Individual taxation Flashcards
(107 cards)
1
Q
What are the main types of taxes covered in the BLP module?
A
• Income Tax
• Capital Gains Tax (CGT)
• Value Added Tax (VAT)
• Corporation Tax
2
Q
What distinguishes direct taxes from indirect taxes?
A
Direct taxes are imposed by reference to a taxpayer’s circumstances, while indirect taxes are imposed by reference to transactions.
3
Q
What is an example of a direct tax?
A
• Income Tax
• Capital Gains Tax (CGT)
• Corporation Tax
4
Q
What is an example of an indirect tax?
A
Value Added Tax (VAT)
5
Q
What is the difference between income receipts and capital receipts?
A
Income receipts are regular payments received, while capital receipts are from one-off transactions.
6
Q
Define income expenditure.
A
Money spent as part of day-to-day trading.
7
Q
Define capital expenditure.
A
Money expended to purchase a capital asset or enhance a capital asset.
8
Q
What is the formula for calculating trading profits?
A
INCOME RECEIPTS – LESS – INCOME EXPENDITURE
9
Q
What is the role of capital allowances?
A
They allow certain types of capital expenditure to be deducted from income receipts over a period of time.
10
Q
How does HMRC collect tax from individuals?
A
Through the self-assessment system.
11
Q
What is the tax year for individuals in the UK?
A
Runs from 6 April in one calendar year to 5 April in the next.
12
Q
What is the PAYE system?
A
A system where income tax is deducted at source by the employer from the employee’s wages.
13
Q
What is the definition of Total Income?
A
A taxpayer’s gross income from all sources before any deductions.
14
Q
What is Taxable Income?
A
Net Income less the personal allowance.
15
Q
What is the Annual Investment Allowance?
A
A special type of capital allowance.
16
Q
What does the term ‘Net Income’ refer to?
A
Total Income less available tax relief.
17
Q
What is the definition of Tax year?
A
Individuals are assessed to tax by reference to tax years rather than calendar years.
18
Q
What is the formula for calculating an individual’s income tax liability?
A
Step 1: Calculate Total Income
Step 2: Deduct available tax reliefs = Net Income
Step 3: Deduct Personal Allowance = Taxable Income
Step 4: Split the Taxable Income into Non-Savings, Savings and Dividend Income
Step 5: Calculate Personal Savings Allowance availability
Step 6: Apply relevant tax rates
Step 7: Add together amounts of tax calculated
19
Q
True or False: All individuals are required to complete a self-assessment tax return.
A
False
20
Q
What is Business Asset Disposal Relief?
A
A tax relief available to individuals in certain circumstances to reduce their chargeable gains.
21
Q
What is the definition of Corporation Tax?
A
A tax paid by companies on their taxable total profit (TTP).
22
Q
Fill in the blank: Capital allowances spread the cost of capital expenditure on certain capital items over a _______.
A
period of time
23
Q
What is the difference between gross sums and net sums?
A
A gross sum is the total sum before tax is levied, while a net sum is the amount left after tax has been paid.
24
Q
What does the Indexation allowance account for?
A
Inflation based on the Retail Price Index (RPI) for companies calculating their chargeable gains.
25
What is Total Income?
A taxpayer’s gross income from all sources
## Footnote
Total Income includes all receipts from all sources of income.
26
What is Net Income?
Total Income less available tax reliefs
## Footnote
Net Income is the amount after deducting tax reliefs from Total Income.
27
What is Taxable Income?
Net Income less the personal allowance
## Footnote
Taxable Income is the amount subject to income tax after deducting the personal allowance.
28
What is the first step in calculating income tax?
Calculating Total Income
## Footnote
Total Income must be calculated before any deductions or allowances.
29
What does 'grossing up' mean?
Including the gross amount in the calculation of Total Income
## Footnote
Grossing up is used when income is received net of tax.
30
What is the personal savings allowance for basic rate taxpayers?
£1,000
## Footnote
Basic rate taxpayers can earn the first £1,000 of interest received on savings tax-free.
31
What is the personal savings allowance for higher rate taxpayers?
£500
## Footnote
Higher rate taxpayers can earn the first £500 of interest received on savings tax-free.
32
Do additional rate taxpayers receive a personal savings allowance?
No
## Footnote
Additional rate taxpayers do not benefit from a personal savings allowance.
33
What is the dividend allowance?
No tax on the first £500 of dividend income
## Footnote
The dividend allowance was previously £1,000 before April 2024.
34
What are benefits in kind?
Non-cash benefits received by employees, such as health insurance and company cars
## Footnote
Benefits in kind are subject to income tax but are not deducted under PAYE.
35
What type of interest is considered a tax relief?
Interest paid on qualifying loans
## Footnote
This interest can be deducted from Total Income to reduce taxable income.
36
What is the personal allowance for the tax year 2024/25?
£12,570
## Footnote
The personal allowance reduces for higher incomes.
37
How is the personal allowance reduced for higher incomes?
By £1 for every £2 of Net Income above £100,000
## Footnote
This reduction continues until the allowance is completely lost at £125,140.
38
What is the formula to calculate the reduced personal allowance?
£12,570 – [(Net Income - £100,000) / 2]
## Footnote
This formula helps determine the adjusted personal allowance for incomes over £100,000.
39
What is the critical order for taxing different types of income?
Non-savings, then savings, and then dividend income
## Footnote
Different tax rates apply to each type of income.
40
What is the basic tax rate for non-savings income in the 2024/25 tax year?
20%
## Footnote
This rate applies to income from £0 to £37,700.
41
What is the higher tax rate for non-savings income in the 2024/25 tax year?
40%
## Footnote
This rate applies to income from £37,701 to £125,140.
42
What is the additional tax rate for non-savings income in the 2024/25 tax year?
45%
## Footnote
This rate applies to income over £125,140.
43
What is the savings income tax rate for basic rate taxpayers?
20%
## Footnote
This rate applies after the personal savings allowance has been deducted.
44
What is the dividend income tax rate for basic rate taxpayers?
8.75%
## Footnote
This rate applies after the first £500 of dividend income is tax-free.
45
How is the total tax payable calculated?
Add the tax on non-savings, savings, and dividend income
## Footnote
Each type of income is taxed separately before summing the total tax.
46
What method can be used to visualize tax calculations?
The 'cake' method
## Footnote
This method likens different income types to layers of a cake to illustrate how tax rates apply.
47
What method is used to calculate tax if a layer of income rises through a tax band?
The tax rate must be apportioned accordingly.
48
What system do individuals use to pay income tax on their salaries?
PAYE (Pay As You Earn).
49
What happens if a taxpayer has overpaid tax during the year?
The taxpayer will receive a tax refund from HMRC.
50
What are National Insurance Contributions (NICs)?
Payments made out of employment income via the PAYE system that do not affect personal income tax computation.
51
Fill in the blank: The first £500 of savings income for higher rate taxpayers is taxed at the _______.
savings nil rate of 0%.
52
How is the Personal Allowance reduced for net income above £100,000?
Reduced by £1 for every £2 of net income above £100,000.
53
What is the formula for calculating an individual’s income tax liability?
Step 1: Calculate Total Income
Step 2: Deduct available tax reliefs = Net Income
Step 3: Deduct Personal Allowance = Taxable Income
Step 4: Split Taxable Income into non-savings, savings, and dividend income
Step 5: Calculate personal savings allowance
Step 6: Apply relevant tax rates
Step 7: Add together amounts of tax calculated = Total tax liability.
54
What is the purpose of anti-avoidance legislation?
To prevent loopholes exploited by taxpayers to reduce or eliminate tax liabilities.
55
True or False: A taxpayer can reduce their income tax liability by making gifts of income-producing items to their children.
False.
56
What is the annual exemption for capital gains tax in the current tax year?
£3,000.
57
What is a Chargeable Disposal in Capital Gains Tax?
The sale or gift of an asset during the taxpayer’s lifetime.
58
Fill in the blank: CGT is charged on all gains made in the relevant tax year, which runs from _______ to _______.
6 April to 5 April.
59
List the main types of assets excluded from Capital Gains Tax.
* Principal private residence
* Motor cars for private use
* Certain investments (e.g., government securities, ISAs)
* UK sterling and foreign currency for personal use.
60
What is the effect of disposals between spouses for Capital Gains Tax?
Neither a gain nor a loss is deemed to occur; the receiving spouse takes over the base cost of the asset.
61
What happens if an asset is disposed of at an undervalue?
The sale is deemed to be at the market value at the date of disposal.
62
How is the chargeable gain calculated?
Consideration Received - Allowable Expenditure = Chargeable Gain.
63
What are the three types of allowable expenditure that can be deducted in Capital Gains Tax calculations?
* Disposal expenditure
* Initial expenditure
* Subsequent expenditure.
64
What are the two rates of Capital Gains Tax for individuals?
18% and 24%.
65
What determines the Capital Gains Tax rate applied to an individual?
Whether the individual’s Taxable Income plus total taxable chargeable gains exceeds the basic rate tax threshold of £37,700.
66
Fill in the blank: Disposals to charities are treated as made on a _______.
no gain/no loss basis.
67
What is the capital gains tax (CGT) rate for basic rate taxpayers?
18%
## Footnote
This rate applies to gains within the unused part of the basic rate tax band.
68
What is the capital gains tax (CGT) rate for higher and additional rate taxpayers?
24%
## Footnote
This rate applies to gains that exceed the threshold.
69
What is the formula to calculate an individual’s capital gains tax liability?
Sale proceeds/market value (A) - Disposal expenditure (B) - Initial expenditure (D) - Subsequent expenditure (E) - Carried forward losses (G) - Annual exemption (3,000) = Taxable Chargeable Gain (H)
## Footnote
This formula is essential for determining the taxable gain for CGT.
70
What is Business Asset Disposal Relief (BADR)?
A relief that reduces the rate of CGT to 10% for gains from qualifying disposals.
## Footnote
Formerly known as Entrepreneur’s Relief or ER.
71
What are the conditions for a qualifying disposal under Business Asset Disposal Relief?
* Disposal of a trading business
* Disposal of assets used in a business that used to trade
* Disposal of shares in a trading company
* Disposal of shares in a company that used to trade
## Footnote
Each condition has specific ownership and timing requirements.
72
What is the lifetime allowance for Business Asset Disposal Relief?
£1 million
## Footnote
This is the total amount of qualifying gains that can be charged at the reduced rate of 10% in an individual’s lifetime.
73
What is Investors’ Relief (IR)?
A relief that reduces the rate of CGT to 10% for gains from disposals of qualifying shares held for at least three years.
## Footnote
It is aimed at investors in unlisted trading companies.
74
What are the conditions for shares to qualify for Investors’ Relief?
* Fully paid ordinary shares issued for cash after 17 March 2016
* Company must be a trading company
* Shares must not be listed on a recognised stock exchange
* Shares held for at least three years
* Individual must not be an officer or employee of the company
## Footnote
These conditions ensure that the relief is targeted at genuine investments.
75
What is Rollover Relief?
A relief that allows the postponement of CGT liability by rolling over gains into the cost of a replacement asset.
## Footnote
This applies to certain business assets like land, buildings, and machinery.
76
What is Hold-over Relief?
A relief that allows the postponement of CGT liability on gifts of business assets.
## Footnote
The donee’s acquisition cost is reduced by the donor’s deemed gain.
77
What triggers Inheritance Tax (IHT)?
* Potentially exempt transfers (PET)
* Lifetime chargeable transfers (LCT)
* Death
## Footnote
Understanding these events is crucial for determining IHT liability.
78
What is the nil rate band (NRB) for IHT for the tax year 2022-2023?
£325,000 = 0%
## Footnote
This is the threshold below which no IHT is charged.
79
What is the death rate of IHT above the nil rate band?
40%
## Footnote
This rate applies to the value of the estate above the NRB upon death.
80
What is Business Property Relief (BPR)?
An exemption that applies to the value of qualifying business assets for IHT purposes.
## Footnote
BPR is available for lifetime transfers and the death estate.
81
What types of business assets qualify for Business Property Relief?
* Business or interest in a business
* Shares in an unquoted company
* Shares in a quoted company
* Land or buildings, machinery or plant used for business purposes
## Footnote
The transferor must have owned these assets for at least two years.
82
What is the relief rate for shares in a quoted company under BPR?
50%
## Footnote
This applies only if the shareholder had control of the company.
83
What is the effect of cumulative total on IHT?
It reduces the NRB available for the current transfer.
## Footnote
The cumulative total includes all chargeable transfers made in the previous 7 years.
84
True or False: Gifts to charities are exempt from IHT.
True
## Footnote
Such gifts do not count towards the NRB.
85
What is Business Property Relief ('BPR')?
An exemption for the purposes of IHT available on both lifetime transfers and the death estate.
86
What categories of property does BPR apply to?
* Various categories of Business Property
87
What is the formula for calculating IHT on lifetime transfers?
* Step A – Calculate cumulative total
* Step B – Identify value transferred
* Step C – Apply exemptions and reliefs
* Step D – Apply NRB and calculate tax
* Step E – Apply taper relief
* Step F – Give credit for tax paid in lifetime
88
What is the process for calculating IHT on a death estate?
* Step 1 - Calculate cumulative total
* Step 2 - Identify assets included in the taxable estate
* Step 3 - Value the taxable estate
* Step 4 - Deduct debts/expenses
* Step 5 - Apply exemptions & reliefs
* Step 6 - Apply RNRB
* Step 7 - Apply basic NRB and calculate tax
89
What is the personal allowance for income tax in the tax year 2024/25?
£12,570
90
What is Glyn's total income for the tax year 2024/25?
£37,525
91
What is Glyn's taxable income after applying the personal allowance?
£24,955
92
What is the total income tax liability for Glyn for the tax year 2024/25?
£4,886
93
What is TP's taxable income for the tax year 2024/25?
£220,000
94
What is the total tax payable for TP in the tax year 2024/25?
£83,593
95
What is Marianne's taxable income for the tax year 2024/25?
£195,000
96
What is Marianne’s total tax liability for the tax year 2024/25?
£72,626
97
What is William's chargeable gain from the sale of the restaurant?
£16,800
98
What is the total chargeable gain for Hardeep from the sale of his shares?
£199,950
99
What is Hardeep's total CGT liability after applying Business Asset Disposal Relief?
£19,695
100
What is Pippa's total chargeable gain from the sale of the painting?
£19,750
101
What is Pippa's taxable chargeable gain after applying carried across loss and annual exemption?
£11,750
102
What tax rate applies to Pippa's taxable chargeable gain as a higher rate taxpayer?
24%
103
What is the CGT liability for Poppy from her gain of £18,000?
£2,700
104
What is the CGT liability for Daisy from her gain of £50,000?
£11,280
105
What is Pete's total CGT liability from his gain of £26,000?
£4,848
106
Fill in the blank: Business Property Relief applies to both lifetime transfers and the _______.
death estate
107
True or False: The tax rate for CGT under Business Asset Disposal Relief is the same for basic, higher, and additional rate taxpayers.
True
