Income Tax

Question 1

what are the sources of law of Income Tax

Answer 1

1. Statutes
   (1) the Income Tax Act 2007 (ITA 2007)
   (2) the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)
   (3) the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).
2. case law
   3.Official Statements made by HMRC
   (1） Extra-Statutory Concessions
   These are published by HMRC in a booklet. If a taxpayer satisfies the terms of an Extra
   Statutory Concession, HMRC waives its right to collect tax which would otherwise be due.
   （2）Statements of Practice
   These are announced by press release and published in the professional journals. They
   indicate what view HMRC will take of particular tax provisions.
   Note that these Official Statements do not bind the courts.

Question 2

what is income tax?

Answer 2

1. no statutory definition or definition from case law
2. A distinction must be made between income and capital profits:the former is subject to income tax; the latter are subject to capital gains tax.
3. Generally, money received will be income if there is an element of recurrence, for example, a salary or partnership profit share received every month, or interest paid on a bank or building society account every
   quarter.

Question 3

Who pay the income tax

Answer 3

(a) individuals;
(b) partnerships (partners are individually responsible for the tax due on their share of
partnership profits);
(c) personal representatives (who pay the deceased’s outstanding income tax and income
tax chargeable during the administration of the estate); and
(d) trustees (who pay income tax on the income produced by the trust fund).

Question 4

tax year

Answer 4

From 6 April until 5 April the following year

Question 5

Types of Income

Answer 5

(a) non-savings, non-dividend income (‘NSNDI’), comprising all sources of income except income derived from savings and dividends;
(b) savings income, which is interest from various sources, for example building society accounts, most National Savings accounts, unit or investment trusts and corporate or
government bonds and gilts; and
(c) dividend income.

Question 6

The steps to work through to calculate the amount of tax payable

Answer 6

Step 1: Calculate the total income
Step 2: Deduct any allowable reliefs
The resulting sum is net income
Step 3: Deduct any personal allowances
The resulting sum is taxable income
Step 4: Separate NSNDI, savings income and dividend income, and calculate the tax on
each type of income at the applicable rate(s) (starting rate, basic rate, higher rate
and additional rate)
Step 5: Add together the amounts of tax from Step 4 (to give the overall income tax liability)

Question 7

what income is charged to income tax?(the ITTOIA 2005 and the ITEPA 2003)

Answer 7

1. trading income–profits of trade, profession or vocation (which applies to sole trader, trading partnership,sole practitioner,professional partnership)
2. property income–rents and other income from land in UK
   3.savings and investment income–interests, dividends,annuities
3. certain miscellaneous income-annual income not otherwise charged
4. employment and pension income

Question 8

Exempt Income

Answer 8

Certain items are free of income tax. They include:
(a) certain State benefits;
(b) interest on Savings Certificates;
(c) scholarships;
(d) interest on damages for personal injuries or death;
(e) income from investments in an individual savings account (ISA) (see 5.3);
(f ) gross income up to £7,500 a year from letting a furnished room in the taxpayer’s home;
(g) annual payments under certain insurance policies, for example, where insurance
benefits are provided in times of sickness; and
(h) premium bond winnings.

Question 9

tax deducted at source

Answer 9

For most taxpayers, their main source of income will be employment income, from which tax
will have been deducted at source. The payee receives the net amount, not the gross amount.
Salaries and other employment income are assessable under ITEPA 2003 using the Pay As You
Earn system (PAYE). Under the PAYE system, the employer deducts from the employee’s
salary and then pays to HMRC income tax at the appropriate rate at the time the salary is paid.
The PAYE system also takes account of personal allowances.

Question 10

net income

Answer 10

Net income=Gross Income- Allowable Reliefs

Question 11

Interest payments on qualifying loans

Answer 11

1. Most interest payments receive no tax relief at all, for example ordinary bank overdrafts, credit
   card interest and hire purchase interest payments. The borrower pays the interest out of taxed
   income.
2. exception: qualifying loans
   (1)A loan to buy a share in a partnership or to contribute capital or make a loan to a
   partnership
   (2)A loan to invest in a close trading company

(3) A loan to personal representatives to pay inheritance tax

Question 12

Types of allowances

Answer 12

1. personal alloawnce
2. marriage allowance
3. blind person’s allowance
   4.property and trading allowance
   5.personal savings and dividend allowance

The availability of allowances depends not on the type of income involved, but on the taxpayer’s personal circumstances, for example disability or the amount of income received
each tax year.

Question 13

Personal Allowance

Answer 13

1. £12，570
   2 sequeance:
   It is applied in this order: first against NSNDI;
   then, if there is a surplus, against savings income;
   and finally any remaining surplus is applied against dividend income.
   For most employees, their Personal Allowance will be used up by their employment income,
   unless such income is below £12,570.
2. If the Personal Allowance exceeds the net income of the taxpayer, the surplus is unused and cannot be carried forward for use in future years.
3. This allowance may be claimed by taxpayers resident in the UK, male, female, adult or child,
   married or single. Husband and wife are treated as separate single people. Each spouse is
   independently liable for tax on their own income, and each has their own Personal Allowance

5.The Personal Allowance is reduced where the taxpayer’s income exceeds the income limit of
£100,000. This reduction applies irrespective of age. The Personal Allowance is reduced by £1
for every £2 of income above the £100,000 limit. The effect of the reduction is that for a
taxpayer with income of £125,140 or more, no Personal Allowance will be available.

6. £12,570 – (net income – £100,000)/2 = adjusted Personal Allowance

Question 14

Marriage allowance

Answer 14

Where one spouse or partner does not have enough income to use their
Personal Allowance fully for that tax year, they may transfer £1,260 of their Personal
Allowance to their spouse or civil partner. The recipient must not be a higher or additional
rate taxpayer.

Question 15

Blind person’s allowance

Answer 15

A taxpayer who is a registered blind person receives an allowance of £2,600. If a husband and
wife are both registered blind, they can each claim the Blind Person’s Allowance.

Question 16

Property and Trading Allowance

Answer 16

1. gross property income or gross trading
   income below £1,000,
2. the income will not be subject to income tax and taxpayers are not required to submit a tax return
3. Where gross property or trading income is in excess of £1,000, the taxpayer can choose to
   take the £1,000 allowance as a deduction against gross income instead of deducting actual
   expenses to arrive at their taxable income figure.

Question 17

Personal Saving Allowance

Answer 17

1. The PSA can be set against savings income, so that up to the first £1,000 of savings income
   will be tax free.
2. Additional rate taxpayers do not receive a PSA. (Contrast the Personal Allowance, where
   both basic and higher rate taxpayers receive the same (£12,570 for 2022/23) and additional
   rate taxpayers receive a reduced allowance
3. basic tax payer: 1,000 allowance
   higher tax payer: 500 allowance
   additional tax payer:0

Question 18

Personal Saving Allowance

Answer 18

1. The PSA can be set against savings income, so that up to the first £1,000 of savings income
   will be tax free.
2. Additional rate taxpayers do not receive a PSA. (Contrast the Personal Allowance, where both basic and higher rate taxpayers receive the same (£12,570 for 2022/23) and additional rate taxpayers receive a reduced allowance
3. basic tax payer: 1,000 allowance
   higher tax payer: 500 allowance
   additional tax payer:0

Question 19

types of tax payer

Answer 19

1. basic tax payer: income:0–37,700
2. higher tax payer: income:37,701-150,000
3. additional tax payer: income: 150,001 and above

Question 20

Dividend allowance

Answer 20

1.The Dividend Allowance can be set against dividend income, so that the first £2,000 of a
taxpayer’s dividend income will be free from tax.
2.ll taxpayers (whether basic, higher or
additional rate taxpayers) are entitled to the £2,000 allowance. (Contrast the Personal Allowance, which is adjusted for higher rate taxpayers.)
3.The result is that these allowances are not set off at this stage with the Personal Allowance to
reduce taxable income. Only the Personal Allowance is relevant for calculating Taxable
Income.
4. Only the Personal Allowance is relevant for calculating Taxable Income. The PSA and dividend allowance are relevant for arriving at and calculating the
amount of the Personal Savings Allowance (if relevant) that the taxpayer is entitled to and the
rates of tax that will be applicable to savings and dividend income

Question 21

taxable NDNSI

Answer 21

taxable income-savings and dividend income

Question 22

order of taxation

Answer 22

1. NDNSI (basic rate 20%,higher rate:40%, additional
   rate:45%)
2. Interests (starting rate: 0,basic rate:20%, higher rate:40%,
   additional rate:45%)
3. Dividends (ordinary rate:8.75%, upper rate:33.75%,
   addtional rate:39.35%)

Question 23

tax on the saving incomes

Answer 23

1. first PSA must be deducted from the saving income figure
2. the remaining savings income after deduction of PSA is taxed at starting, basic, additional, and higher rate.
   (1) starting rate for saving of 0%:0-5,000
   (2) basic rate for saving of 20%:5001-37,700
   (3) higher rate of saving of 40%:37,701-150,000
   (4) additional rate of saving of 45%; 150001 and above

Question 24

Add PSA to taxable NSNDI

Answer 24

1. If the taxable NSNDI plus PSA is less than E5,000,the remaining taxable savings income will be taxed at the starting rate for savings.
2. If the taxable NSNDI plus PSA is less than f37,700, the remaining taxable savings income below E37,700 will be taxed at the savings basic rate (and at the higher and additional rates as appropriate above E37,700).
3. If the taxable NSNDI plus PSA exceeds E37,700, the remaining taxable savings income below E150,000 will be taxed at the savings higher rate (and at the savings additional rate above E150,000).
4. If the taxable NSNDI plus PSA exceeds E150,000,the remaining taxable savings income will be taxed at the savings additional rate.

Question 25

Taxing dividend income

Answer 25

1. taxable dividend income=dividend income-dividend allowance 2. interest rate of dividend income (1) 0-37,700 8.75% (2) 37,701-150,000 33.75% (3) above 150,000 39.35%

Question 26

Add Dividend Allowance to taxable NSNDI plus total savings income (including PSA)(This establishes the relevant rate(s) of tax)

Answer 26

1. If the taxable NSNDI plus total savings income plus the Dividend Allowance is less than E37,700, the remaining taxable dividend income below f37,700 will be taxed at the dividend ordinary rate (and at the dividend upper and additional rates as appropriate above E37,700). 2. If the taxable NSNDI plus total savings income plus the Dividend Allowance exceeds f37,700,the remaining taxable dividend income below f150,000 will be taxed at the dividend upper rate (and at the dividend additional rate above f150,000). 3. If the taxable NSNDI plus total savings income plus the Dividend Allowance exceeds f150,000, the remaining taxable dividend income will be taxed at the dividend additional rate.

Question 27

Sources of Capita Gain Tax

Answer 27

the Taxation of Chargeable Gains Act 1992.

Question 28

Chargeable assets of CGT

Answer 28

All forms of property are treated as assets for CGT purposes, including such things as debts, options, incorporeal property and property created by the person disposing of it. Exception: Sterling is excluded from the definition so disposals of cash do not attract CGT liability.

Question 29

who pays CGT?

Answer 29

(a) individuals; (b) business partners (each partner is charged separately for their share of the partnership gains when there is a disposal of a chargeable partnership asset); (c) personal representatives (who pay CGT when there is a disposal of the deceased’s chargeable assets); (d) trustees (who pay CGT when there is a disposal of a chargeable asset from the trust fund). Companies pay corporation tax on income and capital gains

Question 30

The steps required to calculate the amount of CGT payable

Answer 30

Step 1: Disposal of a chargeable asset It is first necessary to identify the disposal of a chargeable asset, for example the sale of land. Step 2: Calculation of the gain This, in basic terms, will be the consideration received when the asset is sold less cost Step 3: Consider reliefs Step 4: Aggregate gains/losses; deduct annual exemption An individual does not pay tax on all the gains they make. There is an exemption for the first £12,300 of total net gains made by an individual in the current tax year (2022/23) Step 5: Apply the appropriate rates of tax

Question 31

Rates of CGT

Answer 31

(a) If an individual’s gains and taxable income added together do not exceed the threshold for basic rate income tax (£37,700), the rate of tax on the gains is 10%. (b) Subject to paras (c) and (d) below, if an individual’s gains and taxable income added together exceed the basic rate income tax threshold, any part of the gains up to the basic rate threshold is taxed at 10%, but the rate of tax on the gains that exceed the threshold is 20%. (c) Any gains made on the disposal of residential property (which is not exempted by the principal private residence exemption ) are subject to an 8% surcharge on the normal rate, which means that such gains falling below the basic rate threshold will be taxed at 18% and above the threshold at 28%. (d) Any gains that qualify for business asset disposal relief are taxed at a flat rate of 10%.

Question 32

Disposal of property for CGT

Answer 32

1.The sale or gift of a chargeable asset 2.The disposal of part of an asset A sale of part of an asset or a gift of part of an asset is a disposal, for example the sale of part of a field. 3.The death of the taxpayer On death there is no disposal by the deceased, so there is no charge to CGT. The personal representatives acquire the deceased’s assets at the market value at the date of death (the probate value). This has the effect of wiping out gains which accrued during the deceased’s lifetime so that these gains are not charged to tax.

Question 33

the expenditure incuured by CGT tax payer

Answer 33

1. initial expenditure (a) The cost price of the asset (or its market value at the date of acquisition if the asset was given to the taxpayer; or the probate value if the taxpayer acquired the asset by will or intestacy) plus incidental costs of acquisition. Examples of incidental costs of acquisition are legal fees, valuation fees, stamp duty. (b) Expenditure wholly and exclusively incurred in providing the asset. An example is the cost of building a weekend cottage. 2. subsequent expenditure (a) Expenditure wholly and exclusively incurred to enhance the value of the asset, which is reflected in the value of the asset at the time of disposal. An example is the cost of building an extension to a house. The cost of routine maintenance, repairs and insurance, on the other hand, is not deductible. (b) Expenditure wholly and exclusively incurred in establishing, preserving or defending title to the asset. An example is the cost of legal fees incurred to resolve a boundary dispute. 3. incidental expenditure Examples are legal fees and estate agent’s fees. Note that expenditure which is deductible for income tax purposes cannot be deducted when calculating a capital gain.

Question 34

Relief for CGT

Answer 34

1.Tangible moveable property Wasting assets (ie assets with a predictable life of less than 50 years) are generally exempt. Most consumer goods will fall into this category, for example televisions and washing machines. Not all items of tangible moveable property are wasting assets. Some will go up in value, for example antiques. However, they will be exempt from CGT if the disposal consideration is £6,000 or less. 2.Private dwelling house A gain on the disposal by an individual of a dwelling house, including grounds of up to half a hectare, will be completely exempt, provided it has been occupied as their only or main residence through their period of ownership (ignoring the last 9 months of ownership). For most people, their home is their most valuable asset. The effect of this relief is that the house can be sold (or given away) without CGT liability being incurred. 3.Damages for personal injury The recovery of damages or compensation may amount to the disposal of a chargeable asset; however, the receipt of damages for personal injury is exempt. 4.Hold-over relief Hold-over relief enables an individual to make a gift of certain types of business assets without paying CGT. However, if the donee disposes of the asset, the donee will be charged to tax not only on their own gain but on the donor’s gain as well. Because hold-over relief defers the charge to tax until a disposal by the donee, there must be an election by donor and donee to claim hold-over relief. 5.Relief for replacement of business assets (‘roll-over’ relief ) This relief encourages expansion and investment in qualifying business assets by enabling the sale of those assets to take place without an immediate charge to CGT, provided the proceeds of sale are invested in other qualifying business assets. The charge to CGT is postponed until the disposal of the new asset. 6.Roll-over relief on incorporation of a business This relief again defers a CGT charge. It is applied (subject to conditions) when an individual sells their interest in an unincorporated business (sole trader, partnership) to a company. The gain is rolled over into the shares received as consideration for the interest being sold to the company. The CGT charge is postponed until the disposal of the shares. 7.Relief for re-investment in certain unquoted shares To encourage investment in small company shares, it is possible for an individual to defer payment of CGT on any chargeable gain provided the proceeds of sale are re-invested in certain shares in an unquoted trading company. 8.Business asset disposal relief From 6 April 2008, relief (in the form of a reduced rate of tax) is available on gains made by individuals on the disposal (ie on a sale or a gift) of certain assets, including: (a) all or part of a trading business the individual carries on as a sole trader or in partnership; (b) shares in a trading company, subject to certain conditions, including (but not limited to) that the individual’s holding is at least 5% of the ordinary voting shares of the company (ie, it is their ‘personal’ trading company); (c) assets owned and used by the individual’s personal trading company or trading partnership.

Question 35

Annual Exemption for CGT

Answer 35

The amount of the exemption for tax year 2022/23 is £12,300. If a taxpayer’s net gain is smaller than the annual exemption the unused part of the exemption cannot be carried forward to the following tax year.

Question 36

Chargeable assets fall into three categories –

Answer 36

1. residential property, 2. other assets not qualifying for business asset disposal relief and 3. assets qualifying for business asset disposal relief.

Question 37

CGT CALCULATION WHERE THERE IS MORE THAN ONE DISPOSAL IN A TAX YEAR

Answer 37

Where the taxpayer realises gains in two or three of the categories, any losses and the annual exemption can be deducted from gains in the best way possible for the taxpayer (ie to the gains that would otherwise attract the higher rates), so from residential property gains first, then non-business asset disposal relief gains and, finally, business asset disposal relief gains.

Question 38

UNABSORBED LOSSES

Answer 38

1. It is, of course, possible that a taxpayer’s CGT losses in a tax year may exceed their overall CGT gains. If so, setting the losses against the gains will wipe them out completely and the taxpayer will have no CGT to pay. In such a situation, the setting-off of current year losses to wipe out the gains entirely means that the taxpayer loses the use of their annual exemption. The exemption cannot be carried forward to use against gains of future tax years. 2. If, after setting losses against gains, there are still unabsorbed losses, these may be carried forward to future years and then used to the extent necessary to reduce gains to the limit of the annual exemptions available in those future years. Unabsorbed losses can be carried forward indefinitely. 3. The approach should be: (a) work out the gain or loss on each disposal made during the tax year; (b) deduct any losses of the current year from gains; (c) deduct any losses brought forward from previous years to reduce any remaining gains to the limit of the annual exemption; (d) deduct the annual exemption from any remaining gains.

Question 39

Part disposal

Answer 39

Where the disposal is of only part of the asset the initial and subsequent expenditure are apportioned when calculating the gain. 1. consideration +remaining value=total value 2. the part sold is worth consideration/total value 3. the cost of the sold part=purchase price X consideration/value

Question 40

Disposal between spouses

Answer 40

Where spouses or civil partners are living together, a disposal by one to the other is treated as being made for such a consideration as to provide neither a gain nor a loss. This means that a spouse (or civil partner) can dispose of property to the other without paying CGT on the disposal. The donor’s gain is not wiped out but merely deferred. If the donee disposes of the asset, the donee will be charged to tax not only on the donee’s gain but on the donor’s gain as well.