Personal Income

Question 1

The income tax calculation

Answer 1

The tax year for 19/20 is the 6th April 2019 to the 5th April 2020. Total taxable income for the year goes into the income tax calculation

Income tax pro-forma
3 columns - non savings income, savings income and dividend income

Question 2

Personal allowance

Answer 2

Only income in excess of the PA is taxable
The PA is £12,500 (in tax tables)
Usually set off in the order of non savings income, savings income and then dividend income.
PA is reduced if you earn over £100,000
The formula is ANI - £100k / 2
ANI is net income, less the gross amount of gift aid donations, less the gross amount of personal pension contributions

If ANI is over £125k there is no PA
All UK residents are entitled to a PA

Question 3

Income tax pro forma - calculation of tax

Answer 3

Tax on :
Non savings income      x
Savings income              x
Dividend income            x
Less :
Tax reducers (VCT, EIS, SEIS, SITR, MCA, MA)
Add :
High income benefit charge  x
Annual allowance charge for pensions  x

Total income tax liability X
Less :
Tax deducted at source x

Income tax payable/ repayable X/(X)

Question 4

Tax deducted at source

Answer 4

Some income tax is deducted at source so the taxpayer receives an amount after tax is paid.
Gross amount of the income is included in the calculation of taxable income.
Tax deducted at source reduces the income tax liability to see how much tax is still payable or repayable.
Examples are salary (PAYE), interest on loans to UK company’s and income received from trusts

Question 5

Exempt income (tell examiner if something is exempt)

Answer 5

• Income from ISAs
• gambling winnings
• NS&I savings certificates
• premium bond winnings
• some social security benefits
• dividends on first £200,000 of VCT shares acquired in any tax year
• gifts
• maintenance payment receipts
• some compensations for lots of job (up to £30k)

Question 6

Income tax rates

Answer 6

Non savings income and savings income :
Basic rate band - up to £37,500 @20%
Higher rate band - £37,501 to £150,000 @ 40%
Additional rate - above £150,001 @45%

Dividend income :

Question 7

Scottish taxpayers

Answer 7

Scottish taxpayers pay Scottish income on their non savings income and not savings income and dividend income.

The personal allowance of £12,500 and it’s reduction where ANI is more than £100,000 applies to all UK taxpayers

The rates are in the tax tables

Question 8

Welsh taxpayers

Answer 8

Welsh taxpayers pay Welsh income tax on their non-savings income from April 6th 2019.
For 2019/20, Welsh taxpayers pay income tax using the same rates and threshold as other UK (not Scottish) taxpayers.

No calculation required for Welsh taxpayers

Question 9

Savings income

Answer 9

Interest from UK banks and building society accounts, notional savings and investing accounts and government stocks (guilts) is received at gross with no tax being deducted at source.
An individual has a personal savings allowance which is £1,000 for a basic rate taxpayer, £500 for a HR and £0 for an AR taxpayer.
Interest within the savings allowance is still taxable income, but at 0% and can impact which tax band an individual is and if they have a restriction on their PA.
An individual is also entitled to a starting rate band of £5,000 which tax is also charged at 0%. However this is only where the taxable non-savings income is less than £5,000.

For Scottish taxpayers it is calculated the same way. When calculating you compare their taxable income to the normal basic and higher bands of £37,500 and £150,000. The available savings allowance is determined using UK bands.

Question 10

Dividend income

Answer 10

You receive a dividend allowance of £2,000, this applies to all taxpayers.
Dividend income within the allowance is still taxable income (@0%), and still has an impact on the individuals tax band.
Scottish taxpayers are treated the same as other UK taxpayers on their dividend income.
An individual is entitled to both the dividend allowance and the savings allowance, but the amount of dividend income can effect the amount of the savings allowance.

Question 11

Stock dividends and income from unit trusts

Answer 11

A stock dividend (aka scrip dividend) is the offer of additional shares in the company instead of a cash dividend.
If an individual receives a stock dividend, they will be raved on the cash dividend (for example the cash dividend that would have been received had the stock dividend option not been taken). This is taxed at normal dividend rates.
Distributions from unit trusts will either be in the form of interest or dividends. Depending on the nature, the income will be taxed as for other dividends or interest.
Interest distributions from unit trusts are received at gross

Question 12

Allocation of the PA

Answer 12

The usual order of allocating the PA is not always the best.
Where only part of the PA can be allocated against non savings income, the remaining PA should be allocated against the savings income to the level of taxable savings income, to the amount of the starting rate band and the savings allowance.
Any excess PA should be allocated against dividend income.
If you take savings income less than £6,000 you are wasting you PA

Question 13

Income from trusts

Answer 13

Interest in possession trusts -
Amounts received will be allocated between non savings, savings and dividend income as if the income was received directly from the paying source.
The trust last tax at the base rate. This means you need to gross the amount of income (amount received x 100/80 or 100/92.5), this must be included in the computation.
The tax paid by trustees is then deducted from the individuals liability to arrive at their tax payable/ repayable amount

Discretionary trusts -
Income always treated as non savings income
Income received has been taxed at AR
Need to gross up the amount (amount received x 100/55) and tax credit is fully repayable

Question 14

Deductible payments

Answer 14

Qualifying loan interest, which are - loans taken out to buy shares in a close company (which is a company with less than 5 people and you have more than 5% of shares).

• buy partnership interest
• buy employment plant and machinery (4 years)
• buy shares in an employee owned company or invest in a cooperative

Deduction restricted to the higher of 25% adjusted total income or £50,000

Gifts to charity - quoted shares or land/buildings, use market value

Question 15

Charitable donations

Answer 15

Cash donation via gift aid
carry back 1 tax year and claim by 31 Jan in the year of gift.
You pay 80%, HMRC will pay 20%.
Extend the basic rate and the higher rate by the gross amount.
For example if you make £3,600 GAD/PPC.
3600 x 100/80 = 4500. Therefore you extend the rates by 4500.
You also deduct this from net income to arrive at ANI for PA purposes

Question 16

Scottish taxpayers - GAD

Answer 16

GAD are made net of the basic rate of tax for all taxpayers, including Scottish taxpayers.
You use the basic rate of £12,444, intermediate of £30,930 and higher of £150,000 rate limits to be extended by the gross amount of donation.
The starting limit of £2,049 is NOT extended by the gift aid donation

Question 17

Tax reducers

Answer 17

VCT - relief of 30% x investment. Max of £200,000

EIS - relief of 30% x investment. Max £1,000,000 or £2,000,000 if knowledge intensive company.

SEIS - 50% x investment. £100,000 max

SITR - 30% x investment. £1,000,000 max

MCA - 10% x £6,450 min and 10% of £8,915 max. Need to have been born before 6 April 1935.

MA - relief of £1,250. Not available if claimed MCA

Question 18

MCA

Answer 18

Available if spouse born before 6 April 1935
Relief is a tax reduced of 10% of the qualifying allowance.
Max is 10% of £8,915
Max allowance is restricted if ANI of person entitled exceeds £29,600.
The abatement is 1/2 x (ANI - £29,600).
The min allowance after abatement is £3,450.
Marriages before the 5 Dec 2005, the MCA is given to the husband. After the date it is given to the partner with the highest adjusted net income

Question 19

Transferable marriage allowance

Answer 19

MA is 10% (rounded time nearest £) of personal allowance - £1,250 in 19/20.
Available to married couples and civil partners.
Transferrers PA is reduced by £1,250, whereas the recipient is entitled to an income tax reducer at 20% (not an increased PA)
Neither transfer nor recipient can be liable to tax above the basic rate (intermediate for Scotland)
Not available if claiming married couple allowance. If both MCA and TPA can be claimed, MCA is preferable to claim

Question 20

Spouses and civil partners

Answer 20

Each spouse has own PA based on income
For Jointly held property, income is taxed 50,50. You can elect for income to be taxed based on actual proportions if different. Dividends from shares in close companies are always taxed in proportions.
Children get a PA.
If income from parent is a voice £100, it is taxed on the parent not the child

Question 21

Qualifying care relief

Answer 21

An individual providing foster care will not be taxed on receipt of income for providing care if they do not exceed the qualifying amount.
If exceeds qualifying amount the individual chooses to be taxed on the gross receipts less the allowable expenses or can elect to be taxed on the gross receipts less qualifying amount (simple method)
The election to apply for the simplified method should be made by 31 Jan following the tax year concerned. 31 Jan 2021 for 19/20 year.
Qualifying amount is £10,000 per annum and £200 a week for each child under 11 and £250 for over 11

Question 22

Property income

Answer 22

Individuals with gross property income not exceeding £150,000 will calculate the profits using the cash basis.
The £150,000 limit is reduced proportionately if the property business is carried for only part of the year.
Even if the cash basis is the default method the taxpayer may elect to use the accruals basis.

Cash basis - income + expenses are accounted for when money is received or paid and the different gives the property income profit or loss for the year.
Accruals basis - basis uses the rents available (which is the rental income that relates to the tax year, whereas expenses payable are those that relate to the tax year, which may differ to when the cash is actually paid or received), and expenses payable to determine the profit or loss for the year

Question 23

Property income - allowable expenses

Answer 23

Expenses can be deducted from the cash and accruals basis if they are incurred ‘wholly and exclusively’ for the property business.
For example :
- Loan interest to buy/ improve property
- Maintenance
- Council tax and water rates
- Repairs to the property
- Insurance
- Motor expenses
- Advertising for tenants and letting agents fees
- Staff
- Plant and machinery used in property business (either amount paid or capital allowances) but not furniture.
- Replacement of domestic items in respect of furnishings in a residential property - relief restricted to cost of equivalent replacement
- Expenditure restricted where related to private use by landlord

Question 24

Property income - Motor expenses

Answer 24

Landlords are allowed to claim a statutory flat rate expense for motor expenses incurred in their property business instead of having to claim the business proportion of the actual expenses incurred.
Flat rates are :
- 45p per mile for the first 10,000 business miles
- 25p per mile thereafter
Flat rate covers the cost of purchasing, running and maintaining the vehicle
Incidental expenses like parking and tolls are allowable if they relate to the property business

Question 25

Finance cost restrictions (property income)

Answer 25

Interest relief is allowed where the individual takes out a loan to purchase or improve the property that is being let. From 2017/18 interest relief on let residential properties has been restricted. Intention is to restrict the tax relief to the basic rate of tax. In 2019/20, 75% of the interest will be subject to the restriction. The interest not subject to the restriction (25% in 2019/20) will be deducted as normal in calculating the amount of property income, whereas the restricted amount, 75% will be a tax reducer at 20%. The restriction does not apply to the letting of commercial properties or furnished holiday lettings. (Deduct 25% of interest from property, other 75% is a below the line relief at 20%). The amount of the tax reducer at 20% will be based on the lower of : - interest not allowed as a deduction from the property income (75%) - property income for the year less property losses brought forward - adjusted total income (net income - savings income - dividend income - PA) - any amount unused as a tax reducer for year is carried forward and added to the following years interest eligible for relief

Question 26

Property business losses - IT reliefs

Answer 26

Calculate the profit/ loss for each property. Offset the current year profits/losses to obtain profit/ loss (UK properties are treated as separate businesses to overseas properties. If loss, you can carry forward and offset against profits from the same property business UK losses against future UK profits, overseas against future overseas profits

Question 27

Property allowance

Answer 27

Allowance of £1,000 per tax year, if gross income does not exceed this the income is not charged to tax. An individual can elect for this relief to not apply, which is beneficial where a loss has arisen. If it is greater than £1,000 then you can either deduct allowable expenses or deduct £1,000 from the income. Both elections must be made no later than the first anniversary of 31 Jan following the tax year for which the election is made. For jointly owned property the allowance is available to each individual.

Question 28

Premium on grant of a short lease

Answer 28

Short lease

Question 29

Rent a room relief

Answer 29

If gross rents

Question 30

Furnished holiday lettings (FHL)

Answer 30

They are let on a commercial basis (to promote tourism), in the UK or any other EEA state (Europe, except Switzerland, Norway and San Marino) Have to be available for short term letting for 210 days and actually let for 105 days. Occupation by the same tenant for more than 31 consecutive days will not compromise the criteria, as long as the letting does not exceed 155 days in the tax year. Advantages : - no finance restrictions (full deduction) - capital allowances for furniture - earnings for pension contributions - ‘earned income’ - CGT business asset reliefs If two or more properties each pass the 210 days availability tests actual occupation can be averaged to pass 105 day test. If a property was FHL one year but not the next, as it wasn’t let for enough days you can elect for it to continue to being FHL for another year. Elect by the first anniversary of 31 Jan following first year condition wasn’t met. Losses can only be offset against income from FHL businesses and not against general property business profits. UK losses and EEA FHL property losses are kept separate. - UK FHL losses against UK FHL profits - EEA FHL losses against EA FHL profits

Question 31

Real estate investment trusts

Answer 31

A REIT is a special type of company which invests in property. It’s property income and gains are exempt from corporation tax Dividends are paid by REITS out of its tax exempt property income or gains are treated as UK property income in the hands of the shareholder and taxed accordingly at non savings rather than dividend rates. Such amounts are received net of 20% tax. Therefore they need to be grossed up by 100/80 in the the recipients income tax computation and the 20% credit gets deducted at the foot of the income tax computation in the calculation of income tax payable. Dividends paid out of the non tax exempt business of the REIT are treated as normal dividends. ``` Employment income proforma Salary x Bonus/tips x Benefits x Less : allowable deductions (x) This equals employment income ```

Question 32

Vouchers

Answer 32

Taxed on the cost to the employer (less amounts paid by employee). Childcare vouchers- Where employee joined the employee childcare scheme before 6 April 2011, the first £55 a week are exempt. Where employee joined between 6 April and 5 Oct 2008 the level of relief was BR taxpayer - first £55 a week exempt HR taxpayer - first £28 a week exempt AR taxpayer - first £25 a week exempt Employee determines relief available at the start of the tax year by estimating the employees relevant from the employment for a year, other income is ignored

Question 33

Tax free childcare scheme

Answer 33

Parents set up an online account (separate for each child) which is used too lat for approved childcare under the scheme operated by the government with no employer involvement. Person opening the account must be in paid work (min 16 hours a week) and have an ANI not exceeding £100,000 Contributions into the account get a 25% top up subject to a maximum of £2,000 (£4,000 for a disabled child), per annum per child. Top up payments can be made until the 1 September following their 11th birthday or 16 if the child is disabled If the individual remains a member of their employee childcare voucher scheme they are not entitled to participate in this scheme

Question 34

Accommodation benefit

Answer 34

Higher of the annual value (market value of rent) or the rent paid by the employer, which is calculated by: Rent paid + lease premium / length of lease, where the lease of less than or equal to 10 years is entered into Additional charge (only if you own the property) (Cost - 75000) @ the official rate of interest (2.5%) If the employee occupies more than 6 years after purchase by the employer, you use the market value at the date of first occupation of more than the value of the cost. Include capital improvements of incurred before the start of the tax year These are exempt if the accommodation is job related. Accommodation is job related if: Necessary for proper performance of employment (care teacher/boarding school teacher) Customary to provide and enables employee to perform duties better (police house) Provided for security reasons (soldiers) Directors accommodation is only job related if it is provided for security reasons

Question 35

Additional accommodation expenses

Answer 35

General living expenses - cost to employer Furniture - cost x 20% Council tax/ water rates - taxable in full (exempt if job related) The total benefit is limited to 10% of other earnings from employment if job related accommodation

Question 36

Loans (95-96)

Answer 36

Written off - taxable amount = amount written off Interest free/low interest - only if less than £10,000 There is two ways to calculate this : Normal method : Loan @ start + loan @ end / 2 ``` Strict method (HMRC or taxpayers election) Loan interest @ 2.5% x Less interest paid x This equals the taxable amount. This is done on a monthly basis ```

Question 37

Cars and fuel (97-100)

Answer 37

Car benefit 2019/20 - list price x co2% You include optional accessories if added later and above £100 It can be reduced by capital contribution by employee, max £5,000 Time apportion if unavailable for more than 30 consecutive days. You less contributions towards private use. 0-50g/km = 16% taxable benefit 51-75g/km = 19% 76-94g/km = 22% 95g/km + = 23% + 1% for every whole 5g/km over 95g/km. You also add 4% for a diesel vehicle unless is meets kot 2 standard. The max is can be is 37%. Fuel for private mileage, taxable benefit : £24,100 x co2 % x x/12 No reduction for partial reimbursement of fuel for private use.

Question 38

Vans and commercial vehicles (101)

Answer 38

£3,430 or £2,058 if no co2 emissions. All vans where private use not incidental. £655 for private fuel No benefit if private use is insignificant or used only for work to home private use.

Question 39

Use of own car (102-03)

Answer 39

HMRC authorised mileage scheme First 10,000 business miles: 45p per mile Additional miles: 25p per mile Paid x £10,000 @ 45p (x) Extra @ 25p (x) Total X/(X) If positive it is added to employment income If negative deduct from employment income

Question 40

Other assets with private use(104-05)

Answer 40

The benefit is the higher of: 20% of MV when first provided or the rent paid by the employer Time apportion and less employee contributions

Question 41

Asset acquired by employee (106-07)

Answer 41

Benefit of assets being gifted to employee after personal use. Higher of market value of asset when ownership transferred, less any price paid by employee or employer. Or Market value of asset when first provided, less any benefits charged under 20% rule. Less any price paid by the employee or employer

Question 42

Tax free benefits (not exhaustive) (109)

Answer 42

``` Trivial benefits (less than £50 must be for performance) Bicycles provided for commuting Employer pension contributions Mobile phones Recommended health treatment First £8,000 of removal expenses ``` (REMEMBER TO TELL EXAMINER WHEN SOMETHING IS EXEMPT)

Question 43

Allowable deductions (110)

Answer 43

Subscriptions to professional bodies Payments to charity under payroll deduction scheme Wholly, exclusively and necessarily for the performance of duties, if it has two purposes it is not allowed Contributions to approved occupational pension schemes

Question 44

Travel expenses (111)

Answer 44

Normal commenting - never Business travel - only in performance of duties, for example a client visit Site based - temporary workplace, all travel of less than 24 months @ one site / workplace ( and subsistence and accommodation of overnight stay required)

Question 45

Reimbursed business expenses (112)

Answer 45

Payment or reimbursement of business expenses will be exempt from tax if the employee was able to deduct the same amount when calculating their taxable earnings. Other words exempts income. If employer reimburses non allowable expenses the exemption does not apply If an expense is only partly allowable, exemption will not able and employee will claim for the allowable element through their tax return. If allowable expense element is identifiable, the exemption will apply to this amount and only non-exempt amount is taxable.

Question 46

Round sun allowance (113)

Answer 46

Paid to an employee in advance to cover their expenses for a particular period. It only covers qualifying business expenses, will be exempt from tax. If there is only profit element or non qualifying expenses it will be subject to tax in first instance and employer will claim for the allowable element through their tax return If an employee spends part of it on client entertaining, they will not be allowed to claim a deduction as the expense will not be disallowed in arriving at the employers taxable profits

Question 47

Termination payments (115)

Answer 47

There is 3 possible treatments Fully taxable - payment past present and future services, reasonable expectation and contractual entitlement (can include PILON). Restrictive covenants/ unapproved payments on retirement. Usually anything contractual and expected you pay income tax and NI -30k exempt - ex-gratia payments Fully exempt - payments on death and injury. Payments to and from registered pension scheme. Legal costs covered following action to obtain compensation for loss of office

Question 48

Payments in lieu of notice (PILON) (116)

Answer 48

Where an employer terminates an employment within the applicable notice period this is usually compensation by a termination payment Where termination payment is made before the expiry of the contractual notice period, payment needs to be divided into: - post employment notice pay (PENP) - taxable as employment income - amounts not PENP - taxed under rules of termination payments

Question 49

Post employment notice pay (PENP) (117-18)

Answer 49

PENP is equivalent to basic salary the employee would have earned had they remained employed in the notice period PENP is also treated as earnings for NI purposes Any payment in excess of the PENP or non contractual will be treated as a termination payment so the £30,000 exemption applies. The amount treated as a termination payment will not be treated as earnings for NI purposes even if the amount exceeds the £30,000 income tax exemption limit.

Question 50

Optional remuneration arrangements (119)

Answer 50

``` Arrangements whereby an employee either gives up the right to receive earnings in exchange for a benefit or has the choice between a cash allowance or a certain benefit. The employee will be taxed on the higher of the cash amount that they would receive or the taxable benefit amount. Relevant amount is also chargeable to class 1A NIC Certain benefits are excluded from these rules (for example provision of pensions advice, tax free employer provided childcare and cars with ultra low co2 emissions. In these cases the taxable amount is either exempt or very low benefit value ```

Question 51

Pension regime (121)

Answer 51

Pension is funded by and for any individual or employer. Gross contribution eligible for tax relief is up to higher of 3600 or 100% x earnings. Annual allowance charge if exceed available annual allowance Employer uses annual allowance, deduction for ER, tax free benefit for EE

Question 52

Tax relief - individual contributions (122-3)

Answer 52

Personal pension scheme - contributions paid net of basic rate tax (20%). Higher rate and additional rate relief, extend BR and HR band by gross contribution Gross pension contributions deducted in arriving at ANI for personal allowance purposes Occupation scheme - allowable deduction from employment income

Question 53

Annual allowance (124-5)

Answer 53

Annual allowance of £40,000 (gross). Can carry forward unused allowance for 3 years if member of registered pension scheme in those earlier years. Current year allowance is deducted in priority to brought forward allowance Unused allowance brought forward on a FIFO basis

Question 54

Annual allowance charge (126-7) - pensions

Answer 54

If total contributions exceed the available annual allowance, individual is subject to AAC on excess Notionally added to taxable income to determine the rate of charge Falls in BR band - 20%, HR band 40% and AR band 45% Included in tax computation after calculating tax due on taxable income and deduction of tax reducers

Question 55

Tapered annual allowance (128-30)

Answer 55

Annual allowance is reduced where threshold income exceeds £110,000 and adjusted income exceeds £150,000. Allowance cannot be reduced below £10,000. Threshold income = net income, less gross personal pensions contributions Adjusted income = net income plus employer occupational contributions and all pension contributions made by the employer Reduction is £1 for every £2 that adjusted income exceeds £150,000

Question 56

Retirement benefits (131-132)

Answer 56

From age of 55 individuals can take benefits from the pension fund in a flexible manner. Alternatives are : Leave the pension untouched and make contributions until 75 or whenever benefits are to be taken. Take the entire amount out as a cash lump sum, 25% is tax free and the other 75% is taxable as non savings income Purchase an annuity, up to 25% of the pension fund will be taken as a one off tax free amount and the remainder will be used to purchase a guaranteed annual pension which will be taxable as non savings income Flexi-access drawdown - up to 25% of pension fund taken as a one off tax free amount with remainder being invested by the pension provider in a variety of investment funds which individual can access at any time and taxed as non savings income. The individual has choice to how much income they receive each year (unlike an annuity, which gives fixed annual income). However there is no guarantee the income continues for life, unlike an annuity. Take small sums from pension fund as and when required. Each cash withdrawal, 25% of the amount is tax free and the remaining 75% being taxed as non savings income

Question 57

Lifetime allowance (133-4)

Answer 57

Lifetime allowance for 2019/20 is £1,055,000 If the value of the pension fund exceeds the lifetime allowance, the excess will be subject to a charge: - 55% of the excess is taken as a one off lump sum - 25% of the excess is left in the pension fund to create a higher annual pension which itself will be subject to tax on withdrawal as non savings income

Question 58

Child benefit (136)

Answer 58

Paid to main career, usually mother, tax free Paid every 4 weeks 1st child £20.70 a week, second and subsequent is £13.70 a week. Paid for child up to 16 or up to 20 if in some form of recognised education or training

Question 59

High income child benefit charge (137-8)

Answer 59

Benefit withdrawn where claimant or partner have ANI > £50,000. Withdrawal rate is 1% of benefit for every complete £100 of ANI > £50,000 All lost where ANI > £60,000 or more Clawback based on income of higher earner Recovered by adding to tax liability after deduction of tax reducers if higher earner Can notify HMRC for the child benefit not to be paid

Question 60

Individual savings accounts (140)

Answer 60

Types - stocks and shares ISA, cash ISA, Innovative finance ISA Limits - max total investment is £20,000 a year and can be a mix of all ISAs Tax testament - no IT on income, no CGT on capital growth Conditions - need to be over 18 (or 16 for cash ISA) and a UK resident

Question 61

Lifetime ISAs (141)

Answer 61

Introduced from 17/18 for individuals between 18 and 40 to save for buying their first home or retirement. Max total investment is £4,000 per tax year, up to age of 50, can be a combination of cash and stocks/shares Contributions qualify for 25% tax free bonus from government Buy first home worth up to £450,000 or withdraw tax free after 60 If withdraw before 60 (other than for first home),bonuses including interest/ growth will be withdrawn and 5% charge applied

Question 62

Help to buy ISAs (142)

Answer 62

Save for deposit on first home Initial investment up to £1,000, then £200 a month When property purchased the government supplements the amount with a tax free bonus of 25% (max £3,000), provided the balance is at least £1,600 Savings used to buy the first home up to the value of £250,000 or £450,000 in London Can have help to buy ISA and lifetime ISA only one can be used to buy the first home Only available until 30 Nov 2019

Question 63

Junior ISAs (143)

Answer 63

Available for UK residents below 18 Types - stocks and shares account, cash account Limits - combined total investment of £4,368 per tax year across both types of account Tax treatment - withdrawal not permitted, converted into a normal ISA at age 18

Question 64

ISAs transferred on death (144)

Answer 64

Applies to spouses and civil partners On death of first spouse/ CP, surviving spouse/ CP had an additional permitted subscription equal to the value of the decreased ISA investments The investment has to be made within 3 years of the death and is in addition to the surviving spouses own annual subscription limit

Question 65

NIC overview (146)

Answer 65

Class 1 - per employee primary, employer secondary, cash earnings salary and vouchers Class 1A - benefits, employee only Class 1B - employer, PAYE settlement agreement Class 2 - sole trades, fixed amount, around £3 a week (not really relevant to the course) Class 3 - voluntary if you want to pay more Class 4 - sole trader on profits

Question 66

NI contributions (147)

Answer 66

Class 1 EE primary threshold Up to 8632 @ 0%, up to 50000 @ 12% and over 50,000 @ 2% ER : up to 8,632 @ 0% and above @ 13.8% If consistent pay, use annual salary BUT if it differs use monthly/weekly pay

Question 67

Class 1 earnings (148-9)

Answer 67

Benefits that can be surrendered for cash, eg premium bonds Eg salary, bonuses (cash) Vouchers - not childcare and appropriate amount Payment in readily convertible assets (RCAs) - shares in listed companies, gold bullion

Question 68

Class 2,3 and 4 (150-2)

Answer 68

Class 2 - weekly contribution of £3, payable by self employed. Expedition available where profits less than £6,365 pa Class 3 - voluntary where not paid enough class 1 or 2 contributions for full state pension. £15 per week Class 4 (not really in exam) - payable by self employed in respect of taxable profits, 9% on profits between lower limit (8,632) and upper limit (50,000), 2% on profits above upper limit

Question 69

Self assessment (154-5)

Answer 69

You need to tell HMRC that you need a return, if not you can get a penalty The notification deadline for the 19/20 tax year is the 5 Oct 2020. UNLESS No higher rate liability and all income is subjected to PAYE or has been deducted at source or is a UK dividend income or the tax return has been issued

Question 70

Submitting tax returns (156)

Answer 70

Submission deadline for 19/20 tax year is 31 Oct for paper version (or 3 months after the issue of notice, if later) and the 31 Jan 2021 (or three months after the issue of notice, if later) HMRC can amend less than 9 months of receipt Taxpayer can amend less than 12 months after 31 Jan deadline (or less than 12 months after the issue of notice)

Question 71

Payment of tax (157)

Answer 71

Due date 31 Jan following tax year. If large (more than £1,000 or more than 20% net collected elsewhere (ie PAYE) you nerd to make payments on account, for next years liability (50% of previous year liability) Payment on account 1 - 31 Jan in the tax year Payment on account 2 - 31 July after the tax year On 31 jan following year = pay balance POA does not include CGT or class 2 NIC

Question 72

Interest on overdue tax (158-9)

Answer 72

Interest @ 3.25% Interest on over reduced POAs charged on lower of : 50% of final liability The amount the payment on account was reduced by Repayment interest @ 0.5%

Question 73

Penalties (160-1)

Answer 73

Deliberated and concealed - 100% max fine. Min fine is 30% for unprompted disclosure and 50% for prompted disclosure Deliberated but not concealed - 70% max, unprompted disclosure 20% min, prompted disclosure 35% min Any other case - 30% max, unprompted disclosure min is 0% for less than 12 months and 10% for more than 12 months. For prompted disclosure min is 10% for less than 12 months and 20% min for more than 12 months For a late return - immediate £100 penalty. Then a daily penalty of £10 for 90 days. Then 5% of liability added to tax gets added or £300 if greater. If more than 12 months, 70% of deliberate holding of info, 100% if deliberate and concealed, 5% in all other cases Late payment (not for late POA) - 5% of tax unpaid at that date for more than 30 days. Further 5% added for 6 months after days and another 5% added for being a year late

Question 74

Penalties - incorrect returns (162)

Answer 74

Deliberate and concealed - 100% max penalty, min penalties for unprompted disclosure is 30% and for prompted disclosure 50% Deliberate and not concealed - 70% max pen, min pen for unprompted disclosure is 20% and 35% for prompted disclosure. Being classless the max penalty is 50%. The min penalty for unprompted disclosure is 0% and for prompted disclosure is 15%

Question 75

Simple assessments (163)

Answer 75

HMRC are allowed to make an assessment of an individuals IT or CGT liability without the individual having to complete a tax return HMRC must have sufficient information to make the assessment but cannot be made if the individual has filed their return The assessment shows the total tax liability for the year and the amount payable The individual has 60 days to query saying the reason for believing the assessment is incorrect HMRC will then consider the query and give a final response in writing. The taxpayer can appeal the final response

Question 76

Tax reducers | Enterprise investment scheme (165-9)

Answer 76

You bit shares in a fairly small company (less than 250 staff and net assets less than £15 million), unquoted trading company. Get two types of relief IT relief - deduction from tax liability - 30% x cost of shares Max investment is £1,000,000 cannot create a refund and you can carry it back one year If you keep them for 3 years you keep the relief. If you sell them within 3 years you pay back the relief. The Lower of: proceeds x rate of relief or Cost x rate of relief CGT relief If sell less than 3 years the gain is taxable If sell more than 3 years the gain is exempt If sell at a loss it is always allowable

Question 77

Seed enterprise investment scheme (170-3)

Answer 77

But newly issued shares from a very small (less than 25 staff and net assets less than £200k) unquoted trading company. IT relief - 50% x cost of investment, max investment is £100k Need to keep for 3 years, if not clawback in relief. CGT relief : if sell less than 3 years it is taxable If sell more than 3 years the gain is exempt Losses are allowable

Question 78

Venture capital trusts (174-5)

Answer 78

They reduce risk. You buy a VCT they invest in different EIS companies. IT relief - 30% x cost of shares, max investment is £200k CGT is always exempt Min holding period is 5 years, if less than 5 years then you lose pay back relief

Question 79

Social investment tax relief (SITR) (176-9)

Answer 79

You invest in a social enterprise, eg a registered charity. They have less than 500 staff and gross net assets less than £15 million and only have 51% subsidiaries. IT relief - 30% x investment, max investment is £1,000,000 Similar to EIS If not held for 3 years, part of the relief of all is withdrawn

Question 80

Employment income - share remuneration (181)

Answer 80

Shares schemes - employees get offered shares in employing company 2 types - direct to staff and company offers options to buy shares 2 categories in both types - Tax advantages schemes - HMRC like this, however there are conditions Non tax advantaged - no conditions but fewer benefits

Question 81

Direct to staff - non taxed advantaged

Answer 81

On receipt (when you set them), your taxed in employment income = MV @ date given x Cost (x) = employment income X ``` When pay CGT Proceeds x Cost (x) Employment income (x) CGT taxable X ```

Question 82

Taxed advantaged schemes

Answer 82

``` Some schemes are Share incentive plans (SIP) Save as you earn (SAYE) Company shares option plans (CSOP) Enterprise management incentive (EMI) ```

Question 83

Tax advantaged scheme - share incentive plans (SIP)

Answer 83

Employer puts shares in a trust, shares held in trust until withdrawn from plan, shares awarded to employees. Types of shares - Free shares - bought by employee, max £3,600 per tax year Partnership shares - bought by an employee, max 10% of salary per tax year or £1,800 if lower. (Deductible for tax employment income) Matching shares - awarded to employer, up to 2 for every partnership share purchased Dividend shares - reinvest dividends in additional plan SIP tax consequences Free shares - taxed at MV at removal is sold within 3 years. Taxed at the lower of MV at removal or MV at award if sold between 3 and 5 years Partnership - the salary used is not taxable. If sold within 3 years they are taxed at MV at removal. If sold between 3 and 5 years, taxed at the lower of MV at removal or the salary used to buy shares Matching shares - if sold within 3 years, taxed at MV on removal. If sold between 3 and 5 years, taxed at the lower of MV at removal or the MV at award. Dividend - award is dividend tax free. If sold within 3 years s the original dividend is taxable. If sold after 3 years it is not taxed

Question 84

Tax advantaged schemes - Save as you earn (SAYE)

Answer 84

Employer grant options to employee, who has a 3 or 5 year contract. Between £5 and £500 per month for 3 or 5 years. Get cash and interest bonus, tax free. Tax consequences Grant of option - no IT consequences Exercise of option - no IT consequences, provided price set under option was more than 80% of the MV at grant

Question 85

Tax advantaged schemes - Company shares option plans (CSOP)

Answer 85

Employer grants option to employee Max value of shares under option is £30,000 Price of shares = market value at grant Must exercise between 3 and 10 years from grant No IT consequences on grant/ exercise

Question 86

Tax advantaged schemes - Enterprise management incentive

Answer 86

Employer grants option to employee Max value of shares @ grant under option (including shares under CSOP < £250,000) Price of shares can be < MV @ grant Must exercise within 10 years from grant in order to obtain favourable tax treatment on exercise Tax consequences Grant of option - no IT consequences Exercise of option - price of shares > and equal to MV @ grant means no IT consequences - prices of shares < MV @ grant, taxed on the lower of: MV @ grant - price paid MV @ exercise - price paid charged to IT

Question 87

Overseas - definition of residency (196)

Answer 87

UK residence means you are taxable in the UK on worldwide income and gains, unless overseas domiciled. Relief is given if foreign tax is also paid on the same income - double tax relief. Non UK resident - taxed on income arising in the UK, eg rent from UK property

Question 88

Statutory residence test (197)

Answer 88

Three tests : 1 - automatic overseas test, if satisfied they are non UK resident and you do not consider the other tests. If not satisfied you move to test 2 2 - automatic residence test If satisfied you do not consider test 3 and you are UK resident. If not satisfied move to test 3 3 - sufficient UK ties test If you meet the criteria you are UK resident

Question 89

Automatic overseas test (198)

Answer 89

Any individual is not resident in the UK for a tax year if they meet any of the following conditions. - any individual is resident in the UK in one or more of the previous 3 tax years and present in the Uk in the current tax year for less than 16 days - individual has not been resident in the Uk in the last 3 tax years and is present in the UK in current tax year for less than 46 days - the individual meets the working abroad condition, which is - working abroad for an average of at least 35 hours a week for the whole of the tax year And - present for fewer than 91 days in the tax years of which fewer than 31 days are spent working in the UK

Question 90

Automatic residence test (199)

Answer 90

An individual is resident in the UK for a tax year if they meet any of the following conditions: - individual is present in the UK for at least 183 days or more in the tax year - individual has a home in the UK for all of part of the tax year: They are present in their home for at least 30 days in the tax year, and There is a period of at least 91 consecutive days during which the individual has no home overseas or if they have a home overseas they are present for fewer than 30 days in the tax year - individual carries out full time work in the UK for a period of at least 365 days

Question 91

Sufficient UK ties test (201-02)

Answer 91

Where the individual does not meet either of the automatic tests, the number of days spent in the UK and the individuals ties with the UK are compared to determine if they are UK resident for the tax year. - individuals not resident in UK in any of last 3 years = arrivers - individuals resident in the UK in any of last 3 years = leavers For arrivers if they spend less than 45 days in the UK they are none resident. 45 - 90 days they need 4 ties, 91 - 120 they need 3 ties or more, 121 - 182 they need 2 ties or more and if they spend 183 days or more they are always resident For leavers is they spend 16 - 45 they need 4 ties, 45 - 90 days they need 3 ties or more, 91 - 120 they need 2 ties or more, 121 - 182 they need 1 ties or more. If they spend more than 183 days in the UK they are always resident

Question 92

UK ties (203)

Answer 92

Family - spouse and children Accommodation - available for continuous period, 91 days in the tax year and spent one night there or owned by close relative and spend 16 nights there Work Tie - worked in UK for 40 days in the tax year - Spent 90 days in UK in either or both of previous 2 years - country tie - where spend the most of your time, only relevant for leavers where resident in any of the last 3 years

Question 93

Domicile - permanent home (204)

Answer 93

There are 3 types of domicile 1 - domicile of origin - acquired from father at birth 2 - domicile of dependence - domicile of child under the age of 16 will follow the domicile of their father 3 - domicile of choice - individual with UK domicile must either leave the UK and settle permanently in another country, or if already abroad intend to remain in that country permanently or indefinitely

Question 94

Deemed domicile (205)

Answer 94

With effect from 6 April 2017 a non UK domiciled individual will be deemed to be UK domiciled in a relevant tax year for income tax and capital gains tax purposes if either: - the individual was born in the UK - the individual was born in the UK with a UK domicile of origin and - the individual is resident in the UK in the relevant tax year or The individual has been UK resident for at least 15 of the 20 tax years immediately preceding the relevant tax year, but not if - the individual is not UK resident in the relevant tax year, and - the individual has not been UK resident in any tax year from 2017/18 onwards