Key Facts

Question 1

The basic rate of tax on earned income is 20%. The higher rate of tax is 40%. There is also an additional rate of tax of 45% payable on taxable income in excess of £150,000.

Question 2

There is a 0% starting rate band of £5,000 for savings income, but this is not available if taxable non-savings income exceeds the £5,000 limit. If the starting rate is not available, then savings income is taxed at the investor’s marginal tax rates after applying the personal savings allowance.

Question 3

The personal allowance is deducted from income to arrive at the amount which is taxable. Pension contributions and gift aid payments reduce the tax liability for higher- and additional-rate taxpayers.

Question 4

Most savings income is paid gross.

Question 5

A personal savings allowance of £1000 is available for basic-rate taxpayers, with a £500 allowance for higher-rate taxpayers. Additional-rate taxpayers do not benefit from the personal savings allowance.

Question 6

A dividend allowance of £2,000 can be used to shield dividend income from tax. This is available for all taxpayers.

Question 7

Employees under State pension age (SPA) working in the U.K. have to pay Class 1 National Insurance contributions (NICs) if their income is above the primary threshold.

Question 8

Capital gains tax (CGT) is payable by U.K. investors at a rate of 10% for basic-rate taxpayers and 20% for higher- and additional-rate taxpayers. A portion of any gains made during each tax year is not subject to CGT (the annual exempt amount).

Question 9

Only net chargeable gains are taxable (i.e. chargeable gains less capital losses).

Question 10

Inheritance tax (IHT) only applies if the taxable value of a person’s estate when they die is over £325,000 (the nil rate band) (plus a further £175,000 if a main residence is inherited by children or grandchildren).

Question 11

IHT on death is levied at a rate of 40% on the excess above the amount of unused nil rate band (and residence nil rate band (RNRB)).

Question 12

It is possible for spouses and civil partners to transfer their unused nil rate bands at death to the estate of the surviving spouse or civil partner.

Question 13

A potentially exempt transfer (PET) is a lifetime gift that is free of IHT if the person who makes the gift lives for seven years after the gift is made.

Question 14

A person’s residence and domicile are different concepts and may influence their tax status. A person may be U.K. resident but not U.K. domiciled, or vice versa.

Question 15

Stamp duty land tax (SDLT) is a self-assessed tax on land transactions involving any estate, interest, right or power in or over land in the U.K. In Scotland and Wales, land and buildings transaction tax (LBTT) and land transaction tax (LTT), respectively, apply instead of SDLT.

Question 16

Tax relief on pension contributions is at the taxpayer’s marginal tax rate.

Question 17

A tax-free pension commencement lump sum (PCLS) of up to 25% can be taken from a pension fund upon retirement.

Question 18

Investments held within an individual savings account (ISA) are exempt from tax.

Question 19

UK collective investment schemes are exempt from tax on gains made within the fund. The tax treatment of dividend distributions from such funds is the same as the tax treatment of direct holdings of equities. For income funds, distributions are taxed as savings income not dividend income. Disposal of units/shares in collective investment are subject to CGT.

Question 20

Any proceeds from a qualifying life assurance policy are usually free of income and CGT for the original beneficiary.

Question 21

One-off or regular payments from a (single premium) U.K. life assurance bond for a basic-rate taxpayer usually incur no further income tax.

Question 22

An investor is allowed to take a payment from a life assurance bond of up to 5% of the original premium each policy year, until 100% is reached (20 years) without an immediate liability to income tax. Any gains on maturity/encashment (including any previous withdrawals) are taxed as income on maturity.

Question 23

For real estate investment trusts (REITs), any rental income and chargeable gains are exempt from tax at the REIT level, but are taxed at the investor’s marginal rate when they are paid as dividends.

Question 24

Investors in venture capital trusts (VCTs) obtain a tax reduction of 30% of the amount invested, provided they hold the investment for at least five years. VCT investments are exempt from CGT.

Question 25

Provided an enterprise investment scheme (EIS) qualifying investment is held for three years, an individual can reduce their income tax liability by an amount equal to 30% of the amount invested. No CGT is payable in the disposal of an EIS investment, provided the investor has held the shares for three years. The seed enterprise investment scheme (SEIS) provides 50% income tax relief for investment of up to £100,000 per tax year, and there is also a CGT exemption for 50% of any reinvested gains. There is also no CGT on the disposal of a SEIS investment.

Question 26

IHT planning often focuses on lifetime gifts, but most gifts into trusts are chargeable.

Question 27

The gift with reservation rules means that it is difficult to gift an asset and continue to enjoy an ongoing benefit.

Question 28

Income tax can often be mitigated by using investments where the investment returns are not treated as taxable income. Spreading ownership of investments between family members can also save income tax.

Question 29

CGT can be reduced by managing the timing of disposals to make the most of annual exempt amounts and capital losses.