Deck 1 Flashcards

Question

Describe the CGT rules on the transfer of assets between a married couple.

Answer 1

If living together in the tax year; transfer between spouses is no gain, no loss/tax‐ free.

Answer 2

From tax year after separation, but before divorce (not living together in tax year) gain is taxable. Treated as non‐commercial transfer between connected parties. Market value is used as opposed to actual proceeds when calculating.

Answer 3

Fully taxable, unconnected parties. Commercial transaction/open market.

Answer 4

Acquisitions made on the same day. Acquisitions made within the following 30 days Acquisitions made within the share pool. To prevent ‘bed and breakfasting’; crystallising an artificial gain/loss while maintaining beneficial ownership of the asset.

Answer 5

Bonus: shares in the same class are deemed to have been acquired on the same date as the original holding/all gains subject to Capital Gains Tax. No extra acquisition cost, as they are issued free. Rights issue: subscription for further shares as new acquisition with additional costs/Capital Gains Tax levied on excess above acquisition. Shares will be valued at the actual purchase price. Scrip dividends/stock dividend: dividends paid as shares and not cash.  Treated as new acquisitions and charged accordingly.

Answer 6

Contract to provide services. Ability to sub‐contract. If the individual takes on business risk. Does individual have to correct unsatisfactory work in their own time and at their own expense? Have to provide the equipment personally.

Answer 7

Existence of contract of service. Set hours, holiday/sick and overtime pay. Master/servant relationship. Regular weekly or monthly pay /PAYE. If individual works for just one instructor. Equipment is provided by the company.

Answer 8

Pre‐owned asset tax (POAT) may apply/can opt for gifts with reservation (GWR) to apply. The cash value of the benefit is based on an open‐market rent. No tax is charged in any year in which the cash value is £5,000 or less. Valuation date for the property is 6 April each year and it must be re‐valued every five years. They will receive credit for any rent paid. The recipient of the gifted property would be assessed for Income Tax on rental income received.

Answer 9

The gift would be classed as a disposal by the parents for CGT purposes; but should be exempt under principal private esidence rules. Any subsequent disposal by the recipient of the gifted property would potentially be subject to CGT.

Answer 10

If they pay a full market rent/if they do not pay full market rent. Gift with reservation rules will not apply/GWR will apply. The gift is a transfer of value/potentially exempt transfers at the time of the gift. No immediate charge to Inheritance Tax; which may be chargeable as a result of their death(s) within seven years. A double Inheritance Tax charge may apply as the donor will be treated as making a second gift when they cease to retain their interest in it/move out.

Answer 11

Must be presented on the specified form. Registered with the Office of the Public Guardian/Court. Signed by the Donor and Attorney. Certified by a certificate provider. Including the relevant payment. Donor must have capacity when granting the power.

Answer 12

Trust is subject to Perpetuities and Accumulations Act 2009. 125 year perpetuity period regardless of any perpetuity period stated in the trust. No limit on accumulation period. The trust can be set up for a shorter period. Trust can be wound up/Saunders v Vautier. Trustees can resign.

Answer 13

Trustees are legal owners but beneficiaries can enforce the terms of a trust if a breach occurs - Only the parties to a contract generally have equitable/ legal rights under it Trusts based on equity rather than common law Beneficiaries to a trust may be unaware of the trust, parties to a contract must be aware of its items (beneficiaries must be advised of trust once they reach majority) A contract requires consideration whilst a trust requires no consideration Contract requires offer and acceptance A trust can be established for a minor but a minor cannot make an enforceable contract A valid trust requires no agreement between the settler and beneficiaries, a contract does require agreement between the parties

Answer 14

Can be any number Where trust property includes land must be a minimum of 2 and maximum of 4 (unless trust corporation) (Trustee Act 1925) Must be over 18 and of sound mind (can be a bankrupt or in prison!)

Answer 15

Remains outside UK for over year Is a minor Dies Refuses to Act Is unfit/incapable of acting Desires to be discharged Death of all trustees does not invalidate trust – trustees can be appointed by a court

Answer 16

Trustee Act 2000 allowed delegation of powers except relating to: Distribution over trust assets How fees are dealt with Appointment of new trustee Delegation of trustee’s power Not liable for loss due to acts of agent provided due care taken with appointment

Answer 17

Beneficiary can take legal action where they believe trustee has/will committed a breach If court agrees, it can; Issue injunction prohibiting intended action Order trustee to make restitution i.e. appropriate payment to beneficiary Order return of any trust property wrongly transferred

Answer 18

All beneficiaries are ascertained No possibility of future beneficiaries All of full age and mental capacity Unanimous agreement of all beneficiaries

Answer 19

Deed – terms are expressly set out Will Statute Orally By implication – i.e. business partnership Court Order

Answer 20

Words – the intention to create a trust Subject – the trust property Object – the beneficiaries – must be certain i.e. naming/ described as a class. Wording should be precise i.e. not just say relatives.

Answer 21

Applies only to lifetime trusts created and wills executed on or after 5th April 2010 and wills dated after that date Single perpetuity period of 125 years (although can be shorter) May accumulate income for whole of trust period Accumulation period for charitable trusts reduced from indefinitely to 21 years Shorter period may be chosen and incorporated in the trust deed Where perpetuity period is uncertain trustees can execute a deed to establish a fixed perpetuity period of 100 years

Answer 22

Reduce Tax In intestacy In wills To provide for families To assist a charity To provide pensions To give property for those who cannot hold it To provide for disabled or vulnerable people Gain protection from creditors

Answer 23

Charitable trust cannot be void for uncertainty of the object Charitable trust not subject to general law on perpetuities Charitable trust can continue indefinitely and can be varied if it becomes obsolete If becomes impracticable – property can be applied to another charitable purpose as close to other as original – known as cy-près doctrine Accumulate income for a maximum of 21 years

Answer 24

Exempt from income tax and CGT provided the funds are used for charitable purposes Disposals to charities generally exempt from CGT Outright gifts to charities free of IHT Reduction in rate of IHT payable form 40% to 36% if at least 10% of net estate left to charity Gifts to charitable trusts may qualify for income tax relief (gift aid / payroll giving). Charity can reclaim gift aid

Answer 25

Created by deed Executed by one person giving another authority to act for them Must be witnessed by at least one person and signed by the donor General POA is revoked when someone loses capacity Person of unsound mind cannot execute a POA If donor unable to sign due to a physical disability can be signed by another but needs two witnesses

Answer 26

Donor must be over 18 and not bankrupt Attorney must be over 18 and not bankrupt Donor must have capacity It must comply with the regulations made under the MCA Act 2005 – in a prescribed format It must state that the donor and attorney have read the prescribed information and the attorney understands their duties There must also be a certificate from a prescribed person that the donor understands the LPA and that there has been no fraud or undue pressure (Can nominate up to 5 people to be notified of registration, two certificate providers are required if no-one is to be notified) Two forms Health and Welfare LPA, Property and Financial affairs LPA plans to amalgamate on to one form Powers cannot be exercised until registered at OPG – can be done at any time Property and Financial affairs LPA is effective as soon as registered (donor can stipulate powers), Health and Welfare at onset on mental incapacity (can decide aspects of care to be covered)

Answer 27

By the donor whilst retaining capacity Death of the attorney or Donor Bankruptcy of the attorney Bankruptcy of the donor (Welfare decisions continue) Dissolution of marriage between donor and attorney Incapacity of the attorney

Answer 28

Debtor (or creditor owed at least £5000, increased from £750 from Oct 2015) applies to court for debtor to be adjudged bankrupt If court agrees debtor declared bankrupt Control of all debtor’s assets passes to Official Receiver Debtor submits statement of affairs to Official Receiver following a bankruptcy order Official Receiver (OR) then decides whether or not to call a meeting of creditors to enable them to appoint an insolvency practitioner of their choice as the trustee in bankruptcy OR must call a meeting if at least 10% of creditors (by value) demand it Trustee in bankruptcy takes ownership of bankrupt’s property If no trustee in bankruptcy appointed then Official Receiver acts as trustee Trustee in bankruptcy collects all bankrupt’s property, sells it and uses it to repay creditors as far as possible After 1 year bankruptcy usually discharged If full disclosure not made then can be re-opened BRO may be imposed to protect the public from bankrupts whose conduct has been reckless or irresponsible BRO imposes restrictions which may last form 2 – 15 years after discharge Bankrupt may be discharged in less than one year

Answer 29

Disclose all their property to a trustee Not conceal any debts or assets Not destroy or falsify any records Not make any false statements to the trustee Not dispose of property with intent to defraud creditors Not fraudulently give preference to one creditor over another Not leave the country with any of their property Not obtain credit without disclosing their status Cannot be a company director/ member of parliament

Answer 30

Tax return must be completed in the same way as individuals Same payment dates (2 on account and one final) CGT paid by 31st January after end of tax year (no payments on account) All trustees jointly and severally liable Often dealt with by one trustee Unpaid tax can be recovered from any of the trustees who may also be personably liable for any penalties incurred

Answer 31

Income belongs to beneficiary; Based on beneficiary’s tax rate Beneficiary liable for tax, personal allowance can be used Beneficiary must include trust income on tax return Parents gifting money to an unmarried minor child – treated as a settlor interested trust - £100 rule applies. Parent could reclaim any tax from the trust Has CGT advantages as child can use their annual CGT allowance which will be at least double that of the trust

Answer 32

Income and capital gains taxed on individual beneficiary rather than normal trust rules Not all trusts for benefit of vulnerable person enjoy special tax treatment, only; Disabled persons ‘Relevant’ minor children Finance Act 2005, ‘Disabled person’; Person who by reason of mental disorder (meaning within Mental health act 1983) incapable of administering their property or managing their affairs Person in receipt of attendance allowance or disability living allowance care component at highest or middle rate/ DLA mobility component at higher rate or in receipt of personal independence payments Trust property can only be applied for benefit of the disabled person Any income must be paid to disabled person ‘Relevant minor’ is a child who has not yet attained age 18 and at least one of parents died. Eligible trusts for relevant minors: Statutory trusts (or Scottish equiv.) Trusts established under will of deceased parent of relevant minor Trust established under Criminal Injuries Compensation Scheme – giving absolute entitlement at age 18 Trustees are able to apply small amounts of income and capital (equivalent to the lower of £3000 or 3%) without having to prove it’s for the benefit of a vulnerable beneficiary Both trustee and beneficiary must make a joint election using HMRC VPE1 which is irrevocable until one of the following events occurs:- Person ceases to be a vulnerable person Trust ceases to be a qualifying trust Trust is terminated

Answer 33

Created by parent’s will or intestacy, or under Criminal Injuries Compensation Scheme Absolute interest must be given to beneficiary by age 25 Beneficiary treated as owning the trust assets for IHT purposes up to age 18 Exit charge then levied based on number of quarters elapsed since age 18 when assets distributed (maximum of 28/40ths i.e. 7 years between 18 and 25)

Answer 34

Trustees have £1,000 standard rate band is split by number of trusts settlor has in existence in the tax year (Min each can have is £200) Thereafter, higher rate tax is due. 32.5% on dividends and 45% on savings and other income Trustees’ expenses are allowable in calculating any income chargeable at higher rate Expenses first set against dividend income, savings income and then other income Tax relief on the expenses is received, increasing the trust basic rate band Expenses only allowable if they are properly chargeable to income (premiums on life policies, adviser fees etc do not count) and any exempt income will have expenses proportionately reduced (e.g. trustees are non resident) On distribution income becomes trust income and is liable to 45% tax Trustees may have further tax liability at this stage

Answer 35

Establish the assets and debts of the estate/net value. Apply to HM Revenue & Customs/complete PA1 Form/Inheritance Tax (IHT) 400/relevant form. Pay the IHT bill. Obtain Probate. Gather the assets of deceased estate/any monies owed. Pay off any outstanding mortgage/tax/debts. Distribute the net proceeds to the named beneficiaries. Act with due care/best interest of estate.

Answer 36

The deed must refer to the Will. All beneficiaries must be 18 or over. All beneficiaries must be of sound mind Must be executed within two years of death Must contain a statement to the effect that it is for IHT/as if deceased had made it. It must be signed by all beneficiaries whose entitlement is varied. There must be no consideration for money/monies worth.

Answer 37

Transfer into the trust was a chargeable lifetime transfer. The amount above the nil rate band/£325,000. Less two annual exemptions of £3,000/£6,000. Would have been subject to Inheritance Tax at 20% if paid by the trust or 25% if paid by Settlor. If Settlor dies within seven years There could be further tax to be paid by the trustees. Based on the amount above the then nil rate band/nil rate band at date of death. Taper relief might be available. Credit would be given for tax paid at outset. Periodic charges could be levied every ten years. Exit charges could be levied on any capital distributions or appointments.

Answer 38

In place to avoid IHT being paid on the same asset ina short space of time. (quick succession) Only available if in receipt of the gift within 5 years of death Tax charged on death is reduced by a percentage of the IHT paid on the original gift. The percentage applied depends on how long ago the gift was: ``` Less than 1 year - 100% 1 - 2 years - 80% 2 - 3 years - 60% 3 - 4 years - 40% 4 - 5 years - 20% ``` The relief is on the increase in the estate of the recipient of the gift.

Answer 39

An individual renting out a room in their only property has 2 options on how to be taxed. They can elect to use rent a room relief or not. Using rent a room relief, income tax is charged against any rental income which exceeds the allowance, currently £7,500. Expenses can not be offset against the income when using rent a room relief. Income is taxed at individuals rate of tax. If they choose not to use rent a room relief, then the rental income minus any expenses will be charged at the individual's rate of tax.

Answer 40

Contributions are not subject to relief at source on contribution. Relief has to be applied for via self assessment. Relief is then given as a deduction from taxable income. The deduction is the amount of the contribution made.