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Advanced Taxation (ATX-UK) (P6)

(Finance Act 2017)

For June 2018 to March 2019
Examination Sittings
Pocket Notes
Advanced taxation

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ATX (P6)

Contents Reference to
Study text Page
chapter Number
Chapter 1 Income tax – overview and investment income.....................................1, 3................ 1
Chapter 2 Employment income – income tax and national insurance........................2.............. 15
Chapter 3 Relief for pensions......................................................................................4.............. 35
Chapter 4 Capital gains tax – introduction..............................................................6, 7.............. 43
Chapter 5 Capital gains tax – shares and securities..................................................8.............. 59
Chapter 6 Capital gains tax – reliefs...........................................................................9.............. 69
Chapter 7 Stamp taxes...........................................................................................6, 8.............. 95
Chapter 8 Inheritance tax.....................................................................................11-13.............. 99
Chapter 9 Personal tax – overseas aspects.......................................................10, 13............ 129
Chapter 10 Trusts........................................................................................................14............ 155
Chapter 11 Ethics, personal financial management and self-assessment.......3, 15, 16............ 165
Chapter 12 Personal tax planning.......................................................................2, 5, 13............ 193
Chapter 13 Business tax........................................................................................17-19............ 207
Chapter 14 Value added tax..................................................................................20, 21............ 243


Advanced taxation

Reference to
Study text Page
chapter Number

Chapter 15 Corporation tax – liability and losses..................................................22-24............ 269

Chapter 16 Groups – corporation tax and VAT ....................................................27, 29............ 297
Chapter 17 Overseas issues – corporation tax and VAT......................................21, 28............ 317
Chapter 18 Business finance and tax planning for companies.......................25, 26, 29............ 333
Index ..................................................................................................................................... I.1


ATX (P6)

Preface The exam

These Pocket Notes contain the key points Section A (60%)
you need to know for the exam, presented in • Two compulsory case-study questions:
a unique way that makes revision easy and
Question 1: 35 marks
Question 2: 25 marks
Written by experienced lecturers and
There will also be 5 ethics marks and 4
authors, these Pocket Notes break down
professional skills marks available in this
content into manageable chunks to maximise
your concentration.
Section B (40%)
• 2 compulsory 20-mark questions, covering
Quality and accuracy are of the utmost both business and personal tax issues.
importance to us so if you spot an error in
The entire syllabus can be tested in either
any of our products, please send an email
section A or section B.
to with full
details, or follow the link to the feedback Candidates will be expected to undertake
form in MyKaplan. both calculation and narrative work. The
questions will be scenario-based and may
Our Quality Co-ordinator will work with our involve consideration of more than one
technical team to verify the error and take tax, some elements of planning and the
action to ensure it is corrected in future interaction of taxes.


Advanced taxation

The examination time is 3 hours and 15

Exam focus
The examining team has stated that the ATX
Topics which are not tested at TX (F6)
(P6) exam will concentrate on the application
and are new to ATX (P6) will be frequently
of tax rules and will require the
examined. However, candidates will
demonstration of evaluation and explanation
also need a thorough knowledge and
understanding of the basic tax rules tested in
the TX (F6) syllabus. They will set questions involving:
• the interaction of taxes
• decision making within the facts of a
given situation
• making choices in a given situation and
evaluating the tax savings which can be
Questions in section A will be open ended
and are likely to require presentation in the
form of a report or letter.
Section B questions will be more structured
in their requirements.


ATX (P6)

Aim of the paper

To apply relevant knowledge and skills and exercise professional judgement in providing relevant
information and advice to individuals and businesses on the impact of the major taxes on financial
decisions and situations.
Main capabilities

Understanding of the tax system through the study of

more advanced topics within the taxes studied previously and
the study of stamp taxes (A)

Impact of relevant taxes Minimising and/or

on various situations and deferring tax liabilities by the
courses of action, including the use of standard tax planning
interaction of taxes (B) measures (C)

Communication with clients, H M Revenue and Customs and

other professionals in an appropriate manner (D)


Advanced taxation

The keys to success: ATX Provide advice and exercise judgement

(P6) – Higher skills
• Express yourself in clear, concise
Master the technical content technical language.
• Learn the rules, definitions and pro • Apply common sense to the problem as
formas well as your technical knowledge.
• Practise questions to improve your ability • Tailor your answer to the facts of the
to apply the techniques and perform the question and make references to the
calculations scenario given.
• Practise writing explanations of the rules • Be prepared to express an opinion or
to improve your understanding and draw a conclusion from the facts given
written skills – if the question asks for an opinion, give
• Be prepared to produce a report /letter / one.
memorandum. • Be prepared to suggest improvements to
a proposed strategy and to identify tax
planning opportunities.
• When dealing with more than one tax,
address each one separately.



1 Income tax – overview

and investment income
In this chapter
• Income tax pro forma.
• Rates of income tax.
• Married couples and civil partners.
• Child benefit tax charge.
• Exempt income.
• Property income.
• Rent-a-room relief.
• Furnished holiday accommodation.
• Real estate investment trusts.

Income tax – overview and investment income

Exam focus Income tax pro forma

Income tax computation – 2017/18
The computation of income tax is likely to
feature throughout the examination. £
Total income x
Income from property is another key topic Less: Reliefs (x)
covered in this chapter. –––––
Net income x
It is also important to understand the
Less: Personal allowance (x)
marginal effect of transactions (i.e. the –––––
additional income tax payable as a result of Taxable income x
receiving additional income, or the income –––––
tax savings where income is reduced).
Income tax – analyse income
Exam focus Non- Savings Dividends
The income tax computation is essential Basic rate band
knowledge. 20% 20% 7.5%
(first £33,500)
Use the following pro forma to gain easy Higher rate
band (£33,501 – 40% 40% 32.5%
marks on this aspect of the examination.
Additional rate
band (over 45% 45% 38.1%

Chapter 1

Income tax payable remittance basis will be subject to income

£ tax at the non-savings income rates. The
Total income tax (per rates) x savings and dividend nil rate bands and
Less: Tax reducers (x) the lower rates applicable to dividends
––– will not be available.
Income tax liability x
Less: Tax credits/PAYE (x) Key Point
Payments on account (x)
––– Extend the basic rate and higher rate
Income tax payable/(repayable) x/(x) bands if a taxpayer makes payments into a
––– personal pension scheme.
Exam focus
(1)  If savings nil income falls into the first
£5,000 of taxable income it is taxed at Section A questions
0% (not 20%). • Mirtoon
(2) A savings income nil rate band of • Ziti
£1,000/£500 is available to basic/higher • Pippin
rate taxpayers respectively – The savings
Section B questions
income nil rate band is not available to
• Shuttelle
additional rate taxpayers.
• Stella and Maris
(3)  All taxpayers are entitled to a £5,000
• Kesme and Soba
dividend nil rate band.
• Cate and Ravi
(4)  Overseas income assessed under the • Traiste Ltd

Income tax – overview and investment income

Reliefs Personal allowance (PA)

• Interest on qualifying loans – paid gross • Available to all individuals
• Loss reliefs • £11,500 for 2017/18
• Maximum deduction from total income • Deducted from net income to give
= greater of taxable income
–– £50,000 • Transferable amount £1,150 (see later)
–– 25% x adjusted total income (ATI) • Lost if not used in the year
• Therefore the restriction will be £50,000
unless ATI exceeds £200,000.
• ATI is calculated as:
Total income X
Less: Gross PPCs (X)
–––– Exam focus

Exam focus Exam kit questions on this area:

Section B questions
The maximum restriction is more likely to
be examined in the context of loss relief • Amy and Bex
(Chapter 13)

Chapter 1

Reduction of PA – higher rate taxpayers Marriage Allowance

• If Adjusted net income (ANI) > £100,000: • A spouse or civil partner can elect to
–– reduce PA by: transfer a fixed amount of the PA to their
50%  (ANI – £100,000) spouse/civil partner.
• If ANI > £123,000: • This is known as the marriage allowance
–– no PA
• Neither spouse/civil partner may be a
• Effective rate of tax on income between
higher or additional rate taxpayer.
£100,000 to £123,000: 60%
• ANI is calculated as:
• The fixed amount of PA to transfer:
£ = 10% of the individual’s PA
Net income per IT comp x = £1,150 for 2017/18.
Less: Gross gift aid (x)
• There is no provision for transferring less
Less: Gross PPCs (x)
–––– than this amount.
–––– • Relief is given by reducing the recipient’s
income tax liability by a maximum of
Exam focus
£230 (i.e. £1,150 x 20% BR income tax).
Exam kit questions on this area:
Section B questions
• Tetra
• Shuttelle

Income tax – overview and investment income

Tax reducers Rates of income tax

• EIS, SEIS and VCT relief • Income tax rate bands apply to the
= 30%/50%/30% different types of income in the following
• DTR = Lower of UK and overseas tax order:
1 non-savings income
2 savings income
3 dividend income
• To maximise tax relief in most cases
offset PA and reliefs against income in
the same order as above.
• In some circumstances it is beneficial
to offset the PA in a different order e.g.
offset against dividend income first to
avoid wasting the savings starting rate or
nil rate band.

Chapter 1

Income Married couples and civil

Non-savings income: partners
• Employment income Joint income
• Trading income • Applies to married couples and civil
• Property income partnerships.
• Pension income
• Trust income: discretionary, or property • The income arising from assets (except
income from an IIP trust. shares in close companies) held jointly
by husband and wife is normally split
Savings income: 50:50.
• Interest received net of (20%) tax:
interest from an IIP trust, unquoted loan • An election is available to split the
stock issued by UK resident companies. income according to beneficial
• Interest received gross:
NS&I accounts, gilts, treasury stock, • The election cannot be made for joint
exchequer stock, quoted loan stock bank or building society accounts.
issued by UK resident companies, bank Parental dispositions
and building societies.
• Income earned by a child from a parental
Dividend income: disposition = taxed on the parent if the
• This includes overseas dividends for all gross income received in the tax year
UK resident individuals. exceeds £100 p.a.

Income tax – overview and investment income

Child benefit tax charge Where the charge applies the taxpayer must:
• complete a tax return
A child benefit charge arises where:
• pay the charge through the self-
• an individual receives child benefit, and
assessment system.
• they, or their spouse/civil partner, have
ANI ≥ £50,000. The tax charge can be avoided by choosing
not to claim child benefit.
ANI = as for the restriction of the basic PA.

Income Tax charge

£50,000 – £60,000 1% of child benefit
for each £100 of
income over £50,000
Over £60,000 The amount of child
benefit received

Both the appropriate percentage and the

tax charge are rounded down to the nearest
whole number.

Chapter 1

Exempt income • Income from individual savings accounts

• Interest on:
• On death of a spouse/civil partner:
–– NS&I savings certificates
–– v alue of ISAs held at death =
–– Save As You Earn (SAYE) share save
available as additional ISA allowance
for surviving spouse/civil partner.
–– Repayment interest (interest on tax
•  ividends received on shares from
venture capital trusts (VCTs).
• Scholarships and educational grants.
•  rizes and winnings (i.e. premium bonds,
P Stocks and
Cash ISA
betting). shares ISA

•  tatutory redundancy pay and the first

£30,000 of compensation received for
loss of employment. Maximum Investment

•  ertain state benefits (Child benefit,

Universal credit).
Any combination of
cash/stock and
Income tax – overview and investment income

Property income Pro forma – property income

• Taxes income from land and property. £
• Taxable income calculated using trading Rent receivable in the tax year X
income rules; accruals basis, wholly and
exclusively test. Plus: Rental income portion of short
lease premiums received in
• Taxed as other income at: tax year (see below) A
–– 20%, 40% or 45%.
Less: Allowable expenses (X)
• Additional points re expenses:
Profit / (loss) X/(X)
–– interest paid = allowable deduction
for individuals subject to special rules
(see below)
–– replacement furniture relief for the
cost of replacing furnishings
–– for residential property, capital
allowances are only available
on equipment used for property
• Property income losses
–– for individuals, can only be carried
forward against future UK property
Chapter 1

Financing costs Premium for granting short leases only

• Tax relief restricted to basic rate. Income element is calculated as:
• Applies to finance costs relating to loans £
to buy or improve residential property. Premium x
• Being phased in gradually. Less: 2% x premium x (n – 1) (x)
• For 2017/18:
Income element A
–– 75% of finance costs deductible from
property income. Alternative calculation:
–– Tax relief for remaining 25% given at 51 – n
A = Premium x ––––––
basic rate (20%) by deduction from 50
income tax liability. Where n = no. of years of lease
• Note: No restrictions for:
–– companies
–– loans relating to furnished holiday
–– loans relating to non-residential

Income tax – overview and investment income

Rent-a-room relief Furnished holiday

• Furnished room in a main domestic accommodation (FHA)
residence. • Assessed as property income but:
• Gross rents  £7,500 –– treat as arising from a single and
–– exempt, unless elect for loss. separate trade.
• Gross rents  £7,500 • Advantages:
–– normal property income calculation –– b
 usiness asset for CGT rollover
relief, gift relief and entrepreneurs’
–– u
 nless elect for excess over £7,500
to be taxed (with no deduction for
expenses). –– relevant earnings for pensions relief
–– finance costs fully deductible
–– c apital allowances on all P&M,
including furniture.
Exam focus • Losses:
Exam kit questions on this area: –– c an only be set against profits from
the same FHA business
Section B questions
–– U
 K FHA losses can only be set
• Kesme and Soba against UK FHA profits
–– E
 EA FHA losses can only be set
against EEA FHA profits

Chapter 1

–– firstly offset in the same year

Exam focus
–– then carry forward.
Exam kit questions on this area:
• Conditions:
Section B questions
–– situated in UK or EEA
• Monisha and Horner
–– let furnished on commercial basis
–– available to let  210 days/tax year
–– actually let  105 days/tax year
–– if own more than one property,
averaging is available to satisfy the
105 day rule
–– n
 ot let for periods of ‘long term
occupation’ (occupied by same
person > 31 consecutive days) in
excess of 155 days in a 12 month

Income tax – overview and investment income

Real estate investment

trusts (REITs)
• Quoted property investment trust.
• Dividends received by individual from
–– treated as property income
–– received net of 20% tax.


2 Employment income
– income tax and national insurance
In this chapter
•• Employment income – pro forma.
•• Benefits summary.
•• Vehicle benefits.
•• Living accommodation.
•• Beneficial loans.
•• Use of assets.
•• Gift of assets.
•• Share options – tax treatment.
•• Tax advantaged schemes.
•• Lump sum payments.
•• National insurance.
Employment income – income tax and national insurance

Exam focus Employment income

– pro forma
Employment is a particularly important area.
£ £
Skills required may vary from performing the Salary x
basic calculation of employee benefits to Bonus/Commission x
higher skills. For example, making decisions Benefits x
between whether an employee should accept Reimbursed expenses x
a company car or run their own car and take –––
a cash alternative from the business instead. Gross earnings x
Less: Allowable expenses (x)
You may also be required to express an (See overleaf)
opinion on whether an individual, given a Add: Redundancy payment x
particular scenario, is likely to be treated as Less: Exempt portion (x)
self-employed or as an employee. (First £30,000 of
redundancy is tax free)
Employment income x

Chapter 2

Allowable expenses
Exam focus
•• Contributions to employers registered
Exam kit questions on this area: occupational pension scheme.
Section B questions •• Subscriptions to professional bodies.
•• Morice and Babine plc •• Charitable donations under a payroll
deduction scheme.
•• Jerome and Tricycle ltd
•• Shuttelle •• Travel, subsistence and entertaining
incurred wholly, exclusively and
•• Pita plc
necessarily in the performance of the
•• Cate and Ravi
office or employment (see Note).
•• Methley Ltd
•• Cost of partnership shares acquired in a
•• Traiste Ltd
share incentive plan (SIP).
•• Deficit on mileage allowance (AMAP).
Note: Travel and related expenses
–– Not travel from home to permanent
–– Travel from home to a temporary
workplace is allowed if the placement
is expected to last less than 2 years.

Employment income – income tax and national insurance

Benefits summary

Taxable benefits Exempt benefits

General rule: •  Job-related accommodation

Assessed on cost to employer •  Subsidised canteen
(marginal cost if ‘in house’ benefit) (unless part of salary sacrifice scheme)
Special rules: • U
 p to £4 per week towards additional household costs
Non-cash vouchers – cost to employer where the employee works from home
Accommodation – see below •  Occupational pension contributions
Company cars/vans/fuel •  Workplace parking
Beneficial loans •  Relocation expenses ≤ £8,000
Gift and use of assets •  Overnight subsistence
Accommodation – See below •  Mobile phone (one)
•  Workplace nurseries
•  Childcare vouchers ≤ £55/week (or £28 for HR or £25
for AR employees)
•  Annual party ≤ £150 per person per annum
•  Eye care tests
•  Cheap loans ≤ £10,000
•  AMAPs
• Recommended medical treatment assisting return to
work (up to £500 per employee per tax year)

Chapter 2

Exam focus
Points frequently examined:
•• employee contributions
–– d
 educt amounts paid in tax year
from benefit
–– b
 ut note special rules for car:
capital contributions (max £5,000)
and fuel contributions (not allowable)
•• where the benefit is wholly and exclusive
for employment
–– c alculate benefit and deduct expense
•• benefits not available for part of year
–– time apportion.

Employment income – income tax and national insurance

Approved mileage allowance payments

Exam focus
•• The AMAP rates for cars and vans
If employee uses own car, van, motorcycle or
will be provided in the tax rates and
bicycle for business purposes:
allowances (but not the passenger or
AMAPs = tax free other rates).

If mileage allowance received > AMAP:

Excess = taxable benefit
If mileage allowance received < AMAP:
Exam focus
Shortfall = a
 llowable deduction from
Exam kit questions on this area:
employment income
Section B questions
Passenger payments (if provided) for taking
•• Hyssop Ltd
colleagues on same business trip:
•• Morice and Babine plc
•• tax free if up to statutory limit
(5p per passenger) •• Jerome and Tricycle Ltd
•• no deduction for a shortfall. •• Shuttelle
•• Spike
•• Pita plc
•• Methley Ltd

Chapter 2

Vehicle benefits
Where employer provides vehicle used for private purposes by employee.


Car benefit Private fuel Van benefit

n £3,230 p.a. for use of van
Basic car benefit: £22,600 3 % 3 12 •
• £610 p.a. for private fuel
n • % based on car percentage
List price 3 % 3 • Time apportion if
12 • Employee contributions ignored
unavailable > 30 days
• list price, including extras unless reimburses private fuel in full
• employee capital
contribution deductible
(max £5,000)
• benefit reduced if Appropriate %
unavailable > 30 days The percentage used to calculate the car benefit depends on CO2 emissions.
Emission rate per kilometre travelled (‘Base level’) Percentage
• benefit includes all running
95 grams (given in exam) 18% petrol
costs except private fuel
Increased by 1% for every extra 5 grams emitted (max 37%)
• n = number of months car
3% supplement for diesel engines (max 37%)
Low emission car reduced rates:
CO2 emission rate ≤ 50 g/km: 9% (petrol) or 12% (diesel)
CO2 emissions 51-75 g/km: 13% (petrol) or 16% (diesel)
CO2 emissions 76-94 g/km: 17% (petrol) or 20% (diesel)

Employment income – income tax and national insurance

Living accommodation
Benefit Amount taxable Job-related
Basic charge Higher of: Exempt
•• Annual value
•• Rent paid by employer
Expensive accommodation (Cost – £75,000) 3 ORI Exempt
(where employer owns property
ORI = official rate of interest
and cost is > £75,000)
(provided in the exam)
Ancillary services:
•• Use of furniture 20% x m
 arket value when first Same as for non-job
provided related accommodation
•• Living expenses (e.g. heating, Cost to employer Maximum total benefit
electricity, decorating) restricted to 10% of other
employment income
•• Council tax Cost to employer No charge

Chapter 2

Job-related accommodation
Key Point
•• Where the employer rents the
accommodation there can never be an Accommodation which is:
expensive accommodation charge.
•• necessary for proper performance of
•• For the expensive accommodation employee’s duties, or
•• provided for the better performance of
duties and it is customary to provide
Cost = Acquisition cost of the property
such accommodation, or
plus capital improvements up to
the start of the tax year. •• provided as part of special security
arrangements because of a specific

threat to the employee’s security.
If the property is occupied by the
employee more than 6 years after it was
acquired by the employer:
–– s ubstitute the acquisition cost with
the market value at the date the
Exam focus
property was first occupied.
Exam kit questions on this area:
Section B questions
•• Shuttelle

Employment income – income tax and national insurance

Beneficial loans Exceptions

Where an interest free/subsidised loan made •• No benefit if:
to employee:
–– total loans outstanding at any time in
£ the tax year is ≤ £10,000, or
Capital (see below)
–– loans made on ordinary commercial
x official rate of interest (ORI) X
terms (i.e. same terms as to public)
Less: Interest actually paid (X)
Taxable benefit X
––– Exam focus

•• ORI = 2.5% for June 2018 to March •• The benefit should be calculated using
2019 exam sittings (given in tax tables) both methods in the examination unless
the questions states otherwise.
•• Two methods of calculation of capital:
–– Average method:
Opening balance +
Closing balance = average capital

–– Precise method:
calculated each month on balance
•• Either taxpayer or HMRC can elect for
precise method to be used

Chapter 2

Use of assets Used asset:

•• Benefit: •• Benefit is greater of:
20% 3 MV when first made available Method 1
•• 20% rule does not apply to private use of
– Market value at time of transfer X
cars, vans and accommodation provided
Less: Amount paid by employee (X)
by employer. –––
Gift of assets Method 2
New asset: – Market value when first used X
Less: Amount charged as
Benefit = cost to employer.
benefit over period of use (X)
Less: Amount paid by employee (X)
•• These rules do not apply to transfer of:
–– a used car or van
–– bicycles provided for work.
 he benefit in this instance
= Method 1

Employment income – income tax and national insurance

Share options – tax treatment

Non-tax advantaged (Unapproved) Tax advantaged (approved)
Grant of option No tax No tax
Exercise of options Income tax and NIC No tax
(i.e. buy shares) Collected under PAYE immediately
Employment income charge:
MV @ exercise date x
Cost of option (x)
Cost of shares (x)
Employment income charge x
Sale of shares CGT £ CGT £
Proceeds x Proceeds x
Less: Cost of shares (x) Less: Cost of shares (x)
––– –––
Chargeable gain x Chargeable gain x
––– –––
Cost of shares = MV when exercised Cost of shares = E
 xercise price

Chapter 2

Exam focus
(1) Class 1A NIC will be payable by the
employer: Exam kit questions on this area:

•• unless the shares are quoted, Section B questions

•• in which case class 1 will apply, •• Spike

which means the employee will also
be liable.
(2) The gain is taxed at 0%, 10%, or 20%
depending on the availability of the AEA,
entrepreneurs’ relief and level of taxable
(3) Entrepreneurs’ relief will only be
available if:
•• the employee owns at least 5%
shareholding of the company
•• for the 12 months prior to sale.
Except for EMI shares, where:
•• the 12 months ownership
commences at the date the option is
granted, and
•• there is no 5% holding requirement.

Employment income – income tax and national insurance

Tax advantaged schemes

Tax advantaged share option schemes


Participation Employer chooses Employer chooses All employees
Maximum value £30,000 per employee £250,000 per employee. £500 per month
Scheme max £3m
Exercise period 3 – 10 years Up to 10 years 3 or 5 years
Issue price MV Issue at MV to avoid IT Not < 80% of MV
Base cost of Price paid Price paid plus discount Price paid
shares for CGT taxed as income on
exercise (if any)
Other If own > 30% of Gross assets  £30m
company = excluded Employees < 250
from the scheme ER period of ownership
runs from date of grant (not
date shares acquired) and
no need to own  5% of

Chapter 2

Share incentive plan (SIP)

Participation All employees

Awarded free shares Max £3,600 per year
Purchase partnership Max = lower of:
shares •• £1,800, and
•• 10% salary
Cost = allowable deduction against employment income
Awarded matching Max 2 per partnership share
Dividends Tax free if invested in further shares
Holding period • 5 years – IT and NIC free
• If 3-5 years IT and NIC on lower of:
–– initial value of the shares
–– Value of the date of withdrawal
• If 3 years
IT and NIC on value of the shares at the time when they cease to
be held in the plan
Base cost of shares MV when removed from plan

Employment income – income tax and national insurance

Exam focus Exam focus

In the examination you may be required to Exam kit questions on this area:
recommend a suitable tax advantaged share Section B questions
scheme based on the facts in a particular •• Morice and Babine plc
situation. •• Pita plc
Use the following factors to assist in deciding •• Klubb plc
the most appropriate option: •• Methley Ltd

•• participants – open to all/selective

•• share award vs share option scheme
•• financial limits – amount to be awarded
•• size of company – EMI only available to
smaller companies
•• holding period for shares/options.

Chapter 2

Lump sum payments Termination payments on loss of office

•• generally associated with termination. •• If contractual = taxable
•• If non-contractual / ex-gratia
•• but may be used as an incentive to
= first £30,000 exempt
attract an employee.
–– £30,000 includes statutory
Three types: redundancy pay
•• Restrictive covenants (i.e. restraint of
Wholly Fully First £30,000 trade) = fully taxable.
exempt taxable exempt
Taxable amounts
•• Payments •• Pay in lieu •• Genuine •• Assessed in year of receipt
for death, of notice ex-gratia
•• Paid before P45 = Paid net of PAYE
injury and where payments for
disability contractual loss of office
•• Paid after P45 = Paid net of marginal
(see below) rate income tax
•• Statutory •• Reward
•• Taxed as top slice of income (after
redundancy for past
pay or future dividends).
•• Approved services Exam focus
lump sum on
retirement Exam kit questions on this area:
Section B questions
•• Tetra
•• Pita plc
•• Amy and Bex
•• Traiste Ltd
Employment income – income tax and national insurance

National insurance •• Payable at 12% on earnings between

£8,165 and £45,000.
•• Payable at 2% on earnings above
Employee class 1 £45,000.
•• Employees pay class 1 NICs on their •• Contributions are collected by the
‘cash earnings’. employer through the PAYE scheme.
•• Cash earnings includes: Employers
–– a
 ny remuneration derived from
employment and paid in money
–– v ouchers exchangeable for cash or
–– reimbursement of cost of travel
between home and work. Employer’s Class 1A
•• Cash earnings does not include: class 1
–– exempt employment benefits
–– most non-cash benefits Cash earnings Benefits
–– reimbursement of business expenses.
–– mileage allowance  45p per mile.
•• Payable by all employees
–– aged 16 to state pension age.

Chapter 2

Employer’s class 1 Employment allowance

•• Cost borne by employer. •• Up to £3,000 p.a. allowance.
•• Allowable trading expense for tax •• Deducted from employer’s class 1 NICs
purposes. only.
•• Rate of 13.8% on earnings over £8,164 •• Not available where a director is the
per annum. company’s only employee.
•• Paid on ‘cash earnings’, as for employee •• Claimed though the PAYE system.
class 1.
Class 1A
•• Paid in respect of employees aged ≥ 16.
•• Payable by the employer only.
•• Employment allowance available.
•• Payable with employee class 1 •• Rate of 13.8% on taxable benefits
contributions through PAYE system. provided to the employee.

•• Payable on 22nd of the next month •• Payable by 22 July following the tax year
(electronic payments), or 19th of the next if paid electronically) or 19 July (if not
month if not paid electronically. paid electronically).

Employment income – income tax and national insurance


Relief for pensions

In this chapter
• Pensions – overview.
• Types of registered pension schemes.
• Tax relief.
• Annual allowance.
• Lifetime allowance.
• Benefits on retirement.

Relief for pensions

Exam focus Pensions – overview

• Tax relief available for contributions by
Individuals investing in a registered pension
under 75 year olds into HMRC registered
scheme can reduce their income tax liability
pension schemes.
at their highest marginal rate in the tax year
in which they make the investment. • Scheme must satisfy conditions.

Questions may require you to:

• provide information regarding the rules
about the maximum amount a person
is permitted to invest in their pension
• advise a client as to how much tax they
can save if they invest in a registered
pension scheme, and/or
• advise a client as to the maximum
amount they should invest in a particular
tax year in order to maximise their tax

Chapter 3

Types of registered pension schemes

HMRC registered pension schemes

Employed Self employed

Pensionable employment Non-pensionable employment

Occupational Pension Plan (OPP) Personal Pension Plan (PPP)

Relief for pensions

Tax relief Method of relief

Tax relief available for contributions into Employee contributions

HMRC registered pensions of up to:
OPP Allowable deduction against
Lower of: employment income
(a) Total gross contributions paid PPP Basic rate relief
(b) Maximum amount = Higher of: • at source
Higher rate
(i) £3,600
/ additional rate relief
(ii) 100% x (relevant earnings).
• extend basic rate band
Relevant earnings = trading profits, / higher rate band
employment income,
FHA income. Employer contributions
• tax allowable against business profits
Exam focus • exempt benefit for individual
Exam kit questions on this area: • taken into account when calculating total
Section B questions contributions to be compared with the
annual allowance (AA).
• Tetra
• Shuttelle
• Stella and Maris

Chapter 3

Annual allowance (AA) • Unused AA b/f from the previous three

• Where total contributions paid into tax years is taken into account:
pension schemes > the current year AA –– can only be c/f if the individual was
plus unused AA b/f: a member of a registered pension
–– a tax charge arises on the excess. scheme for that tax year
• The tax charge is: • Order of utilisation:

–– taxed as the individual’s top slice of –– current year AA is used first

income. –– then earlier three years unused
–– paid through the self-assessment amount, on a FIFO basis
Exam focus

Exam kit questions on this area:

Section B questions
• Shuttelle
Exam focus • Stella and Maris
In the examination:
• tax the excess last (i.e. after dividends) at
non-savings rates.

Relief for pensions

Restriction of annual allowance – high Threshold income

income individuals £
• The annual allowance is gradually Net income (from the income
reduced for individuals with high income. tax computation) X
• The restriction applies to individuals with Less: Individual’s gross personal
a ‘threshold income’ exceeding £110,000 pension contributions (X)
and ‘adjusted income’ exceeding Threshold income X
• The annual allowance is reduced by:
(Adjusted income – £150,000) × 50% Adjusted income
• The maximum reduction to the annual £
allowance is £30,000, meaning the Net income (from the income
minimum annual allowance is £10,000. tax computation) X
Plus: Individual’s employee’s
occupational pension contributions X
Employer’s contributions into any
scheme for that individual X
Adjusted income X

Chapter 3

If threshold income ≤ £110,000

The annual allowance for the tax year is
If threshold income > £110,000 and adjusted £40,000 (no restriction).
income ≤ £150,000:
If threshold income is > £110,000 and adjusted The annual allowance for the tax year must
income > £150,000: be reduced by (adjusted income – £150,000)
x 50%

Relief for pensions

Lifetime allowance (LA) Tax free lump sum

• LA = Total pension value that can obtain • Maximum = 25% of lower of:
tax relief (1) value of fund
• LA can not exceed £1,000,000. (2) lifetime allowance (LA).
• Considered when individual becomes • The balance of the fund can be
entitled to take his pension/lump sum on withdrawn at any time.
• Withdrawals from the balance are
• If the value of the pension fund at the subject to income tax at normal rates
time exceeds the LA: an additional (20%, 40% or 45%).
charge arises.
If value of fund > LA:
• Income tax charge on excess
Benefits on retirement
–– at 25% if used to purchase a pension
Pension fund grows tax-free
–– at 55% if taken as a lump sum.
• Exempt income tax.
Pension income
• Exempt capital gains tax.
• Pension income = taxable earned
Commencement of benefits income.
• Aged 55. • On death – pension income and/or lump
• Can continue to work and draw a sums for dependants may be made.


4 Capital gains tax – introduction

In this chapter
•• Scope of CGT.
•• CGT computation procedure – individuals.
•• Pro forma CGT computation.
•• Chargeable gain computation – individuals.
•• Part disposals.
•• Chattels.
•• Assignment of leases.
•• Assets lost or destroyed.
•• Asset damaged.
•• Capital losses.
•• Connected persons.
•• Married couples and civil partners.
•• Payment by instalments.

Capital gains tax – introduction

Exam focus Scope of CGT

•• A chargeable gain arises when:
Evaluation of capital gains and losses is
–– a chargeable disposal is made
likely to feature heavily in the examination.
–– by a chargeable person
Questions are likely to feature both
–– of a chargeable asset.
computational and planning aspects.
•• Companies
This chapter provides the tools to enable you
–– pay corporation tax.
to deal with the computational aspects of
different scenarios. •• Individuals
–– pay capital gains tax.

Chapter 4

Scope of CGT

Chargeable persons Chargeable disposals

Chargeable assets
• individual • sale/gift of whole/part of asset
• company • all assets unless • loss/destruction of asset
• trustee specifically • compensation for damage
• partners in a partnership exempt • capital sums received re surrender of rights

Exempt assets Exempt disposals

• gains – no CGT –– equity ISA investments • trading disposal
• losses – no relief –– cash • transfers on death
• examples: –– endowment policy • gifts to charity
–– qualifying corporate proceeds
bonds (QCBs) –– motor cars
–– gilts –– wasting chattels
–– trading inventory (e.g. horses, boats)
–– receivables –– shares in VCT

Capital gains tax – introduction

CGT computation procedure Pro forma CGT computation

– individuals
Compute the CGT payable by an individual
Net chargeable gains for tax year
for a tax year as follows:
(after specific reliefs) X
(1) Calculate the chargeable gains / Less: Capital losses b/f (X)
allowable losses on the disposal of each ––––
chargeable asset separately X
(2) Consider availability of any CGT reliefs Less: AEA (2017/18) (11,300)
(Chapter 6) ––––
(3) Calculate the net chargeable gains Taxable gains X
arising in the tax year ––––
CGT payable
= (chargeable gains less allowable (at appropriate rate) X
losses) ––––
(4) Deduct capital losses brought forward Due date 31 January 2019
(5) Deduct the annual exempt amount (AEA) (31 January after end of tax year)
= taxable gains
Payable by instalments may be possible
(6) Calculate the CGT payable at 10% and/ (see later).
or 20% depending on the availability of
entrepreneurs’ relief (ER) and level of
taxable income (18%/28% for residential

Chapter 4

Chargeable gain computation £

– individuals Consideration (a), (b) X
Less: Incidental costs of sale (c) (X)
Exam focus ––––
Net disposal proceeds X
The following pro forma can be used as Less: Allowable expenditure
the basic layout for the computation of the – acquisition cost (d) (X)
chargeable gain/allowable loss arising on – incidental costs of acquisition (c) (X)
each disposal by an individual. – enhancement expenditure (X)
Elements of the pro forma are computed Chargeable gain/loss X/(X)
differently for specific assets (e.g. part ––––
disposals). The approach to take for assets If a chargeable gain arises:
with additional rules is shown on the Chargeable gain before reliefs X
subsequent pages. Less: CGT reliefs (e) (X)
Chargeable gain after reliefs X
If an allowable loss arises:
Deduct any capital losses for the year
from chargeable gains and include the net
chargeable gains in the pro forma CGT
payable computation.

Capital gains tax – introduction

(a) Disposal proceeds or market value (MV).
(b) Date of disposal:
date of contract/date conditions satisfied
for conditional contracts.
(c) Legal expenses, valuation fees,
advertising costs, stamp duty,
auctioneer’s fees.
(d) Cost/MV/probate value.
(e) Gift relief, rollover relief, incorporation
relief, PPR and letting relief, EIS/SEIS
(f) The gain is aggregated with other gains
and losses and taxed at 10%, or 20%
depending on the AEA, ER and the level
of taxable income. (18% or 28% for
residential property gains)

Chapter 4

CGT – Variations to the pro forma

Part disposals Assignment of a short lease Chattels

Cost =
A Unwasted cost
A+B Cost or SP Cost and
Lease % at date of disposal
A = MV of part disposal = Cost x
Lease % at acquisition date < £6,000 SP > £6,000
B = MV of remainder
Special rules but Normal
not examinable computation

Cost and
SP ≤ £6,000

Capital gains tax – introduction

Part disposals Exam focus

Key Point
Exam kit questions on this area:
Where only part of an asset is disposed of •• Kantar
the cost is adjusted to reflect the cost of the
Small part disposals
part sold.
••  lect to deduct proceeds from the base
•• Cost of part of asset disposed of: cost of part retained
A A = consideration •• applies if proceeds of part disposed of:
Cost 3 A + B
B = MV of the remainder
–– ≤
 5% of value of whole at date of
•• incidental costs which relate: part disposal, or
–– wholly to the part sold –– ≤ £3,000
= fully deductible •• for land and buildings the limit is:
–– to the whole assest –– 20% of the value of the asset,
= apportioned as above (i.e. A/A+B)
–– p
 rovided proceeds from land and
building sales do not exceed £20,000
in the year.

Chapter 4


Tangible movable property

(e.g. painting, jewellery, racehorse, boat,

Wasting chattels:
•• expected life ≤ 50 years
(e.g. racehorse, boat, caravan)
•• exempt from CGT unless plant and
machinery on which capital allowances
Non-wasting chattels:
•• expected life > 50 years
(e.g. antiques, painting)
•• subject to £6,000 rule but special rules
not examinable.

Capital gains tax – introduction

Assignment of leases
Long lease (i.e. > 50 years) Short lease (i.e.  50 years)
•• subject to normal CGT •• subject to special CGT computation
computation •• cost adjusted to reflect depreciating nature of the asset:
Percentage for remaining life on disposal
Allowable cost 3 Percentage for remaining life on acquisition
The % will be provided in the examination

Exam focus

Exam kit questions on this area:

Section B questions:
•• Ash

Chapter 4

Assets lost or destroyed

Asset lost or destroyed

– deemed disposal

No insurance Insurance
proceeds proceeds received

Partially reinvested
computation: Not Reinvested
within 12 months:
Capital loss reinvested: within 12 months:
Normal Elect for no gain/ – immediate gain =
computation no loss proceeds not reinvested
– Rollover remaining gain.

Capital gains tax – introduction

Asset damaged
Asset damaged

No insurance Insurance
proceeds proceeds received

No disposal
Not used in Used in
restoration restoration

Normal part disposal computation:

Part disposal unless ‘rollover’ election
A/(A+B) where
made to deduct proceeds from cost of
A = Insurance received
restored asset on a subsequent disposal
B = Value of damaged asset

Exam focus
Exam kit questions in this area:
Section B questions:
•• Eric
Chapter 4

Capital losses
•• Current year losses:
–– m
 ust be offset against gains if
–– c annot be restricted to preserve the
–– carry forward remaining losses.
•• Brought forward losses:
–– offset after current year losses
–– b
 ut net chargeable gains must not be
reduced below the AEA.
•• Losses in the year of death:
–– can be carried back 3 years
–– LIFO basis
–– can restrict to preserve AEA.

Capital gains tax – introduction

Connected persons
•• Consideration for disposal = market value.
•• Loss on disposal can only be offset against gains to same connected person.

Parents and grandparents

and their spouses

Brothers and Spouse Brothers and

sisters and (or civil partner) sisters and
their spouses their spouses

Business partner
(and spouses and
Children and grandchildren relatives) and a
and their spouses company controlled
by the individual

Civil partner and their relatives (as above) are also connected persons.

Chapter 4

Married couples and civil For CGT purposes, spouse / civil partner
partners transfers are treated as follows:
•• The connected persons rules are
Exam focus overridden.
Scenarios involving married couples / civil •• Spouse or civil partner transfers:
partners are likely to be examined. –– take place at no gain/no loss
It is important that you know how to deal –– regardless of any actual
with transactions between spouses / civil consideration which may have been
partners and also to be able to suggest received.
simple tax planning opportunities to enable •• These rules only apply whilst the couple
them to minimise their total tax liabilities (see are living together (i.e. not separated).
Chapter 12).
• The transferor is deemed to dispose of
the asset at its acquisition cost
–– i.e. the spouse/civil partner takes
over the asset at its original cost.
Exam focus

Exam kit questions on this area:

Section B questions:
•• Monisha and Horner

Capital gains tax – introduction

Payment by instalments
Event Payment details
Disposal proceeds received over a Instalments spread over shorter of:
period >18 months •• 8 years
•• Period over which disposal proceeds
Instalments are interest free (unless late)
Gifts of: Pay by 10 equal annual instalments
•• Land or an interest in land Starting on normal due date
•• Shares or securities from controlling
Instalments are interest bearing
•• Shares in unquoted company
Only if gift relief not available

Exam focus

Exam kit questions on this area:

Section B questions:
•• Cuthbert

5 Capital gains tax –

shares and securities
In this chapter
• Share valuation rules.
• Matching rules – individuals.
• The share pool.
• Sale of rights (nil paid).
• Takeovers and mergers.
• QCBs and government securities.
• Liquidations.
• Losses on unquoted shares.

Capital gains tax – shares and securities

Share valuation rules Matching rules – individuals

Transaction: Consideration: Apply where an individual has made more
than one purchase of shares of the same
Sale Sale proceeds class in the same company.
Gift Market value
Disposals matched with:
Transfer to a connected Market value
person 1 Acquisitions on same day.
2 Acquisitions in the next 30 days
Market value of quoted shares: (FIFO basis).
Value = the mid- price quoted on the Stock 3 The share pool (shares acquired before
Exchange the date of disposal are pooled together).
• i.e. the average of the lowest and highest
prices on the disposal date
Unquoted shares
• No readily available price
– professional valuation required.
• In the exam the value will be given. Exam focus

For the ATX (P6) examination, a thorough

understanding of the basic share
identification rules is required.

Chapter 5

Disposal of shares by individuals The share pool

Share pool 30 days • The share pool contains shares in the
same company, of the same class,
purchased before the date of a disposal.
Date of
disposal • It contains the amalgamated cost of
shares acquired.
Order of matching:
• The cost of shares disposed of is
calculated as a proportion of the number
of shares removed from the pool.
(3) (1) (2)
• If an individual disposes of shares:
–– in his personal trading company, and
Method to calculate gain: –– is also an employee of that company:
Step 1 Determine the sale proceeds­­­­­­­­­­ per Entrepreneurs’ relief (ER) is available
share. (see Chapter 6).

Step 2 Identify the date the shares are

purchased and using the matching
rules allocate the disposal to the
time periods above.
Step 3 Calculate the gains / losses arising
on each matching rule.

Capital gains tax – shares and securities

Bonus issues Rights issues

Definition Definition

Distribution of free shares to shareholders Offer of new shares to existing shareholders

based on their existing shareholding. in proportion to their existing shareholding,
usually at a price below the market price.

For CGT purposes bonus issues are treated For CGT purposes rights issues are treated
as follows: as follows:
• The bonus shares are not treated as a • The rights shares are not treated as a
separate holding of shares. separate holding of shares.
• The shares are treated as acquired on • The shares are treated as acquired on
the same day as the original shares to the same day as the original shares to
which they relate. which they relate.
• Therefore, the number of bonus shares • Therefore, the number of rights shares
are included in the share pool but at nil are included in the share pool, and the
cost. cost in the cost column in the same way
as a normal purchase.

Chapter 5

Sale of rights (nil paid)

Sales of rights (nil paid) = w
 here shareholder does not take up rights issue and sells the ‘right to
buy’ more shares.
The treatment of a ‘sale of rights nil paid’ for CGT purposes depends on the amount of sale
proceeds (SP) received as follows:

If SP (i) > 5% of the value of the shares on (i) 

< 5% of the value of the shares on
received which the rights are offered, and which the rights are offered, or
(ii) > £3,000. (ii) 
< £3,000 if higher.

CGT • deemed part disposal of original • no chargeable disposal at the time

treatment: shares held. of the sale of rights nil paid.
• normal part disposal computation • SP received are deducted from the
required cost of the original shares.
A = SP received
B=M  V of shares on which the
rights are offered

Capital gains tax – shares and securities

Takeovers and mergers With a share for share exchange, it is

possible that:
• Company (B) acquires shares in another
company (A) by issuing shares to A’s • the old shares would qualify for ER if it
shareholders. were treated as a disposal
• ‘Paper for paper’ transaction • ut the new company is not the
= not a CGT disposal by A’s shareholders. shareholder’s personal trading company
The new shares in B ‘stand in shoes’ of and so the later disposal of its shares
old A shares (i.e. take on the cost and would not qualify for relief.
acquisition date of A shares).
However, the individual shareholder can:
• Conditions:
• elect for the event to be treated as a
–– clearance required from HMRC disposal for CGT purposes, in which case
–– B
 acquires > 25% of A’s ordinary the gain is taxed at 0%, 10%, or 20%
share capital (or a majority of the depending on the availability of the AEA,
voting power of A). ER, IR and level of taxable income.
–– the exchange is for bona fide If shares are sold for a mixture of cash and
commercial reasons and main shares then a capital gain arises unless the
purpose not the avoidance of tax. cash element is small.

Chapter 5

Part disposal of cash element :

Cost of asset sold =
Original cost 3 Cash received
Total consideration

‘Paper for paper’ Mixture of
exchange ‘paper’ and cash • Where consideration includes QCBs:
No CGT implications if –– c ompute gain as if QCB was cash
satisfy conditions consideration
• Clearance –– the frozen gain is charged when
• Acquire ≥ 25% QCB sold.
• Bone fide reason

Cash element small Cash element not small

1  5% of total 1 > 5% of total value
value or and
Exam focus
2  £3,000 2 > £3,000
g CGT implications at Exam kit questions on this area:
implications date of exchange Section B questions
at date of re- cash received • Banger Ltd and Candle Ltd
exchange g Part disposal
• Pescara

Capital gains tax – shares and securities

QCBs and government Liquidations

securities • Shareholders are treated as having sold
• Exempt from CGT (i.e. no chargeable their shares for proceeds equal to the
gain/no allowable loss). cash or other assets received from the
• If ER is available on the gain at takeover
the taxpayer must elect for ER and the • A chargeable gain or loss must be
gain will be taxed at 10% at takeover. computed in the normal way.
–– If ER is not claimed at takeover • Consider pre-liquidation dividend
the frozen gain will be taxed at the payment.
appropriate rate in force when it


QCB: Normal commercial loan, expressed in

sterling and not convertible into shares
(e.g. company loan stock/loan notes).
Exam focus

Exam kit questions on this area:

Section B questions
• Banger Ltd and Candle Ltd
• Acryl Ltd and Cresco Ltd

Chapter 5

Losses on unquoted shares

• Capital losses are normally carried
forward and offset against future capital
• Can elect for a capital loss realised
on the disposal of unquoted trading
company shares to be treated as a
trading loss.
• The capital loss can therefore be offset:
–– against income
–– o
 f the tax year in which the loss
arose, and/or
–– the preceding tax year.
• The shares must have been subscribed
for, not purchased.

Capital gains tax – shares and securities


6 Capital gains tax – reliefs

In this chapter
• Overview of reliefs.
• Entrepreneurs’ relief.
• Investors’ relief.
• Principal private residence relief.
• PPR – periods of occupation.
• Rollover relief.
• Reinvestment in depreciating assets.
• Gift relief.
• Incorporation relief.
• EIS reinvestment relief.
• SEIS reinvestment relief.

Capital gains tax – reliefs

Exam focus Overview of reliefs

• After computing gains on disposals of
CGT reliefs are an important aspect of CGT individual assets consider the availability
in practice. of reliefs.
Given the examining team’s approach to • Some reliefs completely exempt a gain
examining real life practical situations they from CGT, or reduce the tax payable
are likely to continue to feature regularly in permanently, others only defer the gain
examination questions. to a later period.

You may be required not just to calculate the Types of relief

reliefs but to state the conditions, when they
apply and the tax implications. Permanent reliefs Deferral reliefs
Entrepreneurs’ relief Rollover relief
Investors’ relief Gift relief
PPR relief Incorporation
Letting relief relief
SEIS reinvestment EIS reinvestment
relief relief

Chapter 6

Entrepreneurs’ relief (ER) • Keep gains which qualify for ER separate

from those which do not qualify.
• Only available to individuals.
• For 2017/18 disposals, the relief must be
• First £10 million of gains on ‘qualifying
claimed by 31 January 2020.
business disposals’ are taxed at 10%,
regardless of the taxpayer’s income. • £10 million = a lifetime limit (partly used
up each time a claim is made).
• Any gains above the £10 million limit
= taxed in full at 10% / 20%.
• Gains qualifying for ER are set against
any remaining basic rate band (BRB)
before non-qualifying gains.
• The 10% CGT rate is calculated after the
deduction of:
–– allowable losses, and
–– the AEA.
• Can choose to set losses and AEA
against non-qualifying gains first to
maximise relief.
Any losses on assets forming part of the
disposal of the business.

Capital gains tax – reliefs

Qualifying business disposals An individual’s ‘personal trading company’ is

one where the individual:
The disposal of:
• owns at least 5% of the ordinary shares
• the whole or part of an individual’s
trading business (i.e. sole trader or • which carry at least 5% of the voting
partner) rights.
• assets of the individual’s or partnership’s When an individual disposes of goodwill to
trading business that has now ceased a close company (e.g. on incorporation) ER
• shares provided: is not available in respect of the goodwill,
unless the individual:
–– in the individual’s ‘personal trading
company’, and • is a retiring partner
–– the individual is an employee of the • holds < 5% of the company’s ordinary
company (part time or full time). share capital or voting rights, or
• assets owned by the individual and used • holds > 5% of the company’s ordinary
in their ‘personal trading company’ or share capital or voting rights, but sells
trading partnership provided: the whole shareholding to another
–– the individual also disposes of all or company within 28 days.
part of their partnership interest or
shares in their personal trading
–– a
 s part of their withdrawal of
involvement in the partnership /
company business.
Chapter 6

Note that: Qualifying ownership period

• “Part of a business” • 12 months prior to the disposal, or
 “substantial part” which is “capable • Where a qualifying business is not
of independent operation”. disposed of but simply ceases:
• Disposal of assets (i.e. not shares): –– relief will be available on gains on
Relief = not available on investment assets in use in the business at the
assets. time it ceased
• No restriction to relief if company holds –– w
 here the assets are disposed
non-trading assets. of within 3 years of the date of
• No minimum working hours to satisfy cessation.
employee condition. • For approved EMI shares:
• For approved EMI shares: –– q
 ualifying period runs from the date
no requirement to hold  5% the option is granted (not when
shareholding. shares acquired).

Key Point

The isolated disposal of an individual

business asset used for the purposes of a
continuing trade does not qualify.

Capital gains tax – reliefs

Applying the relief Interaction of reliefs

(1) Calculate the gains and losses on • Other specific reliefs (if available)
qualifying and non-qualifying assets reduce chargeable gains before ER is
separately. considered.
(2) Net off losses relating to the qualifying • If also eligible for ER the remaining gain
business disposals against qualifying is taxable at 10%.
(3) Offset all other losses and the AEA
against non-qualifying gains. Exam focus
(4) If necessary deduct any remaining losses Exam kit questions on this area:
or AEA from the qualifying gains. Section A questions
(5) Tax the gains as follows: • Mirtoon
–– q
 ualifying net chargeable gains at • Farina and Lauda
• Ziti
–– a
 ny non-qualifying net chargeable
• Jodie
gains as normal at 10% or 20%
(remember that qualifying gains • Waverley
utilise the BRB before non-qualifying Section B questions
• Ash
• Acryl Ltd and Cresco Ltd

Chapter 6

Investors’ relief IR is subject to a separate lifetime limit of

£10 million of qualifying gains.
ER is only available on a share disposal if:
Note that claims for IR cannot be made
• the shares are in the individual’s
before the tax year 2019/20 due to the 3
personal company they hold 5% of the
year minimum holding period. Therefore in
shares, and
the examination you must not apply IR to
• they are an officer or employee of the gains arising before the tax year 2019/20.
On 6 April 2016, investors’ relief was
introduced. This relief extends the benefits of
ER to certain investors who would not meet
the conditions for ER.
IR applies to the disposal of:
• unlisted ordinary shares in a trading
company (including AIM shares)
• subscribed for (i.e. newly issued shares)
on/after 17 March 2016
• which have been held for a minimum
period of 3 years starting on 6 April 2016
• by an individual that is not an employee
of the company.

Capital gains tax – reliefs

Principal private residence PPR – periods of occupation

relief (PPR) • Actual occupation.
• Rules apply to house and garden • Deemed occupation.
(usually up to half a hectare)
• Owner occupied throughout
–– gain exempt
• Owner partly absent
–– PPR relief available

Relief = Gain 3
Periods of occupation
Period of ownership
• If property let
Exam focus
1 Calculate PPR relief
2 Then give You may be presented with an individual’s
Letting relief: personal circumstances and be required to
assess the period of ownership of a property
Lowest of:
which will qualify for PPR.
(i) £40,000
You should provide brief explanatory notes
(ii) PPR relief
for periods of deemed occupation.
(iii) Gain re letting

Chapter 6

Deemed occupation
Exam focus
Conditional Unconditional Exam kit questions on this area:
• Up to 3 years • Last 18 Section A questions
– any reason months of • Mirtoon
• Any period ownership
Section B questions
– employed abroad
• Kesme and Soba
• Up to 4 years
• Noah and Dan
 orking elsewhere
in the UK
(employed or
 orking abroad if
• Must be actual
occupation before
and after
• Condition relaxed
if reoccupation
prevented by terms
of employment

Capital gains tax – reliefs

Rollover relief (ROR) Conditions

• Relief for the replacement of qualifying • Qualifying business assets
business (QBAs). –– land and buildings
• The gain arising on the disposal of a QBA –– fixed plant and machinery
can be deferred if proceeds reinvested
–– g
in replacement QBAs within a qualifying
(unincorporated businesses only).
• Qualifying period
• Available to:
–– from 1 year before
–– c ompanies, individual sole traders,
partnerships. –– to 3 years after the date of disposal.
• Claim is made
–– w
 ithin 4 years from the later of the
end of the tax year of:
–– sale, and
–– replacement
• For a 2017/18 disposal and replacement:
Exam focus –– by 5 April 2022.

ROR is the only relief available to companies.

It is therefore more often tested in a
corporate situation.

Chapter 6

Effect of relief Partial reinvestment of proceeds

Where all proceeds are reinvested: Where all proceeds are not reinvested:
• The full gain on the old asset is ‘rolled • The gain that can be rolled over
over’ against the capital gains cost of the (i.e. deferred) is restricted
new asset. (i.e. not all of the gain can be deferred).
• No tax is payable when old asset sold. • A chargeable gain arises
• Gain deferred until the new asset sold. = lower of
–– the proceeds not reinvested
Deferred gain is:
–– the chargeable gain
• deducted from the base cost of the
replacement asset, and • Taxable on the disposal of the original
• increases the gain on the subsequent
disposal of the replacement asset. • The remaining gain is deferred.

Capital gains tax – reliefs

Procedure for calculating ROR Interaction with entrepreneurs’ relief

1. Calculate the gain on disposal of the • ER is only available if the entire business
trade asset. is being sold.
2. D
 etermine whether all sales proceeds There is no ER on the disposal of an
have been reinvested in qualifying individual asset.
assets. • If the entire business is sold and all
the proceeds are reinvested into new
Proceeds fully Proceeds not fully qualifying assets:
reinvested reinvested
–– consider ROR before ER
No gain now Gain now = Lower of:
–– the gains may be deferred
(i) total gain (B)
(ii) proceeds not –– E
 R only considered on subsequent
reinvested (C) disposal of replacement asset
Gain rolled over A Gain rolled over (D): –– b
 ased on conditions being satisfied
at that time.
• If partial reinvestment and some gain
CGT base cost of CGT base cost new remains chargeable now:
new asset: asset:
Cost X Cost X –– w
 ill be taxed at 0%, 10%, or 20%
depending on the availability of
Gain rolled over (A) Gain rolled over (D)
––– ––– the AEA, ER and level of taxable
XX XX income.
––– –––
–– conditions for ER considered now.

Chapter 6

Exam focus Reinvestment in depreciating

Exam kit questions on this area:
Section A questions Definition
• Daube Group Depreciating asset (DA)
• Hahn Ltd Group • life of  60 years
Section B questions
Common examples in exam:
• Liza
• Fixed P&M
• Leasehold property of  60 years.

Capital gains tax – reliefs

Method of relief • Can defer a gain:

• Conditions and calculation of amount of –– using a depreciating asset (for up to
relief = same as for ROR. 10 years), and
• Method of deferral = different. –– later acquire a non-depreciating
• Gain not deducted from base cost of asset, and
new asset. –– c laim to rollover the deferred gain
• Gain is ‘frozen’ (i.e. deferred) and instead (i.e. defer indefinitely until
crystallises on the earliest of: the replacement non-depreciating
asset is sold)
–– sale of DA
–– p
 rovided the deferred gain has not
–– date DA ceases to be used in trade
previously become chargeable.
–– 10 years from acquisition of DA.
• When deferred gain crystalises: Exam focus
–– taxed at appropriate rate of CGT at Exam kit questions on this area:
that time (not at the time of deferral).
Section B questions
• Bamburg Ltd
• Hyssop Ltd
• Sprint Ltd and Iron Ltd

Chapter 6

Gift relief (GR)

The gain arising on a gift is computed by using the market value of the asset.
GR must then be considered. Recipient
Individual, trustee or
company R in UK
Applies to at time of gift Effect

Gifts and Sales at undervalue Deemed consideration

by individuals and trustees = MV
(not companies) Gain deferred against
Individual donor base cost to donee

Qualifying assets Asset not wholly used for

(1)  ssets used in trade of donor or
A business
by his personal trading company Only gain related to trade use is
(i.e. owns  5% voting rights) deferred.
(2) Shares in unquoted trading company For shares (if own ≥ 5% voting
(3) Shares in donor’s personal trading company rights) proportion of gain
(4) Any asset where there is an immediate qualifying for relief is:
charge to IHT (e.g. gift into trust) MV Chargeable business assets
(5) Agricultural property eligible for APR MV Chargeable assets

Capital gains tax – reliefs

Sale at undervaluation
Key Point
Where the asset is sold, but for less than MV,
Restriction of (CBA/CA) only applies where the ‘actual consideration’ received is ignored:
donor holds ≥ 5% of shares.
• The gain is still calculated using MV.
If donor holds < 5% of shares:
If the actual consideration > transferor’s cost:
–– unquoted = no restrictions to GR
• the excess is immediately chargeable
–– quoted = no GR
• the remaining gain can be deferred.
The chargeable gain arising now will be:
• taxed on the donor at either 0%, 10%,
or 20%
• depending on the availability of the AEA,
ER/IR or the level of taxable income.
If the actual consideration  donor’s cost:
• full gift relief available
• all chargeable gain deferred.
The deferred gain is taxed on the donee later
at the appropriate rate when they dispose of
the asset.

Chapter 6

Emigration of donee Election

If within 6 yrs of gift the donee emigrates: For a gift in 2017/18, a joint election is
• the deferred gain crystallises on the required:
donee • signed by both the donor and donee
• on the day before emigration. • by 5 April 2022.
Effect of relief If gift into a trust:
Regardless of how the gain is calculated, the • only needs to be signed by the settlor.
deferred gain is:
• deducted from the base cost of the
donee, and Exam focus
• deferred until the subsequent disposal of Exam kit questions on this area:
the asset by the donee. Section A questions
When the gain crystallises: • Farina and Lauda
• taxed at appropriate rate of CGT at that • Ziti
time (not at the time of deferral). • Una
Section B questions
• Surfe
• King

Capital gains tax – reliefs

Interaction with entrepreneurs’ relief • If the individual disposes of shares in a

• If ER is applicable: personal trading company:
–– the donor may choose not to claim –– gift relief is available:
gift relief in order to crystallise a gain • subject to the (CBA / CA)
and claim ER now instead. restriction above
•  his is advantageous if the
T • regardless of whether the
donee will not qualify for the relief individual works for the company.
on their subsequent disposal. –– If a gain remains after gift relief (due
For example, if they would not satisfy the to the CBA/CA restriction) then ER
employment condition and/ or one-year will also be available provided:
ownership rule.
• the individual works for the
company, and
• it has been the individual’s
personal trading company
• for the 12 months prior to the

Chapter 6

Incorporation relief Key Point

• Where an individual incorporates his sole
Where consideration is wholly shares:
trader or partnership business:
• No gain on incorporation.
–– chargeable
 gains arise on the MV of
• Gains deferred until the subsequent
the individual assets transferred.
disposal of shares.
• Incorporation relief is a relief which
Where non-share consideration is received:
–– automatically applies
• a chargeable gain arises on incorporation
–– to defer the net chargeable gains
arising on incorporation • taxed at 0%, 10%, or 20% depending on
the availability of the AEA, ER and level
–– provided certain conditions are met.
of taxable income.

Exam focus

Exam kit questions on this area:

Section A questions
• Farina and Lauda
• Waverley
Section B questions
• Stanley Beech

Capital gains tax – reliefs

Conditions • All of the assets of the business (except cash) must be transferred.
• The transfer must be of a business as a going concern.
• The consideration received must be wholly or partly in shares.
Effect • No gains arise on incorporation.
• Gains are deferred against the acquisition cost of the shares.
Consideration not • Gain eligible for deferral:
wholly in shares Value of shares issued
Gain x Total consideration
• Immediate gain in respect of non-share consideration which is taxed
at 10% or 20%:
Value of non-shares consideration
Gain x Total consideration

Future disposal of •  n a later sale of the shares, the gain will normally qualify for ER
shares provided conditions satisfied.

Chapter 6

Election to disapply • Can elect for incorporation relief not to apply.

• Gains on the assets transferred to the company would be taxed at
0%, 10%, or 20% depending on the availability of the AEA, ER and
level of taxable income.
• No gains would be deferred against the cost of the shares, making
the gain on their subsequent disposal lower.
• May be beneficial to elect to disapply if:
–– gains covered by AEA, or
–– s hares are to be sold shortly after incorporation (i.e within 12
months) so would not be eligible for ER.
• Must elect within 2 years from 31 January following the end of the
tax year in which the business is transferred.
• For 2017/18 by 31 January 2021.

Capital gains tax – reliefs

Planning points
Exam focus
• Must transfer all assets
Questions involving incorporation may
–– m
 ay wish to retain property with
require detailed knowledge of incorporation
large growth potential to avoid
relief, gift relief and entrepreneurs’ relief.
double charge to tax
–– c onsider gift relief as an alternative
to transfer selected assets
–– as goodwill transferred to a related
close company is not eligible for ER,
it could be efficient to defer the gains
under incorporation relief. When the
gain becomes chargeable on
disposal of the shares, ER can be
claimed provided the share disposal
• Defers gains pre ER
–– c onsider electing to disapply
incorporation relief if likely to sell
shares within 12 months.

Chapter 6

EIS reinvestment relief • Claim within 5 years from 31 January

following the end of the tax year in which
• Individual:
the disposal occurred
–– disposes of any asset
• For 2017/18 disposals by 31 January
–– s ubscribes for qualifying shares in 2024
EIS scheme
• Planning point:
–– b
 etween 1 year before and 3 years
–– c hoose to claim an amount of relief
after gain
so that remaining gain is equal to the
• Relief is lowest of: AEA and any available losses
(1) the gain –– w
 ork backwards in CGT pro forma to
(2) amount subscribed for EIS shares calculate amount of claim required
(3) any smaller amount chosen
If the asset qualifies for ER a claim can be
• Individual must be resident in UK when
made such that gain is taxed in the year of
gain realised and on reinvestment
disposal at 10%.
• Gain deferred until:
If a claim is not made the gain deferred will
–– the disposal of the EIS shares by the
be taxed at the appropriate rate in force
investor, spouse / civil partner, or
when it becomes chargeable.
–– the investor or spouse / civil partner
(after a previous NGNL transfer) If a gain deferred was entitled to ER at the
becomes non-UK resident (e.g. point of deferral, it will still be taxed at 10%
emigrates abroad) within 3 years of when it becomes chargeable.
the issue of shares
Capital gains tax – reliefs

Exam focus • Maximum SEIS exemption

= 50% of the lower of the
Exam kit questions on this area:
(i) gain
Section A questions
(ii) amount reinvested
• Pippin
(Maximum CGT exemption = £50,000
Section B questions as maximum that can qualify for IT relief
• Capstan = £100,000).
• Relief = flexible, can claim any amount
SEIS reinvestment relief up to the maximum.
• If an individual: • Claim = same as EIS claim:
–– disposes of any chargeable asset, For 2017/18 = by 31 January 2024.
• Planning point:
–– reinvests in qualifying SEIS shares,
which –– a
 s for EIS relief: leave remaining
gain equal to AEA and any available
–– qualify for SEIS income tax (IT) relief losses
some of the gain arising = exempt CGT.
• Any remaining gain is taxable in the
normal way.

Chapter 6

• Withdrawal of relief:
–– If the disposal within three years is:

Not at arm’s
At arm’s length
Lower of:
IT relief
All • All
• (50% x SP received)

Amount of IT relief withdrawn (above)

CGT relief
All = ––––––––––––––––––––––––––––––––––––– x Gain
Original IT relief given

Exam focus
Exam Kit questions on this area:
Section B questions
• Pescara

Key Point

There is no reinvestment relief for VCT investments.

Capital gains tax – reliefs


Stamp taxes
In this chapter
• Stamp duty and stamp duty land tax.

Stamp taxes

Exam focus

Stamp taxes may feature as part of a question, however a question will not be set exclusively on
stamp taxes.

Stamp duty and stamp duty land tax

• Paid by purchaser.

Stamp Duty (SD) / Stamp Duty Land Tax (SDLT)

Stamp Duty Reserve Tax (SDRT)
Payable on
• transfer shares/securities • transactions in UK property
• 0.5% of consideration • up to 12% depending on type of property
• SD only: (residential or commercial), and amount of
consideration (note)
–– min £5
• rates given in tax rates and allowances
–– no charge if consideration ≤ £1,000

Note: The rates are increased by 3% in some circumstances.

Chapter 7

Specific exemptions
Stamp Duty (SD) / Stamp Duty Land Tax (SDLT)
Stamp Duty Reserve Tax (SDRT)
• Exempt securities
–– government stock
–– most company loan stock (unless
–– unit trusts
–– AIM shares.
General exemptions
• Gifts
• Transfers of assets between 75% group companies
–– same definition as for 75% gains groups
–– not available if arrangements in force for purchasing company to leave group
–– SDLT exemption relief withdrawn if transferee company leaves group within 3 years
of transfer, still owning the land.

Stamp taxes

Exam focus

Exam Kit questions on this area:

Section A questions
• Una
• Helm Ltd Group
• Heyer Ltd Group


8 Inheritance tax
In this chapter
• Charge to inheritance tax.
• Lifetime gifts.
• IHT computations.
• Due dates of payment.
• Valuation.
• Exemptions and reliefs.
• Death estate pro forma.
• Payment by instalments.
• Deed of variation.
• Married couples and civil partners.
• IHT and CGT on sales/gifts.
• Skipping a generation.

Inheritance tax

Exam focus Charge to inheritance tax

Inheritance tax regularly features in the
ATX (P6) exam, often as part of a question • Occasions of charge:
involving other taxes too – particularly capital –– Lifetime gifts.
gains tax. –– Death estate.
• Charged on:
–– a chargeable transfer (see later)
–– of chargeable property
–– by a chargeable person.
• Chargeable property:
–– all capital assets / wealth
–– no exempt assets for IHT.
• Chargeable person:
–– individuals.
• Gratuitous intent:
–– transfer must be a gift
–– intention to give asset away
–– not a poor business deal.


Chapter 8

Lifetime gifts
• Two types:
–– Potentially Exempt Transfers (PETs)
–– Chargeable Lifetime Transfers (CLTs)

Definition Gift by individual to: Gift which is not:
• another individual • Exempt, or
• a disabled trust • a PET
• certain old trusts Main examples = gifts to trusts:
(not examinable)
• (except charitable trusts or those treated as
Chargeable Only if donor dies At date of gift Additional IHT if donor
within 7 years of gift dies within 7 years of gift
Tax rates Death rates Lifetime rates Death rates
Tax paid by Donee Donee, or Donee
Donor (gross up gift for
tax paid)


Inheritance tax

IHT computations The chargeable transfer

Exam focus The first stage of the computation for each

situation is always the same; calculate the
An IHT charge can arise in 3 different chargeable transfer:
situations. The computation in each situation
is different and must be studied carefully.
Transfer of value:
1 Lifetime transfers – IHT on CLTs Value before X – Diminution
in value
2 Death – a
 dditional IHT on PETs and
Value after (X) – Related
3 Death estate
In each situation: –––
• Compute the chargeable transfer.
• Compute the taxable amount.
(1) Reliefs (X) – APR
• Compute the tax. – BPR
(2) Exemptions (X) – (See later)
Chargeable transfer A
Order of using reliefs and exemptions
– see later.


Chapter 8

Calculating the taxable amount • The NRBs will be provided in the tax
rates and allowances.
Calculating the taxable amount is also
the same for each situation. However, the Residence nil rate band (RNRB)
calculation of the available nil rate bands • For lifetime gifts - not available.
(NRBs) differs.
• For death estate - available if residential
property left to direct descendants
Chargeable transfer A
Available NRBs (X) • Deceased must have lived in the
–––– property.
Taxable amount X
–––– • Available RNRB will be lower of:
Nil rate bands –– £100,000
• For lifetime gifts – lifetime tax: –– net value of residential property.
–– Use NRB in tax year of gift.
Tapered withdrawal of RNRB
• For lifetime gifts – death tax:
• If net value of estate (before APR, BPR
–– Use NRB in tax year of death. and exemptions) > £2 million
• For death estate: –– reduce RNRB by £1 for every £2 of
–– Use NRB in tax year of death excess.
–– Calculate the available residence nil
rate band (RNRB)


Inheritance tax

Calculating the tax

Exam focus
1 – Lifetime tax on CLT
Exam kit questions in this area:
£ £
Section A questions
Chargeable transfer (A) 222,000
• Una Less:
• Brad NRB at gift (say) 312,000
• Farina and Lauda Less: CLTs in 7 years
prior to gift (say) (170,000)
• Ziti –––––––
NRB available (142,000)
• Kantar –––––––
Taxable amount 80,000
• Pippin –––––––
Section B questions IHT payable:
• Surfe (i) at 20% if donee pays tax 16,000
• Cuthbert (ii) at 25% if donor pays tax 20,000
• Pescara ––––––

• King
• Eric
• Juanita


Chapter 8

If donor pays tax: 2 – Additional tax on lifetime transfers as

Add IHT to value of chargeable transfer (A) to a result of donor’s death
calculate gross chargeable amount (B) i.e. Perform the following calculation for:
(£222,000 + £20,000) = £242,000
• each gift (CLTs and PETs) in the 7 years
prior to death
• in chronological order
Key Point
Note that the donor is primarily responsible Gift 1 – CLT or PET
for the lifetime tax due. £ £
Gross chargeable transfer
(A or B) 365,000
NRB at death 325,000
Less: CLTs and
chargeable PETs
in 7 years prior
to gift (1) (say) (140,000)
NRB available (185,000)
Taxable amount 180,000


Inheritance tax

£ (b) Taper relief

IHT payable at 40% 72,000
Less: Taper relief (40%)(say) (28,800) Years before death % reduction
––––––––– Over 3 but less than 4 years 20%
Chargeable (60%) 43,200
Over 4 but less than 5 years 40%
Less: Lifetime tax paid (say) (10,000)
––––––––– Over 5 but less than 6 years 60%
IHT payable 33,200 Over 6 but less than 7 years 80%
Then perform the same calculation for Gift (c) Lifetime tax deduction:
2 etc.
–– cannot create a repayment of IHT.
(a) Order of using reliefs and exemptions:
1 Exempt gifts, small, spouse, charity
4 Fall in value
5 ME
6 AE current year, then b/fwd
7 Taper relief


Chapter 8

3 – IHT on death estate Due dates of payment

Death estate computation:
1 Lifetime IHT
£ £
Value of estate 1,025,000 Gift: Due date:
(includes home) 6 April – 30 Sept 30 April in next year
Less: 1 Oct – 5 April 6 months after
RNRB (max) 100,000 end of month of gift
NRB at death 325,000
2 Additional IHT on lifetime gifts due to
Less: CLTs and
chargeable PETs
in 7 years prior Due date – 6 months from end of month
to death (say) (180,000) of death.
NRB available (245,000) Note: always paid by donee.
Taxable amount 780,000 3 IHT on death estate
Due date – 6 months from end of month
IHT payable at 40% 312,000 of death.
Less: Quick succession relief (X)
Double taxation relief (X) However, tax is required to be paid with
––––––– delivery of accounts to HMRC, which
IHT payable X may be earlier than due date.


Inheritance tax

Valuation Key Point

Exam focus It is important to appreciate the difference
An exam question, particularly one involving here between CGT and IHT.
the death estate, will also require you to For CGT purposes the consideration used
value the assets being transferred. for a gift = valued at the market value of the
asset gifted.
1 Gifts
• IHT uses the ‘diminution in value’
2 Related property
principle to calculate the ‘transfer
of value’ (i.e. value by which the • Special rules where same type of
donor’s estate has been reduced). property owned by:
£ –– Spouse/civil partner, or
Value of estate before transfer X –– E
 xempt body (e.g. charity) as a
Less: Value of estate after transfer (X) result of an exempt transfer to
Transfer of value X them by the donor or the donor’s
––– spouse/civil partner
• In most cases = value of asset gifted • Applies when valuing a gift or an
• In some cases the diminution in asset in an individual’s estate
value > value of asset gifted.
–– e.g. gift of unquoted shares


Chapter 8

• Value of asset – 2 situations:

(i) All assets except unquoted
Value of individual’s share Value of
Value of individual’s share combined
+ Related party share assets

(ii) Unquoted shares

 se the same formula, but the
‘number’ of shares is used in the
fraction, not the value.

Exam focus

The related property rules are often relevant

in exam questions involving unquoted shares.


Inheritance tax

3 Other assets

General rule Open Market Value

Quoted shares Lower of:
and securities 1/4 up rule and the average of the highest and lowest marked bargains.
Unquoted No readily available market price – will vary depending on % holding.
shares Value agreed with HMRC. In examination – value will normally be given.
Unit trusts Lower bid price
UK freehold Jointly owned property:
property • Valuation ÷ number of joint owners.
• Joint tenants – share passes automatically (not via will) to joint tenant.
• Tenants in common – share inherited according to will.
Value reduced by mortgage – unless endowment mortgage.
Life assurance On own life = actual proceeds received
• For benefit of named beneficiary under a declaration of trust
–– excluded from estate.
• Any other life policy = higher of MV and premiums paid.


Chapter 8

Exemptions and reliefs

Annual exemption Lifetime gifts • Gifts to:
Normal expenditure out during lifetime –  Charity
of income –  Political party
–  National purpose
Small gifts relief
• max £250/recipient 2 • T ransfers between
per tax year IHT on spouses or civil
lifetime transfers partners
Marriage exemption
as a result of
• £5,000 parent death • Agricultural property
• £2,500 grand relief (APR)
parent/party to 3
marriage • Business property
• £1,000 other relief (BPR)

• Taper relief
• Relief for fall in
value as a result
of death

Quick Double tax

succession relief relief


Inheritance tax

Key exemptions and reliefs 2 Fall in value relief

• Applies in the calculation of death
1 Annual exemption
tax on PETs and CLTs.
• £3,000 per annum
• Donee must:
• Applied to gifts in chronological order
–– still own the asset at date of
• Used against PET – even if PET donor’s death, or
never becomes chargeable
–– have sold it in arm’s length
• Unused amount can be carried transaction.
forward one year
• Deduct from chargeable amount the
• Current year exemption used in fall in value:
priority to brought forward
–– from: date of gift
• Applied after all other reliefs and
–– to: date of death or earlier sale.
exemptions have been applied.
• Carry forward original chargeable


Chapter 8

Section B questions
Exam focus
• Surfe
Exemptions and reliefs will always feature in
• Cuthbert
an IHT computation – it is important that you
can identify when they are available and how • Pescara
they are applied. • Stella and Maris
• Juanita
3 Business property relief (BPR)
Exam focus
Two key conditions:
Exam kit questions with exemptions and • Transfer of relevant business property
reliefs: (RBP).
Section A questions • Minimum period of ownership.
• Una
Exam focus
• Brad
• Farina and Lauda This relief is extremely important and can
be expected to feature in almost every
• Ziti
• Kantar
• Applies to lifetime transfers and on
• Pippin death.
• Applies to relevant business property.


Inheritance tax

Relevant business property (RBP) Property Conditions Relief

Property Conditions Relief Sole • Unincorporated 100%
trader business or share in
Quoted • Out of a controlling 50% partnership
shares interest
and • Must be the whole
• Must be trading business not
securities company individual assets
Unquoted • Including AIM 100%
shares • Must be trading • Available on UK and overseas RBP.
and company • Not available on excepted assets
• Only available on (e.g. investments).
securities if have • Where company owns investments BPR
control based on
is given on:
Company’s business
Assets • Land and buildings, 50% property
P&M: Value of shares 3
Company’s total assets
–– Used by company (before liabilities)
controlled by
donor, or
–– Used by a
partnership in
which donor is a


Chapter 8

Length of ownership Tax planning

• Property must have been owned for  2 • No IHT payable on assets which qualify
years (unless replacement property). for 100% BPR.
• Where business property was inherited • No IHT saving from making lifetime gifts
and was eligible for BPR at that time: of assets which qualify for 100% BPR,
–– there is no minimum ownership better to gift on death.
period for BPR on the second death
(successive transfers rule).
• Where business property is transferred
from a spouse/civil partner:
–– the combined length of ownership by
the couple is considered.
Death tax on lifetime gifts Exam focus
• Where additional IHT due on gift as a
result of donor’s death: Exam kit questions on this area:
–– BPR only available where business Section A questions
property is still owned by the donee • Brad
at the date of the donor’s death.
• Ziti
Section B questions
• Eric


Inheritance tax

4 Agricultural Property Relief (APR) Length of ownership

• Applies to lifetime transfers and on • Property must have been owned for:
• Applies to the agricultural value of Agricultural property Ownership
relevant agricultural property. farmed by:
• Agricultural property The owner Two years
= farmland, pastures and farm
A tenant Seven years
• nly available on agricultural
O • Successive transfers and spouse/civil
property situated in UK or EEA. partner transfer rules as per BPR.
• Rate of relief = 100%. Death tax on lifetime gifts
• Retention rules as per BPR.
Exam focus
Tax planning
Exam kit questions on this area: • No IHT saving from making lifetime gifts
Section A questions which qualify for APR, better to gift on
• Una death.

Section B questions
• Eric


Chapter 8

Death estate pro forma IHT payable computation

£ £
Notes £ £ Chargeable estate x
Freehold property x NRB at death 325,000
Less: Mortgage (a) (x) Less: GCT’s in previous 7 years (x)
–– –––––––
x NRB available (x)
Foreign property x RNRB available (x)
Less: Expenses (b) (x) ––
–– Taxable estate x
x ––
x IHT on taxable estate (40% or 36%) x
All other assets owned by deceased x Less: Quick succession relief (x)
Debts due to deceased x ––
Accrued income x A
x A
Average estate = x 100
Less: Outstanding debts (c) (x) Chargeable estate
–– rate (AER)
Less: Double tax relief (x)
Less: Exempt legacies (d) (x)
–– ––
x Inheritance tax payable B
Settled property (e) x ––
Gift with reservation (GWR) (f) x
–– Due date: 
Chargeable estate x Earlier of
–– • 6 months after the end of the month of death, or
• On delivery of the estate accounts
(unless paid by instalments – see below)


Inheritance tax

Allocation of UK IHT payable: Notes

• IHT payable on estate = apportioned at AER (a) Repayment and interest-only mortgages
(after QSR) and accrued interest. Do not deduct
• Tax paid by:
endowment mortgages. Deduct 10% of
value if tenants in common.
Settled property Trustees (b) Expenses restricted to maximum 5% of
GWR Recipient of gift foreign property value.

Remainder (c) Outstanding debts payable by the

deceased (e.g. outstanding bills and
–– overseas asset Recipient of legacy other taxes due: IT, CGT, VAT).
(tax bearing gift)
(d) Exempt legacies = legacies to spouse,
–– UK asset Residual legatee civil partner, charity, political party.
(tax free gift)
(e) Settled property = IPDI trust in where
deceased is the life tenant (Chapter 10).
Key Point
–– Bring in the MV of the assets in the
All assets are chargeable (i.e. no exempt trust.
assets for IHT at ATX (P6)).
Assets that are exempt from CGT (e.g. Motor
cars, gilts, ISAs, PPR etc) are not exempt
from IHT.


Chapter 8

(f) Gifts with reservation = lifetime gift where Substantial legacies to charity
donor retains a benefit (e.g. gift of legal • Reduced rate of 36% applies to estates
title to house but donor still lives in it). where:
–– Bring into estate computation as if gift –– total charitable legacies on death
never made  10% x (baseline amount)
–– can be avoided if donor pays market • Baseline amount
rate rent to donee. = Taxable estate
plus charitable legacies.
• Can use a deed of variation to increase
a charitable legacy to benefit from the
36% rate.

Exam focus

Exam kit questions with a gift with

Section A questions
• Mirtoon
• Una
Section B questions
• Pescara


Inheritance tax

Quick Succession Relief (QSR)

• Look for gifts to the deceased in the five years before death
• Tax credit relief
• QSR = (IHT on first gift) x appropriate %
• IHT on first death = (estate rate on first death) x value of the legacy
• Percentages:

Years between deaths Appropriate % to use in formula

More Than Not more than
0 1 100%
1 2 80%
2 3 60%
3 4 40%
4 5 20%
• Given before DTR

Double Tax Relief (DTR)

• Lower of
(i) overseas tax suffered
(ii) AER x (overseas property value brought into estate)


Chapter 8

Payment by instalments • Other qualifying assets

• Elect to pay in ten equal annual –– instalments interest free.
instalments. • If asset sold in instalment period
• Only the following assets qualify: –– outstanding balance must be paid
–– land and buildings immediately.
–– unincorporated businesses
–– s hares or securities where the donor
has a controlling interest
–– s ome unquoted shares and
securities (detail not examinable).
• Available on
–– death estate
–– P
 ETs and CLTs which become
chargeable on death, and
–– CLTs where the donee pays the tax.
• Land and buildings
–– instalments interest bearing.


Inheritance tax

Exam focus –– to divert family home to direct

descendants (children or
Examination questions on IHT will usually grandchildren) to use RNRB.
involve an element of planning, including –– to increase a charitable donation to
advising on how a transfer of assets could be benefit from the reduced 36% rate
organised more effectively for IHT purposes on death estate.
(see Chapter 12).

Deed of variation Married couples and

civil partners
• To change the distribution of assets
under will or intestacy. Exempt transfers
• Conditions: • Inter spouse / civil partner transfers
–– all beneficiaries must agree = exempt
–– must be in writing –– unlimited in amount
–– m
 ust contain clause that it is to be • Exception = if recipient spouse / civil
effective for IHT purposes partner is non-UK domiciled
–– made within 2 years of death. –– maximum exemption = current NRB
• Situations when useful:
–– to skip a generation where children
wealthy in own right


Chapter 8

Election to be treated as UK domiciled Transfer of unused nil rate bands

• Non-UK domiciled spouse / civil partner • If the NRB/RNRB has not been utilised
–– can elect to be treated as UK at the time of a person’s death, the
domiciled proportion of the unused NRB/RNRB
can be transferred to their spouse or civil
–– irrevocable election
–– by individual in lifetime, or by • The surviving spouse or civil partner will
executors within 2 years of death of have the benefit of:
–– their own NRB/RNRB, and
• Advantage = unlimited inter-spouse / civil
partner exemption. –– any unused percentage of their
spouse’s or civil partner’s NRB/
• Disadvantage = subject to IHT on RNRB.
overseas assets.
• The unused percentage is applied to the
NRB/RNRB at the time of the surviving
spouse’s or civil partner’s death
–– not at the date of first death.
• The executors of the surviving spouse or
civil partner must claim the transferred
NRB/RNRB by the submission of the IHT
return by the later of :
–– 2 years of the second death, or


Inheritance tax

–– 3 months of the executors starting Tax planning

to act.
Advice for couples:
• As a result, each spouse or civil partner
can now leave the whole of their estate • Where the couple own assets that qualify
to the surviving spouse or civil partner for BPR and/or APR these assets should
with no adverse IHT consequences. not be left to the other spouse or civil
Exam focus
This is because the legacy would be
Exam kit questions on this area: covered by the inter-spouse exemption
and the benefit of BPR and APR is lost.
Section B questions
• PR and APR assets should be left
• Surfe
to non-exempt beneficiaries and other
• Pescara assets left to the spouse or civil partner.
• Kesme and Soba
As a result, the benefit of both the
relief and inter-spouse exemption will
be available to reduce the value of the
chargeable estate.


Chapter 8

IHT and CGT on sales/gifts

Examination questions dealing with capital transactions may require consideration of both the IHT
and CGT implications of transactions.

Sale Gain/loss in normal way No IHT – no diminution in estate
Gift during lifetime As for sale CLT – tax now
Gain/loss in normal way PET – tax if die within 7 years
Gift on death No CGT Asset part of death estate
Possible reliefs
– Business assets Entrepreneurs’ relief APR/BPR
Investors’ relief Note: On a PET or CLT – reliefs
Gift relief only available if asset still
owned by donee at date of
Rollover relief donor’s death
EIS/SEIS reinvestment relief

– Non-business PPR relief None

Gift relief if CLT for IHT purposes
EIS/SEIS reinvestment relief


Inheritance tax

Advantage of lifetime gifts Disadvantages of lifetime gifts

• Reduces IHT payable on death as assets • Loss of income and use of the capital if
gifted during lifetime are removed from the assets given away.
chargeable estate. • CGT may be payable if the assets gifted
Note: no reduction in the value of the during lifetime are chargeable assets for
chargeable estate if the assets gifted CGT, whereas no CGT if gifted on death.
get BPR or APR at 100%. • APR or BPR on lifetime gift withdrawn
 on lifetime gifts likely to be less than if donee does not retain asset at donor
IHT in death estate because: death. Therefore better to secure BPR/
–– IHT = Nil (for a PET) if the donor lives APR by retaining asset in donor’s estate.
for > 7 years, and 20% (for CLT) • No RNRB available if residential property
–– the
 value is frozen at the date of the gifted in lifetime.
gift, therefore by gifting an appreciating
asset during lifetime, the IHT is based
on a lower amount, and fall in value
relief is available if fallen in value
–– the
 value subject to IHT is less as
lifetime exemptions (such as AE, ME,
small gift relief) available
–– taper relief available if the donor lives
for > 3 years.


Chapter 8

Exam focus Skipping a generation

• Gifting to grandchildren rather then
Exam kit questions on this area: children avoids a further IHT charge
Section A questions when the children die

• Una • Such planning requires children to be

independently wealthy, such that they
Section B questions have no need for the inheritance.
• Cada
• Stella and Maris


Inheritance tax



Personal tax –
overseas aspects
In this chapter
• Tax status.
• Domicile.
• Residence.
• Splitting tax year.
• Income tax.
• Overseas employment income.
• Capital gains tax.
• Inheritance tax.

Personal tax – overseas aspects

Exam focus Tax status

• How an individual is assessed to income
The overseas aspects of income tax, capital
tax and capital gains tax depends on
gains tax and inheritance tax can feature as
part of a question.
–– Residency status, and,
You must be able to deal with situations
–– Domicile.
involving individuals either coming to or
leaving the UK and with all of the taxes

Exam focus

You may be required to assess the residency

or domicile position of an individual in a
particular scenario. It is essential that you
are familiar with these definitions.


Chapter 9

Domicile Residence
Definition Definition

An individual’s permanent home. An individual will be resident in the tax year

if they:
Domicile of origin:
• do not meet one of the automatic non-
• acquired at birth
UK residence tests, and
• normally domicile of father.
• meet one of the automatic UK
residence tests, or
Domicile of dependency
• meet one or more of the sufficient ties
• up to the age of 16
• if father changes domicile, individual
follows suit.

Domicile of choice
(e.g. where an individual emigrates to
another country)
Key Point
•  eed to demonstrate severed all ties with
UK. If an individual satisfies an automatic non-UK
residence test and automatic UK residence
test = non-UK resident.


Personal tax – overseas aspects

Resident in UK?

Automatic Automatic
Sufficient ties tests
non-UK residency tests UK residency tests

1  Close family resident in UK

Individual in UK in tax year Individual in UK at least: – Spouse/Civil partner/minor child
less than • 183 days in tax year, or 2 Accommodation in UK
• 16 days, or • 30 days in tax year and – available 91 consecutive days in
• 46 days and not UK R in only home in UK, or tax year
any of last 3 years, or • 365 days continuously, 3 Substantive work in UK – 40 days
• 91 days and works FT some in tax year and 4  Days in UK in last two tax years
abroad work FT – › 90 days in either year
5  Country tie – Most time spent in UK

Previously resident Not previously resident

= UK R in one of last 3 years = not UK R in any of last 3 years
See tax tables
Consider all five ties Consider first four ties
in exam


Chapter 9

Application of sufficient ties tests

Days spent in the UK Previously resident Not previously resident

Less than 16 days Automatically not UK resident Automatically not UK resident
16 to 45 days Resident if: 4 UK ties (or more) Automatically not UK resident
46 to 90 days Resident if: 3 UK ties (or more) Resident if: 4 UK ties
91 to 120 days Resident if: 2 UK ties (or more) Resident if: 3 UK ties (or more)
121 to 182 days Resident if: 1 UK tie (or more) Resident if: 2 UK ties (or more)
183 or more days Automatically resident Automatically resident

Note that this table will be provided in the tax rates and allowances.

Splitting tax year

Split year basis (SYB) can apply if individual = UK R in tax year under automatic tests or sufficent
ties test.
• SYB = automatic if conditions satisfied • Cannot disapply SYB

Key Point
• If non-UK R in the tax year
–– SYB cannot apply –– Will be non-UK R for whole year


Personal tax – overseas aspects


Leaving the UK Arriving in the UK

Individual must be
• UK resident in current year, and Individual must be
• UK resident in previous year, and • UK resident in current year, and
• not UK resident in the following year • Not UK resident in previous year

Individual leaves Overseas part starts: Individual arrives in the UK UK part starts:
the UK and: and:
1. Begins working Date start work abroad 1. Acquires a UK home Date acquires UK home
full time abroad 2. Begins working full time in Date start work in UK
2. Accompanies Later of date the UK – For  365 days
partner working – Joins partner 3. Returns following a Date individual (or
full time abroad – Partner starts work abroad period when individual (or partner) stops working
3. Ceases to have Date have no UK home partner) worked full time overseas
any UK home overseas


Chapter 9

Income tax Key Point

General rule: • All income arising in the UK is always
• UK resident subject to UK income tax irrespective of
– Taxed on UK and overseas income. individual’s status.
• Non-resident • A UK resident is always taxed on
overseas income
– Taxed on UK income only
–– the only issue is whether they are
– Personal allowance available against
taxed on an arising or remittance
UK income for UK/EEA citizens.


Personal tax – overseas aspects


UK income Overseas income

R and D in UK NR in UK R but ND in UK

Always taxable whatever Taxable Not taxable
the status of the individual Arising basis or
Remittance basis?
Arising basis Arising basis = Exempt
See next diagram

• No DTR as no double • DTR available

• DTR available taxation • Personal allowances
• Personal allowances • Personal allowances may be available
always available available if EEA, (see next diagram)
Isle of Man or
Channel Islands citizen


Chapter 9

R but ND in UK

UK income Overseas income

Always taxable whatever the Taxable but depends on amount of

status of the individual unremitted overseas income and gains
Arising basis

≤ £2,000 › £2,000

• Remittance basis = automatic • Arising basis = automatic

• Personal allowance available • Personal allowances available
• Can elect for Remittance basis (decision made each year)
If elect:
• Personal allowances not available
If taxed on a remittance basis:
• Possible Remittance basis charge (RBC)
• All overseas income = taxed as
DTR available non-savings income
(including interest and dividends)
(i.e. taxed at 20%/40%/45% and
SNRB/DNRB not available)


Personal tax – overseas aspects

Definition of Remittance
Exam focus
Exam kit questions on this area:
• Bringing overseas income directly into
the UK except for amounts used to: Section A questions
–– Invest in shares or make a loan to • Jodie
an unquoted trading company or • Waverley
member of a trading group Section B questions
–– Pay the RBC. • Shuttelle
• Using overseas income: • Piquet and Buraco
– to settle debts in the UK • Methley Ltd
– to purchase goods and services • Noah and Dan
which are subsequently brought into
the UK
– personal items
(e.g. clothes, jewellery)
– items brought in for repair
– items costing ≤ £1,000
– items brought in temporarily.


Chapter 9

Remittance Basis Charge (RBC)

Exam focus
• Only levied if individual:
– aged ≥ 18 years old Exam kit questions on this area:
– is not UK domiciled Section B questions
– is UK resident in current tax year • Shuttelle
– has been UK resident for 7 out of last • Methley Ltd
9 tax years
– has total unremitted income and gains
> £2,000, and
– elects for the remittance basis to apply.
• Additional tax charge:

if UK resident for
£30,000 p.a. 7 out of last 9 tax years
£60,000 p.a. 12 out of last 14 tax years
£90,000 p.a. 17 out of last 20 tax years
• Added to income tax liability.
• Paid under self-assessment.


Personal tax – overseas aspects

Double tax relief

Deduct from the individual’s income tax liability

Lower of:
• Overseas withholding tax suffered
• UK income tax on that source of overseas income

UK income tax attributable to a source of overseas income

= the reduction in the total income tax liability that would arise if that source of overseas
income is excluded from taxable income

To calculate UK income tax on overseas income:

• Always treat overseas income as the ‘top slice’ of income type
• Calculate total income tax including that source of overseas income
• Calculate total income tax without that source of overseas income
• Difference = UK income tax on that source income

If more than one source of overseas income:

• Need separate DTR calculation for each source of overseas income
• Take out the source with the highest rate of overseas tax first


Chapter 9

Exam focus Overseas employment

You may be asked to consider the tax
position of: Basis of assessment:

• an individual coming to work in the UK, • follows normal overseas income rules
or re-status of individual (see earlier
• a UK individual leaving the UK to work
abroad. • but some exceptions

Exam kit questions on this area: Earnings from duties performed in UK

• always taxable, regardless of tax status
Section A questions
• arising basis
• Mirtoon
Earnings from duties performed abroad
See diagram overleaf.


Personal tax – overseas aspects

Earnings from duties

performed abroad

R and D in UK NR in UK R but ND in UK

Whether duties are wholly or partly performed outside the UK Non-UK R for 3 consecutive
tax years in previous
5 tax years?

Arising basis Exempt

Yes No

Non-UK duties performed

wholly overseas for
overseas employers?

Yes No

Possible arising basis or Arising basis

remittance basis


Chapter 9

UK individual leaving to work overseas

Exam focus •
• If SYB applies, treated as
Exam kit questions on this area:
–– non UK resident
Section B questions
–– for whole of the period overseas.
• Jerome and Tricycle Ltd
• Travel and subsistence – allowable
expenses: • Spetz Ltd Group
– travel to and from overseas
employment at the beginning and
end of contract
– overseas board and lodgings in
respect of overseas employment
– unlimited return trips to the UK
– family travel:
• 2 visits/year
• for spouse/children < 18 years
•  rovided employee overseas ≥
60 continuous days
• employer bears the cost.


Personal tax – overseas aspects

Key Point

Individual comes to UK to take up

• Taxed under normal rules set out above.
• UK residency position depends on
intentions when arrive in UK.
• Tax position resulting from residency
– Taxed on all UK source income
on an arising basis regardless of
residency status
– Overseas income:
See earlier diagram.


Chapter 9

Capital gains tax

• General rule:

Individual’s status Taxed on

R and domiciled in UK Worldwide assets

Not R in UK, regardless of domicile No liability on any assets

(unless trading in UK, or UK residential
R in UK; but Not UK domiciled UK gains
– Arising basis
Non UK gains
– Possible remittance basis, see diagram


Personal tax – overseas aspects


No Yes

• All gains = EXEMPT from CGT

• Both Overseas and UK gains
= exempt Yes No
• unless
– trading in UK • Taxable on Worldwide gains
– temporary absence abroad • AEA available
– UK residential property • Overseas losses allowable
UK gains – always taxable, arising basis
Overseas gains – Taxable but depends on
amount of unremitted overseas income
and gains
• DTR available

≤£2,000 › £2,000

• Remittance basis (RB) = automatic

• AEA available
• Overseas losses available

• DTR available


Chapter 9

• Arising basis = automatic

• AEA available
• Overseas losses allowable
• Can elect for RB (decision made each year)
• One election for both income tax and CGT
If elect:
• No AEA available
• Possible Remittance basis charge (RBC) of £30,000, £60,000
or £90,000?
– see income tax section

If RB claimed – are overseas • DTR available

losses available?
= depends

Make election No election

• Binding • Overseas losses not allowable
• Irrevocable – now or ever
• Overseas losses allowable
– now and forever
• But subject to complicated
matching rules (not examinable)


Personal tax – overseas aspects

Individual coming to the UK Individual leaving the UK

Key Point Key Point

Only taxed on gains made after becoming • If UK resident for 4 of the previous 7 tax
UK resident, subject to domicile rules for years before leaving the UK
overseas assets. • UK residents remain liable to CGT even
though no longer UK resident
if absent from UK for < 5 years
• To avoid the rules and for gains to be
exempt: (see diagram)

Exam focus

Exam kit questions on this area:

Section A questions
• Mirtoon
Exam focus • Brad
You may be asked to consider the CGT • Jodie
position of an individual coming to the UK Section B questions
and leaving the UK.
• Cate and Ravi


Chapter 9

Temporary absence abroad

Individual leaving the UK for

period of temporary absence

Period whilst abroad:


On re-entry into the UK:

Return within five years: Return after five years:

Liable on Liable on
• disposals of all assets whilst abroad, • disposals after the date of return
if the asset was owned before leaving only
the UK • No CGT on disposals whilst abroad
• disposals after the date of return (unless UK residential property)


Personal tax – overseas aspects

Non-UK residents and UK residential • elect to time apportion gain pre and post
property disposals 5 April 2015, or
The disposal of UK residential property by a • elect to be assessed on the whole gain
non-UK resident individual: or loss.
• is a chargeable disposal, and PPR relief for non-UK resident individuals
• a liability to CGT will arise, but • Only consider period of ownership from 6
• only on gains accruing after 5 April 2015 April 2015 for PPR purposes (as only the
gain arising after 5 April 2015 is taxable).
• to the extent that they are not covered by
• PPR relief available as usual for periods
–– reliefs (e.g. PPR relief, rollover relief
of occupation and deemed occupation
or gift relief), or
(see Chapter 6).
–– the AEA.
• For periods of non-occupation, if the
Methods of calculating the gain or loss individual/spouse/civil partner:
–– stayed in the property for at least 90
Property purchased after 5 April 2015:
nights in the tax year
• calculate gain (or loss) before reliefs in = treat whole tax year as period of
the normal way. occupation
Property purchased before 5 April 2015: –– did not stay in the property for at
• rebase the cost to market value at 5 April least 90 nights in the tax year
2015 (automatic treatment without an = treat the whole tax year as a
election), or period of non-occupation


Chapter 9

Exam focus Double tax relief

Exam kit questions on this area: Double tax relief

Section A questions
• Waverley Deduct from the individual’s capital gains tax liability
Section B questions Lower of:
• Noah and Dan • Overseas capital gains tax suffered
• UK capital gains tax on the disposal of that overseas

• The AEA amount is allocated against UK
gains first.
• When calculating UK tax on overseas
gains, treat as ‘top slice’.


Personal tax – overseas aspects

Inheritance tax Location of assets

(only relevant to non-UK domiciled
• General rule:
Individual’s status Taxed on
Land and buildings • Physical
UK domiciled Worldwide assets location
Not UK domiciled UK assets only Registered shares • Place of
and securities registration
• Deemed domicile
Chattels • Location at time
– An individual who ceases to be
of transfer
UK domiciled remains deemed UK
domiciled for IHT purposes for a Debtors • Where the
further 3 years. debtor resides
– An individual who has been resident Bank accounts • Location of
in the UK for  17 out of the account
previous 20 tax years is deemed UK Life assurance • Where
domiciled. policies proceeds are
Key Point
Interest in a • Where the
Liability to IHT is determined by domicile, not
business business is
carried on


Chapter 9

Individual coming to the UK

Exam focus
Key Point
You may be asked to consider the IHT
position of an individual coming to the UK • If acquire a UK domicile of choice:
and leaving the UK. –– liable on worldwide assets when
become UK domiciled.
• If remain non UK domiciled:
Individual leaving the UK
–– deemed UK domiciled and liable
Key Point on worldwide assets when been
resident in UK for 17 out of last 20
• Liable to IHT on worldwide assets
tax years.
–– for 3 years after leaving UK
(deemed UK domiciled).
Exam focus
• If acquire a non UK domicile of choice:
–– will only be liable on UK assets once Exam kit questions on this area:
3 years have elapsed. Section A questions
• Waverley
Section B questions
• Ash
• Kesme and Soba
• Noah and Dan


Personal tax – overseas aspects

Double tax relief

• from IHT on estate
• after QSR
• Lower of:
– overseas death duties
– UK IHT on overseas asset.
• UK IHT on overseas asset
= (Amount included in estate)
x average rate of IHT after QSR.



10 Trusts
In this chapter
• Overview of trusts.
• Types of trust.
• Financial planning benefits of trusts.
• Income tax.
• Capital taxes and trusts.


Overview of trusts
Property passes
SETTLOR Trustees are given
into trust legal title to property

Income is distributed Capital is distributed

to the income beneficiary to capital beneficiary

• Trust (also known as a settlement) = Treated as separate taxable person.

• Must have > one trustee.
• Trustees = act in representative capacity in best interests of beneficiaries.
• Trust deed = details trustee’s powers and duties.

Exam focus

In recognition of the complexity of trusts, the examining team has confirmed that the knowledge
required in relation to trusts is limited to the information summarised in this chapter.


Chapter 10

Types of trust

Definition Types of trust

IIP trust
Discretionary trust

An arrangement whereby:
• property is transferred • no IIP exists
by a settlor • the beneficiaries have • IIP exists
• to the trustees no legal right to benefit • life tenant has legal
• to be held for the from the income or right to benefit from
benefit of one or capital of the trust the income of the trust
more of specified • any distribution of • trustees must
beneficiaries income or capital out distribute life tenant’s
• on specified terms in of the trust is at the full entitlement every
the trust deed. complete discretion of tax year
the trustees



Financial planning benefits • Can provide a means for an older

of trusts generation to protect and make
financial provision for next generation or
• A trust separates the beneficial and legal grandchildren.
ownership of assets:
• Can provide a flexible arrangement
–– e
 nables the benefit of owning assets where different beneficiaries have
(e.g. income), to be enjoyed by different needs.
someone (the beneficiary) other than
the legal owner (the trustees). –– F
 or example, a settlor creates a DT
whereby trustees have discretion to
• Can provide an income from the assets distribute income/assets to children
for one group of beneficiaries while by reference to individual need.
preserving and protecting the capital for
others, for example, setting up an IIP
–– to protect interests of children in
situation where spouse remarries
–– to transfer assets under will to IIP
trust with spouse (life tenant) entitled
to income for life and capital assets
passing to children (remaindermen)
on spouse’s death.


Chapter 10

Income tax
• Trustees = separate taxable person.
• Income tax paid by trustees under self-assessment on income generated by trust and by
beneficiaries on income received.

Type Trustees Beneficiaries

IIP Depends on type of income: • Annuitant entitled to fixed amount of income
• dividends 7.5% each year (annuity).
• savings 20% • Life tenant entitled to the remaining trust income.
• non-savings 20% • Taxed on his entitlement – even if not distributed.
• Income maintains nature in beneficiaries’ hands
(i.e. savings income and other income grossed
up by 100/80 with a 20% tax credit, divided
income grossed up by 100/92.5 with 7.5% tax
DT Different rates – calculation • Taxed on income actually received in tax year.
not examinable • Always grossed up at 100/55 with 45% tax
• Taxed as non-savings income.



Capital taxes and trusts


interest in possession
Discretionary trust (DT)
trusts (IIPs)

Non-qualifying IIP
Qualifying IIP trust (QIIP)

• Immediate post death

interest trust (IPDI)
– An IIP set up on death – set up during settlor’s
lifetime trusts

Relevant property trust



Chapter 10

Inheritance tax

During lifetime
– Transfer to RPT = CLT by settlor
ASSETS PUT – All lifetime gifts into trusts = RPTs (Not possible to set up an IPDI trust during lifetime)
On death
– No special tax consequences
– Assets taxed in settlor’s estate in normal way
– After tax assets put into trust

No charges – Principal charge
WHILST IN – Every 10 years
TRUST – Max = 6%

When IIP ends: At any time:
ASSETS 1. If life tenant dies = = Exit charge
DISTRIBUTED Settled property in life tenant’s when capital
death estate distributed
OUT OF TRUST 2. During life tenant’s lifetime Max = 6%
= PET by life tenant



Capital Gains Tax

For all trusts

During lifetime
ASSETS PUT – Chargeable disposal of asset
INTO TRUST – Calculate gain using MV as consideration
– Gift relief available on ANY asset as there is an immediate charge to IHT
– Trustees base cost = MV less gift relief
On death
– No CGT consequences on death
– Not a chargeable disposal
– Trusts acquire assets at probate value

All trusts
– Chargeable gains on disposals by trustees
WHILST IN – AEA = half individual’s AEA (£5,650 in 2017/18)
TRUST – Rate of tax = 20%
– Trustees pay out of trust fund
– Assessed under self-assessment rules

IPDI ends Any trust

– interest ends on death of – in any other circumstances
ASSETS life tenant = Chargeable disposal
DISTRIBUTED = No CGT – Gift relief on ANY assets as
OUT OF TRUST = Tax free uplift to MV IHT charge
Remainderman receives – unless IPDI
assets at MV on life tenant’s = qualifying assets only


Chapter 10

Tax planning opportunities

Exam focus
• Gifting assets into a trust during lifetime
Exam kit questions on this area:
–– m
 eans that assets not in settlor’s
Section A questions
estate on death.
• Farina and Lauda
• Assets which appreciate in value can be
transferred into the trust Section B questions
–– w
 ill increase in value outside of both • King
the settlor’s and the beneficiaries • Surfe
• Exit charges and principal charges
= max 6%
–– m
 ay not be significant in the
context of the financial planning
• Trustees of a DT can choose to give
income to non-tax paying beneficiaries
–– repayment of income tax paid by the
trustees can be claimed.





11 Ethics, personal financial

management and
In this chapter
• Professional Code of Ethics.
• Monitoring of serious tax offenders.
• Personal financial management.
• Key investment products.
• Tax efficient investment schemes.
• Sources of finance.
• Self-assessment.

Ethics, personal financial management and self-assessment

Exam focus Professional Code of Ethics

This chapter covers the very important topics Principles
of ethics, professional issues, personal • Objectivity.
financial management and self-assessment. • Professional behavour.
The examining team has stated that there • Professional competence.
will always be approximately 5 marks in • Integrity.
section A of each examination allocated to
• Confidentiality.
the topic of ethics and professional issues.
Questions will require you to provide Key Point
practical advice based on a particular set of
Remember: OPPIC.
You need a good knowledge of the
professional code of ethics and the
investment products available.
You must be able to give suitable advice
Exam focus
based on the facts of a particular scenario.
Exam kit questions on this area:
Section A questions
• Drench, Hail Ltd and Rain Ltd
• Jonny
Chapter 11

New clients • For an individual

Before taking on a new client – a member of –– proof of identity and residential
ACCA must assess: address
• risk to the integrity of the practice on –– details of nature and structure of
accepting work any unincorporated business
• whether firm has adequate skills and interests and persons authorised
competence to act on behalf of the business (e.g.
partners in a partnership).
• risk of money laundering.
On accepting work – a member of ACCA:
Information to be obtained:
• must ask permission from the client
• For a company
to contact old advisers to request
–– proof of incorporation, primary information
business address and registered
• if client refuses, should consider not
acting for them
–– structure, directors and shareholders
• if not, issue a letter of engagement
of the company
setting out terms and conditions.
–– identities of persons instructing the
firm on behalf of the company and Exam focus
persons authorised to do so.
Exam kit questions on this area:
Section A questions
• Farina and Lauda


Ethics, personal financial management and self-assessment

Conflicts of interest
Exam focus
• Examples:
Exam kit questions on this area:
–– a
 sked to act for another party in a
Section A questions
transaction with an existing client
• Farina and Lauda
–– acting for both parties in a divorce
–– a
 cting for the employer and their
–– w
 here the adviser may benefit from
the transaction.
• A member of ACCA may act for both
parties if safeguards put in place:
–– the potential conflict should be
pointed out to all relevant parties
–– consent should be obtained to act
for them
–– the firm must have clear guidelines in
relation to confidentiality, and
–– should consider the need to use
separate teams for each client.
• Alternatively, consider acting for just one
party, or not acting for either party.
Chapter 11

Dealing with HMRC –– if client still refuses

• Information provided must be accurate – should cease to act and write to
and complete. HMRC stating that the firm no
longer acts for the client but not
• Must not assist a client to plan or commit
stating the reason why.
an offence.
• If become aware of a tax irregularity:
–– discuss with client
–– ensure proper disclosure to HMRC.
• Client error:
–– d
 ecide whether genuine or
deliberate/fraudulent act Exam focus
–– e
 xplain to client the need to notify
HMRC Exam kit questions on this area:
–– p
 rompt/adequate disclosure taken Section A questions
into account when deciding penalties • Ziti
–– if client refuses: • Kantar
– must explain potential • Gail
consequences in writing
• Hahn Ltd Group
–– if material, consider whether to
• Heyer Ltd Group
continue to act for client


Ethics, personal financial management and self-assessment

Money laundering regulations Employees

Definition If a member is an employee and becomes

aware of irregularities in their firm’s dealings
Money laundering = benefiting from or with HMRC:
concealing the proceeds of crime
• raise concerns with the apporpriate
• includes the proceeds of tax evasion.
A member of ACCA must appoint a Money • if appropriate action not taken
laundering reporting officer (MLRO):
–– seek advice from ACCA
• decides whether to report a transaction
• in addition, consider:
to the National Crime Agency (NCA)
–– need to report to MLRO
• if a report is made, client should not be
informed as this is an offence (known as –– resigning from employment
‘tipping off’). –– n
 eed to disclose under the Public
Interest Disclosure Act.


Chapter 11

Tax evasion versus tax avoidance • HMRC have also introduced:

• Tax evasion –– D
 isclosure obligations re specific tax
–– unlawful avoidance schemes.
–– e
 .g. suppressing information or –– A general anti-abuse rule (GAAR)
submitting false information to counter artificial and abusive
schemes to avoid tax.
–– client = s ubject to criminal
prosecution / fines / This targets arrangements which
imprisonment cannot be regarded as a reasonable
course of action.
–– adviser = s ubject to sanctions of
criminal law. • Serial tax avoidance
• Tax avoidance –– Those who persistently engage in tax
avoidance schemes defeated by HMRC
–– u
 se of the taxation system to
= subject to a regime of increasing
legitimately reduce tax
penalties and may have their
–– e.g. advice to reduce tax liability details published by HMRC.
–– a
 lso used to describe tax schemes
devised to utilise loopholes in the tax Exam focus
Exam kit questions on this area:
• Specific schemes have been targeted Section A questions
with anti-avoidance legislation.
• Una
• Opus Ltd Group


Ethics, personal financial management and self-assessment

Monitoring of serious tax

Those who:
• incur a penalty for deliberate evasion
• in respect of tax of £5,000 or more
will be required to submit returns:
• for up to the following 5 years
• showing more detailed business accounts
information, and
• detailing the nature and value of any
balancing adjustments within the


Chapter 11

Dishonest conduct of tax agents Publication of names of tax offenders

• Incurs a civil penalty of up to £50,000 • HMRC have the power to publish:
• In cases where full disclosure was not –– the names and details
made, HMRC may: –– of individuals and companies
–– p
 ublish details of the penalised tax –– w
 ho are penalised for deliberate
agent defaults leading to a loss of tax of
–– a
 ccess the working papers of a > £25,000.
dishonest agent with agreement of • Names will not be published of:
the Tax tribunal.
–– those who make a full unprompted
disclosure, or
–– a
 full prompted disclosure within the
required time.


Ethics, personal financial management and self-assessment

Giving advice to clients

Considerations of accountants Factors relating to client to consider

• Know the Professional Code of Ethics. • Personal objectives.
• Know your client – fact find. • Current position.
• Best advice – advice must be suitable. • Dependants.
• Best execution – obtain best price. • Age.
• Switching – avoid unnecessary • Risk acceptable.
transactions. • Tax status.
• Key features – explain why course of • Tax efficiency.
action recommended.
• Liquidity.


Chapter 11

Personal financial • Need to ensure some investments are

management readily realisable to fund immediate
unforeseen demands.
Individuals must balance the need for income • Likelihood of receiving an inheritance.
on an on-going basis with investing for
capital growth to be used to fund retirement. • Attitude to risk.

Suitable investments will change during an

individual’s lifetime as lifestyle and income
streams change.
Factors to consider when making
• Income available after meeting current
• Desire to own home and method of
• Need to fund children’s education.
• Responsibility to support parents.
• Required lifestyle on retirement.
• Desire to leave an inheritance to


Ethics, personal financial management and self-assessment

Key investment products

Consider features of different investments to determine if they meet the needs of the client.
IT CGT Risk Liquidity Income/
free free capital
Bank/ B Soc a/cs x N/A L L1 I
NS&I savings certificates 3 3 RF L2 I
Premium bonds 3 3 RF L1 –
Qualifying life assurance policies 3 3 L L3 C

EIS and SEIS scheme Tax relief on

investment but
income taxable 3 VH L3 C

VCT scheme Tax relief on

and dividends
tax free 3 H L1 C


Chapter 11

IT CGT Risk Liquidity Income/

free free capital
Pension schemes 3 3 M L3 C
(Tax relief on payments)
QCBs x 3 M L1 C/I
Gilts x 3 L L1 I
Land and buildings x x M L3 C/I
REITs and unit trusts x x M L1 C
Quoted shares/securities x x M/H L1 C
Unquoted shares/securities x x VH L3 C/I
Individual savings accounts 3 3 L/M L1 C/I

I Income H High risk
C Capital growth VH Very high risk
x Chargeable L1 Immediate access
3 Tax-free L2 Access possible but penalty
L Low risk L3 Non liquid
M Medium risk RF Risk-free
N/A Not applicable


Ethics, personal financial management and self-assessment

Tax efficient investment schemes

Special tax relief to encourage investment by individuals in riskier small companies.
Qualifying • Subscribes in cash • Subscribes
Individual • New ordinary shares • Newly issued shares
• Qualifying company
• Own  30% of ordinary share capital
• Not employee or director • Not current employee
• Independent of company (can be director or
prior to first issue previous employee)
Qualifying • Unquoted trading company • VCT must be quoted
company/VCT • Have a permanent establishment in UK on a stock exchange
• Full time employees • Full time employees < 25 in EEA
 250 • Gross assets • Qualifying investments
• Gross assets  £15m  £200,000 before = in EIS qualifying
before and  £16m after subscription companies
subscription • Not previously have • Approved by HMRC
used EIS or VCT
• Carrying on trade < 2
years old, or preparing
to carry on trade


Chapter 11


Maximum • £5 million in any 12 • £150,000 in any 3 • £5 million in any 12
funds company months years months
can raise • 12 million lifetime total • 12 million lifetime total
Investment by • Max £1 million p.a. • Max £100,000 p.a. • Max £200,000 p.a.
Retention • 3 years • 5 years
period for IT • IT relief withdrawn if sold within 3 years • IT relief withdrawn if
relief sold within 5 years
IT relief: • % of amount subscribed: • % of amount • % of amount
Deduct from IT subscribed: subscribed:
= 30%
= 50% = 30%
Carryback • Any amount invested, but • Any amount invested, • No carryback
amount to cannot get relief on more but cannot get relief on
previous year than £1 million in any more than £100,000 in
one tax year any one tax year

CGT on • Gain – Exempt if held > 3 yrs • No gain or loss

disposal • Loss – Allowable– c an convert into IT loss whenever sold


Ethics, personal financial management and self-assessment


Reinvestment • Gain on any • Up to a maximum of • No relief
relief (chapter chargeable asset = 50% of gain on any
6) deferred to subject to chargeable asset =
conditions exempt subject to
• Gain crystallises when conditions
EIS shares disposed • Relief withdrawn if
of or investor/spouse/ SEIS shares sold < 3
civil partner emigrates years
< 3 years
IHT – BPR • 100% if owned  2 yrs • No BPR
Dividends • Taxable • Tax free on
investment within
annual limit

Exam focus
Exam kit questions on this area: Section B questions
Section A questions • Tetra
• Pippin • Pescara


Chapter 11

Sources of finance Business

Personal Equity
Mortgage • does not need to be repaid
• lowest interest rate (cheap) • dividends can vary each year, not tax
• longest term – secured on house. deductible
Secured loan • outside influence
• cheap, can be long term. • e.g. share issue, EIS and VCT schemes.
Unsecured loan Debt
• more expensive • must be repaid
• normally < 5 yrs. • interest payments fixed, but tax
Hire purchase deductible.
• more expensive Long term debt
• normally 1 – 5 yrs. • for purchase of assets, provision of
Overdraft working capital
• expensive, short term, repayable on • e.g. term loan, mortgage, debenture.
demand. Short term debt
Credit cards • e.g. overdraft, trade credit, debt
• most expensive factoring.
(except zero per cent cards).


Ethics, personal financial management and self-assessment

Self-assessment Notification of chargeability

• Must notify HMRC of income or
Filing for 2017/18 returns
chargeable gains on which tax is due
• Later of:
–– W
 ithin 6 months of end of tax year
–– 31 October 2018 (paper return) in which the liability arises
–– 31 January 2019 (electronic return) –– i.e. by 5 October 2018 for 2017/18
–– T
 hree months after issue of the • Standard penalty may apply for failure to
notice to file a return. notify of chargeability (see later).
• Fixed and tax geared penalties may
apply for late filing (see later).


Chapter 11

Amendments to the return Records

• HMRC can amend return < 9 months of Business records
the actual filing date. • A business must keep records of:
• Taxpayer can amend < 12 months of –– all receipts and expenses
the 31 January filing date. –– all goods purchased and sold
Determination of tax –– all supporting documents relating
to the transactions of the business,
• Issued by HMRC when a return is not
such as accounts, books, contracts,
filed by the 31 January filing date.
• Can be issued by HMRC within 3 years
• Self-employed taxpayers must retain all
from the filing date (i.e. by 31 January
their records (not just business records)
2022 for 2017/18 tax return).
for five years after the 31 January filing
• Assessment = replaced by the actual
self-assessment return when it is
For 2017/18 = until 31 January 2024.


Ethics, personal financial management and self-assessment

Other records Payment dates for 2017/18

• Other taxpayers should keep evidence of
Payments on account (POAs)
income received.
• 31 January 2018.
• Must normally be retained for 12 months
after the 31 January filing date. • 31 July 2018.
For 2017/18 = until 31 January 2020.
Balancing payment
Penalty • 31 January 2019.
• A fixed penalty of up to £3,000 may
be charged for failure to keep or retain POAs = h
 alf previous years’ tax payable by
adequate records. self-assessment and class 4 NIC
(relevant amount)
• No POA if:
–– relevant amount for previous year is
≤ £1,000, or
–– m
 ore than 80% of the income tax
liability of the previous year was
collected at source.


Chapter 11

Late payment interest

Exam focus
Charged on:
Exam kit questions on this area:
• all late payments of tax Section A questions
• at a daily rate • Una
• runs from: due date • Kantar
• to: date of payment • Ray and Shanira
Repayment interest Section B questions
• Ash
HMRC pay interest on overpaid tax
• from: later of
–– date tax due, or
–– date HMRC received tax
• to: date of repayment


Ethics, personal financial management and self-assessment

Standard penalties
Applies in two circumstances:
• Submission of incorrect returns
–– All taxes
• Failure to notify liability to tax
–– Income tax, CGT, Corporation tax, VAT and NIC
• Penalty = % of potential lost revenue
• Depends on the behaviour of the taxpayer

Taxpayer behaviour Maximum penalty

(% of revenue lost)
Genuine mistake (for incorrect returns only) No penalty
Careless / Failure to take reasonable care 30%
Deliberate but no concealment 70%
Deliberate with concealment 100%

• Penalties may be reduced at HMRC discretion, where the taxpayer informs HMRC
–– larger reductions for unprompted disclosure


Chapter 11

• Minimum penalties apply and vary based

Exam focus
–– the taxpayer’s behaviour, and Exam kit questions on this area:
–– w
 hether disclosure is prompted or Section A questions
unprompted. • Una
• An unprompted disclosure Section B questions
= where the taxpayer informs HMRC • Cuthbert
when they have no reason to believe
HMRC have or are about to discover
the error.
• Taxpayer can appeal against a standard


Ethics, personal financial management and self-assessment

Other penalties relating to individuals

Offence Penalty
Late filing of self-assessment tax return
• filed after due date £100 fixed penalty
Additional penalties:
• filed 3 months late Daily penalties of £10 per day (maximum of 90 days)
in addition to £100 fixed penalty
• filed 6 months late 5% of tax due (minimum £300) plus above penalties

• more than 12 months after filing date The penalties above plus:
where withholding information was:
–– not deliberate Additional 5% of tax due (minimum £300)
–– deliberate but no concealment 70% of tax due (minimum £300)
–– deliberate with concealment 100% of tax due (minimum £300)


Chapter 11

Offence Penalty
Late payment of tax
• Paid > 1 month late 5% of tax due
• Paid > 6 months late Additional 5%
• Paid > 12 months late Additional 5%
Applies to balancing payment only (not POAs)
Fraud or negligence on claiming reduced POAs £
POAs if claim not made X
Less: POAs actually paid (X)
Failure to keep and retain required records Up to £3,000 per year of assessment
Note that ‘tax’ for an individual will include income tax, capital gains tax and NIC.


Ethics, personal financial management and self-assessment

HMRC compliance checks

• HMRC has the right to enquire into the completeness and accuracy of any return
• Must issue written notice before commencing a compliance check (enquiry)
–– within 12 months of the date the return is actually filed
• On completion of a compliance check, HMRC must send the taxpayer a completion notice:
–– either stating no amendment required, or
–– amending the taxpayer’s self-assessment
• Taxpayer has 30 days to appeal against HMRC’s amendment.

Discovery assessments
• HMRC can raise a discovery assessment if they discover an inaccuracy in the return within

Time from end of tax year For 2017/18

Basic time limit 4 years 5 April 2022
Careless error 6 years 5 April 2024
Deliberate error 20 years 5 April 2038


Chapter 11

Information and inspection powers Appeals to resolve disputes with HMRC

• Covers income tax, capital gains tax, • Taxpayer can appeal against a decision
corporation tax, VAT and PAYE. made by HMRC
• HMRC can request information from –– in writing
taxpayers –– w
 ithin 30 days of the disputed
–– by a written information notice. decision.
• Requests to third parties for information • They can proceed in one of two ways:
must normally –– request a review by another HMRC
–– be agreed by the taxpayer, or officer, or
–– approved by the first-tier tribunal. –– refer case to an independent Tax
• HMRC also has new powers to Tribunal.

–– e
 nter and inspect a taxpayer’s
business premises
–– in order to inspect business records
and assets.


Ethics, personal financial management and self-assessment

Tax Tribunals The Upper Tribunal will deal with:

Two tiers (layers) of Tax Tribunal system: • Complex cases

• First-tier Tribunal, and –– requiring detailed specialist

• Upper Tribunal. knowledge
–– a formal hearing.
The First-tier Tribunal deals with:
• Default paper cases: Hearings are held in public and decisions are
–– simple appeals (e.g. against a fixed published.
penalty) A decision of the Upper Tribunal:
–– usually no hearing provided both
sides agree. • may be appealed to the Court of Appeal

• Basic cases: • but only on grounds of a point of law.

–– straightforward appeals
–– minimal exchange of paperwork
–– a short hearing.
• Standard cases:
–– more detailed consideration of issues
–– more formal hearing.
• Complex cases:
–– may be heard by the First Tier
–– however usually heard by Upper



12 Personal tax planning

In this chapter
• Personal tax planning – overview.
• Income tax planning.
• Capital gains tax planning.
• Inheritance tax planning.
• Tax efficient income.
• Tax efficient expenditure.
• Tax efficient remuneration.
• Employment versus self-employment.
• Married couples/civil partners tax planning.
• Lifetime giving versus legacies on death.

Personal tax planning

Exam focus Personal tax planning

– overview
In the examination you may need to be
able to identify and advise on the types of Personal tax planning involves consideration
investment and other expenditure that will of the:
result in a reduction in income tax liabilities • income tax
for an individual.
You must also be able to identify the • capital gains tax
appropriate taxes applicable to a given
scenario and advise on suitable tax planning • inheritance tax, and
measures to mitigate the personal tax • stamp taxes
liabilities of an individual.
implications of various courses of action.
Primary aim = u
 sually to maximise the
individual’s ‘net after tax cash
flow’ position.


Chapter 12

Income tax planning Capital gains tax planning

Standard income tax planning measures Standard capital gains tax planning
include: measures include:
• investing in tax efficient income • maximising use of AEA
• incurring tax efficient expenditure • paying tax at lowest rate
• maximising use of allowances and basic • effective utilisation of capital losses
rate band • effective use of CGT reliefs
• negotiating tax efficient remuneration • timing the acquisition and disposal of
• tax planning for married couples/civil capital assets
partners. • tax planning for married couples/civil


Personal tax planning

Inheritance tax planning Common examination scenarios:

• Recommending tax efficient income and
Standard inheritance tax planning measures
• Considering alternative forms of
• maximising use of lifetime exemptions
(e.g. annual exemption, marriage
exemption, small gifts, normal –– E
 mployment versus self-
expenditure out of income) employment.
• making lifetime gifts of appreciating • Tax planning for married couples/civil
assets (but be aware of CGT partners.
implications) • Lifetime giving versus leaving a legacy
• making PETs as soon as possible in a will.
(exempt if survive seven years)
• effective use of IHT reliefs
• maximising use of the nil rate band
• use of a deed of variation. Exam focus

Exam kit questions on CGT and IHT

Section A questions
• Ray and Shanira


Chapter 12

Tax efficient income

• Exempt income – Chapter 1.
• Tax exempt benefits – Chapter 2.

Tax efficient expenditure

Maximum rate of tax relief
• Pension contributions 45%
• Qualifying loan interest 45% on up to greater of £50,000 or 25% of ATI
• Employment expenses 45%
• EIS investment 30% on investment up to £1 million
• SEIS investment 50% on investment up to £100,000
• VCT investment 30% on investment up to £200,000


Personal tax planning

Tax efficient remuneration Exam focus

• Maximising use of exempt benefits
Exam kit questions on this area:
–– Chapter 2.
Section B questions
• Considering the provision of company
• Jerome and Tricycle Ltd
car versus self purchase and mileage
allowance or cash alternative (below). • Hyssop Ltd
• Receiving approved versus unapproved • Methley Ltd
share options – Chapter 2.
• Comparing employment packages
–– Chapter 2.


Chapter 12

Company car versus self purchase and mileage allowance or cash alternative

Company car Self purchase and mileage allowance

or cash alternative
• Additional income tax liability on: • If mileage allowance received > AMAP:
–– Taxable car benefit additional income tax liability and class 1 NICs
payable on excess.
–– Possible fuel benefit.
• If mileage allowance received < AMAP:
• No running costs borne by individual
allowable deduction from employment income.
• Additional income tax and class 1 NICs liability
• Employer liable to class 1A NICs.
on any cash alternative received.
• Costs of providing car and fuel,
• Individual employee bears running costs of car.
including class 1A NICs.
• Employer liable to employer’s class 1 NICs on
= allowable deductions against
excess mileage allowance and cash alternative.
trading profits.
• Mileage allowance, or cash alternative, including
class 1 NICs
= allowable deductions against trading profits.


Personal tax planning

Employment versus self-employment

• Decision = based on facts.
• No one factor is overriding.
• Consider all of the facts presented and apply the following factors:

Factors to Employed Self-employed

consider Contract of service Contract for services
Control of Employee is directed/instructed in how Can choose hours, method, location
work and when to work by the employer. and can sub-contract work to others. Is
contracted to produce a result and is not
directed in how to achieve that result.
Obligations Employee has right to expect work Has no right to expect further work once
and cannot decline the work nor sub- the contract is completed and has no
contract the work to others outside the obligation to perform further work.
Risk No personal financial risk to own Risk financial loss of capital, personally
capital, not responsible for correction responsible for correction of bad work,
of bad work, paid regardless of risk of no return if loss-making.
whether or not the business is


Chapter 12

Factors to Employed Self-employed

consider Contract of service Contract for services
Pay Governed by employment legislation No employment rights, paid when work
(i.e. regular pay, holiday pay, sick pay) completed and invoice rendered.
and paid under PAYE system.
Equipment Employer provides. Provides own.
Clients Usually works wholly or mainly for one Usually works for many customers.


Personal tax planning

• Employed = assessed according to

employment income rules
–– On a receipts basis.
–– A
 llowable deductions = wholly,
exclusively and necessarily incurred.
–– Class 1 NICs payable.
–– Tax collected under PAYE.
• Self-employed = assessed according to
trading income rules
–– On a current year basis.
–– A
 llowable deductions = wholly and
exclusively incurred.
–– Class 2 and 4 NICs payable.
–– Tax collected under self-assessment.
• Advantages of self-employment
–– More allowable expense deductions.
–– Lower total NICs payable.
–– L
 ater payment of income tax and


Chapter 12

Married couples/civil Equalising income

partners tax planning • Aim = to ensure full use of the couple’s
PAs savings NRBs, dividend NRBs and
Income tax BRBs, and to minimise that amount of tax
The following income tax planning advice liable at the higher rate/additional rate.
should be given to married couples and • Consider ownership of income producing
couples in a civil partnership: assets (i.e. sole versus joint ownership).
• Equalise income. • Make declaration to vary the split of joint
• Maximise use of tax free investments. income if advantageous.
• Maximise pension contributions. • Redistribute income producing assets to
minimise the couple’s liability.
• Maximise use of available allowances.

Exam focus

Exam kit questions on this area:

Section B questions
• Monisha and Horner


Personal tax planning

Spouse as partner or employee Capital gains tax

• Employment income is not transferable The ability to transfer capital assets
but if one of the couple is a sole trader, between spouses/civil partners with no CGT
consider implications of creating a consequences provides the opportunity to:
partnership with the spouse versus
• Effectively equalise income (as above)
employing the spouse.
without incurring CGT.
Partner Employee • Ensure both spouses/civil partners use
their AEAs each year.
• split income in • income tax
any proportion, relief on gross • Ensure gains are realised by the spouse/
as desired employment civil partner who has capital losses.
• no tax relief for costs • Ensure remaining gains are left with the
drawings • class 1 spouse with the lowest income.
• class 2 and 4 employee and
NICs payable employer’s


Chapter 12

Inheritance tax
Exam focus
• skip a generation
(i.e. gift to grandchildren) Exam kit questions on IHT planning:
–– no immediate IHT saving Section A questions
–– IHT saved on death of children • Brad
• enter into deed of variation to
increase legacies to:
–– spouse/civil partner, and/or
–– charity to reduce the rate of tax
• if recipient spouse/civil partner is non-
UK domiciled
–– c onsider election to be treated as
UK domiciled
• leave qualifying residential property
to direct descendants to qualify for
residence nil rate band


Personal tax planning

Lifetime giving versus legacies on death

Advantage of lifetime gifts Disadvantages of lifetime gifts
• Reduces IHT payable on death as assets gifted •  oss of income and use of the
during lifetime are removed from the chargeable capital if assets given away.
estate. • CGT may be payable if the
Note – no reduction in the value of the chargeable assets gifted during lifetime
estate if the assets gifted get BPR or APR are chargeable assets for CGT
at 100%. whereas no CGT if gifted on
IHT on lifetime gifts likely to be less than IHT in death.
death estate because: • APR or BPR on lifetime gift
–– IHT = Nil if the donor lives for > 7 years. withdrawn if donee does not
retain asset at donor death, better
–– the value is frozen at the date of the gift,
to secure BPR/APR by retaining
therefore by gifting an appreciating asset during
asset in donor’s estate.
lifetime, the IHT is based on a lower amount.
• RNRB not available on lifetime gift
–– the value subject to IHT is less as lifetime
of residential property.
exemptions such AE, ME, small gift relief
–– taper relief available if the donor lives for > 3



13 Business tax
In this chapter
• Starting in business.
• Cash basis for small businesses.
• Flat rate expense deduction.
• Cessation of business.
• Trading losses.
• Partnerships.
• Self-assessment for the self-employed.

Business tax

Exam focus Exam focus

For unincorporated businesses (which Exam kit questions on this area:
includes sole traders and partnerships) there
Section B questions
is little new technical knowledge at ATX
(P6) but you must now be able to handle • Tetra
business tax within a multi-tax scenario. • Spike
Be prepared to evaluate alternative • Juanita
strategies (e.g. in relation to losses), and to
explain your recommendations.
Decision making is also likely to be a key
area including ‘lease versus buy’ decisions
and whether it is better from a tax point of
view to use employed or self-employed staff
in the business.


Chapter 13

Starting in business Exam focus

Key areas to consider for a new business You need to be able to assess a given
scenario: situation and express an opinion on whether
it constitutes trading.
1 Income tax
Exam kit questions on this area:
A Badges of trade
Section A questions
= factors used to determine if an
activity constitutes: • Una
–– trading (s.t. income tax) or: Section B questions
–– a
 n investment • Cate and Ravi
(s.t. capital gains tax).
• No single test conclusive.
• Consider (SOFIRM):
see table overleaf.
• Additional factors (FAST):
–– Finance method
–– Acquisition method
–– Similar Transactions.


Business tax

Test Consider
Subject matter • Type of good normally traded vs personal asset.
• Income producing.
Ownership period O • Sale within short period indicates trading.
Frequency of • Repeated similar transactions indicate trading.
transactions F • Single transaction may however constitute trading (e.g. toilet rolls
Improvements I • Work carried out to make asset more marketable may indicate trading.
Reason for sale R • Forced sale to raise cash indicates not trading.
Motive • Intention to profit from transaction indicates trading.
M • Absence of profit motive does not prevent being deemed to be
Remember: SOFIRM
B Trading income assessment

Exam focus
You are more likely to be given a tax adjusted trading profits figure in the question than have to
calculate it at ATX (P6).
However you may have to calculate capital allowances. A reminder of the pro forma is given below.
Chapter 13

Pro forma: Capital allowances computation

Main Special Short life Private Allowances
pool rate pool asset use asset
£ £ £ £ £ £
TWDV b/f X X X
Additions not qualifying for AIA or FYA:
Secondhand low emission cars (up to 75 g/km) X
Cars (76 – 130 g/km) X
Cars (over 130 g/km) X
Car with private use X
Additions qualifying for AIA:
Special rate pool expenditure X
Less: AIA (Max £200,000 in total) (X) X
Transfer balance to special rate pool X

Plant and machinery X

Less: AIA (Max £200,000 in total) (X) X
Transfer balance to main pool X

Disposals (lower of original cost or sale proceeds) (X) (X)
–-–– –-–– –-–– –-–– –-––


Business tax

Main Special Short life Private Allowances

pool rate pool asset use asset
£ £ £ £ £ £
BA / (BC) X / (X) X / (X)
Small pools WDA
WDA at 18% (X) X
WDA at 8% (X) X
WDA at 8%/18% (depending on emissions) (X) × BU% X
Additions qualifying for FYAs:
New low emission cars (up to 75 g/km) X
Less: FYA at 100% (X) X
___ 0
––– ––– –––
TWDV c/f X X X
––– ––– ––– –––
Total allowances X


Chapter 13

The Annual Investment Allowance (AIA) • The AIA must be split between related
• Available to all businesses. businesses.
• 100% allowance for the first £200,000 of Businesses owned by the same
expenditure incurred in each accounting individual are related where:
period of 12 months. –– they are engaged in the same
activities, or
• Applied pro rata for periods of account
that are not 12 months. –– share the same premises.
• Available on acquisitions in the order: In such circumstances the owner of the
–– special rate pool items businesses can choose how to allocate a
single AIA between them.
–– plant and machinery in main pool
• Unrelated businesses owned by the
–– short life assets
same individual will each be entitled to
–– private use assets. the full AIA.
• Not available on cars.
• Not available in the accounting period in
which trade ceases.
• Expenditure above the maximum
qualifies for WDA immediately.
• Taxpayer does not have to claim all / any
of the AIA if he does not want to.
• Any unused AIA is lost.


Business tax

Writing down allowance (WDA) First year allowances (FYA)

• Available to all businesses. • Available to all businesses
• WDA available on a reducing balance • 100% FYA available on:
basis. –– n
 ew low emission cars
• 18% on main pool and on SLAs. (CO2 ≤ 75 g/km)
• Special rate pool WDA = 8%. (not available on any other cars), and
• Applied pro rata for periods of account –– energy saving plant and machinery.
that are not 12 months. • Only available in the period of
• WDA adjusted for assets with private use acquisition.
by owner of business. • Never time apportion for short or long
accounting periods.
• Taxpayer does not have to claim all/any
of the FYA if he does not want to.
• If any of the FYA is not claimed the
balance is put in the main pool:
–– b
 ut not entitled to WDA until the
following period.


Chapter 13

Balancing adjustments • A balancing charge (BC)

• Assets disposed of: –– Can occur in any pool at any time.
–– Deduct the sale proceeds from the • A balancing allowance (BA)
relevant pool. –– Can occur in a ‘single asset’ column
–– The amount deducted can never at any time
exceed the original cost of the asset. –– Only occurs on main pool or special
–– A balancing adjustment may arise. rate when the business ceases to
(restricted to original cost)

> balance on < balance on

‘pool’ ‘pool’

Balancing Balancing
charge allowance


Business tax

Summary of the capital allowances available for cars

CO2 emissions
• Low emission:
–– Emissions ≤ 75 g/km
–– New = FYA 100%
–– Secondhand = as for standard emission cars
• Standard emission:
–– Emissions 76 – 130 g/km
–– Put in main pool
–– WDA 18% for a 12 month period
• High emission:
–– Emissions > 130 g/km
–– Put in special rate pool
–– WDA 8% for a 12 month period
• Private use cars
–– Separate column
–– WDA 18%/8% for 12 month period depending on emissions
–– BA or BC will arise on disposal


Chapter 13

The special rate pool • Integral features

• Pools expenditure incurred on: = expenditure incurred on:
–– long-life assets (LLA) –– electrical (including lighting) systems
–– integral features of a building –– cold water systems
–– thermal insulation of a building –– space or water heating systems
–– high emission cars (CO2 > 130 g/km). –– external solar shading
• Pool operates in the same way as the –– p
 owered systems of ventilation, air
main pool. cooling or air purification
• AIA is available on new expenditure –– lifts, escalators and moving walkways.
in this pool first (except high emission • Thermal insulation of a building
cars). =e
 xpenditure on thermal insulation on
• WDA = 8% for a 12 month period, any commercial building (other than
reducing balance basis. residential buildings in a property
• FYA is never available. business).
• LLA = assets
–– with a working life ≥ 25 years, and Exam focus
–– e
 xpenditure incurred ≥ £100,000
for a 12 month period (but not cars Exam kit questions on this area:
or P&M in a retail shop, showroom, Section B questions
hotel or office). • Liza


Business tax

The small pool WDA Short life assets (SLA)

• Applies to the main pool and special rate • Each short life asset has its own column.
pool only • Short life means < 9 years useful life.
–– can claim on either or both pools • AIA available.
–– claim is optional. • A balancing allowance or charge will
• Available where the balance on the arise when the asset is disposed of.
pool after current period additions and • Beneficial where the asset with a short
disposals is ≤ £1,000. life is to be disposed of at less than
• WDA = any amount up to £1,000 for a 12 TWDV.
month period. • Not available on motor cars.
• Applied pro rata if period of account is • If asset not disposed of within 8 years
not 12 months. from the end of the accounting period in
which it was acquired
–– the TWDV is transferred back into
the main pool.
• Election required for SLA treatment:
–– b
 y first anniversary of 31 January
following the end of the tax year in
which the trading period, in which the
asset was acquired, ends.


Chapter 13

Private use assets

Exam focus
(Unincorporated businesses only)
• Separate column for each private use Exam kit questions with plant and machinery
asset. allowances:
• Pool is: Section A questions
–– w
 ritten down by the AIA/WDA in • Farina and Lauda
full, according to the length of the • Ziti
accounting period, or FYA
• Bond Ltd
–– b
 ut actual allowance claimed is
• Pippin
restricted to business use proportion.
Section B questions
• BC/BA on disposal are also restricted to
business use proportion. • Liza
• Cannot claim SLA treatment. • Juanita
• Not applicable for companies.


Business tax

Approach to computational questions Allocate the AIA to special rate pool

additions in priority to additions of P&M
For P&M capital allowances, adopt the
in the main or individual asset pools.
following step-by-step approach:
(5) Any special rate pool additions in excess
(1) Read the information in the question and
of the AIA must be added to the special
decide how many columns / pools you
rate pool column to increase the balance
will require.
available for 8% WDA.
(2) Draft the layout and insert the TWDV b/f
Any main pool expenditure, in excess
(does not apply in a new trade).
of the AIA, should be added to the main
(3) Insert additions not eligible for the AIA pool to increase the balance qualifying
or FYAs into the appropriate column for 18% WDA.
taking particular care to allocate cars
(6) Deal with any disposal by deducting the
into the correct column according to CO2
lower of cost or sale proceeds.
(7) Work out any balancing charge /
(4) Insert additions eligible for the AIA in the
balancing allowance for single asset
first column, then allocate the AIA to the
Remember to adjust for any private
Remember to time apportion if period of
use if an unincorporated business (not
account is not 12 months.
relevant for companies).


Chapter 13

(8) Consider if the small pools WDA applies Basis of assessment

to the main pool and / or the special rate
pool. Exam focus
(9) Calculate the WDA on each of the pools You must know how adjusted trading profits
at the appropriate rate (18% or 8%). are assessed to tax depending on whether
Remember to: the business is in its opening, ongoing or
• time apportion if the period of closing years.
account is not 12 months
• adjust for any private use if an
unincorporated business (not
relevant for companies)
(10) Insert any additions of new low
emission cars or energy saving P&M
eligible for 100% FYA.
Remember the FYA is never time
(11) Calculate the TWDV to carry forward to
the next accounting period and add the
allowances column.
(12) Deduct the total allowances from the
tax adjusted trading profits.
Business tax

New business – opening year rules

Year of assessment Basis of assessment

First tax year Profits from date of commencement
(tax year in which trade starts) to following 5 April (Actual basis)
Second tax year
(a) Period of account ending in the tax year is:
(i) a 12 month accounting period That period of account (CYB)
(ii) less than 12 months long The first twelve months of trade
(iii) more than 12 months long Twelve months ending as the accounting date
in the second tax year (i.e. the last 12 months
of the long period of account)

(b) No period of account ending in the tax year Actual profits from 6 April to 5 April
Third tax year Twelve months ending on the accounting date
in the tax year
(usually CYB, but if a long period of account
= the last 12 months of that long period)
Fourth year onwards Normal CYB


Chapter 13

Choice of accounting date

The following table sets out the key points to consider and whether a year end late in the tax year
(31 March) or early in the tax year (30 April) is the most advantageous in each case.

Accounting period end 31 March 2017 30 April 2017

Time lag between: Assessed: 2016/17 Assessed: 2017/18
earning income and paying tax April year end = profits assessed in following
tax year, and tax paid 12 months later
Time to submit computations Submit: 31.1.2018 Submit: 31.1.2019
10 months to prepare 21 months to prepare
Overlap profits None 11 months
Profits increasing in opening years, Later (higher) profits Earlier (lower) profits
assessments based on:
Profits decreasing in opening years, Later (lower) profits Earlier (higher) profits
assessments based on:


Business tax

Change of accounting date Basis periods for change of accounting

Conditions for valid change of accounting
date: (1) If the new date is earlier in the tax year
than the old one, the basis period for the
• Change must be notified to HMRC on or
tax year of change will be:
before 31 January following the tax year
in which the change is made. –– the 12 months to the new accounting
• The first accounts to the new accounting
–– this will create additional overlap
date must not exceed 18 months.
• There must not have been another
(2) If the new date is later in the tax year
change of accounting date during the
than the old one, the basis period for the
previous five tax years unless for a
tax year of change will be:
genuine commercial reason.
–– the period ending with the new
accounting date
–– overlap profits from the
commencement of trade are off-set in
order to reduce the number of months
taxed to 12.


Chapter 13

Exam focus
• Compulsory registration.
As well as knowing the rules you may be
• Voluntary registration.
required to consider tax planning aspects
(e.g. choice of accounting date). Also need See Chapter 14.
to consider the commercial needs of the
Exam focus
Exam kit questions on this area:
Section A questions You may be required to determine when a
business should register for VAT, identify
• Jonny
advantages and disadvantages of registering
Section B questions earlier and penalties for late registration.
• Tetra
• Piquet and Buraco


Business tax

3 National Insurance Contributions (NIC)

• A sole trader has NIC liabilities based on his profits together with additional NIC liabilities if
he employs staff.


Class 2 Class 4
• Fixed at £2.85 per week.
• Paid on taxable trade profits less losses b/f.
• Payable on 31 January
following the end of the tax • Rate of 9% of profits which fall between £8,164 and
year. £45,000.
• Rate of 2% on profits which exceed £45,000.
• Paid at the same time as income tax under self-
• Not payable if over state pension age or under 16 at the
start of the tax year.


Chapter 13

Key Point

Self-employed individuals who have

employees pay:
• class 2 and class 4 NICs in respect of
their unincorporated trade, and
• employer’s class 1 and class 1A NICs
in respect of earnings and benefits
provided to employees.

Exam focus
Exam kit questions with NIC aspects:
Section A questions
• Pippin
Section B questions
• Tetra
• Juanita
• Traiste Ltd


Business tax

Cash basis for small Under the cash basis:

businesses • accounts can be prepared to any date in
the year
• Cash basis = calculating profits/losses
on the basis of cash received and cash • there is no distinction between capital and
paid in the period of account (instead of revenue expenditure re plant, machinery
normal accruals basis). and equipment for tax purposes;
• Optional. –– p
 urchases are allowable deductions
when paid for and
• Only available to unincorporated –– proceeds are treated as taxable cash
businesses (e.g. sole traders and receipts when an asset is sold.
partnerships) – not companies and LLPs.
• the flat rate expense deduction for car
• Business must have annual turnover of expenses (see below) will always be
£150,000 or less. claimed instead of capital allowances in
• Can continue to account on cash basis the ATX (P6) examination.
until annual turnover exceeds £300,000. Advantages
Exam focus • Simpler accounting.
• Profit taxed when realised and cash
It should be assumed that the cash basis
available to pay.
does not apply unless it is specifically
mentioned in the question. Disadvantages
• Losses can only be carried forward.


Chapter 13

Flat rate expense deduction Type of Flat rate expense

Any unincorporated business (whether or not expense adjustment
they are using the cash basis) can: Motoring Allowable deduction =
• opt to use flat rate expense adjustments expenses amount using the AMAP
rates of 45p and 25p
• to replace the calculation of actual costs
per mile (Note 1)
incurred in respect of those expenses.
Private use Adjustment = fixed
of part of a amount based on the
commercial number of occupants
building (e.g. (Note 2).
guest house)
Covers: private use of
household goods and
services, food and utilities

Notes: If required:
1. AMAP rates are given in tax rates and
2. Fixed amount will be provided within the
examination question.
Private element of the other expenses (e.g.
rent and rates) = adjusted for as normal.


Business tax

Cessation of business Consider the following taxes for each of the

Exam focus
1 Income tax
This scenario may be examined in the
following circumstances: • Capital allowances:
• Sole trader sells his business to another –– Additions and disposals are
sole trader. allocated to relevant pools
• Sole trader sells his business to a –– No AIA/FYA/WDA given in final
company (incorporation of a business). period
• Sole trader gifts his business. –– C
 ompute balancing allowances
• A partner leaves the partnership. (BA) or charges (BC)
• Sole trader retires or dies. –– If business transferred
to connected person
Exam kit questions on this area: (i.e. business incorporated)
Section A questions –– can elect to transfer at
• Mirtoon TWDV (no BAs or BCs)
• Farina and Lauda • Trading income assessment
• Ziti –– Closing year rules:
• Waverley –– Actual
 profit from the end
Section B questions of the basis period of the
• Spike previous year until cessation
• Juanita –– Deduct overlap profits
Chapter 13

2 Capital gains tax 3 Inheritance tax

• Chargeable gains arise on disposal • Consider availability of business
of assets (e.g. goodwill, property, property relief on gift of an
investments). unincorporated business (Chapter 8).
• MV used as proceeds if assets gifted.
• Consider available reliefs:

Sale of business Entrepreneurs’ relief

EIS/SEIS reinvestment
Incorporation relief if
sold to a company
Rollover relief
Sale to company Incorporation relief
in exchange for
Gift of business Gift relief


Business tax

Exam focus
• Deregister when cease to make
taxable supplies. Exam kit questions on this area:
Section A questions
Situation VAT position
Individual assets sold Normal VAT rules • Mirtoon
apply (Chapter 14) • Ziti
Assets held at date of Deemed supply of Section B questions
cessation of trade business assets
• Jerome and Tricycle Ltd
e.g. P&M,
inventory, at MV at
date of cessation
(Deminimis limit
Business transferred as No VAT – not a
going concern, and taxable supply
• Assets used in same
kind of business as
transferor, and
• Transferee is or
immediately becomes
registered for VAT.


Chapter 13

Trading losses
Be prepared to apply your knowledge to a particular scenario, compare alternative strategies and
explain your recommendations.
Trading losses
• Calculated in the same way as a trading profit.
• Trading income assessment is nil.

Relief against total income Relief against chargeable gains

Relief against future
• Available in: • Available in the same years as a trading profits
– tax year of the loss and/or, claim against total income:
– tax year of the loss, and/or
– preceding tax year.
– preceding tax year.
• Only possible after a claim against • Relieved against:
total income has been made in the –– the first available
• Offset can not be restricted to tax year in which a claim against –– trading profits only
preserve PA. gains is required.
• Offset is restricted if loss exceeds • Do not need to claim against total –– of the same trade.
maximum amount (see below). income in both years first. • Loss offset cannot be restricted.
• Excess loss is automatically carried • No maximum restriction.
forward or can be set against
chargeable gains.

• T rading loss is treated as a current year capital loss

• Deducted
–– after the offset of current year capital losses
–– before capital losses brought forward, and
–– before the AEA.


Business tax

Order of offset Opening years relief

When there is more than one loss to offset: In addition to reliefs available for an ongoing
• deal with the earliest loss first business, special opening year loss relief is
• losses b/f are offset in priority to CY and available.
PY claims • A loss incurred in any of the first four
• watch out for the maximum restriction tax years of a new business can be set
(if applicable) (see below). against:
–– total income
Reduced capital allowances claim –– o
 f the three tax years preceding the
year of the loss
• Loss arising can be reduced by not
claiming full capital allowances. –– on a FIFO basis.
• The TWDV c/f for CAs will be • One claim covers all three years.
correspondingly higher. • Offset cannot be restricted to preserve
• Higher CAs will therefore be claimed PA.
in the future rather than creating or • Maximum restriction applies as for
increasing a loss now. ongoing loss relief against total income.


Chapter 13

Terminal loss relief Business transferred to company

In addition to standard relief against total • Business transferred to company.
income and chargeable gains, special • In exchange wholly/mainly for shares
terminal loss relief is available. (80% of consideration).
Relief is given for the loss of the last 12 • Trading losses at date of cessation
months of trading. carried forward indefinitely provided
owner retains shares.
• Relief is:
• Offset against future income received
–– against profits of the same trade
from company in any order:
–– of the tax year of cessation, and
–– earned income (salary, bonus)
–– the three preceding tax years
–– interest
–– on a LIFO basis.
–– dividends.
• Calculation of the terminal loss:
(1) loss from 6 April to date of cessation
(2) plus proportion of loss in the
preceding tax year up to 12 months
prior to cessation date
(3) plus unrelieved overlap profits.


Business tax

Maximum deduction from total income Maximum deduction limit:

Maximum deduction from income other • applies to trading losses set against:
than trading income = greater of: –– current year total income
• £50,000, or –– earlier years if set against income
• 25% of adjusted total income (ATI). other than profits of the same trade.
• does not apply to losses set against
Therefore restriction will be £50,000 unless
chargeable gains.
ATI exceeds £200,000.
Offset against earlier years:
Adjusted total income (ATI):
• set against profits from same trade first,
then non-trading income
Total income X
• no restriction to offset against profits
Less: Gross PPCs (X) from same trade
ATI X • restrict offset against non-trading income
• loss that cannot be set off = not lost
Key Point
–– can claim to offset against
The maximum restriction may be beneficial chargeable gains, or
as it could avoid wasting PAs. –– c/f as usual.


Chapter 13

Procedure for dealing with questions (7) Offset losses in most beneficial way:
involving losses –– O
 btaining relief at highest rates of
(1) Determine tax adjusted loss/profits after tax.
capital allowances for each period of –– Taking relief as soon as possible.
account. –– Not wasting personal allowances.
(2) Determine when loss relief is available Watch out for the maximum deduction
(i.e. in which tax years). rules.
–– D
 ifferent options if in opening/
ongoing/ closing years.
(3) Lay out IT computations for tax years
side by side. Exam focus
–– Leave spaces to insert losses offset.
Exam kit questions on this area:
(4) Set up a loss working for each loss to Section A questions
show how it is utilised.
• Mirtoon
(5) If more than one loss • Jonny
–– Consider in chronological order. • Kantar
(6) Consider options available depending on • Jodie
whether early year, last year, chargeable Section B questions
gains in tax year.
• Spike


Business tax

Choice of loss reliefs –– relief against gains is at 10% or 20%.

• Objectives in choosing the most (18% or 28% for gains on residential
appropriate loss claim: properties).
–– o
 btain relief at the highest marginal • Relief against total income and the
tax rate opening year relief are optional reliefs
but carry forward relief is mandatory and
–– obtain relief as early as possible
automatic if no specific claim is made.
–– a
 void wasting PAs (and the AEA for
• No partial claims allowed (i.e. all or
CGT where appropriate).
nothing reliefs).
• Relief against total income and the
• Losses can be restricted by making
opening year relief give earliest relief,
reduced capital allowance claims.
rather than carrying the loss forward.
• Relief against total income applies to two
• A large gain in a single year (the year of
years but separate claims are required
loss or year immediately preceding):
for each year and such claims can be
–– indicates a claim against chargeable made in either order.
gains may be beneficial
• The best claim may be a compromise
–– b
 ut must relieve total income of same of the main objectives (e.g. may accept
year first and maximum restriction lower tax saving if relief is given earlier).
may apply
–– may result in wastage of PAs
–– m
 aximum restriction does not apply
against gains


Chapter 13

Treat like sole traders – each partner is the owner of the business.

Step 1 Determine the tax adjusted accounting profit/loss after capital allowances of the
partnership for each accounting period.
Step 2 Allocate these profits or losses between the partners according to the profit sharing
agreement (PSA) in the accounting period.
If PSA requires a salary or interest on capital allocation:
• treat as a share in their trading profits.
The balance of profits or losses:
• shared in the profit sharing ratio (PSR).
If a partner joins or leaves during the accounting period:
• treat as if a change in PSR
• time apportion profits, apply appropriate PSA to each part.
Step 3 Determine the taxable trading income assessment for the tax year or the loss reliefs
available for each partner using their share of the accounting profit/loss.
Partner joins – opening year rules
Partner leaves – closing year rules
Other years – normal CYB basis (i.e. assess the profits of 12 months to a/c date)


Business tax

Exam focus

Exam kit questions on this area:

Section A questions
• Farina and Lauda
Section B questions
• Tetra
• Amy and Bex


Chapter 13

Self-assessment for the self-employed

Tax Year Due Date for paying the tax Consequences of paying tax late
Opening • Income tax and class 4 NICs = due on • Late payment interest at 3% for
year the 31 January following the tax year each day payment is late
• If 2017/18 = first tax year of trading, due • Additional penalty of at least
by 31 January 2019 £100 is levied for late filing of
• Filing date = same date return (see Chapter 11)

Second • Income tax and class 4 NICs = payable • Late payment interest at 3% for
year and in three instalments each day payment is late
thereafter • If 2017/18 = second or subsequent year: • Additional penalty of at least
Payment on account 1: £100 is levied for late filing of
 ue 31 January 2018 (i.e. 31 January
in tax year of assessment) • If the balancing payment is late:
Payment on account 2: –– a
 s above, plus extra
penalties of at least 5% of
 ue 31 July 2018 (i.e. 31 July following
the amount due will apply
tax year of assessment)
(see Chapter 11)
Balancing payment:
 ue 31 January 2019 (i.e. 31 January
following tax year of assessment)


Business tax



Value added tax

In this chapter
• Introduction.
• Types of supply.
• VAT registration.
• Deregistration.
• VAT returns.
• Output VAT.
• Input VAT.
• Special accounting schemes.
• Disaggregation.
• Land and buildings.
• Partial exemption.
• Capital goods scheme.
• VAT administration.
• VAT penalties.
Value added tax

Exam focus Introduction

• VAT is an indirect tax charged on
VAT can be examined in the context of
consumer spending.
companies or an unincorporated business.
• VAT is charged on:
The new topics introduced at ATX (P6)
are popular topics, but retention of TX (F6) –– a taxable supply
knowledge is also essential as all areas can –– by a taxable person
be tested. –– in the UK
–– in the course or furtherance of a
• Output tax: charged on sales.
• Input tax: incurred on purchases and


Chapter 14

Types of supply

Exempt Taxable

Standard rated Zero rated

No tax charged

20% 0%

Trader unable to
register Trader able to
register for VAT

Unable to reclaim
input VAT Can reclaim input VAT


Value added tax

VAT registration
• A taxable person is someone who is, or is required to be, registered for VAT.

Compulsory registration Voluntary registration

• Required when: • Traders making taxable supplies (standard
–– v alue of taxable supplies (standard rated or zero rated) can register at any time.
or zero rated)
–– e
 xceeds the registration threshold
(i.e. £85,000).


Chapter 14

Compulsory registration
Exam focus
Historic turnover test Future test
• Taxable supplies in • Taxable supplies in Exam kit questions on this area:
the last 12 months the next 30 days is
Section A questions
exceed £85,000. expected to exceed
• Perform test at the £85,000. • Kantar
end of each month. • Perform test • Sprint Ltd and Iron Ltd
constantly. • Ray and Shanira
Inform HMRC:
• Heyer Ltd Group
• Within 30 days • By the end of the
of the end of the 30 day period in Section B questions
month in which which the threshold • Ash
the threshold is is expected to be
exceeded. exceeded.
Registered from:
• The first day of the • From the start of
second month after the 30 day period.
taxable supplies
exceeded the
• An agreed earlier
If taxable supplies are wholly zero rated there is
an exemption from compulsory registration.


Value added tax

Voluntary registration

Advantages Disadvantages
• Input tax recoverable. • Output charged on sales:
• If making zero rated supplies: –– if make standard rated supplies to
–– VAT returns will show VAT repayable customers who are not VAT registered
will be an additional cost to them
–– c an register for monthly returns to aid
cashflow. –– may affect competitiveness.
• Avoids penalties for late registration. • VAT administration burden.
• May give the impression of a more
substantial business.

Exam focus
Exam kit questions on this area:
Section B questions
• Ash
Chapter 14


Compulsory deregistration Voluntary deregistration

• When cease to make taxable supplies. • If value of expected taxable supplies in the next
12 months will not be > £83,000.
Inform HMRC:
• within 30 days of ceasing to make • At any time when above test satisfied.
taxable supplies.
Deregistered from:
• date of cessation, or • Date of request for deregistration, or
• an agreed earlier date. • An agreed later date.

• Consequences of deregistration
–– Deemed to make a supply of business assets held at date when cease to be a taxable
person (e.g. capital items, trading inventory).
–– Exclude items if no input tax reclaimed on them (e.g. cars purchased with private use).
–– No output charge if VAT on deemed supply is ≤ £1,000.


Value added tax

Exam focus VAT returns

• Normally quarterly.
Exam kit questions on this area:
• If receive VAT repayments can elect for
Section A questions monthly returns.
• Mirtoon
• VAT payable
• Jodie = (Total output tax less total input tax).
Section B questions • A businesses must:
• Jerome and Tricycle Ltd –– file the return online, and
• Acryl Ltd and Cresco Ltd
–– pay electronically,
–– w
 ithin one month and seven days of
the end of the VAT period.
• VAT inclusive amounts:
–– VAT
= Gross amount x 20/120 (or 1/6)
–– Net amount
= Gross amount x 100/120 (or 5/6)


Chapter 14

Output VAT • Goods for own use

–– Replacement value if purchased for
Value of supply
business purposes (no output VAT if
• Consideration in money: purchased for private purposes).
–– T
 rader’s VAT exclusive selling price
less the amount of any trade or bulk
buy discounts offered. Relief for irrecoverable debts

• If a prompt payment discount is offered, • Relief available where:

VAT is charged on the amount received. –– o
 utput VAT in respect of an
• Consideration not in money or money outstanding debt has been
and something other than money: accounted for and paid by the
–– Open market value.
–– the supplier has written the debt off
• Gifts of inventory and non-current assets
in the accounts as irrecoverable
–– Replacement value.
–– s ix months has elapsed since the
• Certain gifts are not taxable supplies: debt was due for payment.
 oods which cost ≤ £50 per
–– g
• Claim the relief as input VAT on the VAT
customer, per year, and
–– any number of business samples,
• Customers who have not paid for goods/
services within 6 months of the due
–– gifts of service (to employees or date must repay the input tax they have
customers). previously claimed.


Value added tax

Transfer of a going concern (TOGC) • Transferee may:

• Transfer of a business is not treated as a –– take over VAT registration of the
supply for VAT purposes, therefore: transferor, but
–– no output VAT charged on assets –– a
 lso inherits the transferor’s VAT
transferred by seller liabilities.
–– no input VAT recoverable by • Where there is a transfer of a business
purchaser. which does not meet the VAT TOGC
• Conditions (all must be satisfied): conditions:
–– b
 usiness transferred as a going –– VAT is payable on the individual
concern assets transferred.

–– no significant break in trading

–– to a taxable person (VAT registered
or liable to become VAT registered)
–– s ame type of trade carried on after Exam focus
the transfer.
Exam kit questions on this area:
• A building on which an option to tax has
Section A questions
been made cannot be part of the TOGC
• Ziti
–– u
 nless the purchaser also opts to tax
the building. Section B questions
• Jerome and Tricycle Ltd


Chapter 14

Input VAT Non-deductible VAT

• Conditions to reclaim input VAT: • Business entertainment
–– M
 ust be taxable person when –– includes hospitality of any kind
incurred (e.g. food, drink, accommodation)
(exception = pre-registration VAT). –– e
 xcludes staff entertainment, and
entertaining overseas customers.
–– S
 upply must have been to the
person making the claim. • Motor cars
–– S
 upply must be properly supported, –– P
 urchase – only recoverable if used
normally by VAT invoice. 100% for business.
–– G
 oods/services must be used for –– Leasing
 – if partly used for private
business purposes. purposes, only 50% of VAT on
leasing charge recoverable.
• No distinction between capital and
revenue expenditure. –– M
 otor expenses – provided some
business use, 100% recoverable.
–– Input VAT is recoverable on the
purchase of capital assets as well as –– If input VAT is not recovered on
revenue expenditure. purchase, output VAT is not charged
on the disposal.


Value added tax

–– F
 uel – Input tax 100% deductible even if
Key Point
private fuel provided
Output VAT chargeable on: Where VAT is not recoverable on capital
expenditure (e.g. purchase of a car) capital
• fuel reimbursed in full allowances are claimed on the VAT inclusive
–– amount reimbursed. cost.
• not reimbursed in full Pre-registration input VAT
–– fuel scale charge (based on CO2
Conditions to reclaim input VAT:
–– s cale charge will be provided in Goods Services
• Acquired in the • Supplied in the
–– Private use 4 years before 6 months before
• input VAT cannot be claimed on registration, and registration
goods or services not used for • Still held at date
business purposes of registration
• an apportionment is made for partial
private use.
–– Goods for own use
• input VAT recoverable if purchased
for business purposes (not
recoverable if purchased for private
Chapter 14

Special accounting schemes

• Three special schemes aimed at small businesses.
Cash accounting scheme

Operation Conditions Advantages

• VAT accounted • Taxable turnover  £1,350,000 • Do not pay output tax until
for on cash • VAT payments and returns receive payment from
payments and must be up to date customer
cash receipts • Provides automatic relief for
• Must leave the scheme if
taxable turnover > £1,600,000 irrecoverable debts

Exam focus

Exam kit questions on this area:

Section A questions
• Drench, Hail Ltd and Rain Ltd


Value added tax

Flat rate scheme

Operation Conditions Advantages

• Flat rate of VAT applied • Taxable supplies for the • Reduces administration
to total turnover next 12 months – do not need to account
(including exempt supplies  £150,000 for VAT on individual
and VAT) • Businesses are eligible purchases
• Flat rate determined by to stay in the scheme • May reduce total VAT
trade sector until their VAT inclusive payable
• Flat rate only used to turnover exceeds
simplify preparation of VAT £230,000
–– s till need to issue tax

Exam focus
Exam kit questions on this area:
Section B questions
• Bamburg Ltd


Chapter 14

Annual accounting scheme

Operation Conditions Advantages

• One VAT return prepared a year • Taxable turnover • Reduces
• Return due:  £1,350,000 administration
2 months after end of annual VAT • VAT payments and returns • Regular payments
period must be up to date can help cashflow
• Payments on account (POA): • Must leave scheme if
taxable turnover
–– 9 POA due in months 4 – 12
> £1,600,000
–– e
 ach POA is 10% of VAT for
previous year
• Balancing payment due with the
VAT return on same date
• New businesses base POA on
estimated VAT liability


Value added tax

Disaggregation Land and buildings

• Where HMRC are satisfied that persons Types of supply
are carrying on separate activities which
could properly be regarded as a single Supplies of land and buildings in the UK can
business, they will issue a direction. be either be zero rated, standard rated or
• The direction will state that the persons
named therein are carrying on activities
listed together (i.e. a partnership is TYPES OF SUPPLY
deemed to exist).
• A direction cannot have retrospective
effect. STANDARD

• Residential • Sale of new • All other

and charitable freehold supplies of land
buildings if: commercial and buildings
–– Freehold buildings (i.e. –– unless
sales, or within three exemption
–– Leases years of their is waived.
of more construction).
than 21


Chapter 14

Opting to tax
A VAT registered vendor or lessor of a
building can opt to waive the exemption of
the building. This is usually referred to as
‘opting to tax.’

• Election must be filed • Supply becomes a taxable

within 30 days of signing. supply.
• Can be withdrawn within • Input tax in respect of the
initial six month cooling building can be recovered.
Exam focus off period or after 20 years • Future supplies of the
otherwise irrevocable. building (e.g. sales or
Exam kit questions on this area: • Election cannot be made rents, must be standard-
for a part of a building, rated).
Section A questions although the election can • New owners are not
be made separately for bound by a previous
• Janus plc Group each property owned. owner’s election, except
for transfers within a VAT
• Flame plc Group group (Chapter 16).
• Ziti
• Maria and Granada Ltd
Section B questions
• Achiote Ltd


Value added tax

Partial exemption Methods of determining recoverable

input tax
Traders who make both taxable and exempt
supplies: The standard method for determining the
amount of recoverable input VAT is as follows:
–– only part of the input tax is recoverable.



Input tax on
Input tax on
goods and The remainder
goods and
services wholly (e.g. non-
services used
used for the attributable
wholly for
purpose of input tax on
Exam focus making taxable
making exempt
Exam kit questions on this area:
Section A questions
The amount
• Janus plc Group Wholly available Wholly
available for
for credit. disallowed.
Section B questions credit is found by
• Spetz Ltd Group
• Nocturne Ltd


Chapter 14

• Non-attributable input VAT reclaimable: De minimis limits

Total taxable supplies (exc. VAT) • All input tax (including that relating
=% wholly or partly to exempt supplies) may
Total supplies
be recovered if the business is below the
–– Exclude supplies of capital goods de minimis limits.
–– Round % up to next whole number • Three tests to see whether a business is
–– A
 ny other reasonable method of de minimis:
apportionment can be agreed with (1) Total input tax ≤ £625 per month
HMRC on average, and
• Can either calculate the reclaimable % Value of exempt supplies ≤ 50% of
each quarter or can use last year’s % value of total supplies
(2) Total input tax less input tax
Annual adjustment
directly attributable to taxable
• Recalculate recoverable % at the end of supplies≤ £625 per month on
each accounting period based on actual average, and
supplies for the year. Value of exempt supplies ≤ 50% of
value of total supplies
• Any under or over-claim accounted for in
first VAT return of next year, or can bring (3) Input tax relating to exempt
forward to final VAT return for this period. supplies ≤ £625 per month on
average, and
Input tax relating to exempt
supplies ≤ 50% of total input VAT


Value added tax

• Only need to satisfy one test. • This means that the business can
• If business was de minimis last year: provisionally recover all input VAT
relating to exempt supplies in each
–– c an provisionally recover all VAT this
return period without having to perform
year (unless input tax expected to be
de minimis calculations.
> £1million).
• At the end of the accounting period, the
• Status must be reviewed at end of the
de minimis status must be reviewed
accounting period based on whole year.
based on the year as a whole and an
• Annual adjustment made as above, if annual adjustment made if necessary.
Annual test Capital goods scheme
• The business can apply the de minimis • Applies to partially exempt traders who
tests once a year rather than every spend large sums on land and buildings
return period if: or computer equipment.

–– the business was de minimis in the • Initial deduction of input tax is made in
previous year, and the ordinary way and then reviewed over
a set adjustment period.
–– the annual test is applied consistently
throughout the current year, and
–– the input VAT for the current year is
not expected to exceed £1 million.


Chapter 14

• Assets covered by the scheme: The annual adjustment is:

Total input tax
––––––––––––––––––  (% now – % in the original year)
Adjustment 10 or 5 years
Item Value
Land and £250,000 10 years
buildings or more Disposal of building in adjustment period
(5 years where
• normal annual adjustment
subject to a
lease of less • further adjustment
than 10 years if disposal: for remainder of
at acquisition) adjustment period assume
Computers £50,000 5 years taxable 100% taxable use
and computer or more exempt 0% taxable use
Exam focus
A trader making say 70% taxable supplies
and 30% exempt supplies: Exam kit questions on this area:
• can initially reclaim 70% of the input VAT Section A questions
charged in respect of a building
• Janus plc Group
• adjustments are made over the next 10
• Bond Ltd
(or 5) years if the proportion of exempt
supplies changes. Section B questions
• Hyssop Ltd


Value added tax

VAT administration VAT penalties

VAT records • Standard penalties apply in the same
• Must keep records of all goods/services way for income tax, CGT, corporation tax
received and supplied, sufficient to allow and VAT.
the return to be completed and allow • Depends on the behaviour of the
HMRC to check the return. taxpayer (see Chapter 11).
• Retain records for 6 years. • Errors in VAT returns can give rise to
• Type of records to retain: –– Default interest, and
–– copies of VAT invoices issued –– S
 tandard penalty for the submission
–– record of outputs (e.g. sales day book) of an incorrect VAT return.
–– e
 vidence to support recovery of input
Specific penalty relating to VAT
• The default surcharge.
–– VAT account.


Chapter 14

Default surcharge

Arises • Return submitted late, or

• VAT paid late
First default • HMRC serve a surcharge liability notice
• Specifies a surcharge period:
–– e
 nding 12 months after the end of the VAT period to which the
default relates
Further defaults • Surcharge period extended to 12 months after the end of the VAT period
in which the latest default relates
• If default involves late payment of VAT – Surcharge penalty levied
Surcharges Default in % of VAT
surcharge period unpaid
First 2%
Second 5%
Third 10%
Fourth and more 15%
• Surcharge assessments at rates below 10% will not be issued for amounts of < £400.
• Where rate is 10% or more, the minimum surcharge is £30.


Value added tax

Error on VAT returns



De minimis limit of error = greater of Issue assessment within 4 years of

(i) £10,000, and relevant VAT period (increase to 20
(ii) 1% of turnover, subject to an upper years if deliberate error)
limit of £50,000

Tax payer option to request

Net error Net error review of decision by HMRC
≤ de minimis limit: Include ≥ de minimis limit: review officer
on next VAT return Separate notification

Standard penalty Default interest and Appeal to tribunal

(no default interest) standard penalty (within 30 days)


Chapter 14

Default interest

Arises • HMRC raise an assessment to collect undeclared/overclaimed VAT.

• Voluntary disclosure of errors exceeding de minimis limit.
Charged • From due date of payment to actual date of payment.


Value added tax



15 Corporation tax
– liability and losses
In this chapter
• Chargeable accounting periods.
• Taxable total profits computation.
• Corporation tax payable.
• Trading profits – specific issues for companies.
• Capital allowances.
• Long period of account.
• Self-assessment.
• Penalties.
• Trading losses – single company.
• Restriction of carry forward of losses.
• Non-trading losses.

Corporation tax – liability and losses

Exam focus Chargeable accounting

periods (CAPs)
Corporation tax is very important.
• Corporation tax computation required for
Questions on corporation tax will regularly each CAP.
feature in the examination and you need • Cannot be longer than 12 months.
to be able to prepare a corporation tax
• Starts:
computation, as well as explain the tax
implications of company transactions. –– when start to trade
–– previous CAP ends.
This chapter revises the key issues in
preparing a corporation tax computation, • Ends:
summarises the self-assessment rules and –– 12 months after start
sets out the options for a single company –– e
 nd of period of account
making losses. (i.e. company’s period for which it
draws up accounts)
–– cease to trade/be resident in UK
–– go into administration/liquidation.


Chapter 15

Taxable total profits Corporation tax payable

computation Notes
• Tax liability:
Corporation tax computation for year £
ended 31 March 2018 TTP 3 19% (g) X
Notes £ Less: DTR (X)
Trading profits (a) X CT payable X
Interest income (b) X –––
Overseas income (c) X
Property income X
Net chargeable gains (d) X
Total profits X
Less: QCD relief (e) (X)
Taxable total profits (TTP) (f) X


Corporation tax – liability and losses

Notes –– if there is a fall in the RPI between

(a) Trading profit = Adjusted trading profit acquisition and disposal: IA = £Nil
less capital allowances. Adjustments –– no AEA
include interest and royalties paid for
–– c onsider rollover relief and
trade purposes.
substantial shareholding exemption.
(b) Interest income includes on non-trading
(e) Qualifying charitable donations (QCDs)
loan relationships (i.e. interest receivable
and payable). –– includes all charitable donations by a
company which are not allowed as a
(c) Overseas income may include rental
trading expense.
income, interest income and branch
profits, but excludes overseas dividends. (f) Dividend income from UK and overseas
companies is never chargeable to
(d) Net chargeable gains
corporation tax and not included in TTP.
= capital gains less all capital losses:
 owever, is included in augmented
–– Indexation allowance (IA) to date of
profits for instalment purposes.
disposal using:
(g) The rate of corporation tax is fixed for
RPI @ date of – RPI @ date of
each financial year. The rate for FY2017
disposal acquisition
is 19%. The rate for FY2016 and FY2015
RPI @ date of acquisition was 20%.
–– rounded to 3.d.p For CAPs straddling 31 March 2017 a
–– c annot create or increase a capital two part computation is required.


Chapter 15

Trading profits – specific Trading loan Non-trading

issues for companies loan
• Loan relationships Example Loan notes Loan to acquire
• Goodwill and other intangibles issued to investment
• Patent box raise funds to property or a
acquire P&M subsidiary
• Research and development
Income/ Trading Interest income
• Gains on shares of companies
capital income

Loan relationships Expense/ Deduct Deduct from

capital from trading interest income
All income, expenses, capital and revenue
loss income Relief available
arising from loans is taxed under the loan
for net loss
relationship rules.

Exam focus

Exam kit questions on this area:

Section A questions
• Helm Ltd Group
Section B questions
• Banger Ltd and Candle Ltd


Corporation tax – liability and losses

Goodwill and other intangibles Goodwill

Intangibles (excluding goodwill) • The treatment of goodwill differs from
other intangible assets.
• Intangible assets acquired by companies
are not capital assets for capital • Amortisation or impairments of goodwill
gains purposes, but follow accounting are disallowable for corporation tax.
treatment. • Profit/loss on disposal = proceeds less
• Debits and credits, income and capital cost (as book value for tax = cost)
= part of trading income assessment. –– Profit on disposal = taxable as part
• A company can claim a 4% WDA p.a. if of trading profits
no amortisation in financial accounts or –– Loss on disposal = relieved as a
amortisation rate is < 4% p.a. non-trading debit.
• On sale of intangibles:
Special intangibles rollover relief
–– p
 rofit or loss is assessable/deductible
• If a new intangible is acquired:
for trading purposes.
–– w
 ithin 12 months before or up to 36
• Accounting profit or loss will give rise to
months after
an identical tax profit or loss:
–– p
 art of the taxable credit may be
–– unless the 4% election is made
–– in which case a tax adjustment
• Applies to goodwill and other intangibles.
must be made by comparing the
accounting profit to the taxable profit.


Chapter 15

• Maximum deferral is: Patent box relief

£ Scheme for companies owning / holding
Lower of: patents for the purposes of their trade.
– Proceeds
– Amount reinvested X Can elect for:
Less: Cost of original intangible (X) • profits relating to those patents
X • to be taxed at a lower rate of corporation
Profits relating to patents will be taxed at

Exam focus Method of relief:

• reduce taxable trading profits by:
Exam kit questions on this area:
net patent profit x (main rate – 10%) /main
Section A questions rate
• Janus plc Group
Scheme is:
Section B questions
• optional
• Cinnabar Ltd
• must be claimed within two years of the
• Maria and Granada Ltd end of the accounting period in which the
• Achiote Ltd patent profits arise


Corporation tax – liability and losses

• applies to all profits derived from Research and development expenditure

patents: (R&D)
–– royalty income, and • Expenditure on R&D as defined by
–– a
 proportion of the profits made on GAAP qualifies for certain reliefs for
goods or services where a patent companies.
has been used in the underlying • Expenditure includes:
production process. –– Staffing costs
–– Agency staff
–– Materials, water, fuel and power
–– Software
–– Subcontractor payments

Exam focus Exam focus

Exam kit questions on this area: Exam kit questions on this area:
Section A questions Section B questions
• Bond Ltd • Sank Ltd and Kurt Ltd
• Cinnabar Ltd


Chapter 15

• Relief as follows: • Net benefit of 8.91%

• If no CT liability or insufficient liability to
Small and medium sized company
net off all the tax credit the excess will be:
+ 130% allowable
–– paid in cash, net of tax
Repayment –– u
 p to max = PAYE/NIC liability for
= 14.5% x lower of: R&D employees for CAP
• trading loss –– if repayable tax credit > max cash
• 230% of qualifying R&D expenditure repayment allowed:
Optional ‘above the line tax credit’ for the remaining tax credit can be:
large companies –– c arried forward and set against the
Large companies can: first available future CT liability, or
• Opt to claim a tax credit against –– group relieved.
their corporation tax liability
= 11% of the qualifying R&D expenditure
• Method of relief:
–– deducted from the CT liability, and
–– include as taxable income in TTP
(taxed at 19%)


Corporation tax – liability and losses

Gains on shares for companies

Exam focus
Substantial shareholding exemption Exam kit questions on this area:
• Disposal of shares out of a substantial Section A questions
shareholding (SSE)
• Janus plc Group
= exempt from corporation tax.
• Opus Ltd Group
• Substantial shareholding
= where company has owned: • Helm Ltd Group
–– ≥ 10% interest in the shares • Sprint Ltd and Iron Ltd
–– for ≥ 12 months continuously • Gail
–– in the last 2 years. Section B questions
• If shares held < 12 months exemption • Cinnabar Ltd
still applies if: • Acryl Ltd and Cresco Ltd
–– s hares disposed of are in a new • Achiote Ltd
company, and
–– trade and assets of another 75%
group company are transferred to
that new company prior to sale of
shares, and
–– trade and assets have been owned
by group for ≥ 12 months in last 2
Chapter 15

If SSE does not apply The share pool

Gains on shares for companies The share pool for companies is different to
• If disposal not out of a substantial the share pool for individuals as follows:
shareholding: • It contains shares in the same company,
–– u
 se matching rules for companies, of the same class, purchased up to 9
and days before the date of disposal.
–– calculate a gain. • The pool keeps a record of the:
• The matching rules for company disposal –– number of shares acquired and sold
of shares is: –– cost of the shares, and
–– Same day acquisitions –– indexed cost of the shares (i.e. cost
–– A
 cquisitions in the previous nine plus indexation allowance).
days (FIFO basis) • The pool cost and the indexed cost will
–– Acquisitions from the share pool. be provided in the examination.

• Calculation of gains • When shares are disposed of out of the

share pool, the appropriate proportion
–– N
 o IA given on same day of the cost and indexed cost which
acquisitions and purchases in relates to the shares disposed of is
previous 9 days calculated on an average cost basis (as
–– IA is available on share pool shares. for individuals).


Corporation tax – liability and losses

Capital allowances Unrelated companies owned by the

same individual will each be entitled to
The changes to the capital allowances the full AIA.
regime for unincorporated businesses apply
equally to companies, with the following (2) For capital allowance purposes, only one
additional points: AIA is available to a group of companies.
Note that:
(1) The AIA must be split between related
companies. • A ‘group’ for this purpose is
defined by the Companies Act and
Companies owned by the same essentially applies where a parent
individual will be regarded as related company holds a simple majority
where they: shareholding (> 50%) in another
–– are engaged in the same activities, company or companies at the end of
–– or share the same premises. the accounting period.
When allocating the AIA:
In such circumstances the owner of the
companies can choose how to allocate a • the group members can allocate the
single AIA between them. maximum £200,000 AIA in any way
across the group
This could be the case if an individual
runs two companies from home, the AIA • the AIA does not have to be divided
will be split between the two businesses. equally between them


Chapter 15

• all of the allowance can be given to (3) The 8% special rate of WDA in respect
one company, or any amount can be of plant and machinery that is integral
given to any number of companies to a building applies to both initial and
within the group. replacement expenditure.

Replacement expenditure occurs where

more than 50% of an asset is replaced in
a 12-month period.

This prevents a tax deduction being

claimed for the repair of such assets
where such repairs are substantial and
the asset can be used in the trade.
Previously, a deduction was allowed
for repairs expenditure, on an asset if
it could be used in the trade before the
‘repairs’ were carried out.
Exam focus
This deduction is no longer available
Exam kit questions on this area: for plant and machinery integral to a
Section B questions building; instead tax relief is spread via
the special rate WDA.
• Sank Ltd and Kurt Ltd


Corporation tax – liability and losses

(4) Expenditure on energy saving or The maximum payment that a company

environmentally beneficial plant and can claim is the higher of:
machinery qualifies for a 100% FYA. –– £250,000 and
Where a company has made a loss: –– its total PAYE and NIC liabilities for
–– it may surrender that part of the loss the relevant accounting period.
that relates to such allowances in Where any of the qualifying plant and
exchange for a payment from HMRC machinery is sold within four years of the
–– p
 ayment = 19% of the loss end of the relevant accounting period:
surrendered. –– there will be a claw-back of an
Such a claim can only be made where appropriate part of the payment
the company is unable to use the losses made, and
in the current accounting period against: –– a reinstatement of the loss.
–– its own profits, or
–– via group relief.
The claim is made in the company’s
corporation tax return.


Chapter 15

Long period of account Note there will be:

Accounting period > 12 months must be split • Two separate pay days
into two CAPs: (i.e. 9 months after end of CAP)

• First 12 months • ut only one file date of the returns

(i.e. 12 months after end of long period
• Remainder of account).
For each CAP, HMRC require:
• a separate CT comp, and
• a separate CT600 return.


Corporation tax – liability and losses

Splitting the profits:

Tax adjusted trading profit before Time-apportion

capital allowances
Capital allowances Separate computations
(where the CA is less than 12 months, the WDA/AIA is
reduced accordingly but not FYA)
Interest/Property/Other income Calculate accrued amount for each period separately (Note)
Chargeable gains According to date of disposal

Qualifying charitable donations According to date paid

Note: if information to apply the strict accruals basis is not available, then time apportion.


Chapter 15

Payment date
• Normal date • 9 months after end of CAP
• Large company • 4 quarterly instalments:
(see below) on 14th of months 7, 10, 13 and 16 after start of CAP
• Based on estimated liability for the year
• Payments must be reviewed and revised as necessary at each
instalment date.
• A company will not be required to make quarterly instalments in two
(1) CT liability < £10,000
(2) Company not large in previous CAP, and augmented profits
≤ £10 million (÷ number of related 51% group companies and/or
reduced for short CAP)

Payment method • Payment must be made electronically

Filing date • 12 months after end of period of account

• Must be filed electronically along with copies of accounts
• Must be filed using Inline eXtensible Business Reporting Language


Corporation tax – liability and losses

Late payment • Charged from due date

interest • Earned from date paid
Repayment interest • Charges and receipts are interest income/expense under the loan
relationship rules
Retention of records • 6 years from end of CAP
Group payment • Optional
arrangements • Where at least one group company pays instalments
• Related 51% group companies can arrange for one group company
to pay quarterly instalments on behalf of group
• Can save interest as overpayments effectively netted off against
• Each company must still prepare separate corporation tax
computation at end of CAP

Large companies
• Large companies must pay corporation tax by instalments (see table above).
• A company is large if its augmented profits for the CAP > £1.5 million threshold:
–– short CAP – time apportion threshold
–– related 51% group companies – divide by total number of related companies at end of
previous CAP.


Chapter 15

Augmented profits
Dividends received X
Augmented profits X
• Exclude dividends from 51% group


Corporation tax – liability and losses

Exam focus • A compliance check ends when HMRC

give notice.
Exam kit questions on this area: • Company has 30 days to amend the
Section B questions return, if applicable.
• Sank Ltd and Kurt Ltd
Exam focus

Exam kit questions on this area:

Compliance checks
Section B questions
• HMRC must give written notice of their
• Sank Ltd and Kurt Ltd
intention to commence a compliance
check (enquiry) into a tax return.
• The time limit to make a compliance
Where a return is submitted on time:
–– 1
 2 months after the actual
submission date
Where a return is submitted late:
–– 1
 2 months after 31 January, 30 April,
31 July or 31 October following the
actual filing date of the return.


Chapter 15

Amendments, errors and mistakes Personal liability of senior accounting

• A company may amend its return: officers
–– within 12 months from the filing date. • Designated senior accounting officer of
large companies and groups have to:
• HMRC may amend a return:
–– e
 nsure the companies’ accounting
–– w
 ithin 9 months from the date the
systems = adequate
return is filed.
–– c ertify annually that the accounting
• A company may make a claim for
systems are adequate, or
overpayment relief:
–– s pecify the inadequacies and
–– w
 ithin four years from the end of the
confirm that the auditors have been
relevant accounting period.
• Large = turnover of more than £200 million
and/or a total of more than £2 billion on
the statement of financial position.
• Penalties (personal and corporate) can
be levied for careless or deliberate failure
of these obligations.
Exam focus
Exam kit questions on this area:
Section A questions
• Janus plc Group
Corporation tax – liability and losses

Standard penalties
• Same rules for income tax, corporation tax, CGT, VAT and NIC (see Chapter 11).
Other penalties for corporation tax

Offence Penalty

Failure to keep and retain required records. Up to £3,000 per accounting period.
Late filing of corporation tax return:
• Within 3 months of filing date • Fixed penalty = £100 (Note)
• More than 3 months after filing date • Fixed penalty increased to £200 (Note)
Additional penalties:
• 6-12 months after filing date • Additonal 10% of tax outstanding 6 months
after filing date
• More than 12 months after filing date • Additonal penalty increased to 20%
Fixed penalties rise to £500 and £1,000
if persistently filed late (i.e. return for 2
preceding periods also late)


Chapter 15

Trading losses – single company

Summary of reliefs

Carry forward relief Current year relief Carry back relief

Current year offset first
then carry back 12 months
• Offset against: • Offset against
–– First available –– Total profits (income and gains)
–– Trading profits –– Before QCD relief
–– Of same trade • Carry forward any remaining losses
• Indefinite carry • Must offset maximum amount possible if claimed
forward • QCD relief is lost if no profits to offset against
• Optional claim


Corporation tax – liability and losses

Trading loss pro forma

2016 2017 2018
£ £ £
Trading profit X 0 X
Less: Loss b/f – (X)3
––– ––– –––
X 0 X
Other income X X X
Net chargeable gains X X X
––– ––– –––
Total profits X X X
Less: Loss relief
– Current year (X) 1
– Carry back (X)2

––– ––– –––
0 0 X
Less: QCD relief Wasted Wasted (X)
––– ––– –––
Taxable total profits 0 0 X
––– ––– –––


Chapter 15

Key Point Exam focus

2017 is the loss-making year. The trading Use the loss pro forma to help you adopt a
profit assessment in this year is nil. methodical approach to a question involving
Keep a separate working of the loss and how trading losses.
it is utilised. Show your workings in a loss working
Assuming there is sufficient loss available, summarising how the loss has been offset.
and assuming that the loss is being relieved
as early as possible, the order in which to
off-set the loss is as follows:
(1) Current year relief; in the year the loss is
(2) Prior year relief; carrying available losses
for offset back 12 months.
(3) Future year relief; against trading profits


Corporation tax – liability and losses

Approach to loss offset

(4) Use separate loss working.
(1) Lay out years – columnar form.
(5) If more than one loss, deal with
(2) Calculate TTP ignoring losses. earliest first.
(3) Choose loss relief by reference to:
–– tax saving: Exam focus
–– aim to save tax at highest possible Exam kit questions on this area:
–– offset in FY2016 saves 20%, offset Section A questions
in FY2017 and future only saves • Drench, Hail Ltd and Rain Ltd
19% • Janus plc Group
–– cash flow: • Bond Ltd
–– carry back may result in a • Opus Ltd
repayment of tax
–– carry forward will only result in a
reduction of future tax
–– offet as soon as possible
–– wastage of QCDs:
–– unrelieved QCDs cannot be
carried foward


Chapter 15

Terminal loss relief Restriction of carry forward

• Loss in final 12 months of trading of losses
–– current year offset; then • Cannot carry forward losses beyond the
–– c arryback against total profits date of a change in ownership (> 50%
(before QCD relief) shares) where:
–– o
 f 3 years preceding loss making –– a
 negligible trading activity is revived
period after a change in ownership, or
–– on a LIFO basis. –– c hange in ownership and a major
change in the nature of trade in a 3
–– focus
Exam year period.
Exam kit questions on this area: –– focus
Section B questions
Exam kit questions on this area:
• Acryl Ltd and Cresco Ltd
Section B questions
• Maria and Granada Ltd


Corporation tax – liability and losses

Non-trading losses


• Current year then carry • Current year then carry Four options available:
forward forward • against total profits before QCD relief of
• Against chargeable gains • Against total profits the current period
only before QCD relief • carry back against interest income of
the previous 12 months (36 months if
the company is ceasing to trade)
• carry forward against non-trading profits
of future periods
• group relief
• Partial claims are not
• Losses must be offset
as soon as possible
• Partial claims are allowed
• The company can therefore choose how much of the deficit is relieved
under each option
• Claims for current period and carry back relief must be made within two
years of the end of the AP of loss



16 Groups – corporation tax

and value added tax
In this chapter
• Group relationships.
• Group relief.
• Consortium relief.
• Capital gains groups.
• Sales of shares or assets.
• Transfer of trade within 75% group.
• Transfer pricing.
• VAT group registration.

Groups – corporation tax and value added tax

Exam focus
Questions on groups can be examined in the
A or B section of the paper.
There has been a large corporation tax
groups scenario on almost every ATX (P6)
examination so far.


Chapter 16

Group relationships
Relationship Definition
Related • One company directly or indirectly owns > 50% of another, or
51% group • Both are 51% subsidiaries of a third company.
Group relief • A parent company and all its direct and indirect 75% subsidiaries
(GR) group (see below).
• The definition of 75% subsidiary is extended for GR purposes only. In
addition to owning 75% of the share capital (SC) the parent must also be
entitled to receive 75% of profits and 75% of assets on winding up.
Capital gains • A parent company (principal member (PM)) and its 75% subsidiaries (see
group below) and their 75% subsidiaries – provided PM has  50% effective
interest in subsidiary.
• A 75% subsidiary of a PM cannot be a PM itself
(i.e. a company can only be a member of one gains group).
75% • One company owns  75% of SC of another, or
subsidiary • Both are 75% subsidiaries of a third company.
• Includes direct/indirect holdings.
• Definition includes overseas companies.


Groups – corporation tax and value added tax

Relationship Definition
Consortium •  75% ordinary SC owned by companies, each owning  5% and
owned • Each member entitled to  5% profits and  5% net assets
• Excludes a company that is 75% subsidiary of another.

Illustration – Group relationships

P Ltd Q Ltd


90% 80% 60%

A Ltd B Ltd D Ltd


C Ltd


Chapter 16

Relationship Group members

Related • A Ltd, B Ltd and C Ltd
51% group • D Ltd excluded as < 50%
companies of
P Ltd
Group relief • P Ltd, A Ltd, B Ltd
(GR) group • C Ltd is not part of the group as P Ltd’s interest is < 75%
i.e. interest in C Ltd = 60% (80% 3 75%)
• B Ltd and C Ltd form a separate losses group
Capital gains • P Ltd, A Ltd, B Ltd and C Ltd
group • C Ltd is part of the gains group as it is a 75% subsidiary of a 75% subsidiary
and P Ltd’s effective interest (60%) is > 50%
Consortium • D Ltd is a consortium company of P Ltd and Q Ltd
relief group • D Ltd is owned  75% by companies and each consortium member (P Ltd
and Q Ltd) is entitled to  5%

Key Point

You must be clear on the distinction between a group relief group and a capital gains group.


Groups – corporation tax and value added tax

• Related 51% group companies include: Effect of related 51% group companies:
–– Both UK and overseas resident Effect:
• Divide the threshold by the number of
–– Companies leaving group. related companies to determine whether
• Exclude: instalments are necessary.
–– Dormant companies • Dividends from related companies
(if dormant for whole CAP) (UK and overseas) = not included in
augmented profit.
–– Non-trading holding company
• One AIA allocated between group
–– Companies joining the group. companies.
• The number of related companies is • VAT group registration available.
based on the position at the end of the • Group payment arrangement available if
previous CAP, hence the treatment of at least one company pays by quarterly
companies joining/leaving in the period. instalments.


Chapter 16

Group relief (GR) Exam focus

• Transfer losses between any member of
a GR group. Exam kit questions on this area:
• Group definition: Section A questions
–– includes overseas companies • Janus plc Group
–– but the relief can only be claimed by • Drench, Hail Ltd and Rain Ltd
UK companies, or UK branches of • Opus Ltd
overseas companies.
• Sprint Ltd and Iron Ltd
• Exceptions:
• Hahn Ltd Group
1. O
 verseas losses can be group
Section B questions
relieved to UK parent if
• Cinnabar Ltd
–– EEA resident subsidiary or has a
branch in EEA, and
–– losses cannot be relieved
2. Losses of a UK branch can be group
relieved in the UK to a UK company if
–– UK branch is owned by an EEA
company, and
–– losses have not been utilised
Groups – corporation tax and value added tax

• Rules:

Surrendering co. Claimant co.

• Any amount of current year: Maximum claim: £
–– trading loss TTP (a) X
Less: CY losses (b) (X)
–– debits on non trading loan relationships, ––
plus excess: ––
–– QCD relief (a) T
 TP is after deduction of losses b/f and
–– UK property losses
(b) T
 he company’s own losses are taken into
–– expenses of management.
account in computing the maximum claim,
but need not actually be claimed before GR


Chapter 16

• Watch for: Payment for group relief

–– non-coterminous CAPs • The claimant company may pay the
•  R restricted to common CAP
G surrendering company for the loss.
(profits/losses deemed to accrue • Any such payment for the group relief
evenly) is ignored in both companies’ CT
–– companies joining group computations.
•  R only available for losses
arising whilst in the group
–– companies leaving group
• GR only available for losses
arising whilst in group, but
• No GR once arrangements for
sale are in place.
Due date for group relief claim
• 12 months after the claimant company’s
filing date for the CAP covered by the
claim (i.e. usually 2 years after the end of
the CAP).


Groups – corporation tax and value added tax

Consortium relief Exam focus

• Two or more companies owning:
Always consider whether or not any of the
–– T
 ogether ≥ 75% or another company
companies in the question form a consortium.
–– Individually ≥ 5%
–– No one company owns ≥ 75%
–– U
 K companies only, but overseas
companies can help to meet the
• Similar to group relief but:
–– Losses to surrender:
•  etween consortium company
(CC) and UK members only
(i.e. not between members)
= lower of: Exam focus
–– member’s TTP / trading loss Exam kit questions on this area:
–– (member’s % holding in CC) Section A questions
× CC’s TTP / trading loss
• Janus plc Group
Section B questions
• Cinnabar Ltd


Chapter 16

Capital gains groups –– unlikely to be taxable as

company selling the shares is
1 Transfer of assets within group likely to benefit from substantial
• Automatically take place at no gain/ shareholding exemption on
no loss (NG/NL) regardless of the disposal of the shares
price paid. –– group ROR not available for a
• Transferee company takes over asset degrouping gain.
at cost plus indexation to date of
• Degrouping charge where transferee
company leaves the gains group still
owning the asset, within 6 years of
the NG/NL transfer
–– c alculated as gain that would Exam focus
have arisen, using MV as
proceeds, at date of NG/NL Exam kit questions on this area:
transfer Section A questions
–– degrouping charge is added to • Drench, Hail Ltd and Rain Ltd
the consideration received by • Janus plc Group
the vendor company selling the • Helm Ltd Group
shares in the company leaving
• Gail
the group


Groups – corporation tax and value added tax

2 Reallocation of gains 3 R
 ollover relief (replacement of
• A joint election can be made to business assets)
reallocate chargeable gains or • For ROR purposes, all companies
allowable losses when an asset is within a capital gains group are
sold outside the group. treated as carrying on a single trade
• The election enables: ––  ain in one company can be
–– group chargeable gains and rolled into the acquisition by
allowable capital losses to be another group company
offset –– group ROR not available for a
degrouping gain.
–– thus maximising the use of
capital losses. Exam focus
Key Point Exam kit questions on this area:
Section A questions
Current year chargeable gains or allowable
losses can be transferred, but not brought • Opus Ltd
forward losses. • Sprint Ltd and Iron Ltd
• Bond Ltd
• Helm Ltd Group
• Hahn Ltd Group
• Heyer Ltd Group
Section B questions
• Liza
Chapter 16

4 Pre-entry losses 5 Intangible assets

• On joining a gains group • imilar rules exist for transfer of
–– identify capital losses intangible assets between group
(realised losses only). members (i.e. tax neutral).
• Can only use against: • Degrouping charge if transferee
company leaves group within 6
–– g
 ains on own assets held at date
of joining group
• Degrouping charge can be allocated
–– g
 ains on new assets acquired
to another group member.
from outside group for use in
business. 6 Stamp taxes
• Can not be used against gains of • Assets subject to stamp duty
other group companies. and stamp duty land tax can be
transferred between group members
as an exempt transfer.
• If the transferee company leaves
the group within 3 years the duty is


Groups – corporation tax and value added tax

Approach to a groups question (vi) Where there are a number of losses

• AIM = to allocate gains and all losses for in a question, deal with the losses
the benefit of the group. with the most restricted set off first.
• The approach (as a general rule) should (vii) Calculate CT liability on revised TTP.
be as follows: (viii) S
 how CT payable and any losses or
(i) Prepare a diagram of the group surpluses to be carried forward.
structure. • Also consider alternatives:
(ii) Determine the number of 51%
–– c arrying back (after current period
group companies, 75% group(s) and
relief) as an alternative to GR, as
this can generate a repayment, and
(iii) Set up a tabular pro forma for TTP possibly save tax at a higher rate,
and augmented profits (if relevant). and
May need to calculate gains,
–– the effect of DTR; surrender of
consider ROR and reallocation of
losses must not waste DTR
gains to calculate TTP.
Do this before dealing with losses. –– try to reduce the TTP of companies
(iv) Complete to TTP, separating out any exceeding the threshold; this will
losses to loss memoranda. be beneficial to the group cash flow
as CT instalments will no longer be
(v) Determine the best use of any
qualifying losses to save tax as soon
as possible.


Chapter 16

Sale of shares or assets Y Ltd

• Carries on trading.
Sale of shares:
• Group relief stops when arrangements in
X Ltd Z Ltd place: time apportion if mid-year.
• Trading losses c/f may be subject to
restriction as Y Ltd has changed owners.
100% X Ltd sells shares to Z Ltd 100% • Pre entry capital losses cannot be used
against gains on Z Ltd’s assets.
• Related to X Ltd until the next CAP.
Y Ltd Y Ltd
Z Ltd
• Related to Y Ltd from the next CAP.
• Group relief starts when Y Ltd joins: time
X Ltd apportion if mid-year.
• Gain/loss on disposal of shares unless • Pay stamp duty 0.5%
SSE available.
• Possible degrouping charge: add to Exam focus
disposal proceeds for sale of shares.
• Still include Y Ltd as a 51% group Exam kit questions on this area:
company as it is based on the previous Section A questions
CAP. • Helm Ltd Group


Groups – corporation tax and value added tax

Sale of assets: Y Ltd

• Ceases trading: end of CAP.
Before After • ains/losses on disposal of chargeable
assets (e.g. land and buildings).
X Ltd Z Ltd • rading profit/loss on disposal of
Y Ltd sells • ossible ROR for gains/profit on
100% assets goodwill.
and trade L&B P&M Goodwill
to Z Ltd • BA/BC on plant and machinery.
• osses remain in Y Ltd: possible terminal
Y Ltd loss relief.
• VAT: transfer of going concern.
Z Ltd
• Acquires assets at MV.
L&B P&M Goodwill
• apital allowances for plant and
machinery based on MV.
• ay stamp duty on land and buildings
X Ltd 0-4%.
• No effect.


Chapter 16

Transfer of trade within a 75% group




•• Can be transferred •• Assets will be

with the trade transferred at TWDV •• Capital gains/
•• Assets pass as losses will arise on
•• Can be used •• No BC/BA for usual at NGNL chargeable assets
against future transferor sold
profits of the •• No FYA or AIA for
transferred trade transferee


Groups – corporation tax and value added tax

Transfer pricing • Rules do not apply if:

• Applies where transactions between S/M → UK S/M
group companies, which have not taken
place at an arms length price, result in S/M → o
 verseas company
a tax advantage (e.g. decreased profits, in qualifying territory
increased losses) to a UK company. (e.g. DTR agreement exists).
• The advantaged company must increase
its taxable profits to reflect an arm’s
length price.
• The other company can reduce its
taxable profits by a corresponding
amount if it is UK resident.
• Rules only apply where the companies
involved are large (or medium sized
under limited circumstances).
• Rules do apply if:
Large → any company
S/M → overseas company in non-
qualifying territory
(e.g. no DTR agreement)


Chapter 16

VAT Group registration • Special consideration required for:

–– company making zero rated supplies
• Membership
–– voluntary –– exclude if in monthly repayment
position to maintain cash flow
–– b
 y any UK companies under common
–– companies making exempt supplies
• Consequences
–– Representative member responsible –– inclusion in group will make the
for accounting for VAT group partially exempt.
–– No VAT on intra-group sales
–– Only one VAT return to prepare
–– A
 ll members jointly/severally liable
for VAT
–– Limits for cash accounting scheme Exam focus
applied to whole group
–– Other VAT schemes for small Exam kit questions on this area:
businesses not available. Section A questions
• Sprint Ltd and Iron Ltd
Exam focus • Hahn Ltd Group
Be prepared to explain whether or not a Section B questions
company should be included in a VAT group. • Liza


Groups – corporation tax and value added tax



17 Overseas issues – corporation

tax and value added tax
In this chapter
• Company residence.
• UK company operating overseas.
• Branch exemption election.
• Overseas income – computational approach.
• Controlled foreign companies.
• Overseas aspects of VAT.

Overseas issues – corporation tax and value added tax

Exam focus Company residence

Overseas issues are likely to feature as part Definition

of a question and are often included within a
groups question. A company is resident in the UK if it is:
• incorporated in the UK, or
• incorporated outside the UK and
–– its place of central management
and control is situated in the UK.

Exam focus
Exam kit questions on this area:
Section B questions
• Spetz Ltd Group


Chapter 17

Company Incorporated overseas?

Incorporated in the UK? Place of central management and


UK resident In the UK Overseas

Not UK resident
Charged to UK tax on worldwide
profits including:
•• overseas branch profits arising
(unless exemption election made) Charged to UK tax on:
•• other overseas income and gains UK source income and gains only including:
(excluding dividends) •• profits from a permanent establishment
(e.g. branch, office, factory of an overseas
company in the UK)


Overseas issues – corporation tax and value added tax

UK company operating overseas

• Can establish operations in 2 ways:
–– a branch/division of the UK company, or
–– an overseas resident subsidiary.
• Different UK tax implications of the two structures.

UK Tax Overseas branch Overseas subsidiary

Scope and Extension of UK operations; therefore Profits remitted to UK
basis of all profits arising assessed on UK • as interest/property income:
charge company.
–– is chargeable to UK CT
If UK control – trading profit assessed
• as dividends:
as UK trading profit.
–– is exempt from UK CT
If not, foreign income (i.e. local control).
Can elect for branch profits to be
exempt in the UK.
Capital Available on overseas located assets Not available under UK tax rules.
allowances purchased and used by overseas
branch unless election for branch
exemption made.


Chapter 17

UK Tax Overseas branch (contd) Overseas subsidiary (contd)

factor (contd)
Trading loss Can relieve trading losses against UK No UK trading loss can be surrendered to
relief profits. overseas subsidiary.
No relief if election for branch exemption Subsidiary in EEA can surrender loss to
made. UK parent if no alternative relief.
Can use UK losses against profits of Branch in UK of an EEA company can
overseas branch. surrender losses to UK if not relieved in
another country.
Chargeable Capital gains computed using UK rules UK rules not applicable.
gains (i.e. ROR is available on reinvestment
and capital losses can be utilised).
Impact on None – as not a separate entity. 51% group company:
tax payment • Reduces the threshold for determining
dates whether instalments are required.
• If dividend received from overseas
51% group company
= ignored for augmented profits.
• If dividend received from overseas
non 51% group
= included in augmented profits.


Overseas issues – corporation tax and value added tax

Exam focus Branch exemption election

• Can be made at any time
Exam kit questions on this area:
• Effective from start of CAP after election
Section B questions
• Spetz Ltd Group
• Irrevocable
• Applies to all overseas branches
• Profits = exempt in UK
• Losses = no relief in UK
• No capital allowances
• Capital gains = not taxable in UK
Tax planning
• May be beneficial not to make election if:
(i) D
 TR means little or no UK CT
payable, and/or
(ii) losses possible or anticipated in an
overseas branch in the future.


Chapter 17

Overseas income (4) Unrelieved overseas tax on branch

– computational approach profits only

(1) Calculate the gross amount of overseas Relief may be available via:
income for inclusion in computation of –– carry back
TTP. –– carry forward.
Foreign income received A
% WT Key Point
Add: WT = A 3 100 – %WT X
X Offset QCD relief and losses against UK
––– income to maximise DTR.
(2) Compute the CT liability on the TTP.
(3) Offset DTR
For each source of overseas income
lower of:
–– overseas tax suffered, and Exam focus
–– UK tax on overseas income.
Exam kit questions on this area:
Section B questions
• Banger Ltd and Candle Ltd
• Spetz Ltd Group


Overseas issues – corporation tax and value added tax

Controlled foreign companies Definition

A non-UK resident company:
Exam focus • Controlled by UK resident companies,
and/or individuals
Always consider the possibility of an
overseas company being a CFC • that has artificially diverted profits from
the UK.
• Provisions exist to prevent UK
companies setting up overseas
subsidiaries and accumulating profits in
countries with lower rates of tax. Key Point
The usual rule of taxing only non-dividend
income from an overseas subsidiary and
exempting dividend income does not apply
to a CFC.


Chapter 17

CFC charge to UK corporation tax Note: UK company’s share of CFC profits

• A CFC charge applies if: = a
 pportioned based on the %
–– U
 K company owns ≥ 25% interest of shares held
in the CFC • UK companies self assess their liability
–– the CFC has chargeable profits. to the CFC charge.
• CFC charge is: • A clearance procedure exists to check
£ how the rules will be applied.
(UK company’s share of CFC profits
x 19% of CT) (see Note) X
Less: Creditable tax
D TR that would be available
if CFC were UK resident (X)
U K CT on income of CFC
that is taxable in UK (if any) (X)
Income tax suffered by the
CFC on its income (X)
CFC charge X


Overseas issues – corporation tax and value added tax

No CFC charge No chargeable profits of CFC

• CFC charge does not arise if • Chargeable profits = income of CFC
–– no chargeable profits of CFC (not chargeable gains) that are artificially
diverted from the UK, calculated using
–– an exemption applies
the UK tax rules.
–– the shareholder = an individual.
• CFCs = regarded as having no
chargeable profits (and therefore no
CFC charge) if:
–– the CFC does not hold assets or
bear any risks
–– that are managed in the UK,
or are
–– u
 nder tax schemes intended to
reduce UK tax, or
–– the CFC would continue in business
if the UK management of its assets
and risks were to cease.


Chapter 17

Exemptions to CFC charge

• CFC may have chargeable profits, but no CFC charge as it satisfies one of the exemptions:

Exempt period The first 12 months of the company coming under the control of UK
Excluded territories HMRC provide a list of approved territories where rates of tax are
sufficiently high to avoid a CFC charge arising.
Low profits The CFC’s TTPs are:
•  £500,000 in a 12-month period
– of which  £50,000 comprises non-trading profits.
Low profit margin The CFC’s accounting profits are  10% of relevant operating expenditure.
Tax exemption The tax paid in the overseas country is  75% of the UK CT which would
be due if it were a UK resident company.

Exam focus
Exam kit questions on this area:
Section B questions
• Klubb plc


Overseas issues – corporation tax and value added tax

Overseas aspects of VAT

EU transactions for supply of goods

‘Destination system’ ‘Origin system’

Status of Supplier and customer VAT registered Supplier registered, customer not
parties (Business to business) (B2B) registered (Business to individual)
Rate of Country of origin Country of origin
VAT • zero rated • rate applicable in country of origin
Destination country
• rate applicable in destination country
Supplier No VAT Account for output tax
May have to register in country of
destination if supplies exceed threshold
Customer Pays output VAT based on date of Cannot recover VAT as not registered
acquisition, which is the earlier of:
• date of invoice
• 15th day of month following month
goods came into UK
Claims VAT suffered as input tax


Chapter 17

Non-EU transactions for supply of goods

Key Point
• Importer pays VAT at point of entry into All supplies of goods within or outside the
UK. EU = taxable supplies.
• Can pay monthly through Duty Deferment Issue = whether the supply is zero or
System. standard rated.
• Recovers VAT suffered as input tax. It will never be an exempt supply.
• Net effect is the same as for purchases Net effect on purchases from within or
from the UK. outside the EU = same, unless purchaser
Exports makes exempt supplies.
• All goods are zero rated. Supply of services
VAT is generally charged in the place of

Supply of Place of supply

services to
Business customer Where the customer
is established
Non-business Where the supplier
customer is established


Overseas issues – corporation tax and value added tax

These rules can be applied to a UK business as follows:

UK business Accounting for VAT

Supplies • Overseas business customer • Place of supply is overseas.
services to (B2B) • Outside the scope of UK VAT.

• Overseas non-business • Place of supply is UK.

customer • Output VAT charged at standard
UK rate.
Receives • Overseas business • Place of supply is UK.
services from (B2B) • Reverse charge procedure:
–– UK business accounts for
‘output VAT’ at standard UK
rate on VAT return.
–– This
 VAT can then be
reclaimed as input VAT.


Chapter 17

Time of supply for cross border supply of

Exam focus
Exam kit questions on this area:
• For single supplies:
Section A questions
–– tax point = earlier of
• Janus plc Group
(i) w
 hen the service is completed,
(ii) paid for
• For continuous supplies:
–– tax point = end of each billing or
payment period


Overseas issues – corporation tax and value added tax



18 Business finance and tax

planning for companies
In this chapter
• Long term finance.
• Short term finance.
• Financing non-current assets.
• Business vehicle.
• Extracting profits from a business.
• Incorporation of a business.
• Disincorporation.
• Close companies.
• Personal service company.
• Withdrawing investment.
• Tax planning for companies.
Business finance and tax planning for companies

Long term finance

Debt versus Equity

Equity Debt
Maximum • Specified in Articles of Association • No limit
Return on • Dividends • Interest
investment • Only paid if profitable • Paid regardless of profitability
Corporate • Dividends received = exempt • Interest received = taxable
Individual • Basic rate and higher rate taxpayers have savings nil rate bands available
investors • All taxpayers have a £5,000 dividend nil rate band. Amounts in excess of
this will be taxed at 7.5%/32.5%/38.1% depending on the taxpayers level of
Other points • If not listed: • lender may require security
–– difficult to issue new shares (i.e. a charge over company
• Owner managed businesses:
–– may not like control to be diluted
–– u
 sually issue shares to existing
shareholders or family members


Chapter 18

Incentives to issue shares Short term finance

For individuals: • Bank overdraft.
• SEIS relief. • Short term loans.
• EIS relief. • Trade credit.
• VCT relief. • Invoice discounting.
• Debt factoring.
For companies:
• Hire purchase and leasing.
• Substantial shareholding exemption.


Business finance and tax planning for companies

Financing non-current assets

Outright Hire purchase Leasing
Initial outlay • Full cost • Instalment • Lease rental
Subsequent cost • None • Instalments spread • Lease rentals spread over length
of purchase over length of HP of lease
agreement • Includes finance charge
• Includes HP interest
Tax relief against • Capital • Interest • Lease rental and depreciation
profit allowances = allowable = allowable deduction against
available deduction against profit (other than high emission
profit cars with CO2 > 130 g/km
• Capital allowances where 15% of lease charge is
available disallowed)
• No capital allowances
VAT Yes Yes Yes
(except cars)
Sale proceeds Yes Yes No
on disposal


Chapter 18

Business vehicle
Sole trader versus company

Sole trader Company

Taxation of • Current year basis • Accounting period basis
profits • Assessed to income tax • Assessed to corporation tax
• Based on taxable trading profits • Based on taxable total profits
• Adjustments for private use • Taxable total profits = after
• Personal allowance may be available individual’s employment
income deducted
• Taxed at 20%, 40% or 45%
• No adjustments for private use
• Class 2 NICs
• No personal allowance
• Class 4 NICs
• Taxed at 19%
• No NICs on business profits
• Individual assessed to income
tax and class 1 NICs on
employment income


Business finance and tax planning for companies

Sole trader (contd) Company (contd)

Relief for • Available against personal income of • Available against company
losses individual profits only
• Against total income of current and/or • Against total profits (income
previous tax year and gains) of current year
• Extension claim against chargeable • Carry back 12 months
gains in same years • Carry forward against trading
• Opening year relief against total income profits of same trade
of previous 3 tax years, FIFO basis
• Carry forward relief against trading
profits of same trade
Withdrawal • No tax implications • Salary/bonus versus dividend
of funds (see below)
• Alternatives:
–– R
 ent (but could affect
eligibility to ER)
–– Pension contributions
VAT • Individual registers • Company registers


Chapter 18

Sole trader (contd) Company (contd)

Disposal of • Disposal of unincorporated business • Disposal of shares
business = gains on individual chargeable assets • Entrepreneurs’ relief
interest • Entrepreneurs’ relief for CGT • If gifted:
• If gifted: –– G
 ift relief for CGT may be
–– Gift relief available for CGT available
–– BPR available for IHT –– B
 PR for IHT may be
• If incorporated: available
–– Incorporation relief or
–– Gift relief for CGT

Key Point
Where initial losses are anticipated, order events to ensure losses can be relieved against the
individuals income and then incorporate business when it becomes profitable.


Business finance and tax planning for companies

Extracting profits from a business

Additional salary (i.e. bonus) Dividend
Rates of IT liability = IT payable IT liability
income tax = 20%, 40% or 45% = 7.5%, 32.5% or 38.1% of dividend
NICs paid by Employee class 1 at 12% or 2% No NICs payable
NICs paid by Employer’s class 1 at 13.8% No NICs payable
Corporation Salary and Employer’s class 1 NICs = None
tax allowable deductions for corporation
implications tax
Pension Salary = relevant earnings for pension Dividends = not relevant earnings for
contributions relief purposes pension relief purposes

Exam focus
Exam kit questions on this area:
Section A questions
• Gail
Section B questions
• Bamburg Ltd
• Traiste Ltd
Chapter 18

Disposal of interest in an unincorporated business

Income tax CGT IHT

Sale of business • Last adjustment of • Gains arise on • No diminution in
profits every single value
• Last capital chargeable asset • No IHT
allowances • ROR
• BCs and BAs • Entrepreneurs’
• Closing year rules relief
Lifetime gift of As above • Gains arise on • PET or CLT
business every single • BPR = 100%
chargeable asset Also available on
• Gift relief death provided
• Entrepreneurs’ donee still owns
relief business when
donor dies
Death owning As above • No CGT on death • Business included
business in Death estate
• BPR = 100%


Business finance and tax planning for companies

Incorporation of a business Exam focus

Exam focus Exam kit questions on this area:
Incorporation is a popular area for Section A questions
examination questions as it can test • Farina and Lauda
knowledge of all taxes in the syllabus: • Waverley
• Income tax Section B questions
• Corporation tax • Jerome and Tricycle Ltd
• National insurance
• Inheritance tax
• Capital gains tax


Chapter 18

Income tax • Formerly liable to class 2 and class 4 NICs
•• Formerly profits of trade assessed • Now liable to employee class 1
to income tax • Company liable to employer’s class 1 and
•• Drawings and private use = not class 1 A NICs
allowable deductions against profit
•• Closing year rules apply on
incorporation Value Added Tax
•• Balancing adjustments arise unless
succession election applies Not a taxable supply
•• If loss making Incorporation relief Provided conditions
available (Chapter 13) satisfied (Chapter 14)

Capital gains tax

Corporation tax Incorporation
•• Disposal of individual
•• Profits of trade now assessed to
corporation tax
•• Incorporation relief
•• Individual becomes director/
or gift relief available
(Chapter 6)
•• Individual assessed to employment
income and dividends Inheritance tax
•• Employment income and employers •• No transfer of value Stamp duty land tax
NICs = allowable deductions •• No diminution in Payable by the company on
against profit value purchase of land and buildings


Business finance and tax planning for companies

Disincorporation Disincorporation relief

Definition From 1 April 2013 to 31 March 2018:
• a joint claim can be made
= the transfer of a company’s trade and assets: (signed by company and shareholders)
–– as a going concern within two years of the transfer
–– to one or more of its shareholders • for qualifying business assets
–– w
 ho carry on the business as a sole (goodwill and interests in land and
trader or partnership, and buildings)
–– wind up the company. • to be transferred at:
–– goodwill = lower of TWDV or MV
Tax treatment
–– interests in land = lower of cost or MV
• the company’s assets
(tangible and intangible) • so no immediate charge to CT arises
= transferred to shareholders at open • but shareholder acquires asset at the
market value reduced base cost, and
–– large chargeable gains and income • therefore the gains = deferred until
gains arise the shareholder disposes of the asset
–– assessed to CT. transferred.


Chapter 18

To qualify, all of the following conditions must

be satisfied:
• the whole business = transferred as a
going concern
• all of the business assets (with the
exception of cash) = transferred to
• all of the shares = held by individuals
• the shareholders = held their shares for
the 12 months preceding the transfer
• the total MV of qualifying assets
≤ £100,000.


Business finance and tax planning for companies

Close companies
Close company = a company with close proprietorial control
(i.e. controlled by five or fewer shareholders or any number of directors usually a family company,
an owner managed business)
1 Benefits provided to shareholders who are not employees

Shareholder Close company

If shareholder = not an employee
• Individual = treated as receiving a dividend • Company = treated as paying a
• subject to income tax at 7.5%, 32.5% or 38.1% dividend to the shareholder
• Value of the deemed cash dividend • Costs of providing benefit
= the benefit which would have been assessable if = not allowable for the company
they had been an employee of the company • No class 1A NICs on deemed
If shareholder = an employee • Company = treated as giving a normal
• Individual = treated as receiving a normal benefit benefit to an employee
of employment • Costs of providing benefit
= allowable for the company
• Class 1A NICs payable


Chapter 18

2 Loans provided to shareholders

Shareholder Close company

• If loan is granted with a beneficial rate of • Company must pay tax charge
interest, the loan benefit assessed as a = 32.5% 3 loan advance if still outstanding at
beneficial loan (see benefits above). the normal due date (i.e. 9 months
• If the loan is written off by the company, after end of the accounting period.)
the individual • Tax charge = payable with corporation tax.
= treated as receiving a cash dividend
• Repaid 9 months after AP end in which
equivalent to the loan written off.
–– loan repaid
• Subject to income tax at 7.5%, 32.5% or
38.1%. –– loan written off.
• Tax charge does not apply if
1 Amount loaned  £15,000
2 Individual = full time employee
3 Individual (with associates) owns < 5%
interest in the company.


Business finance and tax planning for companies

3 Close investment company (CIC) Exam focus

• Not qualifying interest i.e. not
Exam kit questions with close company
4 Shareholder borrows money to buy Section A questions
shares in a close company
• Drench, Rain Ltd and Hail Ltd
• Qualifying loan interest paid
Section B questions
= allowable relief in shareholder’s
• Banger Ltd and Candle Ltd
income tax computation
• Bamburg Ltd
• reduces taxable income of individual.
• Nocturne Ltd
• Methley Ltd


Chapter 18

Personal service company

No Normal rules apply to
Does the worker have an employee company and individual
type relationship with the client?

Received in tax year X
Less: 5% deduction (X)
The company is a personal service   NICs paid by employer (X)
company and IR35 applies   Employer pension contributions (X)
  Salary paid (X)
Allowable expenses (X)
Deemed salary (including NIC) X
Deemed salary calculation required Less: Employer’s NIC (X)
– based on tax year Deemed salary X

•• No
 tax on dividends paid from these
profits •• Deemed paid on 5 April at end of tax year
•• Tax due following 19 April


Business finance and tax planning for companies

Exam focus
Exam kit questions on this area:
Section B questions
• Monisha and Horner
• Eric


Chapter 18

Withdrawing investment

Withdrawing investment from a company

Sale of shares Purchase of own shares Liquidation of company

CGT – payable Conditions satisfied: Payments before liquidator

– capital disposal liable to appointed = income
CGT and entrepreneurs’ relief if
personal trading company

May be difficult to Payments after liquidator

achieve as no ready market appointed = capital
for unquoted shares
Conditions not satisfied:
– treated as dividend
= amount received less HMRC allows winding-up
nominal value of shares without a liquidator and payments to
be treated as capital (max £25,000)


Business finance and tax planning for companies

Purchase of own shares (5) Reduce their shareholding substantially

Conditions for capital treatment: after the buyback – the shareholder must
end up with:
(1) The company must be an unquoted
trading company. –– N
 o more than 30% of the shares in
the company, and
(2) Be able to demonstrate that the
repurchase of the shares is for the –– N
 o more than 75% of the previous
benefit of the trade and not part of a holding.
scheme to avoid tax.
Examples of benefit to trade:
Exam focus
–– buying out retiring directors
Exam kit questions with purchase of own
–– buying out dissident shareholders
–– s hareholder has died and
Section B questions
beneficiaries don’t want shares
• Trifles Ltd
–– v enture capitalist withdrawing
• Traiste Ltd
(3) The individual must be resident in the Exam kit questions with liquidation:
UK. Section B questions
(4) Have owned the shares for 5 years prior • Banger Ltd and Candle Ltd
to the repurchase.
• Maria and Granada Ltd
• Acryl Ltd and Cresco Ltd


Chapter 18

Tax planning for companies

Investments to save tax
• Capital expenditure.
• R&D expenditure.
Tax planning
• Optimum use of losses.
• Group structure.
• Maximising group corporation tax reliefs.


Business finance and tax planning for companies




A Annual Investment Allowance 213

Annual party 18
Above the line tax credit 277
Appeals 191
Additional rate band 2
Approved mileage allowance payments 20
Additional tax on lifetime transfers as a result
Arising basis 136
of donor’s death 105
Asset damaged 54
Adjusted income 40
Assets lost or destroyed 53
Adjusted total income 4, 236
Assignment of leases 49, 52
Advantage of lifetime gifts 126
Augmented profits 287
Agricultural property relief 111, 116
Automatic non-UK residency tests 132
AIA 213, 280
Automatic UK residency tests 132
Allowable employment expenses 17
Average method 24
AMAP 17, 18, 20, 229
Amendments 289 B
Amendments to the return 183
Badges of trade 209
Balancing adjustments 215
Annual accounting scheme 257
Balancing allowance 215
Annual adjustment 261
Balancing charge 215
Annual allowance 39
Balancing payment 184
Annual exempt amount 46
Baseline amount 119
Annual exemption 111, 112



Basic charge 22 CAPs 270

Basic rate band 2 Car benefit 21
Basis of assessment 222 Carry back relief 291
Beneficial loans 24 Carry forward relief 291
Benefits 18 Cash accounting scheme 255
Benefits on retirement 42 Cash basis for small businesses 228
Bonus issues 62 Cash earnings 32
BPR 113 Cash ISA 9
Branch 320 Cessation of business 230
Branch exemption election 322 CFCs 324
Business property relief 111, 113 CGT computation 46
Business records 183 Change of accounting date 224
Business vehicle 337 Chargeable accounting periods 270
Chargeable assets 45
Chargeable disposals 45
Capital allowances 10, 12, 211, 230, 280 Chargeable gain computation 47
Capital allowances available for cars 216 Chargeable Lifetime Transfers 101
Capital gains group 299, 307 Chargeable persons 45
Capital gains tax planning 195 Charitable legacies 119
Capital goods scheme 262 Chattels 49, 51
Capital losses 55, 67, 296 Child benefit tax charge 8



Childcare vouchers 18 CSOP 28

Choice of accounting date 223 Current year relief 291
Class 1A NIC 33
Class 1 (employee) 32
Class 1 (employer’s) 33 Dealing with HMRC 169
Class 2 (NIC) 226 Death estate 107, 117
Class 4 (NIC) 226 Debt versus Equity 334
Close companies 346 Deed of variation 119, 122
Close investment company 348 Deemed domicile 152
Closing year rules 230 Deemed occupation 77
CLTs 101 Default interest 267
Company residence 318 Default surcharge 265
Compliance checks 190, 288 Degrouping charge 307
Compulsory deregistration 249 De minimis limits 261
Compulsory registration 247 Depreciating assets 81
Conflicts of interest 168 Deregistration 249
Connected persons 56 Destination system 328
Consortium 300 Determination of tax 183
Consortium relief 306 Diminution in value 107, 108
Controlled foreign companies 324 Disadvantages of lifetime gifts 126
Corporation tax payable 271 Disaggregation 258



Discovery assessments 190 Employment versus self-employment 200

Discretionary trust 157 Entrepreneurs’ relief 12, 70, 71, 80, 86
Dishonest conduct of tax agents 173 Error on VAT returns 266
Disincorporation 344 EU transactions for supply of goods 328
Disincorporation relief 344 Exempt assets (CGT) 45
Dividend nil rate band 3 Exempt benefits 18
Dividends income 7 Exempt disposals 45
Domicile 131 Exempt income 9
Double tax relief (CGT) 151 Exemptions to CFC charge 327
Double tax relief (IHT) 111, 120, 154 Exempt legacies 118
Double tax relief (income tax) 140 Exempt supply 245
Due dates of payment (IHT) 107 Ex-gratia payments 31
Exit charge 161
Expensive accommodation charge 22
EIS 6, 176, 178, 197 Extracting profits from a business 340
EIS reinvestment relief 70, 91
EMI 28, 73
Employee class 1 32 Fall in value relief 112
Employer’s class 1 33 Filing date (companies) 285
Employment allowance 32, 33 Filing dates (individuals) 182
Employment income 16 Financing non-current assets 336



First year allowances 214 H

Flat rate expense deduction 229
Higher rate band 2
Flat rate scheme 256
Hire purchase 336
Free shares 29
Historic turnover test 247
Fuel scale charge 254
Furnished holiday lettings 12 I
Future test 247
FYA 214, 282 IHT and CGT on sales/gifts 125
IHT computations 102
G IIP trust 157, 160
Immediate post death interest trust 160
General anti-abuse rule 171
Income tax computation 2
Gift of assets 25
Income tax payable 3
Gift relief 12, 70, 83
Income tax planning 195
Gifts with reservation 119
Incorporation 342
Giving advice to clients 174
Incorporation relief 70, 87
Goodwill 274
Indexation allowance 272
Group payment arrangements 286
Individual savings accounts 9
Group relief 299, 303, 311
Inheritance tax 100
Inheritance tax planning 196
Input VAT 244, 253



Inspection powers 191 L

Intangibles 274
Large companies 286
Intangibles rollover relief 274
Late filing of corporation tax return 290
Integral features 217
Late filing penalties (individuals) 188
Interest received gross 7
Late payment interest 185, 286
Interest received net 7
Late payment penalties (individuals) 189
Investment products 176
Legacies to charity 119
IR35 349
Letting relief 70
ISAs 9
Life assurance 110
J Life tenant 157
Lifetime allowance 42
Job-related accommodation 22, 23
Lifetime gifts 101
Joint income 7
Lifetime giving versus legacies on death 206
Joint tenants 110
Lifetime tax 104
K Liquidation 66, 351
Living accommodation 22
Key investment products 176
Living expenses 22
Loan relationship deficits 296
Loan relationships 273
Location of assets 152



Long period of account 283 N

Long term finance 334
National Insurance Contributions 32, 226
Losses on unquoted shares 67
New clients 167
Lump sum payments 31
Nil rate bands 103
M Non-cash vouchers 18
Non-EU transactions for supply of goods 329
Market value of quoted shares 60
Non-savings income 7
Marriage Allowance 5
Non-trading losses 296
Marriage exemption 111
Non-UK residents and UK residential prop-
Married couples and civil partners 7, 57, 122
erty disposals 150
Married couples/civil partners tax planning
Non-wasting chattels 51
Normal expenditure out of income 111
Matching rules 60
Notification of chargeability 182
Matching rules – individuals 60
NS&I savings certificates 9
Matching shares 29
Maximum deduction from total income 4, 236 O
Medical treatment 18
Occupational Pension Plan 37
Mergers 64
Official rate of interest 24
Money laundering regulations 170
Opening year rules 222
Opening years relief 234



Option to tax 259 Payroll deduction scheme 17

Origin system 328 Penalties 290
Output VAT 244, 251 Pension income 42
Overseas aspects of VAT 328 Pensions 36
Overseas branch 320 Personal allowance 4
Overseas employment income 141 Personal financial management 175
Overseas subsidiary 320 Personal Pension Plan 37
Personal service company 349
Personal trading company 72
Paper for paper 64, 65 PETs 101
Parental dispositions 7 Potentially Exempt Transfers 101
Part disposals 49, 50 PPR 76
Partial exemption 260 PPR relief for non-UK resident individuals 150
Partnerships 239 Precise method 24
Partnership shares 29 Pre-entry loss 309
Patent box relief 275 Premium for granting short leases 11
Payment by instalments (CGT) 58 Pre-registration input VAT 254
Payment by instalments (IHT) 121 Principal charge 161
Payment date (companies) 285 Principal private residence relief 76
Payment dates (individuals) 184 Private fuel 21
Payments on account 184 Private use assets 219



Professional Code of Ethics 166 Related property 108

Property income 10 Relevant business property 113, 114
Property income losses 10, 296 Relevant earnings 38
Publication of names of tax offenders 173 Relevant property trust 160
Purchase of own shares 351, 352 Relief against chargeable gains 233
Relief against future trading profits 233
Relief against total income 233
QCBs 66 Reliefs 4
QCDs 272 Relocation expenses 18
Qualifying charitable donations 272 Remittance 138
Quarterly instalments 285 Remittance basis 137, 146
Quick succession relief 111, 120 Remittance basis charge 139, 147
Rent-a-room relief 12
R Repayment interest 9, 185, 286
Real estate investment trusts 14 Replacement furniture relief 10
Reallocation of gains 308 Research and development expenditure 276
Records 183, 286 Residence (company) 318
Reduction of PA 5 Residence (individuals) 131
Redundancy payments 16, 31 Residence nil rate band (RNRB) 103
Related 51% group companies 299, 302



Restriction of annual allowance 40 Share incentive plan 17

Restriction of carry forward of losses 295 Share options 26
Restrictive covenants 31 Share pool 61, 279
Rights issues 62 Share valuation rules (CGT) 60
Rollover relief 12, 70, 78, 308 Short life assets 218
Short term finance 335
SIP 17, 29
Sale of rights (nil paid) 63 Skipping a generation 127
Sale of shares or assets 311 Small gifts 111
Save As You Earn 9 Small part disposals 50
Savings income 3, 7 Small pool WDA 218
Savings nil rate band 3 Sole trader versus company 337
SAYE 9, 28 Sources of finance 181
SDLT 96 Special rate pool 217
SEIS 6, 176, 178, 197 Splitting tax year 133, 134
SEIS reinvestment relief 70, 92 Stamp duty 96, 97
Self-assessment 182, 241, 285 Stamp duty land tax 96, 97
Senior accounting officers 289 Stamp duty reserve tax 96, 97
Serious tax offenders 172 Standard penalties 186, 264, 290
Settled property 118 Standard rated 245
Share for share exchange 64 Statutory redundancy pay 9, 31



Stocks and shares ISA 9 Temporary workplace 17

Subscriptions 17 Tenants in common 110
Subsidised canteen 18 Terminal loss relief 235, 295
Substantial legacies to charity 119 Termination payments 31
Substantial shareholding exemption 278 Threshold income 40
Sufficient ties tests 132, 133 TOGC 252
Supply of services 329 Trading losses 233, 291
Trading loss pro forma 292
Transfer of a going concern 252
Takeovers 64, 65 Transfer of assets within group 307
Taper relief 106 Transfer of trade within a 75% group 313
Taxable benefits 18 Transfer of unused nil rate band 123
Taxable total profits computation 271 Transfer of value 108
Tax avoidance 171 Transfer pricing 314
Tax efficient expenditure 197 Trust deed 156
Tax efficient remuneration 198 Trustees 156
Tax evasion 171 Trusts 156
Tax free lump sum 42
Tax reducers 6
Tax Tribunals 192 Use of assets 25
Temporary absence abroad 149 Use of furniture 22



Valuation (IHT) 108 Wasting chattels 51
Valuation rules 60 WDA 214, 281
Value of supply 251 Withdrawing investment 351
Van benefit 21 Workplace nurseries 18
VAT 244 Workplace parking 18
VAT administration 264 Writing down allowance 214
VAT group registration 315
VAT penalties 264
VAT records 264 Zero rated 245
VAT registration 246
VAT returns 250
VCT 6, 9, 176, 178, 197
Vehicle benefits 21
Venture capital trusts 9
Voluntary deregistration 249
Voluntary registration 248