WS6: Individual Taxation - IT, CGT, IHT

Question 1

Which taxes are direct versus indirect?

Answer 1

Income tax, CGT and corporation tax are direct

VAT is indirect

Question 2

What is the difference between a direct and an indirect tax?

Answer 2

Direct - imposed on an individual’s circumstances

Indirect - imposed on a transaction

Question 3

What is a receipt?

Answer 3

Money paid to a business - referred to as income

Question 4

What is an expense?

Answer 4

Expense is money that the business pays out of the business.

Question 5

What is the difference between income and capital receipts?

Answer 5

Income receipts is more likely to be for money received on a regular basis

Capital more likely to be for a one-off transaction

Question 6

What is the difference between income and capital expenditure?

Answer 6

Money spent as part of day to day trading is considered income expenditure - regular expenses

Money used to purchase a capital asset as part of infrastructure / enduring benefit for business is considered capital expenditure - same applies for expenditure enhancing a capital asset (but not routine maintenance)

Question 7

Why is it important to make a distinction between income and capital expenditure?

Answer 7

Because some income expenditure can be set off against income receipts to reduce an overall tax bill

Question 8

When can capital expenditure be deducted for tax?

Answer 8

Only when a capital asset is disposed of

Question 9

What is the function of capital allowances?

Answer 9

They spread the cost of capital expenditure on certain capital items over a period of time, by a proportion of the capital expenditure being deducted from income receipts over a period of time
This means that some types of capital expenditure can be deducted from income receipts

Question 10

When does the tax year run from and until? Who is assessed on this basis, and for what taxes?

Answer 10

Tax year runs from 6 April to 5 April

Individuals are assessed on income tax, and CGT on this basis

Question 11

When does the financial year run from and until? Who is assessed on this basis?

Answer 11

Runs from 1 April to 31 March

Companies assessed on corporation tax

Question 12

What is the PAYE system? When is it used?

Answer 12

System whereby the payer of a taxable sum deducts the tax due in respect of the sum, and accounts for it to HMRC on the recipients behalf - employee will receive salary net of tax

Common for employers.

Question 13

Why do you need to keep an eye on whether income tax has already been deducted via PAYE?

Answer 13

When calculating tax liabilities - if tax has been deducted, it is the gross amount of the receipt that must be included in the calculation - not the net amount (e.g. pre tax amount)

Question 14

What is the difference between gross sums and net sums?

Answer 14

Gross sum - amount before tax is levied

Net sum - amount after tax has been reduced

Question 15

What are the two methods by which HMRC assess and collects income tax?

Answer 15

Self-assessment

Deduction at source

Question 16

What kind of people will always be required to complete a self-assessment tax return?

Answer 16

Directors, high and additional rate taxpayers, self-employed people

Question 17

Personal tax computation: what is total income?

Answer 17

Total income: a taxpayer’s gross income from all sources

Question 18

Personal tax computation: what is net income?

Answer 18

Total income less available tax reliefs

Question 19

Personal tax computation: what is taxable income?

Answer 19

Net income, less personal allowance

Question 20

When is CGT charged?

Answer 20

a chargeable disposal, of a chargeable asset, by a chargeable person, which gives rise to a chargeable gain

Question 21

In which period is CGT charged? When is it due?

Answer 21

Charged on the relevant year - 6 April to 5 April

Tax is payable on or before 31 January following the tax year in which the disposal occurs

Question 22

When is CGT payable?

Answer 22

• Sale of an asset
• Gift of an asset during taxpayer’s lifetime – no chargeable disposal on death

Question 23

What is a basic overview of the steps in an income tax calculation?

Answer 23

1) Calculating the total income - add up total income from all sources (income, savings interest, benefits in kind)

2) Subtract any reliefs (personal pension contributions, interest paid on a qualifying loan) to find the net income

3) Deduct the taxpayer’s personal allowance to find the taxable income

4) Split taxable income into non-savings, savings and dividends

5) See whether the personal savings allowance is available

6) Apply relevant tax rates

7) Add up the three amounts of tax calculated

Question 24

How does the personal savings allowance change depending on which income tax rate band you are in?

Answer 24

Basic rate taxpayers - get their first £1,000 at the nil rate

Higher rate taxpayers - first £500 at the nil rate

Additional rate taxpayers - no personal savings allowance

Question 25

How much of a dividend is taxed at 0%, and for who?

Answer 25

Universal - first £500 of a dividend is untaxed

Question 26

When calculating net income (deducting any tax reliefs from total income), what can be deducted?

Answer 26

Personal pension contributions Interest paid on qualifying loans Certain charitable donations

Question 27

What is a qualifying loan?

Answer 27

o Loans to buy an interest in a partnership o Loans to contribute capital or make a loan to a partnership o Loans to buy shares in or make a loan to a close company o Loans to buy shares in an employee controlled company or invest in a co-operative

Question 28

What is the current personal allowance on income tax? How does it taper off?

Answer 28

£12,570 Taper: reduction of £1, on every £2 of net income, above £100,000

Question 29

Above what threshold do you lose the benefit of the personal allowance completely?

Answer 29

Above £125,140

Question 30

What calculation should you perform to figure out the reduced personal allowance for individuals with a net income between £100,001 and £125,140

Answer 30

£12,570 – ((Net income – 100,000) / 2) = reduced allowance

Question 31

When calculating taxable income, in which order must you split and calculate the taxable income?

Answer 31

Non-savings Savings Dividend income

Question 32

What are the three tax bands for basic, higher and additional tax payers [NB - AFTER personal allowance of £12,570 has been applied]

Answer 32

0 - 37,700 37,701 - 125,140 Over 125,140

Question 33

What are the three tax rates for basic, higher and additional tax payers for NON-SAVINGS INCOME

Answer 33

Basic - 20% Higher - 40% Additional - 45%

Question 34

What are the three tax rates for basic, higher and additional tax payers for SAVINGS INCOME? What must you also remember?

Answer 34

Basic - 20% Higher - 40% Additional - 45% Remember that these are after the personal savings allowance has been removed of the following: Basic - first £1000 taxed at 0% Higher - first £500 taxed at 0% Additional - no exemption

Question 35

What are the three tax rates for basic, higher and additional tax payers for DIVIDEND INCOME? What must you also remember?

Answer 35

Basic - 8.75% Higher - 33.75% Additional - 39.35% Universal first £500 tax free

Question 36

When is CGT charged?

Answer 36

Where there is a chargeable disposal, of a chargeable asset, by a chargeable person, which gives rise to a chargeable gain

Question 37

On what period is CGT charged? When is it payable?

Answer 37

It is charged on the relevant tax year - 6 April to 5 April Tax is payable on or before 31 January following the tax year in which the disposal occurs

Question 38

What assets are excluded from CGT for the definition of chargeable asset?

Answer 38

Principal private residence - if occupier as only / main residence during whole period of ownership, or exempt during last 9 months of ownership even if not in actual occupation Motor cars for private use Certain investments; government bonds, National Savings Certificates, Shares and Securities in ISAs, life assurance policies Cash

Question 39

How does HMRC approach consideration received in different types of transactions?

Answer 39

Disposal at arm's length - consideration received will be price paid by the buyer when asset sold Disposal between connected persons - seller deemed to have received market value, irrespective of the actual sale proceeds

Question 40

What can be deducted from the sale proceeds of a capital asset?

Answer 40

Capital losses Annual exemption - £3,000 annually for individuals (does not apply for companies, nor does it double up to £6,000 like wills)

Question 41

How do you calculate the Total Taxable Chargeable Gain?

Answer 41

total chargeable gain (after deductions and annual exemption - losses = total taxable chargeable gains

Question 42

What are rates of CGT for individuals?

Answer 42

Basic rate taxpayer - 18% CGT Additional rate taxpayer - 24% CGT If gains straddle two bands, apportion.

Question 43

What is the formula for calculating an individual's CGT liability?

Answer 43

Sale proceeds - disposal expenditure = Net Sale Proceeds Net Sale Proceeds - initial expenditure - subsequent expenditure = Total Chargeable gain Total Chargeable Gain - carried forward losses - annual exemption = Taxable Chargeable Gain Apply CGT Rate

Question 44

What is Business Asset Disposal Relief?

Answer 44

Reduces rate of CGT to 10% for gains arising on qualifying disposals

Question 45

What is a qualifying disposal for BADR? What are the conditions for BADR?

Answer 45

Disposal of: - All or part of a trading business [owned for at least two years prior to the date of disposal] -Assets in a business that used to trade [Owned for at least 2 years before it ceased to trade, and assets used in course of business] - Shares in a trading company [Shares held for at least 2 years before the company ceased to trade, person disposing of shares was an officer / employee of the company who held at least 5% of ordinary voting shares] - Shares in a company that used to trade[Shares held for at least 2 years before the company ceased to trade, person disposing of shares was an officer / employee of the company who held at least 5% of ordinary voting shares]

Question 46

What is the lifetime allowance on Business Asset Disposal Relief?

Answer 46

First £1 million of qualifying gains can be charged at 10%, including as many claims as an individual would like

Question 47

Once BADR lifetime allowance runs out, what rate is applied?

Answer 47

Standard rate of 18% or 24%

Question 48

What type of companies are never eligible for BADR?

Answer 48

Investment businesses or companies

Question 49

What is Investor's Relief?

Answer 49

Reduces rate of CGT to 10% for gains arising on disposals of qualifying shares subject to lifetime cap of £1 million

Question 50

What conditions must be met for shares to qualify for Investor's relief?

Answer 50

Shares are fully paid ordinary shares and are issued for cash Company is a trading company Not listed Shares held by individual for 3 years from 6 April 2016 and continuously since issue Individual / CP is not an officer / employee of the company / any connected company

Question 51

What is rollover relief?

Answer 51

Taxpayer can elect to postpone CGT liability it realises on the sale of an asset by rolling over the gain into a replacement asset

Question 52

What conditions are there for rollover relief?

Answer 52

New asset does not have to be the same as the old one Possible to roll gains over indefinitely Annual exemption cannot be used to reduce gain rolled over

Question 53

What is holdover relief? When can it be used?

Answer 53

When an individual gives away a business asset, donor and donee can claim hold-over relief - meaning that the whole of CGT liability can be postponed until the donee ultimately disposes of the asset Value will be judged at market value Annual exemption cannot be combined with this.

Question 54

How is holdover relief claimed where an asset is sold at an undervalue?

Answer 54

Relief will only be available on the gift element - different between price paid and market value

Question 55

For inheritance tax purposes, what relief can be claimed on business property?

Answer 55

Business Property Relief 100% relief for transfers of business / interest in one / shares in an unquoted company 50% relief for shares in a quoted company