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chapter 2

Investment income
Contents
Introduction
Examination context
Topic List
1

Property income

Individual Savings Accounts (ISAs)

Enterprise Investment Scheme (EIS)

Venture Capital Trusts (VCT)

Summary and Self-test


Technical reference
Answers to Self-test
Answer to Interactive question

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Taxation

Introduction

Learning objectives
`

Describe the principal aspects of the taxation of property income, including rent-a-room
relief and premiums on short leases

Identify investments which produce non-taxable income and/or capital gains and recognise
when they might be appropriate for individuals

Identify investments and expenditure which reduce tax liability and recognise when they
might be appropriate for individuals

Identify investments which produce non-taxable income and/or capital gains and recognise
when they might be appropriate for businesses

Identify investments and expenditure which reduce tax liability and recognise when they
might be appropriate for businesses

Tick off

Specific syllabus references for this chapter are 2(d), 2(u), 2(v), 1(x), 1(y).

Practical significance
The increase in UK property prices has led to an explosion in the number of taxpayers keen to invest in
property. The profits from letting together with profits on sale of buy-to-let property must all be declared
on the Tax Return. There are different rules for income from letting a room in your own home and there
are also differences between letting furnished and unfurnished property.
Other investment vehicles, such as the Enterprise Investment Scheme (EIS) and using Venture Capital
Trusts (VCT), also attract tax relief and can be very useful schemes for smaller businesses seeking new
finance from outside investors.

Stop and think


Most likely you have been paying tax on your various sources of income and gains. Have you stopped to
think about whether you could reduce this tax bill? For example do you regularly invest in tax free savings
accounts?

Working context
Many of you will come across clients who have invested in property even if you do not work in general
practice or personal tax. You will need to be able to apply the rules to determine when income is taxable
and what allowances for expenditure can be claimed. Not all of these are intuitive and you will be able to
add considerable value to a clients business by advising on how to claim deductions at the most appropriate
time and knowing what extra incentives are available. For example, generous deductions are given for
expenditure on energy efficient products such as cavity wall insulation.
The topics covered in this chapter will help you to understand the tax treatment of various types of
investment and how this might influence a persons decision to invest. The rules explained in this chapter
cover the basic principles, but in practice the detailed rules for the EIS and VCT schemes are considerably
more complex and contain pitfalls for the ill advised investor.

Syllabus links
None of the topics in this Chapter were covered in the Principles of Taxation study manual in any detail.

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INVESTMENT INCOME

Examination context

Exam requirements
In the examination candidates may be required to:
`

Calculate the total property income assessment of an individual, including dealing with 'rent a room'
and lease premiums.

Give advice to an individual about investments in ISAs, subscriptions in EIS shares and VCT shares.

Show how income tax and capital gains tax relief is given for investments in EIS or VCT shares.

Examiner's comments on how students tackle questions


In past examinations candidates have found lease premium calculations difficult. It is essential that time is
spent understanding the methods for calculating lease premiums.
Better candidates have previously been able to pick up valuable marks by offering advice on tax efficient
investments. Candidates who can differentiate between the different types of investment available do well
on these questions.

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Taxation

1 Property income
Section overview
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`
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1.1

Property income is taxed on the amount accrued in a tax year.


Allowable expenses are deductible, including a wear and tear allowance for furnished property.
Losses are carried forward and set against the first available property income.
Rent a room relief applies to lettings in the taxpayer's own home.
Qualifying holiday accommodation is generally treated as a trade carried on by the taxpayer.
Real Estate Investment Trusts (REITs) allow a taxpayer to spread his investment in property.
Part of the premium received by a landlord on the grant of a short lease is taxable property income.

Property income
The main type of property income is rental income from the letting of unfurnished or furnished property.
Rental income specifically includes any amounts receivable for the use of furniture if the property is
furnished property.
Rental income is taxed on the amount accrued in a tax year. Therefore, for 2007/08 the rental income
taxable is the amount accrued between 6 April 2007 and 5 April 2008, after allowable expenses. Expenses
are also allowable on an accruals basis.

Worked example: Property income accruals basis


Susan rents out an unfurnished house. Until 30 June 2007, rent is 1,250 per calendar month, payable on
the last day of each month. Thereafter the rent is increased to 1,500 per month.
The rent is usually paid promptly, but the payment due on 31 March 2008 was not received until 10 April
2008.
Susan paid an insurance premium of 1,600 on 1 January 2007 for the year to 31 December 2007 and an
insurance premium of 1,800 on 1 January 2008 for the year to 31 December 2008.
Susan had other allowable expenses of 6,020 accrued in 2007/08.
Requirement
Calculate Susan's taxable property income for 2007/08.

Solution
Susan
Property income

Rent accrued
April June 2007 1,250 3
July 2007 March 2008 1,500 9
Less: insurance premium
April December 2007
1,600 9/12
January March 2008
1,800 3/12
other expenses
Taxable property income

3,750
13,500
17,250

1,200
450
6,020

(7,670)
9,580

Note that the fact that the March 2008 rental payment is not received until 2008/09 is not relevant the
amount due is accrued in 2007/08 and is therefore taxable in that year.

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INVESTMENT INCOME

If more than one property is let, all income and expenditure is pooled to calculate a single amount of
taxable property income.
However if one or more properties satisfy the conditions to be treated as qualifying holiday
accommodation, the income from such lettings is taxed separately (see later in this section).

1.2

Allowable expenses
Allowable expenses include the following:
`

Legal, professional and administrative costs

Interest paid eg on loans to buy property, overdraft interest relating to property letting

Rates and taxes paid by the landlord eg council tax, water rates

Ancillary services provided by the landlord eg cleaning, gardening

Insurance for the property (in all cases)

Furnishings (if let furnished) see 1.4 below

Repairs and maintenance eg painting, redecoration

Landlord energy saving allowance up to 1,500 per dwelling house for installing loft/cavity wall/floor
insulation, draught proofing and hot water system insulation. From 6 April 2007 if a building contains
more than one dwelling, the 1,500 applies per dwelling.

If a property is partly owner-occupied and partly let, expenses relating to periods of owner-occupation are
not allowable.

1.3

Bad debt relief


Rental income is taxed on an accruals basis. If a tenant does not pay the rent, the income is still taxable.
However, if the debt remains unpaid and the debt is written off by the landlord, relief is given for the
amount written off.

1.4

Capital expenditure
Capital allowances are only available on the cost of plant and machinery used for the repair or maintenance
of the property.
Capital allowances are therefore not available for most items of plant and machinery, furniture and other
equipment provided for use in a furnished property.
Instead, where a property is let furnished, the landlord can choose between the renewals basis and a
wear and tear allowance.
Under the renewals basis, there is no deduction for the cost of the first furniture provided. However, the
cost of replacement furniture is treated as an allowable expense.
The wear and tear allowance is calculated as 10% of rents accrued less any amounts paid by the landlord
which are legally the responsibility of the tenant (eg water rates and council tax). The allowance is given for
the period when the property is available for letting.

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Taxation

Interactive question 1: Taxable property income

[Difficulty level: Exam level]

Lee owns a flat which he lets out furnished at a weekly rental of 125.
During 2007/08, the flat was let out for 34 weeks, occupied by Lee for 9 weeks and then let out for the
remaining 9 weeks to a new tenant.
Lee had the following expenditure during the year:

460
680
255
500
240
440
25

Repairs
Council tax
Water rates
Redecoration
Insurance
Gardening and cleaning (during tenanted period only)
Advertising for new tenant
Lee claims the wear and tear allowance.
Requirement
Using the standard format below, compute the taxable property income for Lee.

Income

Expenses

Allowable in full:
Allowable for let period:

................... .................../52
Wear and tear allowance:
10% [.................................] .................../52
Taxable property income

See Answer at the end of this chapter.

1.5

Losses
In each tax year, all property letting income and expenditure is pooled. As a result, a single overall profit (or
loss) figure is calculated for that tax year.
If a loss arises, there is no taxable property income in that tax year.
The loss is carried forward and set, as far as possible, against the first available future property income. The
deduction is made at Step 2 of the income tax liability computation (Chapter, 1 Section 1.5) in arriving at
net income.

1.6

Rent a room relief


If an individual lets out part of his home, he will receive taxable property income. However, rent a room
relief may apply.
To be eligible for the relief, the accommodation let to the tenant must be furnished and part of the
individual taxpayer's only or main domestic residence (ie house or flat).
The tax treatment of rental income depends on the level of gross annual rents.

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INVESTMENT INCOME

Where gross rental income is not more than 4,250 per tax year: [Hp5]
`

The income and expenses arising in relation to the letting are ignored for income tax;

Similarly, no property losses arise unless the taxpayer elects to set aside the rent a room rules for a
particular tax year and so claim a property loss.

Where gross rental income is more than 4,250 per tax year:
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The normal property income rules usually apply;

Alternatively, the taxpayer can elect to be assessed under the rent a room rules on the gross rents in
excess of the rent a room limit of 4,250. However, in this case, there is no relief for expenses. This
election applies for subsequent tax years until the election is withdrawn or the gross rents do not
exceed the rent a room limit.

Where two or more people, including husband and wife/civil partners, share a home each has rent a room
relief of 2,125 (4,250/2).

Worked example: Rent a room relief


Gina let out a room in her house at a rent of 120 a week throughout 2007/08. Her allowable expenses for
the year were 5,100 (including a wear and tear allowance).
Requirement
Show the tax position of Gina if:
(a) the normal property income rules apply; or
(b) she has made an election in 2006/07 to use the rent a room rules.
Based on your computations, what advice would you give to Gina?

Solution
(a)

Normal property income rules


Rent received 120 52
Less: expenses
Taxable property income

(b) Rent a room rules


Gross rents
Less: rent a room limit
Taxable property income

6,240
(5,100)
1,140

6,240
(4,250)
1,990

Gina should withdraw her election to use the rent a room rules, as the normal property income rules give a
lower taxable amount of property income.

1.7

Qualifying holiday accommodation


Income from qualifying holiday accommodation is taxed as property income. However, for certain
purposes, it is treated as taxable trading income.
Therefore, a record of income and expenditure for qualifying holiday accommodation must be kept
separate from ordinary lettings.

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Taxation
Qualifying holiday accommodation must be:
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Situated in the UK; and

Furnished; and

Let on a commercial basis with a view to the realisation of profits; and

Available for letting to the public as holiday accommodation for at least 140 days in the tax year; and

Actually let for at least 70 days during the same tax year; and

Not normally occupied for periods of 'longer-term occupation' (more than 31 consecutive days to the
same person) for more than 155 days in a tax year.

The key income tax advantages are:


`

Profits are relevant earnings for pension scheme purposes, so pension contributions may be made in
respect of such profits;

Losses are trading losses under the trading income rules, not property income losses. Therefore they
can be set against other income and not restricted to property income only;

Capital allowances are available on all plant and machinery including furniture (instead of the renewals
basis or the wear and tear allowance).

The main capital gains tax advantage is that the property is treated as a business asset. This entitles the
individual to the associated capital gains tax reliefs, such as taper relief and relief for replacement of business
assets.
For inheritance tax, business property relief may be available, although the test for that relief to apply is
slightly different to that for the other taxes (see later in this text).

1.8

Real Estate Investment Trusts (REITs)


On or after 1 January 2007 a company can be treated as a Real Estate Investment Trust (REIT). Investing in
a REIT rather than an individual property enables the investor to spread his investment over a number of
properties. The shares should be more marketable than a property would be, but the investor is still
exposed to fluctuations in the property market. Some income generated by a REIT is tax-exempt, other
income may not be tax-exempt.
REITs are exempt from corporation tax on their property income and gains. Amounts paid out of taxexempt property income or gains to a shareholder of a REIT are taxable on the shareholder as property
income and are paid net of basic rate tax at 22%. Amounts paid out of non tax-exempt property income or
gains to a shareholder of a REIT are taxable as normal dividends and are grossed up by 100/90. Gains on
disposals of shares are subject to capital gains tax in the normal way (see later in this text).

1.9

Lease premiums taxed as property income


If a lease is granted by a landlord to a tenant, the landlord may receive a capital payment from the tenant.
This is called a premium. If the lease is a short lease (50 years or less), part of the premium is taxable as
property income.
The amount of the premium taxable as property income is: [Hp38]
P

50 Y
50

Where:
P = total premium paid
Y = complete number of years of the lease minus one

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INVESTMENT INCOME

Worked example: Grant of short lease


Sasha grants a 30 year lease to Greg for a premium of 45,000.
Requirement

Compute the amount of the premium which is taxable as property income.

Solution
P

50 (30 1)
50 Y
= 45,000 =
=
50
50

18,900

Where a trader pays a premium for a lease, he can deduct an amount from his trading profits in each year
of the lease. The deduction is the amount of the premium taxed on the landlord as property income divided
by the number of years of the lease. Where the lease starts or ends during the traders accounting period
the deduction is pro rated. [Hp40]

Worked example: Lease deduction for trader


Sean grants a 25 year lease of a workshop to Fred, who carries on a trade in the workshop. The premium
paid by Fred on the grant of the lease is 15,000.
Requirement

Compute the amount that Fred can deduct each year from his trading profits.

Solution
Amount taxable on Sean

Taxable property income


15,000

50 (25 1)
=
50

7,800

Amount deductible each year by Fred

7,800
25

312

If a tenant grants a sublease of the property to a sub-tenant, any premium he receives will also be subject to
these rules. If the tenant paid a premium on the grant of the lease to him, he can deduct the appropriate
part of the amount taxed on the landlord on the original grant, from the part of the premium he receives
which is taxable as property income.

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Taxation

Worked example: Grant of sub lease


Misha granted a lease to Eleanor on 1 December 2000 for 40 years. Eleanor paid a premium of 80,000.
On 1 December 2006, Eleanor granted a 10 year sub-lease to Wayne. Wayne paid a premium of 16,000.
Requirement

Compute the amount of the premium paid by Wayne to Eleanor taxed on her as property income.

Solution
Amount taxed on Misha

Taxable property income


80,000

50 (40 1)
=
50

17,600

Amount taxed on Eleanor

Taxable property income


50 (10 1)
16,000
=
50
10
Less: 17,600
40
Taxable property income

13,120
(4,400)
8,720

2 Individual Savings Accounts (ISAs)


Section overview
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`
`

2.1

ISAs can contain cash, shares and insurance products.


An individual may invest in a maxi-ISA or two mini-ISAs.
Income and gains on ISA investments are exempt from tax.

Investing in an ISA
ISAs are available to individuals aged 18 or over. Cash-only ISAs are also available to 16 and 17 year olds.
An individual can invest in either or both of the two different components of an ISA:
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Cash and cash like equity products eg investment of cash in bank and building society accounts;

Qualifying stocks and shares and insurance products eg investment on any worldwide stock exchange
including shares and securities, gilt-edged securities, unit trusts and investment trusts and investment
in insurance products.

For each tax year, an individual can choose whether to invest in either a single maxi-ISA or one or two
mini-ISAs, one for each component.
A maxi-ISA must be provided by a single fund provider. It can include both components.
A mini-ISA provides an investment in one component only. If an individual invests in more than one miniISA, a different provider can be used for each component.

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INVESTMENT INCOME

2.2

Limits on ISA investment


There are conditions attached to the amounts that can be invested in each tax year: [Hp35]

2.3

The annual subscription limit is 7,000 for each tax year;

Maxi-ISA: an individual can invest up to 7,000 in stocks, shares and insurance products.
Alternatively, he can invest up to 3,000 in cash and cash like equity products and the balance in
stocks, shares and insurance products;

Mini-ISAs: 3,000 in a cash and cash like equity products mini-ISA; 4,000 in a stocks, shares and
insurance products mini-ISA.

Tax reliefs for ISAs


All income (interest, dividends, insurance proceeds) is exempt from income tax.
All gains and losses on disposals of assets (eg shares) are exempt from capital gains tax.

3 Enterprise Investment Scheme (EIS)


Section overview

3.1

An individual may invest in shares under the EIS, and obtain relief on up to 400,000 of the
investment.

There is an income tax reducer up to 20% of the investment.

The income tax relief may be brought back into charge if the individual disposes of the shares within
three years.

Reinvestment relief is available in relation to investments under the EIS.

Gains on EIS shares are exempt if the shares are held for three years.

Losses on EIS shares are allowable.

Investment under the EIS


An individual is eligible under the EIS if he subscribes for new ordinary shares in a qualifying company
wholly for cash.
A qualifying company is an unquoted UK trading company whose gross asset value before the share issue
does not exceed 7 million (and 8 million immediately after the share issue). The company must have
fewer than 50 full-time employees at the date of issue. The company must have raised no more than
2 million under EIS schemes in the previous 12 months.
The maximum amount of investment on which an individual can obtain relief in any tax year is 400,000.
The minimum EIS investment required in any one company is 500. [Hp36]

3.2

Income tax relief under the EIS


The taxpayer is entitled to a tax reducer, at Step 6 of the calculation of income tax liability (Chapter 1,
Section 1.5). It is equal to the lower of:
`
`

20% amount invested under the EIS scheme; and


The amount which reduces his income tax liability to nil.

Where shares are issued before 6 October, a claim can be made to treat up to 50% of the shares as being
issued in the previous year. The maximum carry back is 50,000.

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Taxation

Worked example: Carry back of EIS relief


Graham has a tax liability of 76,254 before EIS relief in 2007/08. He invested 120,000 in EIS shares on 24
August 2008 and intends to make a claim to carry back as much relief as possible to 2007/08.
Requirement

Show Graham's revised tax liability for 2007/08.

Solution
Graham
Tax liability

Original tax liability


Issued pre 6 October therefore maximum carry back lower of:
` 50,000; and
` 50% 120,000 = 60,000 ie 50,000
Tax reduction 50,000 20%
Revised tax liability

76,254

(10,000)
66,254

Income tax relief will be withdrawn if the investor disposes of the EIS shares within three years of issue.
Income tax relief is withdrawn by bringing the relief given back into charge in the tax year in which the
disposal is made.
Income tax relief is only given for the investment in shares: any dividends subsequently received on the
shares are taxable in the normal way.

3.3

Reinvestment relief under the EIS


Capital gains tax reinvestment relief is available where an investment is made under the EIS scheme.
Where any asset is disposed of and new EIS shares are subscribed for within 12 months before and 36
months after the date of the disposal, the chargeable gain arising on the disposal of the asset may be
deferred until the later disposal of the EIS shares. [Hp75]
The maximum amount of relief available is the lower of:
`
`

The amount of the gain; and


The subscription cost of the new shares.

A claim for less than the maximum amount of the relief can be made (eg to maintain the benefit of the
annual exemption).
On the disposal of EIS shares, a gain or loss may arise on the EIS shares. In addition the amount of the gain
for which reinvestment relief was claimed becomes chargeable on the disposal of the EIS shares. The gain is
eligible for taper relief based on the qualifying ownership of the original asset up to the date of the disposal
of that asset.

3.4

Capital gains tax exemption under the EIS


Any gains arising are exempt provided the EIS relief has not been withdrawn.
The capital gain exemption does not apply if the investor disposes of the EIS shares within three years of
issue. [Hp75]
If a capital loss arises on the disposal, it is allowable whether or not the disposal is within three years.
In calculating a gain or loss on the disposal of EIS shares themselves, the cost of the shares is reduced by the
amount of EIS income tax relief attributable to the shares disposed of.

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INVESTMENT INCOME

4 Venture Capital Trusts (VCT)


Section overview
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`
`
`
`

4.1

A VCT allows a taxpayer to invest in unquoted companies through a quoted company.


There is an income tax reducer up to 30% of the investment.
The income tax relief is withdrawn if the individual disposes of the shares within five years.
Gains on VCT shares are exempt.
Losses on VCT shares are not allowable.

Investment in a VCT
A VCT is a company quoted on the Stock Exchange, approved by HM Revenue & Customs (HMRC), whose
income is derived wholly or mainly from shares and securities in unquoted companies. The company must
have fewer than 50 full-time employees at the date of the issue. The company must have raised no more
than 2 million under VCT schemes in the previous 12 months.
Therefore an individual can obtain an investment in a wide variety of unquoted investments by holding
readily marketable quoted shares in a VCT.
An individual is eligible for relief if he is at least 18 and subscribes for new ordinary shares in a venture capital
trust. The maximum permitted investment for income tax relief is 200,000 per tax year. The individual may
invest more than this amount in a VCT, but will not receive tax relief on any further investment.

4.2

Income tax relief for investment in a VCT


The relief is a tax reducer at Step 6 of the income tax liability computation (Chapter 1, Section 1.5). It is
equal to the lower of: [Hp37]
`
`

30% amount invested;


The amount which reduces the income tax liability to nil.

The tax relief is only available in the tax year the investment is made.
The VCT tax reducer is given before any EIS tax reducer.
Income tax relief will be withdrawn if the investor disposes of the VCT shares within five years of issue.
Income tax relief is withdrawn by bringing the relief given back into charge in the tax year in which the
disposal is made.
Dividends received from a VCT are exempt if they relate to shares acquired within the 200,000 permitted
maximum per tax year. This relief applies even if the shares are sold within five years of issue.

4.3

Capital gains tax relief for investment in a VCT


Any capital gain is exempt and any loss is not allowable on the disposal of VCT shares, whenever the shares
are disposed of.

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Taxation

Summary and Self-test

Summary
Property income: income and
expenses accrued in tax year

Furnished property:
No CAs on
furnishings, instead
renewals basis or
wear and tear
allowance

Rent a Room relief:


Letting room in own
house gross rents up
to 4,250 per year

Losses:
c/f and set off against
first available
property income

Qualifying holiday
accommodation: keep
separate, generally
treated as a trade

Premiums on short leases:


part of premium taxed as
property income

Tax efficient investments

ISAs:
Maxi/mini,
cash, stocks & shares &
insurance products, up
to 7,000

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EIS:
tax reducer on investment,
reinvestment relief, gain
exempt if held 3 years, loss
always allowable

VCT: tax reducer on


investment, dividends
exempt, gains exempt,
losses not allowable

INVESTMENT INCOME

Self-test
Answer the following questions.
1

Harry owns a property which he lets for the first time on 1 November 2007 at a rent of 6,000 a
year, payable in four equal instalments on 1 November, 1 February, 1 May and 1 August.
Harry paid an insurance premium of 1,200 on 1 November 2007 for the year to 31 October 2008.
He had other expenses of 900 relating to the letting.
What is Harry's taxable property income for 2007/08?
A
B
C
D

900
1,100
1,625
3,900

Jane received property income as follows in 2007/08.


(1) House first let furnished on 1 August 2007. Rent of 4,200 accrued in the period to 5 April 2008.
Expenses of 649 related to the same period. Council tax and water rates are paid by the tenant.
(2) 4,000 from letting a furnished room in her home.
Jane claims the wear and tear allowance.
What amount of taxable property income does Jane have?
A
B
C
D

Which one of the following statements about maxi-ISAs is true?


A
B
C
D

3,131
7,131
3,551
7,551
The maximum investment in cash and cash like equity products is 7,000.
Any amount invested is deducted in computing the taxpayer's income tax.
No income tax is payable on income generated by ISA until the income is withdrawn.
The maximum investment in stocks, shares and insurance products is 7,000.

Which of the following statements about the EIS are true?


(1) The gross assets of the company must be more than 7m before the investment and 8m after
the investment.
(2) Dividends received from an EIS investment are taxable
(3) As long as the shares are held for three years, any gain on disposal is exempt
A
B
C
D

All of them
(1) and (2) only
(1) and (3) only
(2) and (3) only

Which of the following statements about a VCT investment are true?


(1) The maximum investment is 200,000 per tax year.
(2) Relief for income tax is a tax reducer of 30%.
(3) As long as the shares are held for five years, there is no capital gains tax on disposal.
A
B
C
D

All of them
(1) and (2) only
(1) and (3) only
(2) and (3) only

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Taxation
6

Jonas

Jonas is aged 35. In 2007/08 he had the following income and expenses:
Trading income

12,150

Building society interest received:


Deposit account
Mini cash ISA

485
120

UK dividends:
Quoted company
EIS company
VCT (from 30,000 investment)

360
738
675

Property income (letting of furnished flat):


Rent received
Redecoration
Insurance
Agent's fees
Water rates
Interest on loan to buy flat

10,720
700
600
500
360
6,000

Jonas claims the wear and tear allowance.


In January 2008, Jonas invested 5,000 under the Enterprise Investment Scheme.
Requirement

Calculate the tax payable by Jonas.

(10 marks)

Now, go back to the Learning Objectives in the Introduction. If you are satisfied you have achieved these
objectives, please tick them off.

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INVESTMENT INCOME

Technical reference
Legislation
Property income

References are to Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)
Charge to tax

ss.268 - 271

Calculation of profits

s.272

Furnished lettings

s.308

Rent a room relief

s.309

Qualifying holiday accommodation


Premiums on short leases

ss. 323 - 328


s.277

ISAs

References are to Individual Savings Account Regulations 1998 (SI 1998/1870) (as amended)
General conditions for accounts and subscriptions to accounts

reg.4

General investment rules

reg.6

Qualifying investments
Exemption from tax

regs.7 - 9
reg.22

EIS

References are to Income Tax Act 2007 (ITA 2007)


Eligibility for relief

s.157

Qualifying companies

ss.142, 180

Maximum and minimum subscriptions

ss.157-158

Form of relief
Loss of relief on disposal of shares

s.158
ss.209-210

References are to Taxation of Chargeable Gains Act 1992 (TCGA 1992)


Reinvestment relief

Sch 5B

Exemption from CGT

s.150A

VCTs

References are to Income Tax Act 2007 (ITA 2007)


Entitlement to claim relief

ss.261-265

Loss of relief on disposal of shares

ss.266-267

Reference is to Taxation of Chargeable Gains Act 1992 (TCGA 1992)


Capital gains tax exemption

s.151A

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Taxation
HMRC manual references

Property Income Manual (Found at http://www.hmrc.gov.uk/manuals/pimmanual/index.htm)


Income chargeable: overview

PIM 1051

Deductions: general rules: introduction

PIM2005

Venture Capital Schemes Manual (Found at http://www.hmrc.gov.uk/manuals/vcmmanual/index.htm)


EIS: general: structure of the scheme and the guidance

VCM20010

VCT scheme: general: what is a VCT?

VCM60020

This technical reference section is designed to assist you when you are working in the office. It should
help you know where to look for further information on the topics covered in this chapter. You will
not be examined on the contents of this section in your examination.

40

INVESTMENT INCOME

Answers to Self-test

B 1,100
Rent accrued
November 2007 March 2008
6,000 5/12
Less: insurance premium
November 2007 March 2008
1,200 5/12
other expenses
Taxable property income

2,500

500
900

(1,400)
1,100

A 3,131
House

Rent
Less: expenses
wear and tear
10% 4,200
Property income

4,200

649
420

(1,069)
3,131

Room in own house

Exempt under rent a room (gross rent less than 4,250)


3

D The maximum investment in stocks, shares and insurance products is 7,000.


The maximum investment in cash and cash like equity products is 3,000. There is no tax deduction
on an ISA investment. Income tax relief applies whether income is withdrawn or not.

D Dividends received from an EIS investment are taxable and as long as the shares are held for three
years, any gain on disposal is exempt.
The gross assets must be less than 7m, not more than 7m.

B The maximum investment is 200,000 per tax year and relief for income tax is a tax reducer of
30%.
VCT shares are exempt from capital gains tax regardless of the period of ownership.

41

Taxation
6

Jonas
Tax payable

Trading income
Property income (W)
BSI 485 100/80
Dividends:
360 100/90
738 100/90
Net income
Less: PA
Taxable income

Non-savings
income

12,150
1,524

Savings
income

Dividend
income

Total

606

13,674
(5,225)
8,449

606

400
820
1,220

606

1,220

Tax

15,500
(5,225)
10,275

223
1,368
121
122
1,834

2,230 10%
6,219 22%
606 20%
1,220 10%
10,275
Less: tax reducer EIS investment 5,000 20%
Tax liability
Less: tax deducted at source
606 20%
1,220 10%
Tax payable

(1,000)
834
(121)
(122)
591

Interest on ISA and VCT dividends are exempt from income tax.
WORKING

Income

Rent received

Expenses

Redecoration
Insurance
Agent's fees
Water rates
Interest
Wear and tear allowance:
10% [10,720 360]
Taxable property income

42

10,720

700
600
500
360
6,000
1,036

(9,196)
1,524

INVESTMENT INCOME

Answer to Interactive question

Answer to Interactive question 1


Income

Rent received
(34 + 9) = 43 125

5,375

Expenses

Allowable in full:
Gardening and cleaning
Advertising for new tenant
Allowable for let period:
Repairs
Council tax
Water rates
Redecoration
Insurance
Wear and tear allowance:
10% [5,375 ((680 + 255) 43/52) ]
Taxable property income

440
25
460
680
255
500
240
2,135 43/52

465

1,765
460

(2,690)
2,685

43

Taxation

44