Question 20

What is the ‘cake’ method in income tax calculation?

Answer 20

Each type of income is viewed as a layer of a cake: non-savings income is the base, savings income is the middle, and dividend income is the top.

This method helps visualize the order of taxation.

Question 21

What are the four elements required for CGT to apply?

Answer 21

CGT is charged on gains made from chargeable disposals of chargeable assets by chargeable persons.

1. Chargeable disposal
2. Chargeable asset
3. Chargeable person
4. Chargeable gain

It applies to gains made in the tax year from 6 April to 5 April.

Question 22

What is a chargeable disposal?

Answer 22

The sale or gift of an asset during the taxpayer’s lifetime.

There is no chargeable disposal on death.

Question 23

What types of assets are excluded from CGT?

Answer 23

Gifts to charity, principal private residence (PPR), motor cars for private use, ISAs, government securities.

PPR exemption can apply even if the owner moves out before selling.

Question 24

What must individuals do to qualify for the Principal Private Residence (PPR) exemption?

Answer 24

Occupy the PPR as their only or main residence during the whole period of ownership.

Question 25

Can an owner claim the PPR exemption even if they weren't living in the home during the last 18 months of ownership?

Answer 25

Yes, they can still claim the exemption for this period.

Question 26

How is the main residence determined when an individual owns more than one home?

Answer 26

It is determined by where they spend most time.

Question 27

Can a married couple each claim a separate PPR?

Answer 27

No, a married couple can only have one PPR between them unless they are legally separated.

Question 28

What types of private use items are considered exempt from CGT?

Answer 28

* Motor cars for private use * Certain investments (government securities, ISAs, etc.) * UK sterling and foreign currency held for personal use.

Question 29

What is the formula to calculate the chargeable gain?

Answer 29

Chargeable gain = sale price - disposal expenditure - initial expenditure - subsequent expenditure

Question 30

What are the costs/allowable expenditure you can deduct from sale price, to determine the taxable chargeable gain?

Answer 30

1. Initial expenditure * The cost price of the asset (the ‘base cost’); and * The incidental costs of acquisition (eg surveyors’ fees/lawyers’ fees). 2. Subsequent expenditure * Subsequent expenditure on the asset which enhances its value; and * Expenditure incurred in establishing, preserving or defending title to the asset. 3. Disposal expenditure * Incidental costs of disposal (eg agents’ commission).

Question 31

What is the annual exemption (AE) for the current tax year 2025/26?

Answer 31

£3,000.

Question 32

What are the standard CGT rates?

Answer 32

* 10% * 20%

Question 33

Are gifts to charities subject to CGT?

Answer 33

No, gifts to charities are exempt.

Question 34

What happens to CGT when assets are transferred between spouses?

Answer 34

No CGT is due, and the recipient inherits the asset's original cost.

Question 35

Who are considered connected persons for CGT purposes?

Answer 35

* Relatives and spouses of relatives * Companies under common control * Partners in business.

Question 36

What happens in a disposal between connected persons?

Answer 36

The seller is deemed to have received market value regardless of actual sale proceeds.

Question 37

Do companies pay CGT?

Answer 37

Companies do not pay CGT. Instead, gains are taxed at corporation tax rates.

Question 38

What is the tax rate for basic rate taxpayers concerning CGT?

Answer 38

10%.

Question 39

What is the tax rate for higher and additional rate taxpayers concerning CGT?

Answer 39

20%.

Question 40

What does business asset disposal relief do?

Answer 40

Reduces the higher rate of CGT from 20% to 10% for qualifying disposals.

Question 41

What is a qualifying disposal for business asset disposal relief?

Answer 41

* All or part of a trading business [owned for at least 2 years]. * Assets in a business that used to trade [owned for at least 2 years]. * Shares in a trading company [2 years and at least 5%]. * Shares in a company that used to trade [2 years and at least 5%].

Question 42

What is the £1 million lifetime limit for business asset disposal relief?

Answer 42

The first £1 million of gains is taxed at 10%. Gains beyond this are taxed at normal CGT rates (10% or 20%).

Question 43

What is investors’ relief (IR)?

Answer 43

Benefits investors in unlisted trading companies who hold their shares for at least three years. Reduces CGT rate from 20% to 10%.

Question 44

What are the conditions for shares to qualify for investors’ relief?

Answer 44

* Fully paid ordinary shares issued for cash; * Company is/had been a trading company; * Shares held for at least three years; and * Individual is not an officer or employee of the company.

Question 45

What is replacement of business assets relief (rollover relief)?

Answer 45

Defers CGT liability on the sale of certain business assets by rolling over the gain into a qualifying replacement asset. Can't use AE.

Question 46

What is gift of business assets relief (hold-over relief)?

Answer 46

Defers CGT when a business asset is gifted or transferred at less than its market value.