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FLK 1: Business Law And Practice > Topic 8: Individual Taxation > Flashcards

Topic 8: Individual Taxation Flashcards

(85 cards)

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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

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2
Q

What is the difference between direct taxes and indirect taxes?

A

Direct taxes are imposed by reference to a taxpayer’s circumstances, while indirect taxes are imposed by reference to transactions.

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3
Q

What is an example of a direct tax?

A

Income Tax

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4
Q

What is an example of an indirect tax?

A

Value Added Tax (VAT)

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5
Q

What is the significance of distinguishing between income and capital?

A

To ensure the correct tax treatment is applied.

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6
Q

Define income receipts.

A

Money received on a regular basis, classified as income.

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7
Q

Define capital receipts.

A

Receipts from transactions that are not part of regular activity, considered ‘one-off’ transactions.

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8
Q

What constitutes income expenditure?

A

Money spent as part of day-to-day trading.

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9
Q

What constitutes capital expenditure?

A

Money expended to purchase a capital asset or enhance a capital asset.

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10
Q

How is capital expenditure typically treated for tax purposes?

A

It can only be deducted from the proceeds realized when a capital asset is disposed of.

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11
Q

What are capital allowances?

A

Tax relief for capital expenditure, allowing certain types of capital expenditure to be deducted from income receipts.

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12
Q

What is the difference between the tax year for individuals and the financial year for companies?

A

The tax year runs from 6 April to 5 April, while the financial year runs from 1 April to 31 March.

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13
Q

What is the PAYE system?

A

A system where income tax is deducted at source by the employer from employees’ wages.

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14
Q

What does ‘gross’ mean in the context of income?

A

The total sum before tax is levied.

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15
Q

What does ‘net’ mean in the context of income?

A

The amount left after tax has been paid/deducted.

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16
Q

What is Total Income?

A

A taxpayer’s gross income from all sources before any deductions.

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17
Q

What is Net Income?

A

Total Income less available tax reliefs.

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18
Q

What is Taxable Income?

A

Net Income less the personal allowance.

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19
Q

What is the first step in calculating an individual’s income tax liability?

A

Calculate Total Income.

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20
Q

What is the formula to calculate Taxable Income?

A

Net Income less Personal Allowance.

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21
Q

What must be included in Total Income if received net of tax?

A

The gross amount of the receipt.

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22
Q

What is the annual exemption in relation to Capital Gains Tax?

A

A tax allowance for individuals only.

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23
Q

What is Business Asset Disposal Relief?

A

A tax relief available to individuals in certain circumstances to reduce their chargeable gains.

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24
Q

What is the definition of Taxable Total Profits (TTP)?

A

The total of a company’s taxable income profits and chargeable gains.

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25
What is the purpose of the dividend allowance?
A band of tax-free dividend income available for income tax purposes.
26
True or False: Income tax is only collected from self-employed individuals.
False
27
What is the term for including the gross amount in the calculation of Total Income?
Grossing up
28
What is the personal savings allowance for basic rate taxpayers?
First £1,000 of interest received on savings
29
What is the personal savings allowance for higher rate taxpayers?
First £500 of interest received on savings
30
Do additional rate taxpayers receive a personal savings allowance?
No
31
What is the effect of the dividend allowance?
No tax on the first £500 of dividend income
32
What are benefits in kind?
Non-cash benefits received by employees, such as health insurance and company cars
33
Are benefits in kind subject to deduction of tax under PAYE?
No
34
What must employees do with benefits in kind during tax return?
Include the benefit sums on their tax return
35
What types of tax reliefs are considered to calculate Net Income?
Interest paid on qualifying loans and pension scheme contributions
36
What is the definition of qualifying loans?
Loans used to buy an interest in a partnership, contribute capital to a partnership, or buy shares in certain companies
37
How are pension scheme contributions treated for tax purposes?
Deducted from Total Income for tax relief
38
How is the personal allowance reduced for individuals with Net Income above £100,000?
Reduced by £1 for every £2 of Net Income above £100,000
39
What is the formula to calculate the reduced personal allowance?
£12,570 - [(Net Income - £100,000) / 2]
40
What is the order in which different types of income must be taxed?
Non-savings, then savings, then dividend income
41
What are the tax rates for non-savings income in the basic rate band?
20%
42
What is the tax rate for dividends in the basic rate band?
8.75%
43
What is the tax rate for dividends in the higher rate band?
33.75%
44
What is the personal savings allowance for taxpayers with Taxable Income above £125,140?
None
45
What is the maximum tax rate applicable to additional rate taxpayers?
45%
46
When calculating Taxable Income, what must be deducted from Net Income?
Personal Allowance
47
What is the cake method in relation to calculating income tax?
Visualizing types of income as layers of a cake to understand tax rates
48
What happens if a taxpayer has overpaid tax during the year?
They will receive a tax refund from HMRC
49
Fill in the blank: Benefits in kind are _______.
non-cash benefits received by employees
50
True or False: All taxpayers receive the same personal savings allowance.
False
51
Do NICs affect personal income tax computation?
No, NICs do not affect the individual’s personal income tax computation.
52
How is tax calculated on non-savings income for a higher rate taxpayer?
20% on the first £37,700 and 40% on the remaining amount.
53
What is the tax due on the first £37,700 of non-savings income?
Tax Due = £7,540.
54
What is the formula to calculate an individual’s income tax liability?
Step 1: Calculate Total Income, Step 2: Deduct available tax reliefs, Step 3: Deduct Personal Allowance, Step 4: Split Taxable Income, Step 5: Calculate personal savings allowance, Step 6: Apply tax rates, Step 7: Add tax amounts.
55
What is anti-avoidance legislation designed to do?
To stop loopholes exploited by taxpayers to reduce or eliminate tax liabilities.
56
What is Capital Gains Tax (CGT)?
CGT is charged on the profit made from disposing of a capital asset that has appreciated in value.
57
When is CGT charged?
CGT is charged on all gains made in the relevant tax year (6 April to 5 April).
58
What is a chargeable disposal?
A sale or gift of an asset during the taxpayer’s lifetime.
59
What assets are excluded from CGT?
* Principal private residence (PPR) * Motor cars for private use * Certain investments (e.g., ISAs) * UK sterling and foreign currency for personal use.
60
What is a chargeable gain?
A gain made when disposing of an asset, calculated from the consideration received.
61
What happens during disposals between spouses?
No gain or loss is deemed to occur, and the receiving spouse takes over the base cost.
62
What is the consideration received in disposals at arm's length?
The price paid by the buyer when the asset is sold.
63
What is the treatment of disposals between connected persons?
The seller is deemed to have received market value irrespective of actual sale proceeds.
64
What is the basic calculation for chargeable gain?
Consideration Received - Sale proceeds (or market value) = Gain.
65
What types of expenditure can be deducted from the consideration received?
* Disposal expenditure * Initial expenditure (base cost and incidental costs) * Subsequent expenditure (enhancements and title preservation costs).
66
What is the annual exemption (AE) for CGT?
The annual exemption for the current tax year is £3,000.
67
How is tax payable calculated on total chargeable gains for individuals?
Tax payable is calculated at either 18% or 24% based on the individual's taxable income.
68
What is Business Asset Disposal Relief?
It reduces the rate of CGT to 10% for gains on qualifying disposals.
69
What qualifies for Business Asset Disposal Relief?
* Disposal of all or part of a trading business * Disposal of assets in a business that used to trade * Disposal of shares in a trading company.
70
What is the minimum time a business must have been owned before it ceased to trade for Business Asset Disposal Relief?
At least two years. ## Footnote This is a requirement for the assets used in the business to qualify for relief.
71
What must be true about the assets of a business to qualify for Business Asset Disposal Relief?
The assets must have been used in the business when it ceased to trade. ## Footnote This ensures that the relief applies to assets actively used in the business.
72
What is the time limit for disposing of assets after a business has ceased trading to qualify for Business Asset Disposal Relief?
Within three years. ## Footnote This stipulation is crucial for claiming the relief.
73
What is required for shares to qualify for Business Asset Disposal Relief?
The company must be a trading company for at least two years before disposal. ## Footnote This ensures the company is actively engaged in trading.
74
What is the minimum percentage of ordinary voting shares an individual must hold to qualify for Business Asset Disposal Relief?
At least 5%. ## Footnote This criterion applies to the individual disposing of the shares.
75
What is the lifetime allowance for Business Asset Disposal Relief?
£1 million. ## Footnote This is the amount of qualifying gains that can be charged to CGT at a reduced rate.
76
What is the CGT rate applied to the first £1 million of qualifying gains under Business Asset Disposal Relief?
10%. ## Footnote Gains beyond this threshold are taxed at higher rates.
77
What happens if taxable chargeable gains exceed £1 million under Business Asset Disposal Relief?
They will be charged to CGT at either 18% or 24%. ## Footnote The rate depends on the individual's CGT payment level.
78
Is Business Asset Disposal Relief available for investment businesses or companies?
No. ## Footnote It specifically applies to trading businesses.
79
What is Investors’ Relief (IR)?
A benefit for investors in unlisted trading companies who hold shares for at least three years. ## Footnote This relief reduces CGT to 10% for qualifying shares.
80
What are the conditions for shares to be qualifying shares under Investors’ Relief?
* Fully paid ordinary shares issued for cash consideration on or after 17 March 2016 * The company must be a trading company * None of the company’s shares were listed on a recognized stock exchange at the time of issue * Shares must be held for at least three years * The individual must not be an officer or employee of the company. ## Footnote These conditions ensure that only specific shares qualify for relief.
81
What is Replacement of Business Assets Relief (Rollover Relief)?
A relief that allows taxpayers to postpone CGT liability by rolling over gains into a replacement asset. ## Footnote It applies to certain business assets like land, buildings, and goodwill.
82
What does the new asset need to qualify for Rollover Relief?
It must be a qualifying asset but need not be of the same type as the old one. ## Footnote The key is that it falls within the list of qualifying assets.
83
What is Gift of Business Assets Relief (Hold-over Relief)?
A relief allowing the donor and donee to postpone CGT liability on gifted business assets. ## Footnote The donor has no liability, and the donee’s acquisition cost is reduced by the donor’s deemed gain.
84
When can Hold-over Relief be claimed?
When an individual gives away a business asset or sells it at undervalue. ## Footnote The relief applies to the gift element of the transaction.
85
What types of assets can hold-over relief be claimed on?
* Goodwill * Assets used in the business * Shares in a trading company not quoted on a stock market. ## Footnote These assets are eligible for the relief under specific conditions.

FLK 1: Business Law And Practice (14 decks)

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