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AF1 2020/21 > Investment Taxation > Flashcards

Flashcards in Investment Taxation Deck (22)
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Property - tax treatment of rental income - key points:

  • Rental income treated as investment rather than earned/ trading income
    • only allowable as trading income if landlord provides substantial services i.e. house leeping
  • Where treated as trading income this counts as relevant earnings for penion contributions and losses can be offset against other earned income. 
  • Being part of a business also means CGT rollover, holdover and business asset disposal relief (10% CGT on first £1m) may be available. 
  • Accounts should be drawn up to the end of the tax year of 31st March. 


Short lease premium - key points:

  • Where a lease is granted for less than 50 years ad paid as a lump sum, part of tht lump sum is treated as property income. Formula:
    •  Premium - [(years of lease - 1) x premium / 50]
  • The lessee can claim the 'rent' as a deduction, spread equally across the preiod of the lease, providing the lessee uses the property for a trade or sublets it. 


Rent-a-room relief - key points:

  • Available to owners of UK properties who rent out a furnished room (not self contained unit). 
  • Rent up to £7,500 not chargeable to tax. Unless landlord elects for normal property rules to apply (must choose to do so within 12 months of the 31st January following end of tax year).
  • Where more than one person receives the rent, £7,500 is split. 
  • Where rent is more than £7,500 can choose between RRR with no deduction for expenses or normal property letting rules. 


Furnished holiday lettings - key points:

  • Located in UK or EEA
  • Furnished
  • Let on commercial basis
  • Available for 210 days per tax year
  • Let for 105 days per tax year
  • May be let for continuous periods of more than 31 days, but not more than 155 days in a tax year
  • Does not need to be in holiday resort


Furnished holiday letting - tax advantages:

  • Treated as trading income i.e. relevant earnings for pension contributions, though losses can only be offset against other furnished letting income. 
  • CGT 18/28%. Rollover, holdover and business asset disposal relief available. 


Woodland tax treatment - key points:

  • Profits exempt from income tax
  • IHT postponed until trees cut/ timber sold, providing woodland owned 5 years
  • Commerically managed woodlands exempt from CGT




ISA eligibility and conditions - key points:

  • Individual contracts only (no joint ISAs)
  • UK resident or non-UK resident Crown exmployees working overseas (or their spouse/ civil partner). 
  • On becoming non-resident, no further contributions can be made, but the tax benefits can be kept. 
  • Can only invest in one provider per ISA type per tax-year. Though can set up different ISA types with different provider. 


Offshore funds (Reporting) - key points:

  • Report full details of income to HMRC. 
  • investors must declare their share of income via self-assessment. 
  • Income paid gross and taxable as either savings or div income (depending on source) - even if income not actually distributed. 
  • PSA and DA can be used to offset savings and div income. 
  • Once allowances used, income is taxed at the appropriate savings/ dividend rates.
  • Gains on encashment charged to CGT under usual rules. 


Offshore funds (non-reporting) - key points:

  • Taxed on encashment only. 
  • Gain is calculated on CGT principles - no CGT AEA
  • Tax is charged at income tax rates
    • PSA and DA do not apply. 
  • Divs received by offshore funds may be subject to non-reclaimable withholding tax.
  • Some countries levy a small tax charge on offshore funds.


Life Assurance-based Products - Qualifying rules, key points:

  • Secure capital sum on maturity, death or earlier incapacity
  • Minimum term 10 years
  • Premiums annual or more frequent
  • Term policies sum assured no less than 75% premiums payable for term
  • WOL sum assured no less than 75% of premiums payable should death occur at 75. 
  • Premiums in one year not more than twice premiums payable in any other year and not more than 1/8 of total premium payable over the term (first 10 yrs for WOL). 
  • Premiums no more than £3,600 per annum. 


Top-Slicing Relief - 5 Steps:

  1. Calculate total taxable income and resulting tax bill.
    • Gain, salary, divs etc. 
    • Work out what portion of gain falls into HR or AR band and tax on this
  2. Workout tax due on gain and deduct tax-deducted at source (if applicable).
  3. Workout the annual equivalent of the gain
    • Gain / policy years
  4. Workout the tax on the gain annual equivalent
    • Deducting 20% of this amount if applicable.
    • Multiply back by the number of complete policy years
  5. Top-slicing relief given
    1. Step 2 minus step 4
    2. Deduct the resulting figure from total tax liability, and the basic rate credit

If an offshore bond - identical process except no deduction for BR tax credit


Friendly society policies - key points:

  • Annual premiums under £270/ or £25 per month (£300)
  • Limit applies across all friendly society policies an investor holds
  • Baby bond can be taken out for under 18s
  • If qualifying conditions are breached, taxed as per non-qualifying but with no credit for basic rate paid at source (20%, 40% and 45%). 



Life policies held in trust - key points:

Where life policy is held in trust:

  • If settlor is alive and UK res, they are liable to tax on any chargeable gain, but can recover tax from trustees. 
  • If settlor is not liable, then UK trustees have the liability at 20% (up to SR band) and then 45%. Credit will be given for the 20% deemed taken at source for onshore bonds. 
  • If trustees and settlor non-res, any UK resident beneficiaries will be liable at personal tax rates with no top-slicing relief. 

For trustees to avoid high rates of tax, it is best to assign the policy to the beneficiaries in the tax year before the chargeable event.


Special purpose vehicles - key points:

  • Limited partnership or exempt UK unit trust or investment trust set up to finance specific projects. 
  • Allow investments to be made from SIPPs, SSASs and charitites. 
  • Highly geared (up to 90% of purchase cost). 
  • Income (rental) is used to service debt, so only offer capital growth over a short term. 
  • Enable small investors to build a portfolio in commercial property market. 
  • NMPI and can only be marketed to experienced investors by authorised person. 


Real Estate Investment Trusts (REIT) - key points:

  • Single company or group that owns and manages commercial or residential property on behalf of shareholders (not the letting of owner-occupied buildings)
  • Company must be UK resident, closed ended and quoted on a recognised stock exchange
  • If at least 75% of the company's total gross profits come from property letting, and interest on borrowing is at least 125% covered by rental profits, company is exempt from corp tax on property letting portion of business.
  • Gains on sale of propertis developed are taxable at 30% unless held for at least three years from completion. 
  • 90% of profits must be paid out to investors within 12 months of the end of the accounting period. Distributions consist of two elements:
    • Payment from CP tax exempt element - classed as property income and paid net of 20% tax which can be reclaimed. 
    • Dividend from non-exempt element - classed as investment income and paid gross. 
  • Capital gains taxable in usual way.


Venture Capital Trusts (VCTs) taxation treatment - key points:

  • Income tax relief of 30% as a tax reducer, up to max investment of £200,00 per tax year. Withdrawn if shares disposed of within 5 years. 
  • No income tax on dividends from investments up to the maximum per tax year. 
  • Exempt from CGT on disposal. 
    • Cannot defer gains. 
  • Will be included in value of estate on death. 


Venture Capital Trusts (VCTs) qualifying conditions - key points:

HMRC must approve the company as a VCT which means it has satisified the following conditions:

  • Must not be a close company
  • Must be listed on an EEA stock exhange
  • Income must be mainly or wholly derived from shares
  • At least 80% of these shares must be in qualifying unlisted trading companies
  • VCT must not hold more than 15% of ordinary shares in any one company
  • At least 10% of investments in any company must be in ordinary, non-preferential shares or certain preference shares
  • Companies the VCT invests in must have gross assets of no more than £15m before investment and no more than £16m after. Such companies must have fewer than 250 employees (500 KIF). 
  • Maximum annual investment by VCT of £5m (£10m KIF)


Enterprise Investment Schemes taxation treatment - key points:

  • Income tax relief at 30% as a tax reducer, up to a maximum investment of £1,000,000 (£2,000,000 KIFs) per tax year. Relief withdrawn if shares sold within three years. Investment can be carried back one year if this is more advantageous. 
  • Disposal proceeds exempt from CGT provdied EIS is held for three years and that income tax relief was given at outset. 
  • EIS can be used to defer gains if original disposal proceeds reinvested in EIS. Can be no more than one year before, or three years after disposal. 
    • No maximum on maximum deferral amount. 
    • Gain chargeable on disposal of EIS (unless reinvested into another EIS). 
  • If disposal creates a loss, loss relief available - can be deducted from gains or income. 
  • Income and CGT relief available if investor unconnected. CGT deferral available to everyone. Cannot have pre-arranged exit provisions. 
  • 100% IHT relief provided shares held for two years before and still being held at death.


Enterprise Investment Schemes qualifying conditions - key points:

To qualify for EIS, company must:

  • Be unlisted when EIS shares are issued, can be no rarrangement at the time to become listed (being quoted on AIM is ok). 
  • Must have permanent establishment in UK
  • Company must have fewer than 250 (500 KIF) full time employees
  • Gross assets must not be more than £15m before investment or £16m after investment.
  • Company must be carrying out a qualfying trade or be parent company of trading group. Excluded trades include dealing in land, commodities, financial instruments, property development.
  • Cannot raide more than £5m (£10m KIF) in past 12 months from EIS or VCT investment
  • £12m cap (£20m for KIFs) total investment. 


Seed Enterprise Investment Scheme (SEIS) taxation treatment - key points:

  • Incoe tax relief given as tax-reducer up to a maximum of £50,000 (Half of maximum £100,000 investment permitted in current tax-year). Relief withdrawn if shares disposed of within three years. 
  • Relief can be carried back a year - shares then treated as having been issued in the same year. 
  • Income tax relief claim can be made up to five years after 31 Jan following tax year of investment. 
  • Half of chargeable gains reinvested in SEIS that qualify for income tax relief are exempt from CGT, up to £50,000, same as for income relief. 
    • SEIS reinvestment can take place before disposal providing reinvestment and disposal occur in same year. 
  • Investment must be in ordinary shares with no prior exit strategy in place.
  • Providing not otherwise connected, investor maybe a paid director of company where shares subscribed for. 


Seed Enterprise Investment Scheme (SEIS) qualifying conditions - key points:

Company must fulfil following conditions to qualify for SIES:

  • Company must have been trading for less than two years, carrying out a genuine trade, gross assets of less than £200,000 and fewer than 25 full time employees. 
  • Company must be unquoted at time of share issue.
  • Must be carrying out a qualifying trade. 


Social Investment Tax Relief (SITR) taxation treatment - key points:

  • Income tax relief at 30% as a tax reducer, up to a maximum investment of £1,000,000 per tax year. Relief is withdrawn if investment sold within three years. Investment can be carried back one year if this is more advantageous. 
  • Can invest in debt as well as equities
    • Debt must be unsecured and rank lower than other debt on wind up
  • Disposal proceeds exempt from CGT
  • Can be used to defer gain from CGT
  • Org concerned must have
    • 'defined and regulated' social purpose
    • fewer than 250 employees
    • assets no more than £15m
    • raised no more than £1.5m in lifetime