Unit 1 topic 4 - Taxation

Question 1

What is capital gains tax?

Answer 1

Capital gains tax (CGT) is payable on a gain made on the disposal of certain assets.

Question 2

Give me examples of CGT

Answer 2

Examples include: 1) personal property worth more than £6,000; 2) a property or land that is not the individual’s main home; 3) the individual’s main home if it has been let out or used for business, or if it is very large;4) the sale of shares, if they are not held in an ISA5) business assets, such as land, buildings, machinery or registered trademarks.

Question 3

What is the annual exempt amount for CGT in 2019/2020?

Answer 3

£12,300

Question 4

True or false :The full CGT allowance also applies to a bare trust (which has a specified beneficiary who will have absolute entitlement to assets at 18), trustees of a trust for a vulnerable beneficiary, and to personal representatives.

Answer 4

True

Question 5

True or False :CGT applies to gains made since 6 April 2015 by individuals or trustees who are not UK resident on residential property located in the UK. Gains made during ownership prior to this date are ignored.

Answer 5

True

Question 6

True or False:Gains that accrue to non‐UK residents on non‐residential property have been subject to tax since 6 April 2019.

Answer 6

True

Question 7

Calculating CGT liability involves the following:

Answer 7

1) Calculate the amount of the gain.2) Deduct the CGT annual exempt amount (if this has not been used against other gains in the same tax year).3) Deduct any losses that can be offset against the gain.4) What remains is the taxable gain.5) Add taxable gain to taxable income to establish what rate(s) of CGT should be paid.6) Apply tax at appropriate rates. In 2019/20, for example, the rates are: 10 per cent for taxable gains falling in the basic‐rate income tax band; 20 per cent otherwise, with an 8 per cent supplement where the gain results from the sale of property not subject to private residence relief.

Question 8

What do PETs stand for?

Answer 8

potentially exempt transfer

Question 9

Most gifts made during a person’s lifetime are potentially exempt transfers (PETs) and are not subject to tax at the time of the transfer. After how many years do these transactions become fully exempt and no tax is payable.?

Answer 9

7 Years

Question 10

In July 2015, Joan made a gift to her daughter of £350,000. She has made no other gifts in her lifetime. Joan died in October 2019 leaving a total estate worth £420,000. The full rate of IHT in 2019/20 is 40 per cent on estates over £325,000. How much IHT is applied to the value of the gift that is in excess of the nil‐rate band (£25,000)?a) £5,000 b) £6,000 c) £8,000 d) £10,000

Answer 10

The answer is b) £6,000. In the first instance, the gift uses the available nil‐rate band of £325,000, there is then an excess of £25,000 above the nil‐rate band. Joan died between four and five years after the gift, so the £25,000 excess is liable for IHT at 60 per cent of the full rate (ie 60% of £15,000).

Question 11

What gifts and transfers are exempt from inheritance tax?

Answer 11

1) transfers between spouses and between civil partners both during their lifetime and on death, provided that the receiving spouse/civil partner is UK domiciled2) small gifts of up to £250 (cash or value) per recipient in each tax year;3)donations to charity, to political parties and to the nation4) wedding gifts of up to £1,000 (increased to £5,000 for gifts from parents or £2,500 from grandparents)5) gifts that are made on a regular basis out of income and which do not affect the donor’s standard of living6) up to £3,000 per tax year for gifts not covered by other exemptions. Any part of this £3,000 that is not used in a given tax year can be carried forward for one tax year, but no further.

Question 12

What is Value added tax (VAT)?

Answer 12

Value added tax (VAT) is an indirect tax levied on the sale of most goods and the supply of most services in the UK.

Question 13

What are Zero‐rated items in terms of VAT?

Answer 13

food, books, children’s clothes, domestic water supply and medicines

Question 14

True or false: certain financial transactions such as loans and insurance

Answer 14

True

Question 15

What is the advantage of registering as VAT business?

Answer 15

An advantage of registering is that VAT paid out on business expenses can be reclaimed

Question 16

Two disadvantages of VAT registered businesses are…..

Answer 16

1) the fact that the firm’s goods or services are more expensive to customers (by the amount of the VAT that the firm must charge);2) the additional administration involved in collecting, accounting for and paying VAT.

Question 17

What is Stamp duty and stamp duty reserve tax?

Answer 17

Stamp duty is payable on paper documents that transfer the ownership of financial assets, such as shares and bearer instruments.Stamp duty reserve tax (SDRT) is charged on transfers that are completed electronically.

Question 18

What is Stamp duty land tax?

Answer 18

Stamp duty land tax (SDLT) is paid by the purchaser of property and there are different rates of SDLT which apply to different portions of the purchase price.

Question 19

What is Corporation tax?

Answer 19

Corporation tax is paid by limited companies on their profits(It is also payable by clubs, societies and associations, by trade associations and housing associations, and by co‐operatives.)

Question 20

What is Withholding tax?

Answer 20

The phrase ‘withholding tax’ refers to any tax on income that is levied at source before that income is received.

Question 21

Melanie bought a painting in a charity shop for £40. It turned out to be by a well‐known artist, and she sold it three years later for £2,000. She had to pay CGT on the gain she made. True or false?

Answer 21

False. Gains made on ‘chattels’ (movable objects such as jewellery, antiques and paintings) are exempt from CGT if their value is £6,000 or less.

Question 22

For how many years can the annual exempt amount for CGT be carried forward?

Answer 22

The CGT annual exempt amount cannot be carried forward at all.

Question 23

To qualify for roll‐over relief, a business must replace an asset not more than five years from the date of disposal. True or false?

Answer 23

False. Assets must be replaced within three years after the date of disposal.

Question 24

Inheritance tax would be charged on which of the following?a) The total value of the deceased’s estate.b) The total value of the estate above the available nil‐rate band.c) The value of the estate less any gifts that have been made in the previous seven years.

Answer 24

b) Inheritance tax would be payable on the total value of the estate above the available nil‐rate band.

Question 25

Tax on a chargeable lifetime transfer in excess of the available nil‐rate band is payable:a) immediately, at the full rate.b) only if the transferor dies within seven years of the transfer.c) immediately, at a reduced rate.

Answer 25

c) Immediately, at a reduced rate of 20 per cent.

Question 26

What kind of tax is payable when shares are purchased electronically?

Answer 26

Stamp duty reserve tax.

Question 27

A company makes an annual profit of £1.2m. When would the company’s corporation tax normally be payable?

Answer 27

Nine months after the end of the relevant accounting period.

Question 28

What is a chargeable lifetime transfer?

Answer 28

Some lifetime gifts - notably those to companies, other organisations and certain trusts - are not PETs but chargeable lifetime transfers, on which tax at a reduced rate of 20% is immediately due. This ‘lifetime’ tax is only payable if the value of the chargeable lifetime transfer, when added to the cumulative total of chargeable lifetime transfers over the previous seven years, exceeds the nil-rate band at the time the transfer is made. The 20% tax is only applied to the excess over the nil-rate band. As with PETs, the full tax is due if the donor dies within seven years (subject to the same taper relief) and any excess over the 20% already paid then becomes payable.

Question 29

What are the tax rates for calculating capital gains tax liability in the 2021/22 tax year?

Answer 29

• 10% for taxable gains falling in the basic-rate income tax band (18% on residential property)
  20% (or 28% on residential property) on any amount above the basic tax rate.

Question 30

Define Disposal with respect to taxation.

Answer 30

For CGT purposes, a disposal can be the sale of an asset, transferring ownership to another party, giving it away, or receiving compensation for its loss or destruction

Question 31

How is CGT treated for gains made by those that are not UK residents?

Answer 31

CGT applies to gains made since 6 April 2015 by individuals or trustees who are not UK resident on residential property located in the UK. Gains made during ownership prior to this date are ignored.

Question 32

What is Private residence relief?

Answer 32

Private residence relief is available when someone sells the property they have lived in as their main or only residence.

Question 33

What is Entrepreneur’ relief

Answer 33

A lower rate of 10% is applied to a lifetime limit of £10m of cumulative gains arising from the disposal of trading businesses and from certain disposals of shares in trading companies.The individual must generally own at least 5% of the ordinary share capital of the business.In addition they must be entitled to at least 5% of the distributable profits and net assets of the company.

Question 34

What is Roll-over relief

Answer 34

Business assets are chargeable to CGT. However, roll-over relief may be claimed if the assets disposed of are replaced by other business assets. This means that, instead of CGT falling due on the original disposal, it is deferred until a final disposal is made.

Question 35

What is Hold-over relief?

Answer 35

CGT on any gain arising on the gift of certain assets can normally be deferred until the recipient disposes of it.

Question 36

What is the Nil-rate band?

Answer 36

The amount on which a nil rate of inheritance tax applies; in other words, the amount is liable to tax but the rate that applies is 0%.