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Chapter 1: The Regulatory Environment > Tax > Flashcards

Tax Flashcards

1
Q

When is the tax year

A

6th April - 5th April

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2
Q

When are tax changes made? (2)

A
  • In the autumn pre-budget by the Chancellor
  • Finalised in March budget
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3
Q

Why are tax years important?

A
  • To calculate income tax
  • Capital gains tax
  • Tax allowance changes/refreshes
  • Changes to financial products are often made and come into effect in the new tax year
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4
Q

When is the financial year?

A

1st April to 31st March

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5
Q

What are the 3 tests for automatic overseas residents?

A
  • There are 3 tests but only 1 needs to be met
    1. In the UK for fewer than 16 days in a fiscal year
    2. Not a resident in the UK during the previous 3 years - in the UK < 46 days a year
    3. Works full time overseas and visits the UK < 91 days a year (working no more than 30 days in the UK)
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6
Q

What are the 3 tests for an automatic UK resident?

A
  1. In the UK for at least 183 days a fiscal year
  2. Only home is in the UK - 91 days or more
  3. An individual works full time in the UK
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7
Q

What is the sufficient ties test? (3)

A
  • A tie that grants eligibility to residency:
  • Family tie
  • Accommodation tie
  • Work tie
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8
Q

What is the concept of residency based on? (4)

A
  • Nationality
  • Place of residence
  • Citizenship
  • Work
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9
Q

What is domicile?

A
  • Where an individual chooses to belong
    E.g. someone can have multiple residency but can only be domiciled in one place
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10
Q

What are the 3 different types of domicile under UK tax law?

A
  • Domicile or origin - acquired at birth, normally from the individuals father - does not have to be where the individual was born.
  • Domicile of choice - cannot be chosen until the individual is 16 years of age - changing domicile is not easy, it means the person has to cut ties with their previous domicile
  • Deemed domicile - an individual is deemed a UK domicile if they are a resident for 15 out of 20 consecutive fiscal years
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11
Q

Why is domicile important?

A
  • For determining income tax liability, especially inheritance tax liability
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12
Q

How are UK residents, UK res non-doms and overseas residents’ income taxed? (3)

A
  • UK resident - worldwide income and gains taxed on an arising basis
  • UK resident non-dom - UK income and gains on an arising basis. Overseas income is taxed on an arising or remittance basis if above £2,000. Remittance basis if below £2,000 a fiscal year
  • Overseas resident - UK income on an arising basis. Overseas income is not subject to tax

All income earned in the UK is taxed, regardless of status

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13
Q

What is a remittance basis? (2)

A
  • Overseas income will be taxed on a remittance basis when it is bought to the UK
  • If income and gains are over £2,000 there is a choice of between being taxed on an arising or remittance basis - if remittance basis is chosen, tax allowances are lost
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14
Q

How much is the Remittance Basis Charge and when does a UK res non dom pay this?

A
  • Individual is living in the UK 7 out of 9 years - £30,000
  • Individual is living in the UK for 12 out of 14 years - £60,000
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15
Q

What are the 3 ways income tax is collected for employees, self employed and savings/dividends?

A
  • Non-savings income - PAYE
  • Self employed - payments on accounts in 31 Jan in tax year and 31 July after tax year (50% of previous tax year liability)
  • Savings, dividends and rental income - self assessment - free calculation from HMRC before 31st Oct. Deadline for submitting tax returns in 31st Jan.
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16
Q

How long must tax self assessment be kept on record?

A
  • 5 years after 31st Jan following the end of the tax year
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17
Q

What 2 ways can statutory income be reduced?

A
  • Charity - donating with gift aid can allow claiming back tax
  • Pension contribution - basic amount of £3,600 and maximum of £60,000 a year. If pension allowances are unused, they can be bought forward for 3 years only. For those earning over £260,000 the pension allowance falls by £1 for every £2 earned.
  • If net income (after pensions and charity donations) is £200,000 person is exempt from tapered allowance
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18
Q

What is the personal allowance for non-savings income?

A

£12,570, however this is reduced once an individual starts earnings £100,000 at the rate of £1 for every £2 earned. Anyone earning £125,140 or more will not have a personal allowance

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19
Q

What is the marriage allowance?

A
  • When a person earns less than £12,570, they can transfer 10% of their personal allowance to their spouse if they are a basic rate tax payer up to £50,000.
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20
Q

What are the bands and allowances for savings income? (2)

A
  • £5,000 tax free allowance on savings income
  • Allowance is reduced by £1 for every £1 of non-savings income above the personal allowance

Once savings and non savings income is above £17,570 following allowances apply:
- Basic rate - £1,000
- Higher - £500
- Additional - £0

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21
Q

What is the allowance for dividend income and the marginal rates? (1)

A
  • 0% tax paid on first £1,000. Anything above that is taxed at marginal rates

Basic - 8.75%
Higher - 33.75%
Additional - 39.35%

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22
Q

How is a discretionary trust taxed? (6)

A
  • Trusts are liable to income tax
  • The first £1,000 is taxed at a basic rate - 20% and 8.75%. This is called the Standard Rate Band
  • Above £1,000 is taxed at an additional rate - 45% and 39.75%. This is called the Trust Rate
  • It is the Trustees legal duty to ensure tax liabilities are paid from the trust
  • Like individuals, non savings income is taxed first, then savings income and then dividend income
  • £1,000 is based on the settlor. If the settlor has 2 trusts, this will be £500 for each
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23
Q

What are the 6 features of National Insurance?

A
  • Paid by employees and self employed people aged 16 and over earning above a certain level
  • State benefits are linked to NI contributions - ‘contributory benefits’
  • Employees - NI is deducted via PAYE income or tax benefits such as a company car
  • Self employed people are paid at a flat rate if profits is above threshold or as a percentage of annual taxable profits
  • Prior to 1977, married women are eligible to a reduced rate - while this is positive, unlikely to reach minimum contributions to receive state pension
  • 35 years of NI contributions must be made to qualify for a full state pension
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24
Q

Who is liable to CGT? And how is CGT calculated? (5)

A
  • A UK resident is liable to CGT on gains arising anywhere in the world
  • Proceeds on disposal
  • Minus cost of purchase
  • Minus other costs
  • Minus £6,000 allowance
  • Minus losses (losses can be carried forward indefinitely)
    = Gains realised
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25
Q

What are the 3 types of IHT transfers and their features?

A
  • Potentially exempt transfers - donors (giver) of asset in excess of £325,000 NRB must survive 7 year rule
  • Chargeable lifetime transfers - a discretionary trust that exceeds NRB - charged at 20% or higher is donor does not survive 7 year rule
  • Exempt transfers - £3,000 allowance which can be carried forward one year only (£6,000 in any given year if so). £5,000 gift allowance for marriage - bride and groom. Transfers between spouses - fully exempt unless one spouse is non-UK domicile (£55,000 transfer limit). Charities - if 10% is left to charity, 36% IHT rate.
26
Q

How is IHT calculated?

A
  • Each UK domiciled individual receives a £325,000 nil rate band charged at 0%
  • Anything above the NRB is charged at 40%
  • An additional NRB of £175,000 on main residence passed down to next of kin
  • Unused NRB and additional main residence NRB can be transferred between spouses and civil partners
    E.g. 2 x £352,000 and 2 x £175,000
27
Q

What is a gift with reservation? (2)

A

When an asset e.g. a family home has been gifted but the donor still benefits from it e.g., parents still live in the home. The 7 year clock will not start until.

They must leave or pay market rate rent to stay for 7 yr rule to begin.

28
Q

What is SDLT? (4)

A
  • A transaction tax on the transfer of ownership of residential UK land or property
  • The buyer is responsible for paying this within 30 days of the transaction
  • First time buyers pay 0% SDLT up to £425,000 for properties valued up to £625,000. The remaining is charged at 2%
  • Paid rounded down to the nearest pound
29
Q

What is the SDLT rate bands for main residence vs additional property?

A

Main residence

0% - up to £250,000
5% - £250,001 - £925,000
10% - £925,001 - £1.5m
12% - £1.5m+

Additional property
3%
8%
13%
15%

30
Q

What is SDLT on property bought by corporate bodies?

A

Flat rate of 15% on properties valued more than £500,000
Non UK residents may pay an extra 2%

31
Q

How is corporation tax paid? (3)

A
  • Self assessed
  • Paid 9 months and 1 day after the accounting period
  • If profit is more than £1.5m then it is paid quarterly in 4 instalments
32
Q

What are the VAT rates for stockbrokers

A

Discretionary - 20%
Executions only - 0%

33
Q

What are the tax benefits of pensions?

A
  • Income and CGT tax free
  • 25% lump sum can be withdrawn on retirement tax free
34
Q

What are the different ways of accessing pensions savings?

A
  • Lifetime annuity
  • Flexi access drawdown - reduces personal allowance to 4,000
  • Lump sum
35
Q

What are some tax wrappers? (6)

A
  • ISAs
  • EIS
  • Pension contributions
  • VCTs
  • JISAs
  • Life company funds
36
Q

What is the income bands for non-savings income?

A

Personal allowance - £12,570 - 0%
Basic - 20% - £12,570-£37,700
Higher - 40% - £37,700-£125,140
Additional - 45% - £125,140+

37
Q

Interest can be offset against income if money is borrowed for what qualifying activities? (5)

A
  1. Buying machinery for employment
  2. Interest in unquoted employee controlled company
  3. Investing in a partnership
  4. Investing in a co-operative
  5. Buying ordinary shares or lending money to a close company

Interest paid on buy to let mortgages can no longer offset against tax - 20% tax credit is received

38
Q

How is a bare trust taxed?

A
  • At the beneficiaries marginal rate
39
Q

What are the rates for CGT? And what is the exemption for married couples?

A
  • 10% Basic
  • 20% Higher and additional

On secondary property
- 18% Basic
- 28% Higher and additional

Married couples can transfer assets across to eachother without incurring CGT to get 2 x £6,000 allowance. E.g. one client opens a portfolio to transfer assets

40
Q

What assets are liable to CGT?

A
  • Equities
  • Chattels (e.g. paintings, cars, antiques, wines, stamps) above £6,000
  • Secondary property
  • Currency bought and sold for gain
  • Units in CIS
41
Q

Why is domicile and residency important in tax?

A

Residency - determines income and CGT
Domicile - determines IHT

42
Q

What indirect assets are taxed and how?

A

Equity CIS (60%+ fund is equities) - dividend income, CGT
Debt CIS (60%+ of fund is debt) - savings income, CGT
ITC - dividend income and CGT
REIT- non-savings income, withholding tax (20%), CGT and stamp duty
VCT - stamp duty

43
Q

What is stamp duty? (2)

A
  • A tax on the transfer of assets such as real estate and share purchases over £1,000
  • This is 0.5% - both SDRT and stamp duty
44
Q

What is stamp duty reserve tax and on what assets is SDRT paid?

A
  • A 0.5% tax on the transfer of securities in electronic form (CREST) such as:
    1. Shares in a company
    2. UK convertible loan stock

It is only the buyer who is liable to pay

45
Q

What assets are exempt from SDRT? (6)

A
  • Gilts
  • Bonds
  • Units in OEIC and unit trusts
  • Shares traded on AIM, high growth segment of LSE or AQSE
  • Overseas securities
  • New issues
46
Q

What is the rate of stamp duty and stamp duty reserve tax?

A

0.5%
Stamp duty - paid up to the nearest £5
SDRT - paid to the nearest penny

47
Q

What is SDLT on commercial properties?

A

0% - £0 - £150,000
2% £150,001 - £250,000
5% - £250,000 +

48
Q

When is SDLT paid on new leased property? (2)

A

Residential property above £250k / commercial property above £150k = additional 1% is applied.
Anything above £5m it is additional 2%.

49
Q

What is the rate of corporation tax?

A
  • 19% on £50k or below (small company)
  • 26.5% above £50k (medium company)
  • 25% above £250k (large company)
50
Q

What is the annual savings ISA allowance?

A

£20,000

51
Q

What is a Help to Buy ISA? (6)

A
  • £1,200 minimum deposit
  • £200 a month
  • Interest is accumulated (£3,000 max)
  • Government adds 25% to this
  • Money can only be used to buy a house or for retirement
  • Ended in Nov 2019
52
Q

What is a Lifetime ISA? (4)

A

‘LISA’
- Max £4,000 contribution a year
- Government matches 25%
- For under 40s only
- Can only be drawn on retirement or buying a house

53
Q

What is a JISA/Trust Fund? (2)

A
  • For under 18s - no access until child turns 18
  • £9,000 allowance per year
54
Q

When must a business report to HMRC?

A

When it generate £85k in income

55
Q

What is an offshore fund? (6)

A
  • A unit trust that is domiciled overseas
  • Reporting status and income to HMRC; income focused.
  • Income paid in gross - 85% of income is distributed.
  • Any subsequent disposal of units are subject to CGT
  • Non-reporting ‘roll up funds’: distribute less than 85% of income. Income is reinvested and don’t pay dividends.
  • Gains are subject to income tax not CGT; capital focused.
56
Q

What is a life company fund? (5)

A
  • Taxed at 20%
  • Offer life protection and investments
  • Life company bonds (bond linked to a portfolio of assets - liable to income and CGT)

Qualifying fund - meets the rules - no more tax to pay
Non-qualifying fund - extra income tax to pay for higher and additional rate taxpayers

57
Q

What is a qualifying policy rules? (4)

A
  • Be a regular premium policy - at least annual premium
  • Have an initial term of at least 10 years - must be kept for 75% of the term or 10 years whichever is lower)
  • Premiums restricted to £3,600 per year
  • Most common time of this policy is an endowment policy - can suffer from shortfall risk
58
Q

What are the rules for a single premium/non-qualifying policy? (4)

A
  • Any profits made from this policy are taxable
  • Portfolio linked investment that tries to maximise return over long term
  • 20% tax charge
  • Should the holder die or cash in the bond - the return sum will be net of the 20%. Higher and additional rate tax payers will pay 40% or 45%
  • 20% corporation tax on the fund
    E.g.
  • Investment bonds/insurance bonds
  • Unit linked bonds with profit bonds
  • Distribution bonds
59
Q

What is the 5% withdrawal rule for life funds/OIBs? (4)

A
  • Withdrawals of up to 5% can be made per year on a tax deferred basis
  • Only applies to lump sum payments
  • If more than 5% is withdrawn, this is a taxable event - extra 20% and 25% tax for higher and additional rate tax payers
  • When bond is cashed in, withdrawals and any gains are taxed as income
60
Q

What are the tax benefits of VCTs? (4)

A
  • Max £200,000 investment per year
  • Income tax relief is 30% if held for 5 yrs - paid immediately - max tax relief is £60k (30% of £200,000)
  • Income and CGT tax free
  • Losses are not allowable to offset gains
61
Q

What are the tax benefit of EIS? (8)

A
  • Provides tax relief in UK unquoted companies
  • EIS can only invest in companies with assets no greater than £15m before the issue of shares
  • Max investment per year £1,000,000
  • £500 minimum investment per tax year
  • Income tax relief of 30% if held for 3 years
  • No CGT if held for 3 yrs
  • Losses can be offset by gains
  • EIS is exempt from IHT
62
Q

What is a Seed EIS?

A
  • Runs alongside EIS
  • 50% of income tax relief up to £200,000 investment per year
  • Up to 50% of gains can be reinvested into SEIS exempt of CGT

Chapter 1: The Regulatory Environment (10 decks)

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