Professional Documents
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CN Atx PDF
CN Atx PDF
(ATX – UK)
(FA 2018)
Course Notes
For exams in June 2019, September 2019,
December 2019 and March 2020
ISBN: 9781509780495
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Advanced Taxation
(ATX – UK)
Taught Phase Study Programme
Page
Introduction to the course........................................................................................................................................ 5
1 Principles of income tax ............................................................................................................................... 13
2 Pensions and other tax efficient investment products .................................................................................. 23
3 Property and other investment income......................................................................................................... 35
4 Employment income..................................................................................................................................... 43
5 Employment income – additional aspects .................................................................................................... 51
6 Trade profits ................................................................................................................................................. 59
7 Capital allowances ....................................................................................................................................... 71
8 Trading losses .............................................................................................................................................. 77
9 Partnerships and limited liability partnerships .............................................................................................. 87
10 Overseas aspects of income tax .................................................................................................................. 93
3
32 Appendix A: Tax tables............................................................................................................................... 387
33 Achievement Ladder Step 4 Questions ...................................................................................................... 393
34 Achievement Ladder Step 6 Questions ...................................................................................................... 399
4
INTRODUCTION
5
INTRODUCTION
Advanced Taxation –
United Kingdom
(ATX – UK)
Taxation –
United Kingdom
(TX – UK)
The advanced taxation syllabus assumes knowledge acquired in Taxation (TX – UK) and develops
and applies this further and in greater depth.
6
INTRODUCTION
A1 Income and income tax liabilities in situations involving further overseas Chapters
aspects and in relation to trusts, and the application of additional exemptions 1–10
and reliefs
A2 Chargeable gains and capital gains tax liabilities in situations involving Chapters
further overseas aspects and in relation to closely related persons and 11–15
trusts, and the application of additional exemptions and reliefs
A3 Inheritance tax in situations involving further aspects of the scope of the tax Chapters
and the calculation of the liabilities arising, the principles of valuation and the 16–19
reliefs available, transfers of property to and from trusts, overseas aspects
and further aspects of administration
A4 Corporation tax liabilities in situations involving overseas and further group Chapters
aspects and in relation to special types of company and the application of 20–27
additional exemptions and reliefs
A5 Stamp taxes Chapter 19
A6 Value added tax, tax administration and the UK tax system Chapters 15,
3, 6, 22, 28 &
29
7
INTRODUCTION
C1 Types of investment and other expenditure that will result in a reduction in Chapters
tax liabilities for an individual and/or a business 2 & 20
C2 Legitimate tax planning measures, by which the tax liabilities arising from a Chapter 30
particular situation or course of action can be mitigated
C3 The appropriateness of such investment, expenditure or measures, given a Revision
particular taxpayer's circumstances or stated objectives course
C4 The mitigation of tax in the manner recommended, by reference to numerical Revision
analysis and/or reasoned argument course
C5 Ethical and professional issues arising from the giving of tax planning advice Chapter 30
C6 Current issues in taxation Chapters 11,
13, 2, 26 & 29
8
INTRODUCTION
9
INTRODUCTION
Key to icons
The following icons appear in this set of Course Notes:
Question practice
This is a question we recommend you attempt to reinforce your learning on a
key topic.
Formula to learn
10
SKILLS BANK
1 Effective reading
5 Choosing the and planning to
appropriate understand the
calculations to be contents of the
prepared scenario
2 Accurate analysis
4 Effective and of a question's
professional requirements
communication
3 Disciplined
time management to
ensure that all parts of
the question and all
questions are answered in
the time allowed
11
SKILLS BANK
We recommend that you spend time at the beginning of your exam carefully reading through all of the questions in
the exam, and each of their requirements. It's important to start the exam positively so make a decision about the
order in which you're going to attempt the questions.
Time should also then be spent at the start of each question identifying the various tax implications and planning
how best to construct your answer. 'Think before you write' is often quoted by the examining team as a rule to
follow.
In all ATX – UK questions, and particularly in the Section A questions, there are often many requirements to
complete. It is therefore necessary to identify what aspects are required in a question and to find how many tasks
are required so effort can be spent earning marks and time is not wasted. In Section A questions, you will usually
need to look not only at the requirements at the end of the question, but also to indentify the more detailed
instructions within the body of the question. Look for key phrases in the question such as 'I need the following ….'
or 'Please prepare the following for me…'.
Like all ACCA examinations, Advanced Taxation (ATX – UK) is fairly time pressured so it is vital to ensure that all
questions are attempted in the time given. Remember 1.95 minutes a mark. Also it is useful in multi-part questions
to identify how long each task should take using the mark allocation as a guide, so sufficient attention is given to
each part. Remember that small overruns of time during the first half of the exam can add up to you being very
short of time towards the end.
In question one, one of the requirements always states that a report/letter format is to be adopted. You therefore
need to practice constructing your answers in this required manner. It is usually very helpful to use an Appendix for
any calculations which can then be referred to in the body of your answer. Remember there are 4 marks for
professional skills available.
In this exam you will need to decide which calculations are needed to get to the information you need to support
your answer. Preparing standard computations will not always be necessary, so it is important to think about the
best way of finding the answer. This may mean using marginal rates of tax to compute additional tax liabilities
instead of preparing a full tax computation.
12
Principles of income tax
13
1: PRINCIPLES OF INCOME TAX
14
1: PRINCIPLES OF INCOME TAX
Overview
Income tax
computation
15
1: PRINCIPLES OF INCOME TAX
16
1: PRINCIPLES OF INCOME TAX
Tax charged
1.2 When calculating the tax due consider:
The savings income nil rate band which is £1,000 for a basic rate tax payer, £500 for a
higher rate taxpayer and £0 for an additional rate taxpayer. The savings income nil rate
band will still count towards the £34,500 basic rate and £150,000 higher rate limits.
A dividend nil rate band of £2,000 which is available for all taxpayers. Again, the
dividend nil rate band will count towards the £34,500 basic rate and £150,000 higher
rate limits.
NSI SI DI
45% 45% 38.1%
£150,000
40% 40% 32.5%
£34,500
20% 20% 7.5%
0%*
* The 0% savings starting rate applies to savings income only in the first £5,000 of taxable
income.
Exempt income
1.3 (a) Income from National Savings Certificates
(b) Statutory redundancy money
(c) Winnings
(d) Scholarships
(e) Certain social security benefits eg Child benefit
(f) Interest on damages for personal injuries
(g) Income from investments made through Individual Savings Accounts (ISAs)
17
1: PRINCIPLES OF INCOME TAX
(vi) The PA should be offset so as to maximise the tax saved. So, for example, if a
taxpayer with low NSI had some PA left, then it would be beneficial to offset this
against DI in priority to SI if the SI would already be covered by the savings starting
rate and savings income nil rate bands, and the dividends exceeded the dividend nil
rate band.
Illustration
In 2018/19 Wayne has trading income from a partnership of £5,000, and receives bank
interest of £8,500 and dividends of £18,100. Calculate Wayne's tax liability for 2018/19.
Non-savings Savings Dividend
income income income Total
£ £ £ £
Trading income 5,000
Bank interest 8,500
Dividends 18,100
Net income 5,000 8,500 18,100 31,600
Less personal allowance (N) (5,000) (2,500) (4,350)
Taxable income 0 6,000 13,750 19,750
Note. Follow these steps to set off the personal allowance correctly.
Step 1 Set off the maximum amount of personal allowance against non-savings
income ie £5,000.
Step 2 Work out how much savings income should be left taxable in order to use the
savings starting rate band and the savings income nil rate band ie £5,000 +
£1,000 (basic rate taxpayer) = £6,000.
Step 3 Work out difference between net savings income and taxable savings income
ie £8,500 – 6,000 = £2,500. This is the amount of the personal allowance to be
set off against savings income.
Step 4 Work out the amount of the remaining personal allowance to be set off against
dividend income ie £11,850 – 5,000 – 2,500 = £4,350.
Income tax £
Savings income
£5,000 0% (starting rate band) 0
£1,000 0% (savings income nil rate band – basic rate taxpayer) 0
Dividend income
£2,000 0% (dividend nil rate band) 0
£11,750 (13,750 – 2,000) 7.5% 881
Tax liability 881
18
1: PRINCIPLES OF INCOME TAX
Geraldine has net income of £110,000. She makes a personal pension contribution of £5,000 in
2018/19.
Required
What personal allowance does Geraldine receive for 2018/19?
Solution
3 Children
3.1 Children are taxed on any income they receive after allowing for the deduction of their own
personal allowance.
3.2 Income of a minor child received from funds provided by a parent (not grandparents) is
deemed to be the parent's income if the amount exceeds £100 (gross) a year. This includes
income from trusts created by a parent in favour of the child.
19
1: PRINCIPLES OF INCOME TAX
Holly receives £35,000 salary each year (PAYE £4,045). She also received £6,000 dividend
income, and £7,500 bank deposit interest in 2018/19. Her expenses for the year included a
qualifying interest payment of £2,000.
Required
Calculate her income tax payable for 2018/19.
Solution
20
1: PRINCIPLES OF INCOME TAX
6 Chapter summary
Section Topic Summary
1 Income tax All income except exempt income is aggregated within
computation an income tax computation. Remember to split this
income into non-savings, savings and dividend income
to enable each slice to be taxed at the appropriate
rate.
2 Personal allowances Every individual receives a personal allowance but this
can be restricted to nil if the individual has adjusted net
income in excess of £100,000.
3 Children Income of minor children from funds provided by
parents is treated as parents' income if amount
exceeds £100.
4 Qualifying interest Qualifying interest payments are deducted from total
income.
5 Jointly owned assets Income from jointly owned assets is split 50:50 unless
election made for actual proportions.
21
1: PRINCIPLES OF INCOME TAX
END OF CHAPTER
22
Pensions and other tax
efficient investment
products
23
2: PENSIONS AND OTHER TAX EFFICIENT INVESTMENT PRODUCTS
Overview
Pensions
Personal Occupational
EIS/SEIS VCT
24
2: PENSIONS AND OTHER TAX EFFICIENT INVESTMENT PRODUCTS
2.2 Contributions by basic rate taxpayers to personal pension schemes may therefore be
ignored in the personal tax computation.
3.2 Similarly, additional rate taxpayers obtain additional relief of 25% (45% – 20%) by making a
claim to extend the basic rate limit and the higher rate limit by the gross amount of the
pension contribution.
3.3 Adjusted basic rate limit for 2018/19 = £34,500 + (cash contribution 100/80).
3.4 Adjusted higher rate limit for 2018/19 = £150,000 + (cash contribution 100/80).
3.5 Adjusted net income is net income minus gross personal pension scheme contributions.
Adjusted net income is used to determine whether an individual's personal allowance (PA) is
restricted.
25
2: PENSIONS AND OTHER TAX EFFICIENT INVESTMENT PRODUCTS
John earns £200,000 per year. He pays £39,000 to a personal pension scheme in 2018/19. Ignore
the impact of the annual allowance.
Required
(a) What is John's adjusted net income for 2018/19?
(b) What is his adjusted basic rate limit and higher rate limit for 2018/19?
(c) What is his income tax liability for 2018/19?
Solution
26
2: PENSIONS AND OTHER TAX EFFICIENT INVESTMENT PRODUCTS
6.2 Employer's contributions are not limited, but they will however use up part of the annual
allowance (see Section 9 below).
8.2 Relevant earnings are, broadly, employment income, trading income and income from a
furnished holiday lettings.
27
2: PENSIONS AND OTHER TAX EFFICIENT INVESTMENT PRODUCTS
9.2 From 2016/17 individuals who have adjusted income in excess of £150,000 will have a
reduced annual allowance. The annual allowance will be reduced by £1 for every £2 that the
individual's adjusted income exceeds £150,000 subject to a minimum annual allowance of
£10,000. Thus once an individual's adjusted income exceeds £210,000 the minimum
£10,000 allowance is available.
9.3 Adjusted income for the self-employed is the same as net income. Adjusted income for
employees is net income plus pension contributions to occupational schemes under net pay
arrangements plus employer contributions to any type of pension scheme.
9.4 This reduction only applies where an individual's threshold income exceeds £110,000.
Threshold income is usually net income less the individual's gross personal pension
contributions.
In 2018/19 Eric is an employee with a salary of £130,000. This is his only income in the fiscal year,
during which Eric has made pension contributions to his occupational pension scheme of £9,000
and his employer has made contributions of £21,000. Eric has also made gross personal pension
contributions of £5,000.
What is Eric's annual allowance for 2018/19?
Solution
28
2: PENSIONS AND OTHER TAX EFFICIENT INVESTMENT PRODUCTS
9.5 If the annual allowance is not used in a tax year the unused portion can be carried forward
for three years provided that the individual was a member of a pension scheme in that tax
year.
9.6 The annual allowance for 2018/19 is used first and then the unused allowances from the
three earlier years on a FIFO basis.
9.7 If an individual pays more into their pension scheme, there will be an annual allowance
charge which is subject to income tax at the individual's marginal rate. This is added in in the
bottom half of the income tax computation as the top slice of tax and is taxed at the NSI
rates.
Dev is a sole trader with £100,000 of trade profits in 2018/19. He paid the following gross personal
pension contributions:
2014/15 £28,000
2015/16 £39,000
2016/17 £34,200
2017/18 £36,000
Dev's trade profits in earlier years have always been below £100,000, and he has no other sources
of income.
Required
What is the maximum gross contribution Dev could pay into his pension scheme in 2018/19
without incurring an annual allowance charge?
Solution
29
2: PENSIONS AND OTHER TAX EFFICIENT INVESTMENT PRODUCTS
10 Lifetime allowance
10.1 On retirement there are a number of common ways an individual can receive benefits from
their pension. One common way is to use a flexi-access drawdown where an individual
takes up to 25% of the value of their fund as a tax-free lump sum and the balance is kept by
the pension fund and reinvested to provide taxable pension income as required by the
individual. Historically individuals had to use the balance of the fund to buy an annuity but
this is no longer compulsory if the individual would prefer flexible access.
10.2 However, an individual's pension fund cannot grow beyond a certain value, called the
'lifetime allowance'. This currently stands at £1,030,000. If the fund grows beyond this point,
a charge will be made on the excess value of the fund when the individual retires.
10.3 This charge depends on whether the excess value is taken as a lump sum (tax is at 55%) or
used to provide a pension income (tax is at a lower rate of 25%, because the income will be
taxable on the individual as it's drawn, whereas a lump sum will not).
11.6 IT relief as a tax reducer is available on subscriptions of up to £1,000,000 in any tax year.
The relief is the lower of:
30% of the amount subscribed (up to max £1,000,000)
The individual's income tax liability for the year
30
2: PENSIONS AND OTHER TAX EFFICIENT INVESTMENT PRODUCTS
11.7 The relief is withdrawn if shares are held for less than three years.
(a) Proceeds 30% (or the original rate of relief obtained, if lower) is the amount
withdrawn if the shares are sold at a loss
(b) All the relief is withdrawn if the shares are sold at a gain or the transaction is not at
arm's length
31
2: PENSIONS AND OTHER TAX EFFICIENT INVESTMENT PRODUCTS
Solution
32
2: PENSIONS AND OTHER TAX EFFICIENT INVESTMENT PRODUCTS
12.2 There are a number of conditions which the company needs to meet for it to qualify as a
SEIS company but knowledge of these conditions is not required in your exam. You are,
however, expected to understand conditions relating to the shares and the investors.
13.2 Anyone subscribing for shares in a VCT receives a 30% IT credit (up to a subscription limit
of £200,000 per tax year). The relief is withdrawn if the shares are held <5 years, in the
same way as EIS relief.
13.4 Gains on disposal of both secondary purchases or new issues are free of CGT, losses are
not allowable. No minimum holding period.
33
2: PENSIONS AND OTHER TAX EFFICIENT INVESTMENT PRODUCTS
14 Chapter summary
Section Topic Summary
2 Method of giving relief Contributions to personal pension schemes are made
– personal schemes net of basic rate tax of 20%.
3 Personal schemes – To obtain further relief the basic rate limit and the
additional relief for higher rate limit are extended by the gross amount of
higher and additional the pension contribution.
rate tax payers
4 Occupational schemes Two types of schemes:
Money purchase
Final salary
5 Method of giving relief Relief is given under the net pay arrangements.
– occupational pension
schemes
6 Employer contributions These are a tax-free benefit and are deductible in the
employer's tax computation.
7 Limit on contributions Tax relief is only given for the individual on amounts up
to their relevant earnings (or £3,600 if higher).
Total contributions by everyone into the scheme are
compared to the annual allowance to see whether an
annual allowance charge will be imposed.
8 Max contributions by An individual can invest the higher of £3,600 or
an individual relevant earnings into either a personal pension
scheme or occupational scheme and save tax at their
marginal tax rate.
9 Total (tax-relievable) If gross contributions by everyone exceed the annual
contributions in excess allowance of £40,000, a tax charge is made on the
of the annual excess.
allowance Unused annual allowance can be carried forward for
up to three years and if the individual has high income
the annual allowance can be reduced to a minimum of
£10,000.
10 Lifetime allowance Pension fund cannot exceed £1m. Any excess is taxed
at 55% if taken as a lump sum or 25% if used to
provide pension income.
11 Enterprise investment The enterprise investment schemes allow individuals
scheme (EIS) to invest in a company's shares and gain a number of
tax advantages.
12 Seed enterprise The seed enterprise investment schemes allows
investment scheme individuals to invest in a company's shares and gain a
(SEIS) number of tax advantages.
13 Venture capital trusts Venture capital trusts do a similar thing but provide risk
(VCTs) diversification.
END OF CHAPTER
34
Property and other
investment income
Understand the income tax position of trust beneficiaries John and Maureen Robinson
(6/08)
Poblano (6/10)
King (6/15)
35
3: PROPERTY AND OTHER INVESTMENT INCOME
Overview
Property income
36
3: PROPERTY AND OTHER INVESTMENT INCOME
37
3: PROPERTY AND OTHER INVESTMENT INCOME
Mo lets out a house throughout 2018/19 at a monthly rental of £2,000. His rent due on
31 March 2019 wasn't received until 16 April 2019. He has a mortgage on the house and in
2018/19 makes capital repayments of £5,000 and pays interest of £4,000. He has other allowable
expenses paid of £3,000. Mo's other taxable income (after the deduction of the personal
allowance) is £54,000.
Required
Calculate Mo's income tax liability in respect of his rental income for 2018/19.
Solution
38
3: PROPERTY AND OTHER INVESTMENT INCOME
Solution
39
3: PROPERTY AND OTHER INVESTMENT INCOME
40
3: PROPERTY AND OTHER INVESTMENT INCOME
6 Trust income
6.1 Income from discretionary trusts is received net of 45% tax. Such income is treated as
non-savings income.
6.2 If income from an interest in possession trust is paid out of the trust's non-savings income or
savings income it is received net of 20% tax, and if out of dividend income it is received net
of 7.5% tax.
7 Chapter summary
Section Topic Summary
1 UK property business Income from UK property business is computed on a
cash basis unless property income receipts exceed
£150,000, the business run by a company or an
election is made to use the accruals basis.
For 2018/19, 50% of the finance costs are deducted
from property income with the remaining 50% getting
20% relief as a tax reducer.
2 Furnished holiday lets Furnished holiday lets are special types of rental
property which are assessed in the same way as other
property income but receive a number of tax privileges
as the operation is viewed more as a trading venture
than an investment one.
3 Lease premiums on Part of a lease premium on short leases is treated as
grant of short lease rent in advance.
4 Rent a room First £7,500 pa is tax free.
5 Real estate investment Dividends paid by this trust are paid net of 20% and
trusts (REITs) treated as UK property income.
6 Trust income Income from discretionary trusts is net of 45%. Income
from interest in possession trusts is net of 20%/7.5%
depending from which type of income the payment is
made.
41
3: PROPERTY AND OTHER INVESTMENT INCOME
END OF CHAPTER
42
Employment income
43
4: EMPLOYMENT INCOME
Overview
Employment income
NIC
Class 1 Class 1A
Primary Secondary
44
4: EMPLOYMENT INCOME
Basis of assessment
1.3 Assessed on amount received in the fiscal year.
Section 1.2
45
4: EMPLOYMENT INCOME
3 Benefits (TX)
3.1 Two general rules will apply when calculating benefits:
46
4: EMPLOYMENT INCOME
Solution
47
4: EMPLOYMENT INCOME
Employee Employer
suffers suffers
Top Co Provide
Provide services
services
Fees
paid
Intermediate
5.1 Anti-avoidance legislation is designed to prevent what HMRC perceives as abuse of the
self-employed v employed rules. This anti-avoidance legislation will apply to those who
have set up companies to offer their services rather than be employed.
48
4: EMPLOYMENT INCOME
5.3 A 'deemed salary' needs to be calculated if an individual would have been employed but for
their intermediaries. The employed vs self-employment rules should be used to determine this.
5.4 Treat payments from client to intermediary company ('relevant engagements') as deemed
salary to the extent it is not paid as salary.
5.5 PROFORMA
£
Income from relevant engagements X
Less statutory 5% deduction (X)
X
Less salary/benefits paid to worker (X)
Less employer's NIC on actual payments (X)
Less expenses allowable under employment income (X)
Gross amount of deemed payment G
Employer's NIC on gross deemed payment
(X)
(G 13.8 )
113.8
Note that the employment allowance (if available) cannot be used to reduce
the employer's NIC on this deemed payment.
Actual deemed payment to worker X
Alan is currently employed by Farringdon Ltd and is paid a salary of £70,000 per year. He has no
other income for the tax year.
Alan is planning to resign from Farringdon Ltd and form Alan Ltd (a personal service company).
Alan Ltd will provide services to Farringdon Ltd and to other companies. The services will be
carried out by Alan personally.
All of Alan Ltd's income will be in respect of relevant engagements and therefore subject to the
personal service company (IR35) legislation. Alan will be a director, and the only employee of
Alan Ltd.
Alan Ltd estimated income and outgoings for a full tax year
£
Gross income 80,000
Salary paid to Alan 48,000
Administrative expenses 3,000
Travel expenses reimbursed to Alan 1,500
Dividend paid to Alan 18,000
The travel expenses are those which will be necessarily incurred by Alan in performing the work for
Farringdon Ltd and the other customers of Alan Ltd.
49
4: EMPLOYMENT INCOME
Required
Prepare calculations to determine the effect on Alan's annual income, after deduction of all taxes of
working for Alan Ltd rather than Farringdon Ltd.
Solution
6 Chapter summary
Section Topic Summary
1 Types of employment Any amounts deriving from an office or employment are
income and basis of assessed under employment income. Employment
assessment income is assessed in the year of receipt.
2 Allowable deductions To be deductible, expenses must be wholly,
exclusively and necessarily incurred in the
performance of the employment.
3 Benefits Non-monetary benefits are converted into a monetary
amount via specific rules which you need to know.
4 National insurance Class 1 NIC is based on 'cash earnings'. Class 1A is
contributions (NICs) based on benefits but is only suffered by the employer.
5 Personal service The legislation for personal service companies prevents
companies individuals avoiding being treated as employed by
offering their services through the intermediary of a
company.
END OF CHAPTER
50
Employment income –
additional aspects
51
5: EMPLOYMENT INCOME – ADDITIONAL ASPECTS
Overview
Termination payments
Share schemes
52
5: EMPLOYMENT INCOME – ADDITIONAL ASPECTS
1 Termination payments
TERMINATION PAYMENTS
For death, injury and Pay in lieu of notice Other (ex gratia)
disability 'PILON' (whether Statutory redundancy pay
contractual/not), ie can
Approved lump sum on Genuine compensation
be asked to leave today
retirement for loss of office
and notice period will be
paid Continued provision of
Reward for past/future any benefit, eg a
services company car
Exempt First
Fully £30,000
taxable exempt
Ban was made redundant from UpTempo Ltd on 1 May and asked to leave immediately. His
employment contract entitled him to two months' notice or two months' salary in lieu of notice. His
annual salary was £30,000. He was also given £1,300 in statutory redundancy pay and a £34,500
non-contractual lump sum as a gesture of goodwill.
Required
Calculate how much of his termination payment would be taxable.
Solution
53
5: EMPLOYMENT INCOME – ADDITIONAL ASPECTS
2 Share schemes
Section 1
2.1 Share schemes are schemes whereby a company gives/sells shares to its employees, often
as part of a remuneration package. This will have tax consequences.
2.2 A typical share scheme will be set up as follows:
Grant – this is the date that the employee is given the right to buy shares at a future
date at a price set now.
Exercise – this is the date where the employee decides to take up the rights and buy
the shares.
Disposal – once the employee owns the shares they can then choose when to go on
and sell the shares.
2.3 The tax at each of these dates will depend on whether the scheme is tax advantaged or not.
A scheme is tax advantaged if it complies with certain conditions. It is therefore less flexible
than a non-advantaged scheme as it is restricted by having to comply with conditions.
However, an advantaged scheme will have a preferential tax treatment.
2.4 This table outlines the normal tax rules which will apply whether a scheme is advantaged or
not, although there follows more information about advantaged share schemes.
54
5: EMPLOYMENT INCOME – ADDITIONAL ASPECTS
Tax-free dividends
if used in this way and held
for three years
55
5: EMPLOYMENT INCOME – ADDITIONAL ASPECTS
3.2
SAVINGS RELATED SCHEMES
All employees
Three or five yrs contributions
Conditions
CGT at sale
56
5: EMPLOYMENT INCOME – ADDITIONAL ASPECTS
3.4
ENTERPRISE MANAGEMENT INCENTIVES (EMI)
CGT on sale
Fred is granted options over 10,000 shares on XYZ plc at a price of £1.50, their current market
value. They are exercisable in six years' time when the market value of the shares is expected to
be £4. Fred will then dispose of the shares after a further two years, for their new market price of
£5.50.
Required
Show the tax implications if the scheme is either advantaged or non-advantaged.
Solution
57
5: EMPLOYMENT INCOME – ADDITIONAL ASPECTS
4 Chapter summary
Section Topic Summary
1 Termination payments Payments made on the termination of employment
may be exempt, partially exempt or fully taxable.
2 Share schemes Schemes where a company gives/sells shares to its
employees. They can be advantaged or non-
advantaged schemes and these have different tax
consequences.
3 Tax-advantaged share If shares or share options are provided to an employee
schemes an income tax charge arises on the benefit. This can
be avoided if various conditions are met.
END OF CHAPTER
58
Trade profits
59
6: TRADE PROFITS
Overview
Trade profits
NIC
Class 2 Class 4
60
6: TRADE PROFITS
61
6: TRADE PROFITS
3.2 When using a cash basis certain expenses can be calculated on a flat rate basis:
Use the approved mileage allowance for the deduction of business mileage
Where business premises are partly used for private purposes, calculate the private
use adjustment on a flat rate basis according to number of occupants
3.3 If cash basis produces a trading loss the only relief available is to carry forward against
future trading profits.
Which fiscal year will the profits of the year ended 30 June 2018 be taxed in?
Solution
4.3 The profits are taxed on an actual basis in the first year, ie the profits accruing from the start
date until the next 5 April.
62
6: TRADE PROFITS
Linda starts trading on 1 January 2017. She decides on a 30 June year end and her results are:
£
6m to 30.6.17 18,000
y/e 30.6.18 48,000
Required
What are the assessments for the first three tax years? What are the overlap profits?
Solution
63
6: TRADE PROFITS
Peter begins trading on 1 July 2017. He decides on a December year end but draws up his first
accounts to 31.12.18.
He made £18,000 profits in the 18 months to 31.12.18.
Required
What are his assessments in the first two tax years and what are the overlap profits?
Solution
Agnetha begins trading on 1 December 2017 and draws up her first accounts to 31 May 2019, her
chosen year end. She makes £36,000 of profit in this period.
Required
What are her first three years' assessments? What are her overlap profits?
Solution
64
6: TRADE PROFITS
4.8 This final year taxes any profits not yet taxed with a deduction for the overlap profits created
at the start of the business.
Albert, who has been trading for some years making up his accounts to 31 December, ceases to
trade on 30 April 2018 with profits as follows:
Adjusted profits
after capital allowances
£
Year to 31.12.17 22,000
4 months to 30.4.18 12,000
The overlap profits arising in the opening years of his trade were £3,500.
65
6: TRADE PROFITS
Required
What are the assessments for 2017/18 and 2018/19?
Solution
Frida closes her business on 31 January 2020. Her adjusted profits after capital allowances
were as follows:
£
y/e 31.12.18 16,000
y/e 31.12.19 12,000
1 month ending 31.01.20 6,000
Required
What are her last two years' assessments? There were no overlap profits.
Solution
66
6: TRADE PROFITS
(1) Bee makes up accounts to 31 August until changing her accounting date to 31 May. Her
results are as follows:
£
Y/e 31.8.17 20,000
9 months to 31.5.18 15,000
Y/e 31.5.19 30,000
Y/e 31.5.20 40,000
Required
What are Bee's assessments for 2017/18, 2018/19, 2019/20 and 2020/21?
Solution
67
6: TRADE PROFITS
(2) Zoe makes up accounts to 30 June until changing to 31 December. Her results are as
follows:
£
Y/e 30.6.17 25,000
Y/e 30.6.18 30,000
6 months to 31.12.18 15,000
Y/e 31.12.19 35,000
Zoe has nine months of overlap profits totalling £21,000.
Required
What are Zoe's assessments for 2017/18, 2018/19, and 2019/20?
Solution
68
6: TRADE PROFITS
Suffers
Class 2 Class 4
69
6: TRADE PROFITS
7 Chapter summary
Section Topic Summary
1 Badges of trade Badges of trade determine whether an individual is
trading or not.
2 The computation of Net profit is adjusted for disallowable expenditure,
trade profits income not taxable or taxable elsewhere and capital
allowances.
3 Cash basis for small Small businesses can compute trading income on a
business cash as opposed to an accruals basis.
4 Basis of assessment Basis periods are used to link periods of account to
tax years.
Special rules apply when a trade begins, ceases as
the current year basis breaks down in all these
situations.
5 Change of accounting Make sure you know the step-by-step approach to
date deal with this.
6 National insurance Class 2 and Class 4 NICs are paid by the self-
employed.
END OF CHAPTER
70
Capital allowances
71
7: CAPITAL ALLOWANCES
Overview
Capital allowances
72
7: CAPITAL ALLOWANCES
Function vs setting
No
FYA/ECA AIA Allowances
100% 100%
Cars
Based on CO2
emissions
73
7: CAPITAL ALLOWANCES
The following format is recommended for use in the exams, for each accounting period.
Private
Special Short used
Main rate life asset
AIA FYA pool pool assets (40%) Allowances
£ £ £ £ £ £
TWDV b/fwd X X X
Additions X X X X X
Disposal
(proceeds (X) (X)
limited to cost)
AIA (X) X
Tfr to MP/SRP X X X
X X X X
FYA 100% (X) X
–
WDA 18%/8% (X) (X) (X) (X)
60% X
TWDV cfwd X X X X X
74
7: CAPITAL ALLOWANCES
1.4 Businesses are related if carried on/controlled by same individual/partnership and either:
(a) Engaged in same activity
(b) Share the same premises
1.6 Companies can surrender tax losses attributable to ECAs for a tax credit of 12.67%.
(Two-thirds of the corporation tax rate of 19%).
Note: the maximum payment which a company can claim is the greater of:
£250,000; and
its total PAYE & NIC liabilities for the accounting period.
Obama incurs the following transactions in the year ended 31 March 2019.
Additions £
1.5.18 Plant & machinery 200,000
1.7.18 Plant & machinery 120,000
1.8.18 Integral feature 210,000
1.9.18 Car (CO2 emission 100g/km) 24,000
Disposals
1.10.18 Sold short-life asset for 10,000
Tax written-down values on 1.4.18 were as follows:
£
Main pool 180,000
Short-life asset (bought June 2016) 15,000
Van (20% private use) 10,000
Required
Calculate the capital allowances for the year ended 31 March 2019.
75
7: CAPITAL ALLOWANCES
Solution
2 Chapter summary
Section Topic Summary
1 Capital allowances Plant and machinery is entitled to a 18% writing down
allowance pa. 100% AIA applies to £200,000 spent
on plant and machinery (not cars) in a year. Related
businesses share an AIA. The capital allowance rules
for cars depend on their CO2 emissions. Low
emission cars and energy efficient equipment get
100% FYA.
END OF CHAPTER
76
Trading losses
77
8: TRADING LOSSES
Overview
Trading losses
Trade loss relief Carry forward Terminal trade Share loss relief
against general loss relief loss relief against general
income income
78
8: TRADING LOSSES
2.2 If a claim is made the maximum possible loss must be set off (ie personal allowances
cannot be saved); this is because the loss is deducted in calculating the taxpayer's net
income.
2.5 Adjusted total income is total income after deducting gross personal pension contributions.
2.6 The cap does not restrict the loss that can be claimed against profits of the same trade for
the preceding tax year. Any remaining loss can be carried forward against future profits from
the same trade.
79
8: TRADING LOSSES
Poppy commenced trading on 1 October 2004 making up her accounts to 30 September 2005 and
annually thereafter. Her recent results and projected results are:
Year ended £
30.9.17 20,000
30.9.18 (140,000)
30.9.19 8,000
30.9.20 4,000
She has received other income as follows:
£
2017/18 80,000
2018/19 120,000
2019/20 70,000
2020/21 60,000
Required
Compute Poppy's net income for 2017/18 to 2020/21, assuming maximum trade loss relief against
general income claims are made.
Solution
80
8: TRADING LOSSES
Mr Cubitt has general income of £15,000 for 2018/19. He also has net capital gains of £28,000 for
2018/19 all arising from assets not qualifying for entrepreneurs' relief. In the year ended
31 December 2018 he incurred a trading loss of £40,000. He also has capital losses brought
forward of £12,000 at 6 April 2018.
Required
Assuming Mr Cubitt relieves his trading loss in the current year, show his taxable income and
chargeable gains for 2018/19.
Solution
81
8: TRADING LOSSES
5.3 A claim under early trade loss relief applies to all three carryback years. The taxpayer
cannot choose to relieve the loss against just one or two of the years or to relieve only part
of the loss.
Solution
82
8: TRADING LOSSES
6.2 The loss of the last accounting period (AP) is increased by any overlap profits.
6.3 Loss under terminal loss relief is the actual loss in last 12 months of trading, constructed as
follows:
(a) Final fiscal year
£
Unrelieved trading loss from 6 April to date of cessation
(increased by overlap profits) X
(b) Penultimate fiscal year
Unrelieved trading loss (if any) arising from a date 12m
before cessation to 5 April X
Terminal loss X
6.4 If either (a) or (b) above yields a profit as opposed to a loss, the profit is regarded as zero for
this purpose.
A business which commenced on 1 May 2005 making up accounts to 30 September each year
ceased trading on 30 June 2019. The most recent results were:
Year 30 September 2016 £8,000 profit
Year 30 September 2017 £10,000 profit
Year 30 September 2018 £4,000 profit
Period to 30 June 2019 £27,000 loss
There were overlap profits brought forward of £2,000.
Required
Show how the loss will be relieved under terminal loss relief.
83
8: TRADING LOSSES
Solution
7 Incorporation relief
7.1 Any unrelieved trading losses of the business are carried forward and set off against the first
available income from the company.
The set off must be made against the first available income from the company, including
dividends, interest and salary. If more than one type of income is received then the loss can
be offset against income in the most tax efficient manner.
7.2 Conditions
The consideration for the sale must be wholly or mainly shares (at least 80%), which must
be retained by the vendor throughout any tax year in which the loss is relieved.
84
8: TRADING LOSSES
9 Chapter summary
Section Topic Summary
1 What to do with In accordance with legislation a taxpayer can reduce
trading losses his taxable income by deducting the loss.
2 Continuing trade Trade losses may be relieved against general income,
against capital gains and against future profits of the
same trade. Make sure you know how all the different
options work so you can advise a taxpayer correctly.
3 Tax planning A trader needs to carefully choose the right loss relief
to save tax at the highest marginal rate and ideally as
quickly as possible.
4 Trading losses against Once a loss has been offset against general income for
capital gains a tax year it can also be offset against capital gains in
that year.
5 Early years trade loss In opening years a special relief allows the trade loss to
relief be carried back three years against total income
(FIFO).
6 Ceasing trade Loss of the last 12 months can be set against trade
profits of final year and previous three years (LIFO).
7 Incorporation relief Any unrelieved trade loss can be carried forward
against income from the company.
8 Losses on unquoted Capital losses on certain unquoted shares (EIS/SEIS)
shares can be set against general income of the year of the
loss and/or the preceding year.
85
8: TRADING LOSSES
END OF CHAPTER
86
Partnerships and limited
liability partnerships
87
9: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS
Overview
Partnerships
88
9: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS
Eric and Ernie have been a partnership for many years, sharing profits as follows:
Eric Ernie
Salary £2,000 £3,000
Balance – PSR 3 2
On 1 March 2018 the agreement was changed such that profits and losses are shared equally with
no further salary payments.
During y/e 31.8.18 the partnership made a trading profit of £80,000.
Required
Show how this is split between the partners.
Solution
89
9: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS
Losses
1.2 These are allocated using the same method as for profits. Each partner can then decide on
how to use his/her share of the loss.
90
9: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS
Hamish and Angus commenced in partnership on 1 January 2013. They produce accounts to
31 December each year and their recent trading profits have been as follows:
£
Y/e 31.12.17 20,000
Y/e 31.12.18 18,000
Y/e 31.12.19 30,000
They share profits as follows:
Hamish Angus
Salary £5,000 –
PSR 60% 40%
On 1 June 2018 they invite Finbar to join the partnership.
It is agreed that Hamish's salary will increase to £6,500 and the profits will then be split equally
between the three partners.
Required
Show the assessments on the partners for the tax years 2017/18 to 2019/20.
Solution
91
9: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS
5 Chapter summary
Section Topic Summary
1 Partnerships Split profits and losses of a partnership between the
partners according to the profit sharing agreement in
the accounting period. Watch out for changes in this
agreement which will result in the profit/losses being
pro-rated.
2 New partnerships Apply commencement rules to each partner's share of
commencing profits.
3 Changes in Outgoing partner – cessation rules
partnership personnel Existing partners – CYB
New partner – commencement rules
4 Limited liability As per normal partnerships.
partnerships
END OF CHAPTER
92
Overseas aspects of
income tax
93
10: OVERSEAS ASPECTS OF INCOME TAX
94
10: OVERSEAS ASPECTS OF INCOME TAX
Overview
OECD agreement
95
10: OVERSEAS ASPECTS OF INCOME TAX
No
No
Yes No
Does the individual satisfy
the sufficient ties test?
Automatic UK tests
1.3 The following will automatically be treated as UK resident:
A person who is in the UK for 183 days or more during a tax year
A person who is in the UK for 30 days in the tax year and whose only home is in the
UK
A person who carries out full-time work in the UK during a 365-day period, some of
which falls within the tax year
96
10: OVERSEAS ASPECTS OF INCOME TAX
(a) Abbey has been resident in Canada for many years. In the current tax year she came to the
UK on holiday on three occasions, amounting to 40 days in total.
Required
Will Abbey be treated as UK-resident in the current tax year?
(b) Zoe has always lived in the UK and her only home is also in the UK. However, she is only
present in that home for 30 days in the current tax year.
Required
Will Zoe be treated as UK-resident in the current tax year?
(c) Oliver (a widower) has a home in the UK as well as one in Sweden. He was UK resident
(spending at least 10 months of every year) until one year ago when he moved permanently
to Sweden. In the current tax year he spends 100 days in the UK visiting family and friends.
97
10: OVERSEAS ASPECTS OF INCOME TAX
The remainder of the year was spent in Sweden. His brother and sister-in-law are his only
family members living in the UK.
Required
Will Oliver be treated as UK-resident in the current tax year?
Solution
1.7 The split year treatment applies to individuals leaving the UK where:
The individual leaves the UK to begin full time work overseas
The individual's partner (spouse, civil partner or someone with whom the individual
lives) leaves the UK to begin full time work overseas and the individual leaves the UK
in order to continue to live with them
The individual leaves the UK to live abroad, sells their UK house, spends a minimal
amount of time in the UK and establishes ties with the overseas country
98
10: OVERSEAS ASPECTS OF INCOME TAX
1.8 The split year treatment applies to individuals coming to the UK where:
The individual comes to the UK, acquires a home in the UK and the individual does
not have sufficient ties to the UK in order to be UK resident prior to obtaining the UK
home
The individual comes to the UK to work full time for a period of at least a year and the
individual does not have sufficient ties to the UK in order to be UK resident before
coming to the UK
The individual returns to the UK following a period where the individual or partner has
worked full time overseas
99
10: OVERSEAS ASPECTS OF INCOME TAX
>£2,000 <£2,000
Keep UK PA and
AEA
If use Arising Basis If elect to use RB
No RBC
- Keep UK PA and AEA - Lose UK PA and AEA
- Only pay UK IT on
overseas income and
gains if remitted to the UK
100
10: OVERSEAS ASPECTS OF INCOME TAX
Claire has been resident for the last nine years but is not UK domiciled and was born overseas.
In 2018/19 Claire has the following income:
£
UK trading income 10,000
Foreign income 80,000
She remits £15,000 of her foreign income to the UK.
Required
Determine whether or not Claire should claim to use the remittance basis in 2018/19.
Solution
101
10: OVERSEAS ASPECTS OF INCOME TAX
4 Overseas income
4.1 Taxpayers R and D in the UK are taxed on overseas income on an arising basis. The
overseas income is put into the appropriate column of the IT computation dependent on the
source of overseas income ie rental income or pension income in NS column, interest
income in SI column and dividends in DI column.
4.2 Taxpayers R but neither UK D nor UK DD who are using the remittance basis will put all
remitted overseas income into the non-savings income column (it loses its nature and all
becomes NSI). The benefit of the savings income and dividend nil rate bands is therefore
lost.
5.4 Foreign income is treated as the top slice of a taxpayer's income and, where there is more
than one foreign source, the taxpayer may choose which is to be their top slice of income.
They will choose the foreign source suffering foreign tax at the highest rate.
DTR
Neil has earned income of £35,400 for 2018/19. In addition he has foreign income, the gross
amount taxable in 2018/19 being:
Foreign loan stock interest £6,000 (including foreign tax £920)
Foreign property income £6,500 (including foreign tax £3,250)
Neil is resident and domiciled in the UK.
Required
Calculate his UK income tax liability.
102
10: OVERSEAS ASPECTS OF INCOME TAX
Solution
103
10: OVERSEAS ASPECTS OF INCOME TAX
7 Chapter summary
Section Topic Summary
1 and 2 Definitions Residence: Apply statutory tests.
Domicile: Your permanent home.
Deemed domicile: if a long term resident and/or a
formerly domiciled resident.
3 Effect of status on A non-resident individual is liable to income tax on their
income UK income only.
An individual who is resident but neither UK domiciled
or UK deemed domicile can use the remittance basis,
which means that they are liable for income tax on their
UK income and foreign income if remitted to UK. If a
claim is made the UK PA and AEA are lost and a RBC
may be due.
An individual who is resident and domiciled/deemed
domiciled is liable to income tax on their worldwide
income on an arising basis.
4 Overseas income Income is included gross of any foreign tax.
5 Double taxation relief DTR is given as a tax credit to reduce the double
(DTR) taxation that foreign income can suffer and is the lower
of foreign tax suffered or UK income tax on that item of
income.
6 Organisation for A tax treaty to use as a standard method for countries
Economic starting to create their own.
Co-operation and
Development (OECD)
model agreement
END OF CHAPTER
104
Achievement Ladder Step 1
You have now covered the Topics that will be assessed in Step 1 of your Achievement Ladder. This
contains short form questions covering the topics below.
It is vital in terms of your progress towards 'exam readiness' that you attempt this Step in the near future.
You will receive feedback on your performance, and you can use the wide range of online resources and
ongoing BPP support to help address any improvement areas. This will help you to tailor your learning
exactly to your own individual requirements.
Course Notes
Topic name Subtopic/Chapter name
chapter
Principles of income tax 1
Pensions and other tax efficient
Income tax
investment products 2
Property and other investment income 3
Employment income 4
Employment income – additional
More income tax
aspects 5
Overseas aspects of income tax 10
105
Achievement Ladder
106
Achievement Ladder Step 2
You have now covered the Topics that will be assessed in Step 2 of your Achievement Ladder. This
contains extracts from two real past exams.
It is vital in terms of your progress towards 'exam readiness' that you attempt this Step in the near future.
You can carefully review the model solution to gain and understanding of the topics covered and to start to
think about what real exam questions might look like. Make sure you take time to look back at your own
solution to think about how you could have improved.
Course Notes
Topic name Subtopic/Chapter name
chapter
Principles of income tax 1
Pensions and other tax efficient
Income tax
investment products 2
Property and other investment income 3
Employment income 4
Employment income – additional
More income tax
aspects 5
Overseas aspects of income tax 10
Trade profits 6
Income tax – businesses Capital allowances 7
Trading losses 8
107
Achievement Ladder
108
Chargeable gains:
an outline
Remember the material covered in Taxation (TX – UK) under Capstan (6/11)
the headings 'scope of taxation of capital gains', 'basic Mirtoon (12/11)
principles of computing gains and losses' and 'the computation Una (6/12)
of capital gains tax'
Brad (6/13)
FL Partnership (12/13)
Pescara (12/13)
Monisha and Horner (12/13)
Ziti (6/14)
Kantar (12/14)
King (6/15)
Ray and Shanira (Mar/Jun 16)
Eric and Zak (Mar/Jun 16)
Waverley (Sep/Dec 16)
Traiste Ltd (Mar/Jun 17)
Advise on the impact of dates of disposal
Evaluate the use of capital losses in the year of death Cada (12/14)
Determine the tax implications of independent taxation and John and Maureen Robinson
transfers between spouses (6/08)
Monisha and Horner (12/13)
109
11: CHARGEABLE GAINS: AN OUTLINE
110
11: CHARGEABLE GAINS: AN OUTLINE
Overview
Chargeable gains
Chargeable persons,
disposals and assets
Capital losses
111
11: CHARGEABLE GAINS: AN OUTLINE
Persons chargeable
1.2 Individuals
Partnerships
Companies
Trustees
Chargeable disposal
1.3 Sale
Gift
Sale at undervalue
Loss/destruction
Chargeable assets
1.4 All assets are chargeable assets unless they are specifically exempt. The following assets
are exempt:
(a) Cars
(b) UK government stocks (taxable for companies under investment income)
(c) Qualifying corporate bonds (taxable for companies under investment income)
(d) Wasting chattels (greyhounds, racehorses)
(e) Currency for personal use
(f) Medals awarded for valour or inherited (not if purchased)
(g) National Savings certificates
(h) Gambling winnings
(i) Chattels sold at a gain where cost and proceeds <£6,000.
Exempt disposals
1.5 The following disposals are exempt:
(a) Transfers on death; and
(b) Gifts to charities.
1.7 Timing of disposal should be considered taking into account rates of tax in different years.
112
11: CHARGEABLE GAINS: AN OUTLINE
3.2 Taxable gains not qualifying for entrepreneurs' relief nor on residential property, are
chargeable to capital gains tax at the rate of 10% or 20% depending on the individual's
taxable income. Gains on residential property which are not fully exempt under the principal
private residence (PPR) relief are chargeable at 18% or 28% depending on the individual's
taxable income. Note that, if an individual has a mixture of residential property gains and
other gains, the annual exemption is deducted in priority against the residential property
gains.
3.3 The rate of tax on taxable gains not qualifying for entrepreneurs' relief is determined as
follows:
(a) If taxable income ≥basic rate limit (extended by gross personal pension
contributions), gains are taxed at 20% (or 28% if residential property)
(b) If taxable income is <basic rate limit (extended by gross personal pension
contributions), gains are taxed at 10% (or 18% if residential property) up to the limit
less taxable income and 20% (or 28%) thereafter.
3.4 The rate of tax on taxable gains qualifying for entrepreneurs' relief is 10% (see Chapter 13).
Illustration
3.5 Thomas Arne realises a chargeable gain of £28,600 in 2018/19. The gain does not qualify
for entrepreneurs' relief and is not on residential property.
He had taxable income of £24,920 in 2018/19 and made a net personal pension contribution
of £2,400 in December 2018.
His CGT payable for 2018/19 is calculated as follows:
£
Chargeable gain 28,600
Less annual exempt amount (11,700)
Taxable gain 16,900
113
11: CHARGEABLE GAINS: AN OUTLINE
£
Basic rate limit 34,500
Add personal pension contribution £2,400 100/80 3,000
Extended basic rate limit 37,500
CGT payable:
£(37,500 – 24,920) = £12,580 (unused basic rate band) 10% 1,258
£(16,900 – 12,580) = £4,320 20% 864
Total CGT payable 2,122
In 2018/19, Diane makes a gain on an asset of £48,000 and a gain of £30,000 on another asset.
She also makes an allowable loss of £54,300.
Diane also has capital losses brought forward of £15,000.
None of the assets disposed of qualified for entrepreneurs' relief nor are residential property.
Required
Show Diane's taxable gains for 2018/19, after the annual exempt amount.
Solution
114
11: CHARGEABLE GAINS: AN OUTLINE
If an individual
Gain X X
AE (Bal) (2) (11,700) (1)
X X
On 30 August 2018 a freehold office building was sold for £260,000. The building had been
purchased in July 1990 for £81,000 and had been extended at a cost of £43,000 in May 2002.
Barbara had incurred legal fees of £3,740 in connection with the disposal. Entrepreneurs' relief is
not available on the disposal and this was Barbara's only disposal in 2018/19. She had taxable
income of £50,000 in 2018/19.
Required
Calculate the after tax sale proceeds arising from this disposal.
115
11: CHARGEABLE GAINS: AN OUTLINE
Solution
Mr Brown transferred 1,000 shares in A plc to his son. The prices were 200p–204p.
Required
Calculate the deemed proceeds to be used in the gain calculation.
Solution
116
11: CHARGEABLE GAINS: AN OUTLINE
Gain X
A = MV of the part disposed of
B = MV of the remainder of the asset
Solution
6.3 Note this is an election and for it to be available two conditions need to be met:
(a) Aggregate proceeds from sales of all land and buildings in the same tax year must not
exceed £20,000; and
(b) Proceeds do not exceed 20% of the market value of the land prior to the disposal.
117
11: CHARGEABLE GAINS: AN OUTLINE
Harvey bought 15 acres of land in June 2000 for £30,000. He sells three acres for £3,000 in the
current tax year. This is his only sale of land in the current tax year although he has made other
gains which have utilised his annual exemption. The market value of the land immediately prior to
the disposal is £40,000.
Required
What is Harvey's CGT position? Assume Harvey makes any relevant election.
Solution
118
11: CHARGEABLE GAINS: AN OUTLINE
7.2 (a) Transfers between spouses/civil partners are on a no gain/no loss basis.
(b) Recipient spouse/civil partner is treated as if he or she bought the asset at the
transfer date for a price equal to cost.
Madeleine bought a Ming vase for £9,600 in January 1999. In August 2001 she transferred the
vase to her husband Ultan.
Ultan subsequently sold the vase in the current tax year for £24,000.
Required
What is Ultan's chargeable gain?
Solution
119
11: CHARGEABLE GAINS: AN OUTLINE
Parent + Spouses
Children + Spouses
Note. Spouse also includes civil partner
(ii) Business relationships:
(1) A partner is connected to fellow partners and their current spouses.
(2) A company is connected to the persons controlling it.
(c) Losses from sales to connected person can only be relieved against current and
future gains on sales to the same person.
120
11: CHARGEABLE GAINS: AN OUTLINE
Required
What is Maria's CGT liability for 2018/19?
Solution
121
11: CHARGEABLE GAINS: AN OUTLINE
10 Chapter summary
Section Topic Summary
1 General For capital gains tax to apply you need a chargeable
person making a chargeable disposal of a chargeable
asset.
2 Calculation of the gain A chargeable gain is calculated by deducting cost and
enhancement expenditure (if relevant) from proceeds.
3 Tax payable on gains CGT is a separate tax for individuals. Everyone
receives an annual exempt amount each tax year.
Gains not qualifying for entrepreneurs' relief are taxed
at 18% or 28% if residential property, and 10% or 20%
if not on residential property, depending on taxable
income.
4 Capital losses Current year losses must be offset against current
year gains. Capital losses brought forward can be
restricted to preserve annual exempt amount. Losses
in the year of death can be carried back three years.
5 The full computation A chargeable gain is calculated by deducting cost and
enhancement expenditure (if relevant) from proceeds.
Next relevant reliefs are considered. Any remaining
taxable gain will have CY and b/f capital losses offset
before the annual exempt amount is deducted and tax
calculated.
6 Part disposal On a part disposal the cost of the original asset needs
to be split between part sold and part retained, using
A/A + B.
7 Transfers between Spouses/civil partners are treated as separate people.
husband and wife/civil Transfers between spouses/civil partners are at no
partners gain/no loss. Each spouse/civil partner receives an
annual exempt amount but this cannot be transferred
to the other spouse/civil partner.
8 Transfers to connected Proceeds are deemed to be open market value.
partners
9 Business partnerships If a partnership disposes of any asset, the gain or loss
is split using capital profit sharing ratio.
END OF CHAPTER
122
Shares and securities
Remember the material already covered in Taxation (TX – UK) Pescara (12/13)
under the heading 'gains and losses on the disposal of shares
Ray and Shanira (Mar/Jun 16)
and securities'
Extend the explanation of the treatment of rights issues to
include the small part disposal rules applicable to rights issues
Define a qualifying corporate bond (QCB), and understand what Capstan (6/11)
makes a corporate bond non-qualifying. Understand the capital
gains tax (CGT) implications of the disposal of QCBs in
exchange for cash or shares
Apply the rules relating to reorganisations, reconstructions and Capstan (6/11)
amalgamations and advise on the most tax efficient options Banger Ltd and Candle Ltd
available in given circumstances (12/12)
Ray and Shanira (Mar/Jun 16)
123
12: SHARES AND SECURITIES
Overview
Shares and
securities
124
12: SHARES AND SECURITIES
1.2 The share pool aggregates all purchases except for those made on the same day as the
disposal or within the following 30 days.
Solution
125
12: SHARES AND SECURITIES
Henry bought 7,000 £1 shares in Tristan Ltd for £7,000 (ie at par) on 1.1.2000. The company
made a 1:2 rights issue in the current tax year. Henry did not take up his rights, instead he
received £4,000. The market value of the shares retained were worth £50,000.
Required
Calculate Henry's chargeable gain.
Solution
126
12: SHARES AND SECURITIES
4.2 (a) If there is a cash element then this represents a disposal for CGT purposes and
original cost needs to be apportioned between the cash and new shares received.
(b) Cash element treated as proceeds of a part disposal and A/A + B rule applied to cost,
where:
A = cash element
B = value of non-cash element ie market value at date of takeover.
(c) If cash element is less than the higher of 5% of the value of the total holding
post- takeover and £3,000 then no disposal has taken place. Instead the cash is
deducted from the base cost for future disposals. This treatment is automatic unless
the shareholder elects to be taxed on the part disposal.
4.3 Paper-for-paper transactions are only treated as not giving rise to any immediate CGT
liability if the transactions are entered into for bona fide commercial reasons and not for tax
avoidance.
4.4 The acquiring company must obtain clearance from HMRC to ensure the above condition
has been met.
4.5 If QCBs are given in exchange for the original shares, a gain arises on the shares using
market value of QCBs at takeover. However, this gain is deferred until the QCBs are sold.
4.6 Thus on disposal of the QCB while the gain (or loss) on the QCB itself is exempt, the
deferred gain from the original share sale will be taxed.
127
12: SHARES AND SECURITIES
Amanda plans to start up a new business and will need to raise £310,000 to do so.
She is planning to sell 34,080 shares in Granada plc for £83,496 and £20,000 6% Granada plc
non-convertible loan stock for £23,920 to raise some of the funds, with the balance being obtained
via a bank loan on 1 February 2019.
The shares and loan stock were acquired as follows:
(a) Amanda was given 11,360 Forte plc shares by her uncle on 1 May 2008. At that time they
were worth £70,432.
(b) On 1 September 2012 Forte plc was taken over by Granada plc. Amanda received 34,080
shares in Granada, £8,000 in cash and £20,000 6% Granada non-convertible loan stock (a
qualifying corporate bond) in exchange for the shares in Forte plc.
The shares and loan stock were worth £78,344 and £22,720 respectively on 1 September 2012.
Amanda has taxable income of £60,000 in 2018/19. Entrepreneurs' relief does not apply on any of
the disposals.
Required
Calculate how much external finance Amanda will need to raise.
Solution
128
12: SHARES AND SECURITIES
5 Chapter summary
Section Topic Summary
1 Shares and securities Share-matching rules are used to determine the
appropriate cost of the shares sold.
2 Bonus and rights issues Treat as acquired at same date as underlying
shares.
Sale of rights nil paid is treated as a part disposal.
3 Gilts and qualifying Exempt for individuals.
corporate bonds
4 Takeovers/reorganisations On a takeover only the receipt of cash will cause a
gain to arise. For a paper-for-paper exchange the
new holding is treated as having been acquired on
the same date and for the same amount as the
original holding.
129
12: SHARES AND SECURITIES
END OF CHAPTER
130
Chargeable gains:
reliefs
131
13: CHARGEABLE GAINS: RELIEFS
132
13: CHARGEABLE GAINS: RELIEFS
Overview
CGT reliefs
Entrepreneurs' relief
133
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Deemed occupation
1.3 The period of occupation includes the following deemed periods provided they are preceded
and followed at some time by genuine occupation:
(a) Up to three years for any reason
(b) Any period where required by employment to work abroad
(c) Up to four years, if required to live elsewhere in the UK by reason of their work or was
self-employed and forced to work away from home (UK and overseas)
Part occupation
1.4 If any part of the residence is not occupied by the owner for residence purposes, PPR relief
will be proportionately withdrawn.
On 30 September 2018 Bob sold his house for £145,000. The house had been bought on 1 April
1999 for £45,000. Bob occupied the house as his main residence until 30 September 2001 when
he went to live with his sister. The house remained empty for four years but has been rented out
since then.
Required
Calculate Bob's gains after all exemptions.
Solution
135
13: CHARGEABLE GAINS: RELIEFS
2.2 Business/shares must have been owned throughout period of one year before disposal.
2.3 On sale of business, the whole or part of the business must be disposed of as going concern.
2.4 If business has ceased, business must have been owned throughout period of one year
before disposal and disposal was within three years after cessation – can cover disposal of
individual assets.
Operation of relief
2.5 Disposal of assets qualifying for entrepreneurs' relief are treated as a single chargeable gain
(net off gains and losses).
This chargeable gain is taxed at 10%.
2.6 If the taxpayer has disposals of assets not qualifying for entrepreneurs' relief in the tax year:
(a) Set off losses and the annual exempt amount against gains not qualifying for
entrepreneurs' relief first
(b) Deduct gains qualifying for entrepreneurs' relief from amount of basic rate band
available for gains not qualifying for entrepreneurs' relief.
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13: CHARGEABLE GAINS: RELIEFS
2.8 Claim must be made by first anniversary of 31 January following tax year of sale.
2.10 If market value rent is received for the asset no entrepreneurs' relief is available. If rent is
below market value, entrepreneurs' relief is proportionately withdrawn.
Gerald sold his sole trader business, which he had run since 2002, in August 2018. Gains and
losses arose on chargeable assets as follows:
£
Offices 25,000
Warehouse (7,500)
Investments 22,300
Gerald has taxable income of £18,000 in 2018/19. He has no other chargeable assets.
Required
Calculate Gerald's CGT liability for 2018/19. He has not previously made a claim for entrepreneurs'
relief.
Solution
137
13: CHARGEABLE GAINS: RELIEFS
3 Investors' relief
3.1 This relief was introduced in Finance Act 2016 and means that an individual disposing of
qualifying shares in unlisted trading companies in which they are not an officer or
employee will be able to claim investors' relief to qualify for a 10% tax rate on their gain.
The shares will need to have been held for three years and so consequently it will not be
until disposals in 2019/20 that investors will be able to benefit from this relief. Consequently,
while you need to be aware of the advantages of this relief, you will not see this tested
computationally.
Conditions
4.2 (a) The disposal must be made to an individual who is UK resident or to a trust and be a
disposal of qualifying assets.
(b) Qualifying assets:
(i) Business assets used in donor's trade (see paragraph c below)
(ii) Agricultural property
(iii) Unquoted shares in a trading company
(iv) Quoted shares in a personal trading company (≥5%)
(v) Gifts subject to an immediate IHT charge (ie assets into a trust).
(c) For business assets used in donor's trade this covers a sole trader disposing of one
or more asset(s) and also covers an individual disposing of an asset where the asset
is used in the trade of their personal trading company.
Also note that if the asset is used in the trade for only part of the ownership period
then the gain must be apportioned.
Taxed now
4.3 Provided the gift is for no consideration then the whole gain is deferred by reducing the base
cost of the gifted asset.
138
13: CHARGEABLE GAINS: RELIEFS
There are two potential complications which you need to be able to consider:
(1) Partial consideration (sale at undervalue)
(a) The excess of actual proceeds received over cost is taxed immediately.
(b) The balance is rolled over into the base cost for a subsequent disposal of the
asset.
(c) Entrepreneurs' relief may apply to gain taxed immediately if conditions
satisfied.
(2) Gift of qualifying shares
(a) Gain on gift of shares may not all be eligible for relief where a personal
company has investments in its net assets.
(b) Gain eligible for relief will be:
MVCBA
Total gain
MVCA
Where CA = chargeable assets
CBA = chargeable business assets (CA except investments)
(c) Entrepreneurs' relief may be available on remaining gain if conditions satisfied.
Bronwen gives her 100% shareholding in Red Dragon Ltd, a trading company, to her daughter
Maria in December 2018. The shares had cost her £100,000 in 1997 when Bronwen also became
a director of the company. At the date of disposal the company held the following assets:
£
Factory 400,000
Office premises 500,000
Goodwill 300,000
Investments in quoted shares 100,000
Plant and machinery (cost and MV < £6,000) 150,000
Other current assets 550,000
2,000,000
Required
Calculate Bronwen's liability to CGT for 2018/19 if this is Bronwen's only disposal in the year, if
Bronwen and her daughter jointly elect for gift relief, and Bronwen claims entrepreneurs' relief. She
has not previously made a claim for entrepreneurs' relief.
Solution
139
13: CHARGEABLE GAINS: RELIEFS
Qualifying assets
5.2 Both the old and new assets must be one of the following:
(a) Land and buildings;
(b) Fixed plant and machinery;
(c) Goodwill (individuals only); or
(d) Ships, aircraft, hovercraft.
Timing
5.3 Purchase of replacement may be up to 12 months before disposal of old asset and
36 months after disposal of old asset.
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13: CHARGEABLE GAINS: RELIEFS
Taxed now
5.4 Any proceeds not reinvested in a qualifying asset are deducted from the gain to be rolled
over and are taxed immediately.
Groups
5.5 A 75% group is treated as one unit for rollover relief.
In September 1997 Kaye bought a freehold property for £168,000 which was used in her trade. In
October 2018 she sold it for £300,000, reinvesting £260,000 of the proceeds in a new freehold
property for use 100% in this trade.
Required
Calculate the chargeable gain and the base cost of the new asset.
Solution
141
13: CHARGEABLE GAINS: RELIEFS
Depreciating assets
5.6 Definition
(a) Asset with expected life 60 years
(b) Fixed plant and machinery
5.7 Effect
If new asset is a depreciating asset:
(a) Gain deferred is not deducted from cost of new asset
(b) Instead it is postponed until the earliest of:
(i) Disposal of new asset;
(ii) Date new asset ceases to be used in the trade; or
(iii) 10 years after new asset was acquired.
Mick disposed of the following assets during the tax year 2018/19:
(1) On 19 May 2018, Mick sold a freehold warehouse for £522,000. The warehouse was
purchased on 6 August 2003 for £258,000, and was extended at a cost of £99,000 during
April 2005. In January 2009, the floor of the warehouse was damaged by flooding and had
to be replaced at a cost of £63,000. The warehouse was sold because it was surplus to the
business's requirements as a result of Mick purchasing a newly built warehouse in
December 2017 for £500,000. Both warehouses have always been used for business
purposes in a wholesale business run by Mick as a sole trader.
(2) On 24 September 2018, Mick sold 700,000 £1 ordinary shares in Rolling Ltd, an unquoted
trading company, for £3,675,000. Rolling Ltd has 10,000,000 shares in issue. He had
originally purchased 500,000 shares in Rolling Ltd on 2 June 2007 for £960,000. On
1 December 2012, Rolling Ltd made a 3-for-2 bonus issue. Mick has been a director of
Rolling Ltd since 1 January 2007.
(3) On 30 June 2018, Mick sold a house for £308,000. The house had been purchased on
1 January 2001 for £93,000. On 10 June 2008, Mick had incurred legal fees of £5,000 in
relation to a boundary dispute with his neighbour. Throughout the 210 months of ownership
the house had been occupied by Mick as follows:
Months
34 Occupied
18 Unoccupied – Travelling overseas
24 Unoccupied – Required to work overseas by his employer
106 Occupied
12 Unoccupied – Required to work overseas by his employer
13 Unoccupied – Travelling overseas
3 Unoccupied – Lived with sister
210
Mick let the house out during all of the periods when he did not occupy it personally.
Throughout the period 1 January 2001 to 30 June 2018 Mick did not have any other main
residence.
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13: CHARGEABLE GAINS: RELIEFS
(4) On 24 June 2018, Mick made a gift of his entire 12% holding of 12,000 £1 ordinary shares in
Reward Ltd, an unquoted trading company, to his son. The market value of the shares on
that date was £98,400. The shares had been purchased on 15 March 2006 for £39,000. On
24 June 2018, the market value of Reward Ltd's chargeable assets was £540,000, of which
£460,000 was in respect of chargeable business assets. Mick has never been employed by
Reward Ltd.
Mick has capital losses brought forward of £25,000.
Required
Calculate Mick's CGT liability for 2018/19 assuming all beneficial claims are made.
Solution
143
13: CHARGEABLE GAINS: RELIEFS
144
13: CHARGEABLE GAINS: RELIEFS
6 Incorporation relief
6.1 Incorporation is a sale of assets to a company. Incorporation results in chargeable gains (or
losses) on the disposal of chargeable assets which are taxable.
6.2 Incorporation relief allows these gains to be deferred into the base cost of any shares
received as consideration from the company.
Relief under incorporation relief is automatically available. However, individuals can elect
that incorporation relief should not apply.
6.3 The election must be made within two years of 31 January following the end of the tax year
in which the business was incorporated.
6.4 Conditions
Must transfer all assets (except cash) to company
The business must be transferred as a going concern
The consideration must be wholly or partly in shares
Brian transfers his lawnmower business (started in 1994) in September 2018 to a company in
exchange for £650,000 ordinary £1 shares (to be issued at par) and £150,000 cash. The following
gains arose at the date of transfer:
£
Freehold building 75,000
Goodwill 90,000
Leasehold building 52,500
Plant and machinery (all assets worth <£6,000) 60,000
Brian intends to keep his shares for the foreseeable future.
Required
Calculate Brian's CGT liability for 2018/19 assuming that he is a higher rate taxpayer, does not
have any other chargeable assets and has not made any claims for entrepreneurs' relief. Show the
base cost of the shares.
145
13: CHARGEABLE GAINS: RELIEFS
Solution
7.4 Note that if the original gain qualified for entrepreneurs' relief when it was deferred it will
continue to qualify for entrepreneurs' relief when the deferred gain is taxed.
7.5 Shares must be issued between one year before and three years after the gain arose.
146
13: CHARGEABLE GAINS: RELIEFS
Alan disposed of a painting for £300,000 in November 2018, giving a chargeable gain of £60,000.
This is his only disposal in 2018/19.
He subscribed £70,000 in a company which qualified under the EIS rules in September 2018.
Required
What will be the deferred gain, assuming Alan makes the most tax-efficient claim?
Solution
8.3 Note that, in contrast to EIS reinvestment relief, SEIS reinvestment relief exempts the gain
rather than defers it.
8.4 It is possible to claim to obtain relief in respect of gains in the preceding tax year.
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13: CHARGEABLE GAINS: RELIEFS
Withdrawal of relief
8.5 SEIS reinvestment relief is withdrawn or reduced if the shares are sold within three years of
acquisition.
8.6 If the shares are not sold at arm's length all of the SEIS income tax relief and all of the CGT
SEIS reinvestment relief will be withdrawn in respect of those shares.
8.7 If the shares are sold at arm's length the amount of SEIS income tax relief withdrawn is
restricted to a maximum of 50% of the consideration received and the same proportion of
CGT SEIS reinvestment relief will also be withdrawn.
Ciaran disposed of a statue realising a chargeable gain of £65,000 during 2018/19. He subscribed
£70,000 for shares in Octopus Ltd (a qualifying SEIS company) in the same tax year. His income
tax liability for 2018/19 was sufficient to obtain full income tax relief.
Ciaran sold the shares in Octopus Ltd on 6 September 2020 for £55,000 (an arm's length value).
Required
(a) Compute the maximum amount of SEIS reinvestment relief Ciaran could obtain in 2018/19.
(b) Explain how much SEIS reinvestment relief would be withdrawn on the disposal of the
shares in 2020/21.
Solution
148
13: CHARGEABLE GAINS: RELIEFS
9 Chapter summary
Section Topic Summary
1 Principal private Disposal of your principal private residence is exempt
residence (PPR) relief from CGT. The exemption may however be restricted
due to periods of non-occupation or business use.
2 Entrepreneurs' relief Relief for first £10m of net gains on disposal of whole
or part of business or qualifying shares and securities.
Rate of tax is 10%.
3 Investors' relief 10% tax rate will be available to a non-employee
shareholder selling qualifying shares from 2019/20.
Historically, for shares to qualify for 10% tax the
individual needed to be an employee of the company.
4 Gift relief Gift relief is available for gifts and sales at an
undervalue but only in respect of certain qualifying
assets.
5 Replacement of If a business replaces a business asset the gain can
business assets be deferred, but only if full proceeds are reinvested.
6 Incorporation relief On incorporation, gains can be deducted from the cost
of the shares received unless there is a non-share
element in the consideration which causes a part
disposal.
7 EIS reinvestment relief Gains can be deferred if an individual invests in shares
of a enterprise investment scheme (EIS) company.
8 SEIS reinvestment Gains can be exempted if an individual invests in
relief shares of a seed enterprise investment scheme (SEIS)
company.
149
13: CHARGEABLE GAINS: RELIEFS
END OF CHAPTER
150
Chargeable gains:
additional aspects
151
14: CHARGEABLE GAINS: ADDITIONAL ASPECTS
152
14: CHARGEABLE GAINS: ADDITIONAL ASPECTS
Overview
Leases Trusts
153
14: CHARGEABLE GAINS: ADDITIONAL ASPECTS
1.2 The special rules that apply when cost and/or proceeds are £6,000 are outside of the
syllabus. However, the exemption for proceeds and cost less than £6,000 is still examinable.
1.5 Such assets are exempt from CGT, unless they are plant and machinery qualifying for
capital allowances in the owner's hand. If sold for less than cost, no allowable loss as relief
for fall in value given via capital allowances.
1.6 Other wasting assets (eg copyrights) – cost is written down on a straight line basis.
2 Leases
2.1 There are two types of lease transaction that are examinable:
(a) Assignment of a lease with more than 50 years to run (long lease); and
(b) Assignment of a lease with 50 years or less to run (short lease).
154
14: CHARGEABLE GAINS: ADDITIONAL ASPECTS
Solution
A
3.2 applies where
A B
A = compensation received
B = unrestored value of asset
155
14: CHARGEABLE GAINS: ADDITIONAL ASPECTS
Mr James bought a holiday cottage for £40,000 in August 1991. In August of the current tax year
the cottage was damaged in a fire. An insurance claim was made and £33,000 received in
September of the current tax year. The cottage was valued at £45,000 after the fire.
Required
Calculate the gains arising.
Solution
3.3 If all or part of the compensation is applied in restoring the asset, this is treated as
enhancement expenditure on a subsequent disposal.
3.4 A capital sum received can be deducted from the cost of the asset if the sum is either:
(a) Wholly used to repair asset
(b) Partly used to repair asset and unused part is 'small' (higher of 5% of capital sum and
£3,000)
(c) 'Small' compared to value of asset (higher of 5% of value of asset and £3,000). If
amount not used in restoring asset is not small, taxpayer can elect for amount used in
restoration to be deducted from the cost; the balance will continue to be treated as a
part disposal.
3.6 If the compensation receipts are reinvested in a replacement asset within 12 months, a
form of 'rollover' relief is available.
3.7 The 'replacement' asset must be of a similar function and type to the original.
156
14: CHARGEABLE GAINS: ADDITIONAL ASPECTS
Lester bought a painting for £30,000 in May 2000. It was destroyed in July of the current tax year.
An insurance claim was made and £45,000 was received in October of the current tax year. Lester
spent £40,000 on a replacement asset one month after receiving the insurance.
Required
Compute Lester's chargeable gain and the base cost of the replacement asset.
Solution
5 Variation of a will
5.1 If within two years of death the terms of a will are changed by a variation of the will or by a
disclaimer, the change will not be a disposal for the original beneficiary for CGT purposes.
The assets are treated as being acquired by the new beneficiary at probate value (ie at
death) and not at their value when the change is made.
157
14: CHARGEABLE GAINS: ADDITIONAL ASPECTS
158
14: CHARGEABLE GAINS: ADDITIONAL ASPECTS
UK R NR
159
14: CHARGEABLE GAINS: ADDITIONAL ASPECTS
7.4 In general only the gain/loss accruing since 6 April 2015 is chargeable. If a property was
acquired pre April 2015 then the default method of calculating the gain is:
Proceeds X
Less: MV at 5 April 2015 (X)
Enhancement post 5 April 2015 (X)
Gain/loss X
7.6 The non-resident individual would, in this circumstance, be entitled to an annual exemption
and would pay CGT at a rate dependent on their UK taxable income and gains.
7.7 Of course, with a portion of the gain now being taxable when a non-resident disposes of a
UK residential property, it's worth noting that PPR relief may be available for the period of
ownership post 5 April 2015 if the individual has had actual occupation. However, actual
occupation after 5 April 2015 is not taken into account unless the individual (or spouse/CP)
was UK-resident in the tax year or stayed overnight at the property for at least 90 days in the
tax year. Note the last 18 months of ownership are always treated as a period of occupation
provided the individual has had actual occupation at some point.
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14: CHARGEABLE GAINS: ADDITIONAL ASPECTS
Michaela bought a UK house on 6 April 2012. She lived in the house until 5 April 2016 when she
left the UK to live in Utopia in her sister's house and ceased to be UK tax resident on that date.
Michaela did not stay overnight in the house between leaving it and selling it on 5 April 2022. Her
gain since 6 April 2015 on the sale was £126,000.
Calculate Michaela's taxable gain for 2021/22, assuming that the tax rules and allowances in
2018/19 continue to apply.
Solution
Temporary absence
7.8 If a UK resident leaves the UK for less than five years they will remain subject to CGT in
respect of assets acquired before leaving the UK.
7.9 For the temporary non residence rules to apply the individual must have been UK resident
for at least four of the seven previous tax year before the tax year in which they become non
resident.
7.10 Gains made during the year of departure are taxed in that year.
7.11 Gains made subsequently will be chargeable in the tax year of return.
Leave UK Less than five years Return UK
1.2.18 30.6.20
6.4.18
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14: CHARGEABLE GAINS: ADDITIONAL ASPECTS
8 Chapter summary
Section Topic Summary
1 Chattels and wasting Gains on wasting chattels are exempt and losses are
assets not allowable. These rules are modified if the asset is
eligible for capital allowances.
2 Leases Disposal of a short lease requires the cost to be
depreciated using lease percentage tables as it is a
depreciating asset.
3 Compensation or Damaged assets are treated as a part disposal.
insurance monies Destroyed assets constitute a full disposal with the
possibility of rollover if a replacement asset is
acquired.
4 Negligible value claims To treat asset as sold and immediately reacquired to
create an allowable loss.
5 Variation of will Variation not disposal for the original beneficiary for
CGT. New beneficiary takes assets at probate value.
6 CGT and trusts CGT if set up while settlor is alive but usually gift relief
is available due to immediate IHT charge. No CGT if
set up on death.
Also CGT as assets pass out of the trust to
beneficiaries and again usually gift relief available.
7 Overseas aspects of CGT applies to individuals resident in the UK but the
CGT domicile/deemed domicile of the individual determines
which assets they are liable to tax on.
END OF CHAPTER
162
Self assessment
for individuals and
partnerships
163
15: SELF ASSESSMENT FOR INDIVIDUALS AND PARTNERSHIPS
Overview
Self assessment
Notification of Compliance
chargeability checks
164
15: SELF ASSESSMENT FOR INDIVIDUALS AND PARTNERSHIPS
1.3 Penalty date for filing later return is day after due date.
Penalties for filing on or after penalty date
0–3 months £100
3–6 months Further penalty: £10 per day (maximum 90 days)
6–12 months Further penalty: greater of 5% of unpaid tax and £300
12 months + Further penalty: greater of % of unpaid tax (conduct based)
and £300
165
15: SELF ASSESSMENT FOR INDIVIDUALS AND PARTNERSHIPS
CGT
2.2 31 January following the end of the year of assessment.
Interest
2.3 Interest is chargeable on late payment of payments on account and balancing payments
from due date until day before actual payment date.
Repayment supplement
2.5 Runs from original date of payment until day before repayment of tax is made.
Compliance checks
2.6 HM Revenue & Customs (HMRC) must give notice by the first anniversary of actual filing
date if the return is filed on or before filing date.
If the return is filed after the filing date, HMRC must give notice by the quarter day following
the first anniversary of the actual filing date. The quarter days are 31 January, 30 April,
31 July and 31 October.
166
15: SELF ASSESSMENT FOR INDIVIDUALS AND PARTNERSHIPS
3 Chapter summary
Section Topic Summary
167
15: SELF ASSESSMENT FOR INDIVIDUALS AND PARTNERSHIPS
END OF CHAPTER
168
Achievement Ladder Step 3
You have now covered the Topics that will be assessed in Step 3 of your Achievement Ladder.
Approximately half of the questions will focus on the shaded topics below but the remainder contains
some recap questions on earlier topics.
It is vital in terms of your progress towards 'exam readiness' that you attempt this Step in the near future.
You will receive feedback on your performance, and you can use the wide range of online resources and
ongoing BPP support to help address any improvement areas. This will help you to tailor your learning
exactly to your own individual requirements.
Course Notes
Topic name Subtopic/Chapter name
chapter
Principles of income tax 1
Pensions and other tax-efficient
Income tax
investment products 2
Property and other investment income 3
Employment income 4
Employment income – additional
More income tax
aspects 5
Overseas aspects of income tax 10
Trade profits 6
Income tax – businesses Capital allowances 7
Trading losses 8
169
Achievement Ladder
Course Notes
Topic name Subtopic/Chapter name
chapter
Partnerships and limited liability
Capital gains tax and partnerships 9
partnerships Chargeable gains: an outline 11
Shares and securities 12
Chargeable gains: reliefs 13
Chargeable gains: additional aspects 14
More capital gains tax
Self assessment for individuals and
partnerships 15
170
An introduction to
inheritance tax (TX – UK)
171
16: AN INTRODUCTION TO INHERITANCE TAX
172
16: AN INTRODUCTION TO INHERITANCE TAX
Overview
An introduction to IHT
173
16: AN INTRODUCTION TO INHERITANCE TAX
Excluded property
1.3 Some property is excluded from the charge to IHT. The most important example is foreign
assets owned by individuals who are not UK domiciled (see Chapter 18).
Mr Jones owns 75% of an unquoted investment company. He gives 30% to his son.
Shareholdings on this date were valued at:
Shareholding
£
75% 370,000
45% 200,000
30% 105,000
Required
Calculate the value transferred for IHT purposes and calculate the value to be used for proceeds in
the capital gains tax computation.
Solution
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16: AN INTRODUCTION TO INHERITANCE TAX
Annual exemption
3.5 (a) First £3,000 of value (not covered by any other relief or exemption) transferred in any
tax year is exempt.
(b) Any unused annual exemption (or part thereof) may be carried forward for one year
only for use in the following tax year after that year's own annual exemption.
(c) The exemption is given in priority to the earlier gifts made in the tax year.
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(d) If the donor dies within seven years of making a CLT, additional tax may become
payable on death.
5.4 Life tax need only be calculated on CLTs. A separate calculation will need to be made for
each separate CLT.
5.5 Deduct available nil band – nil rate band (NRB) at the date of the gift less any CLTs in the
seven years before that gift. Previous year's nil rate bands are given in your tax tables.
5.6 Tax excess at 25% (¼) if donor pays or 20% if trust pays. If the question is silent, assume
the donor pays it.
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Mr Fist put £264,000 into a trust on 13 August 2018, having already put £110,000 into a trust three
years earlier (the gross chargeable transfer was £104,000). He also made a gift of £4,000 to his
son on 15 April 2018.
Required
Calculate the IHT payable when the trust is set up and the gross chargeable transfer to carry
forward for future calculations assuming:
(a) The trust agrees to pay the tax
(b) Mr Fist pays the tax
Solution
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7.2 The percentage reduction depends on the period between date of gift (PET/CLT) and death.
Period Percentage reduction
0–3 0%
3–4 20%
4–5 40%
5–6 60%
6–7 80%
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Solution
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16: AN INTRODUCTION TO INHERITANCE TAX
Solution
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9.3 The RNRB is tapered if an individual's net estate exceeds £2 million. The net estate is
calculated as the value of all assets less liabilities but is before the deduction of any
exemptions such as the spouse or charity exemption and any reliefs such as agricultural
property relief (APR) or business property relief (BPR). (See Chapter 17 for APR and BPR).
The RNRB is tapered by £1 for every £2 the net estate exceeds £2 million. Consequently
once the net estate exceeds £2.25 million the RNRB will have been tapered to nil.
9.4 The RNRB is deducted from the value of the death estate rather than directly from the value
of the main residence in the death estate and is deducted before considering the nil rate
band.
9.5 The ACCA have stated that a question will make it clear if the RNRB is available. Thus if
there is no mention of a main residence do not consider a RNRB.
Pietr died on 31 August 2018 leaving a main residence worth £600,000, on which there was a
secured mortgage of £520,000, and cash and other assets worth £2,100,000. Debts and funeral
expenses amounted to £25,000. Pietr left cash and jewellery worth £500,000 to his wife and the
remainder of his estate to his son.
Required
What is the available RNRB for use in calculating the IHT due on Pietr's death estate?
Solution
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10.3 If the nil rate band has increased since the death of the first spouse/civil partner, uprate the
unused nil band proportionately.
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George died on 1 June 2007 leaving an estate valued at £400,000. He left £300,000 of his estate,
including his main residence, to his wife Mildred and the balance to his son.
Required
Assuming Mildred dies on 1 September 2018, what nil rate band(s) will be available to her?
Assume that she leaves her estate, including the main residence, to her son.
Solution
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James died on 22 January 2019. He had made the following gifts during his lifetime:
(1) On 9 October 2011, a cash gift of £235,000 to a trust. No lifetime IHT was payable in
respect of this gift.
(2) On 14 May 2015, a cash gift of £420,000 to his daughter.
(3) On 2 August 2017, a gift of a property valued at £260,000 to his son. By the time of James'
death on 22 January 2019, the property had increased in value to £310,000.
On 22 January 2019, James' estate consisted of the following assets:
(1) A main residence valued at £660,000. This had an outstanding mortgage of £94,300.
(2) A portfolio of ordinary shares valued at £192,600.
(3) A motor car valued at £21,900.
James owed £9,400 in respect of credit card debts, and had also verbally promised to pay the
£4,600 medical costs of a friend. The cost of James' funeral amounted to £5,800.
Under the terms of his will, James left his entire estate to his children.
The nil rate band of James' wife was 40% utilised when she died 10 years ago.
Required
Calculate the IHT which will be payable as a result of James' death, and state who will be
responsible for paying the tax.
Solution
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11 Chapter summary
Section Topic Summary
1 Basic principles IHT applies to transfers of wealth.
2 Transfers of value IHT is charged on what the donor loses, not what the
donee gains.
3 Exempt transfers Gifts to spouses/civil partners, UK charities, political
parties etc are exempt in lifetime and at death. Some
exemptions apply to lifetime gifts only, eg annual
exemption, small gifts exemption, marriage exemption.
4 Types of lifetime CLTs are chargeable to tax in lifetime. PETs are
transfers exempt during the lifetime of the donor.
5 Tax payable during Life tax is paid on chargeable lifetime transfers eg gifts
lifetime into a trust. Take care to determine who will pay this
life tax.
6 Tax payable on death Death tax is paid on all gifts within seven years of
death and the death estate.
7 Taper relief Taper relief is available to reduce the death tax on gifts
made within three to seven years of death.
8 Death estate The death estate includes all assets that exist at
death. Unlike CGT, few assets are exempt. Any debt
and funeral expenses are deducted before the value of
any exempt transfers such as to a spouse or charity.
9 Tax on the death Any residence nil rate band is first deducted from the
estate value of the death estate before any remaining nil rate
band and finally any balance is taxed at 40%.
10 Spouses and civil Any unused nil rate band and residence nil rate band
partners on the death of the first spouse/civil partner can be
transferred to remaining spouse/civil partner.
END OF CHAPTER
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Inheritance tax:
valuation, reliefs and the
death estate
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Overview
Foreign property
Valuation rules
Jointly owned property
Reliefs
BPR APR
Death estate
Tax payable
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1.2 When calculating the available nil band on other gifts the original value has to be used.
Mark made a gift of some property to his daughter for £230,000 on 1 March 2014. He then gave a
cash gift to his son of £210,000 on 2 October 2017. Mark's only other lifetime transfer was a gift to
a trust on 14 August 2010, which resulted in a gross chargeable transfer of £105,000.
Mark died on 21 August 2018. At his death, the value of the property given to his daughter had
fallen to £200,000.
Required
Calculate the IHT liabilities on these gifts arising on Mark's death.
Solution
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2 Valuation rules
Quoted shares and securities (TX)
2.1 (a) Shares are valued at the lower of:
(i) '¼ up': the lower (bid) of the two closing prices + ¼ of the difference between
this and the higher (offer) price; or
(ii) Average of highest and lowest marked bargains.
(b) These rules are different to the rules used for CGT purposes which are simply to use
the lower of the two prices shown plus one-half of the difference between the two
prices (Chapter 11).
(c) An adjustment is needed for any 'ex-div/ex-int' quotations for shares in the death
estate. The full net amount of the next dividend/interest payment needs to be included
in the death estate. No adjustment is needed for gifts during lifetime.
Unit trusts
2.2 Unit trusts are valued at the lower of two published prices.
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Mike holds 55% of the shares in a family investment company. His wife holds 25%. The balance of
the share capital is held by other members of Mike's family.
Mike wants to gift his entire shareholding to a friend.
The following share values have been agreed at the date of the gift.
80% £400,000
60% £270,000
55% £240,000
45% £135,000
35% £90,000
20% £50,000
10% £20,000
Required
Calculate the value of the shares to be transferred to his friend.
Solution
5 Foreign property
5.1 Foreign property is converted into sterling at the exchange rate that gives the lowest sterling
valuation.
5.2 Administrative expenses in relation to administering and realising the foreign property are
deductible up to a maximum of 5% of the value of that property.
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General
6.1 When business property is transferred, relief is given against the value of the asset and is
calculated as either 50% or 100% of the value. BPR is available on both lifetime gifts and
those in the death estate.
Rates of relief
6.3 The rates of relief for business property are:
(a) Sole proprietor's business or partnership share 100%
(b) Shares in an unquoted trading company 100%
(c) Quoted shares or securities in company of which
transferor had voting control 50%
(d) Land, buildings, plant and machinery owned by individual
and used either in a partnership in which they are a
partner, or a company which they control 50%
When measuring the percentage of voting rights held or determining whether control
applies, include votes held by persons holding related property.
6.4 Shares do not qualify if the company is an investment company or a company dealing in
stocks and shares or land and buildings.
Excepted assets
6.6 (a) No BPR is available on excepted assets.
(b) An excepted asset is an asset that:
(i) Has not been used wholly in the business in the last two years; and
(ii) Is not required for future use in the business.
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Henry gifted 3,200 shares in Henry Ltd to his daughter. This represented 16% of the company's
share capital which he had held for the last 5 years and was worth £100,000.
The company's net assets at that date were:
£
Freehold 400,000
Plant and machinery 80,000
Goodwill 150,000
Investments 170,000
Net current assets 200,000
1,000,000
Required
Show the IHT valuation of the shares gifted.
What would happen to the valuation if Henry died within seven years of the gift and his daughter
no longer held the shares?
Solution
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17: INHERITANCE TAX: VALUATION, RELIEFS AND THE DEATH ESTATE
APR/BPR interaction
6.11 (a) APR takes priority over BPR.
(b) Any value which has been relieved by APR cannot be relieved by BPR. However, full
open market value is chargeable – relieve agricultural value with APR, relieve
remaining value with BPR if BPR rules satisfied.
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Solution
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Solution
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17: INHERITANCE TAX: VALUATION, RELIEFS AND THE DEATH ESTATE
7 Death estate
7.1 As seen earlier, the death estate is a list of the assets net of liabilities for the deceased.
From this any exempt legacies are deducted to come down to the chargeable estate. Any
RNRB and remaining NRB are then deducted and the balance is usually taxed at 40%.
However, if a large gift to charity has been made, a 36% rate of IHT may apply.
Fiona died, leaving an estate valued at £1.4 million (this was before deducting any exempt
transfers).
In her will she wished to leave £200,000 to the RSPCA, with the balance, including her main
residence worth £600,000, going to her son.
Fiona has made no lifetime gifts. She is a divorcee.
Required
Calculate the IHT payable on her estate.
Solution
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17: INHERITANCE TAX: VALUATION, RELIEFS AND THE DEATH ESTATE
Solution
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17: INHERITANCE TAX: VALUATION, RELIEFS AND THE DEATH ESTATE
Rate of relief
8.2
Mr K transferred shares to Mr L on his death on 4 March 2014. The chargeable (ie gross) value of
the transfer was £48,531 including IHT of £8,420 paid by Mr K's estate.
On 8 May 2018 Mr L died, leaving a chargeable estate valued at £330,000. He had made no
lifetime transfers.
Required
Show the tax liability on Mr L's estate.
Solution
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9 Chapter summary
Section Topic Summary
1 Relief for fall in value If asset gifted in lifetime has fallen in value at death, can
(FIV) of lifetime gifts use death value to calculate the tax.
2 Valuation rules Quoted shares and securities are valued at the lower of:
(1) ¼ up; or
(2) average of highest and lowest marked bargains.
This is different to the rules for CGT (Chapter 11).
3 Related property Watch out for related property valuation rules if shares
valuations are also held by the spouse.
4 Jointly owned Joint tenants – property passes automatically to other
property joint tenant.
Tenants in common – property passes according to will.
5 Foreign property Deduct administrative expenses up to maximum of 5%
of value of property.
6 Reliefs against asset BPR and APR can reduce the value of assets by 100%
valuation or 50% but they are only available on certain assets.
7 Death estate The death estate includes all assets that exist at death.
Unlike CGT few assets are exempt.
8 Quick succession A tax credit if asset is taxed twice in a five-year period.
relief (QSR)
END OF CHAPTER
200
Inheritance tax:
additional aspects
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18: INHERITANCE TAX: ADDITIONAL ASPECTS
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18: INHERITANCE TAX: ADDITIONAL ASPECTS
Overview
Overseas aspects
Payment of tax and
instalment option
Domicile DTR
Location of assets
Trusts
Interest in Discretionary
possession
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1 Overseas aspects
1.1 Chargeable persons who are UK domiciled are taxed on all gifts of wealth that they make.
Non-UK domiciled persons are taxed on gifts of UK assets only.
Domicile
1.2 The country regarded as the person's permanent home. (Note. Born with father's domicile
but may change it as an adult by 'severing all ties' with the country of old domicile.)
1.3 A person is also deemed to be domiciled in the UK for IHT purposes at the time a transfer is
made if they satisfy any one of three conditions:
(1) They were domiciled in the UK within the 3 years immediately preceding that time.
(2) The individual is a formerly UK domiciled individual. This is an individual who:
Was born in the UK; and
Has a UK domicile of origin; and
Is UK resident in the relevant tax year; and
Was UK resident in at least 1 of the 2 tax years immediately before the relevant
tax year.
(3) The individual is UK resident:
For at least 15 of the 20 tax years immediately preceding the relevant tax year;
and
For at least 1 of the 4 tax years ending with the relevant tax year.
The rules on deemed domicile for IHT are similar to those covered earlier for income tax and
capital gains tax but not quite the same. Make sure you know the differences.
1.4 A non-domiciled person is taxed on UK assets only, so the location of assets is important.
(a) Land and buildings are located in the country where they are physically located.
(b) A debt is in the country of residence of the debtor.
(c) Life policies are in the country where proceeds are payable.
(d) Registered shares and securities are in the country where they are registered.
(e) Bearer securities are where the certificate of title is located.
(f) Bank accounts are at the branch where the account is kept.
(g) An interest in a partnership is where the business is carried on.
(h) Goodwill is where the business is carried on.
(i) Tangible property is at its physical location.
(j) Property held in trust follows the above rules.
1.5 A non-UK domiciled individual can elect to be treated as UK domiciled for the purposes of
IHT if their spouse or civil partner is UK domiciled.
The election can be made while the UK domiciled spouse or civil partner is alive or it can be
made in the two years following the death of the UK-domiciled spouse or civil partner.
It is irrevocable but will lapse if the individual is non-UK resident for four consecutive years.
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2.3 The latter is found by applying the average rate of IHT suffered by the estate to the value of
the foreign property.
UK IHT (after QSR)
The average rate =
Value of chargeable estate
Susan died leaving a chargeable estate of £360,000. This included a villa in Spain worth £40,000
in respect of which Spanish death duties of £10,000 were paid. Susan made no gifts during her
lifetime. She is UK domiciled and left her estate to her niece.
Required
Calculate the IHT payable as a result of Susan's death.
Solution
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4 Deeds of variation
4.1 (a) The terms of a deceased's will can be altered by use of a deed of variation.
(b) The main reasons for wishing to do this are:
(i) To include someone who has been left out of the will
(ii) To implement tax planning to reduce IHT; for example, to leave the main
residence to direct descendants and thus become entitled to the residential nil
rate band
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4.3 The effect of a deed of variation is to treat the rewritten will as if it had been the original will.
4.4 A variation will automatically apply both for IHT purposes and for capital gains tax (CGT)
purposes if the people making the variation specify in the variation that it is to have that
effect.
5 Definition of a trust
General
5.1 Property is held by one person (trustee), ie the legal owner, and applied for the benefit of
another (beneficiary).
It is the legal separation of ownership and benefits.
Illustration
5.4 Mr A dies and leaves his house and property in trust for his son. His wife, Mrs A, is the life
tenant. She is entitled to live in the house and would receive any income arising from the
property. On the death of Mrs A the house and property pass automatically to the son.
Mrs A = life tenant
Son = remainderman
Discretionary trusts
5.5 Nobody has an entitlement to any income of the trust. Income will be paid out to
beneficiaries at the discretion of the trustees.
There does not have to be a specific remainderman with a vested (ie certain) interest. The
trustees could also have discretion over the distribution of the capital when the trust ends.
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Settlor CLT
RPT Exit charge
Alive (max 6%)
Death
Dead
estate
Principal charge
10-yearly charge
(max 6%)
7 Payment of tax
Section 5 Lifetime transfers
7.1 If a chargeable lifetime transfer (CLT) is made between 6 April – 30 September, tax is due
30 April following, otherwise tax is due six months from end of month of transfer.
Death tax
7.2 On lifetime gifts – six months from end of month of death.
On estate – six months from end of month of death or on delivery of account if earlier.
8 Instalment option
8.1 Tax may be paid in ten equal annual instalments on certain assets:
(a) Transferred on death
(b) Charged during lifetime where donee pays the tax
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9 Comprehensive example
Solution
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18: INHERITANCE TAX: ADDITIONAL ASPECTS
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18: INHERITANCE TAX: ADDITIONAL ASPECTS
10 Chapter summary
Section Topic Summary
1 Overseas aspects UK domiciled (or deemed domiciled) individuals are
liable to IHT on worldwide assets. Non-UK domiciled
individuals are liable to IHT only on UK assets.
2 Double tax relief (DTR) DTR is available to reduce IHT on assets also taxed
overseas.
3 Gifts with reservation Gifts with reservation of benefit rules prevent IHT
being avoided by enabling HMRC the option of taxing
the gift when it was made or when the reservation was
released.
4 Deeds of variation A variation or disclaimer can be used to vary a will
after death, enabling an estate to be distributed more
tax-efficiently.
5 Definition of a trust There are two types of trusts:
Those with an interest in possession
Those without, generally referred to as
discretionary trusts
6 Inheritance tax aspects If created at death all treated as part of death estate.
If created in lifetime a CLT.
Principal and Exit Charges also apply
7 Payment of tax Normally six months from the end of the month
following gift or death.
8 Instalment option Tax on certain assets can be paid via ten equal
annual instalments.
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END OF CHAPTER
212
Achievement Ladder Step 4
You have now covered the Topics that will be assessed in Step 4 of your Achievement Ladder. This
contains two longer exam-style questions. The first focusses on income tax and capital gains tax and
the second on inheritance tax. As a reminder, Step 4 must be completed and submitted in order to be able
to qualify for Pass Assurance. It is Written Assessment 1 and can also be found at the back of these
course notes.
It is vital in terms of your progress towards 'exam readiness' that you attempt this Step in the near future.
You will receive feedback on your performance, and you can use the wide range of online resources and
ongoing BPP support to help address any improvement areas. This will help you to tailor your learning
exactly to your own individual requirements.
Course Notes
Topic name Subtopic/Chapter name
chapter
Principles of income tax 1
Pensions and other tax-efficient
Income tax
investment products 2
Property and other investment income 3
Employment income 4
Employment income – additional
More income tax
aspects 5
Overseas aspects of income tax 10
Trade profits 6
Income tax - businesses Capital allowances 7
Trading losses 8
Partnerships and limited liability
Capital gains tax and partnerships 9
partnerships Chargeable gains: an outline 11
Shares and securities 12
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Achievement Ladder
Course Notes
Topic name Subtopic/Chapter name
chapter
Chargeable gains: reliefs 13
Chargeable gains: additional aspects 14
More capital gains tax
Self assessment for individuals and
partnerships 15
An introduction to inheritance tax 16
Inheritance tax: valuation, reliefs and
Inheritance tax
the death estate 17
Inheritance tax: additional aspects 18
214
Stamp taxes
215
19: STAMP TAXES
Overview
Stamp duty
Rates Exemptions
Rates Exemptions
216
19: STAMP TAXES
1 Stamp duty
1.1 Stamp duty applies to transfers of shares.
1.4 Exemptions:
Gifts
Changes in trustees
Divorce arrangements
Variation of wills
2.3 SDRT is charged at 0.5% of the consideration unless if falls under one of the exemptions
mentioned above in 1.4.
2.4 Securities traded on AIM are no longer chargeable securities for the purpose of stamp duty
and stamp duty reserve tax. No stamp taxes are therefore charged on such transactions.
3.3 Exemptions:
Gifts of land
Transfer on divorce/separation
Variation of will
Transfers to charities
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19: STAMP TAXES
3.4 Rates
Non-residential properties (banded)
Up to 150,000 0%
150,001 – 250,000 2%
250,001 + 5%
Note that stamp duty on residential properties will not be examined in ATX.
4.4 If the recipient company leaves the group <3 years, SDLT will be payable on the market
value at the date of original transfer.
5 Chapter summary
Section Topic Summary
1 Stamp duty 0.5% on transfers of shares.
2 Stamp duty reserve tax 0.5% on electronic transfers of shares and securities.
(SDRT)
3 Stamp duty land tax Applies to sales of land or rights over land.
(SDLT)
4 Transfer of stampable Exempt if part of 75% group.
property between
group companies
END OF CHAPTER
218
Corporation tax
computation
219
20: CORPORATION TAX COMPUTATION
220
20: CORPORATION TAX COMPUTATION
Overview
Transfer pricing
221
20: CORPORATION TAX COMPUTATION
Accounting periods
1.2 (a) CT liabilities are calculated for a company's accounting periods.
(b) The tax is calculated by reference to financial years (running from 1.4 to 31.3).
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20: CORPORATION TAX COMPUTATION
Usual trading income rules apply If credits > debits – NTLR income
If debits > credits – NTLR deficit (see later)
Incidental costs of loan finance (debits) will also be deductible under the loan relationship
rules. This includes costs directly related to varying the terms of the loan relationship and
abortive loan relationship costs (ie where the loan relationship is not actually taken out).
223
20: CORPORATION TAX COMPUTATION
Lucky Ltd was incorporated on 20 July 2017, and commenced trading on 1 December 2017. The
following information is available for the five-month period 1 December 2017 to 30 April 2018:
(1) The operating profit for the five-month period ended 30 April 2018 is £432,600. Advertising
expenditure of £4,700 (incurred during September 2017), depreciation of £14,700, and
amortisation on a lease of £9,000 have been deducted in arriving at this figure.
The amortisation relates to a premium which was paid on 1 December 2017 to acquire a
leasehold warehouse on a 12-year lease. The amount of premium assessed on the landlord
as income was £46,800. The warehouse was used for business purposes by Lucky Ltd
throughout the period ended 30 April 2018.
(2) Lucky Ltd purchased the following assets during the period 20 July 2017 to 30 April 2018:
£
19 August 2017 Computer 6,300
22 January 2018 Integral features 41,200
31 January 2018 Office equipment 52,900
17 March 2018 Motor car 12,800
The integral features of £41,200 are in respect of expenditure on electrical systems, a
ventilation system and lifts which are integral to a freehold office building owned by Lucky Ltd.
The motor car has a CO2 emission rate of 49 grams per kilometre.
(3) Lucky Ltd made a loan to another company for non-trading purposes on 1 February 2018.
Loan interest income of £700 was accrued at 30 April 2018.
Required
Calculate Lucky Ltd's corporation tax liability for the five-month period ended 30 April 2018.
(9 marks)
Solution
224
20: CORPORATION TAX COMPUTATION
4.3 Amortisation. There are two methods for calculating amortisation to be included in the tax
computation:
(1) Accounts basis. Where the debits and credits are for trade purposes they will be
treated as trading expenses or receipts of the trade. Thus no adjustment to the
accounting profit is required.
(2) 4% straight line basis. The company can elect to have the cost of the patent written
off for tax at 4% straight line rather than claim the amount charged to the statement
of profit or loss. If a rate of less than 4% is used in the accounts, then you should
elect to use the 4% rate.
4.4 When a patent is sold, the difference between the proceeds and tax written down value will
be taxed as a trade profit or loss. Tax written down value will be net book value (NBV)
unless the 4% alternate deduction has been claimed.
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20: CORPORATION TAX COMPUTATION
Rollover relief
4.7 (a) It is also possible to rollover the gain on disposal of an intangible non-current asset.
(b) The maximum income gain eligible for rollover is calculated as the sale proceeds
less original cost, not NBV.
4.8 To be able to make a rollover claim the company needs to buy a new intangible non-current
asset in the period 12 months before to three years after disposal of the original
intangible non-current asset.
4.9 (a) For full rollover relief of the eligible gain to be available, all the proceeds must be
reinvested into another intangible non-current asset.
(b) If they are not, then the proceeds not reinvested become taxable now (in addition to
the amortisation charged to date) and the balance can be rolled over as for traditional
rollover relief.
In June 2018 Sun Ltd sells patent rights which it acquired in May 2006.
Sale proceeds £3,000,000
Original cost £1,800,000
NBV in accounts £890,000
Sun Ltd acquires another patent in June 2019.
Required
Calculate:
(i) The amount of gain that is available for rollover
(ii) The amount taxable as trading income
(iii) The base cost of the patent
assuming the new patent cost is:
(a) £3,500,000
(b) £2,500,000
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20: CORPORATION TAX COMPUTATION
Solution
5 Transfer pricing
5.1 Anti-avoidance legislation exists to prevent companies under common control structuring
their transactions to shift profits (or losses) from one company to another.
Illustration
5.2 If H bought goods for £10,000 and sold them to a third party for £20,000, a profit of £10,000
would arise in H.
However, the transaction could be rearranged as follows:
Sell to subsidiary for £14,000
Subsidiary sells to third party for £20,000.
Only £4,000 profit arises in H.
The legislation requires profit to be computed as if the transaction had arisen at arm's
length.
5.3 The same rules apply where a company makes non-commercial loans (or at non-
commercial rates) to another connected company, so that profits can be shifted via the
payment of interest (aka 'Thin Capitalisation').
Again, profits are adjusted to the arm's length amounts.
227
20: CORPORATION TAX COMPUTATION
5.4 Small and medium-sized enterprises (SMEs) are normally exempt from transfer pricing
requirements unless one of the parties is resident in a non-qualifying territory (eg one
without a double tax treaty with the UK).
228
20: CORPORATION TAX COMPUTATION
7 Chapter summary
Section Topic Summary
1 General Taxable total profits are the total profits less qualifying
charitable donations of each accounting period.
Corporation tax is 19% TTP.
2 Loan relationships Interest on trading loans is included in trading income.
Interest on non-trading loans is part of investment
income.
3 Long periods of A long period of account must be split into two
account separate chargeable accounting periods.
4 Intangible property Patents are recognised for tax purposes on the same
rules basis as they are recognised in the accounts.
Amortisation on goodwill is not tax deductible but on
disposal any profit is taxed as trade income (loss
deducted as non-trading loss).
Rollover relief is available on disposal where there is a
disposal of an intangible asset and a new intangible
asset is acquired.
5 Transfer pricing The transfer pricing legislation prevents manipulation
of profits between group members not buying and
selling at market price.
6 Research and R&D expenditure entitles companies to a deduction of
development (R&D) 230% if small or medium- sized and an above-the-line
tax credit if large.
229
20: CORPORATION TAX COMPUTATION
END OF CHAPTER
230
Chargeable gains for
companies
231
21: CHARGEABLE GAINS FOR COMPANIES
Overview
232
21: CHARGEABLE GAINS FOR COMPANIES
1.3 The calculation of the gain/loss is similar to that of an individual, except there is a relief for
inflation called indexation allowance.
Proceeds X
Cost
(including incidental costs of acquisition) (X)
Unindexed gain X
Indexation allowance
Cost Indexation Factor (to 3 d.p.) (X)
Indexed gain X
1.4 The indexation allowance is designed to give companies relief for inflation over their period
of ownership of an asset however, indexation was frozen in December 2017 and so relief for
inflation after this date will no longer be given.
1.5 The indexation factor (IF) is calculated by reference to movements in the retail price index
(RPI) between the date of acquisition of an asset and the earlier of the date of disposal and
December 2017. In your exam you will be given the relevant IF in the question and you will
not be expected to calculate it from RPIs.
1.6 In your exam you may be given the IF from the date of acquisition to the date of disposal
and from the date of acquisition to December 2017. Remember that if disposal is after
December 2017 you must use the IF up to December 2017.
1.7 Indexation is also given separately on any capital enhancement expenditure incurred prior to
January 2018.
1.8 Remember that the indexation allowance cannot increase or create a loss.
2.2 In the Advanced Taxation (ATX – UK) examination where you see a company disposing of
shares you must first consider whether the substantial shareholding exemption might apply
(see later in this chapter). If the substantial shareholding exemption does not apply then a
gain must be calculated using the standard gain proforma.
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21: CHARGEABLE GAINS FOR COMPANIES
3.3 The relief operates in the same way as for individuals, except goodwill is not a qualifying
asset.
4.3 The substantial shareholding must have been held for a continuous 12-month period during
the six years prior to the disposal.
This qualifying 12-month period can include the time when the assets owned by the
company being sold were used within a trade carried on by the group, before being
transferred to the company being sold.
4.4 The company invested in must be a trading company or the holding company of a
trading group at the time of disposal however it is not usually necessary for the company
invested in to continue to be a trading company after disposal.
Orange Ltd is considering disposing of a 7% shareholding in Lemon Ltd for £500,000. Orange Ltd
acquired an 11% holding in Lemon Ltd in May 2018 for £260,000 and Lemon Ltd is a trading
company. Orange Ltd prepares its accounts to 31 March.
Required
Calculate Orange Ltd's after-tax proceeds if the sale occurs in March 2019. What advice might you
give the directors of Orange Ltd?
The indexation factor from May 2018 to March 2019 is 0.028.
234
21: CHARGEABLE GAINS FOR COMPANIES
Solution
235
21: CHARGEABLE GAINS FOR COMPANIES
5 Chapter summary
Section Topic Summary
1 Corporation tax on No annual exempt amount. Deduct indexation
chargeable gains allowance from date of purchase to date of sale or
December 2017 if earlier.
2 Shares and securities Matching rules (different from individuals) apply when
a company sells shares.
3 Replacement of Only deferral relief available to companies.
business asset relief
4 Substantial If a company sells shares from a substantial
shareholdings - shareholding the gain is exempt or the loss is not
exemption allowable.
END OF CHAPTER
236
Corporation tax
administration
237
22: CORPORATION TAX ADMINISTRATION
Overview
238
22: CORPORATION TAX ADMINISTRATION
Hamish has a business idea, which he thinks will give rise to trading profits of £60,000 per annum.
All of his expenses are tax deductible. He intends to start trading on 6 April 2019.
Hamish enjoys a lavish lifestyle and has significant expenses, so he wants to maximise his income
from the business.
Advise Hamish on how he should structure his business to best meet his needs. If he set up as a
company he will pay himself a salary of £8,424 and take the balance as a dividend.
(Assume FA 2018 rates continue to apply, and that Hamish will have no other taxable income in
2019/20.)
Solution
239
22: CORPORATION TAX ADMINISTRATION
2.2 Interest charged on tax paid >9 months and one day after end of AP.
2.3 All companies must file their return electronically and include a self assessment of any tax
payable within 12 months after end of period of account. Companies are also required to file
electronically a copy of their accounts in inline eXtensible Business Reporting Language
(iXBRL).
2.4 Penalties arise for late filing (£100 if up to three months late, £200 thereafter).
2.5 The common penalty regime, as explained in Chapter 15, applies to errors on the return and
late notification of new sources of income.
2.6 Interest on tax paid late is a deductible expense, interest received on overpaid tax is
taxable.
2.7 If HM Revenue & Customs (HMRC) does not make a compliance check into the return
within 12 months of the due filing date, it will be treated as finalised.
240
22: CORPORATION TAX ADMINISTRATION
Solution
241
22: CORPORATION TAX ADMINISTRATION
4 Chapter summary
Section Topic Summary
1 Choice of business In ATX you need to be able to compare and contrast
structure an unincorporated business with an incorporated one.
2 Corporation tax self Tax returns must be submitted within 12 months of
assessment end of period account.
3 Quarterly instalments Large companies pay their corporation tax in four
for large companies quarterly instalments. Others pay nine months and
one day after the end of the accounting period.
END OF CHAPTER
242
Administration,
winding up, purchase of
own shares
243
23: ADMINISTRATION, WINDING UP, PURCHASE OF OWN SHARES
Overview
Administration,
winding up
Company purchase of
own shares
244
23: ADMINISTRATION, WINDING UP, PURCHASE OF OWN SHARES
During liquidation
1.4 A company has to pay corporation tax on the profits arising during the winding up. All assets
will be disposed of, including chargeable assets and trading assets such as stock and
machinery. Therefore trading profits/ (losses) and chargeable gains may arise. Any assets
passed up to the shareholders as a 'distribution in specie' are deemed to be sold at market
value.
245
23: ADMINISTRATION, WINDING UP, PURCHASE OF OWN SHARES
Taylor Ltd has a December year end and ceased trading 5 July 2018.
The members passed a resolution to wind up the company on 18 October 2018 and the winding up
was completed 2 February 2020.
Required
Show the accounting periods from 1.1.18 to completion of winding up.
Solution
Distributions
1.6 Distributions made after liquidation has started are treated as capital disposals of shares for
the shareholder.
Individuals will suffer tax at their marginal rate. However, if they had held their shares, which
qualified for entrepreneurs' relief, for one year before the company ceased to trade and the
shares are then being sold within three years of cessation of trade then entrepreneurs' relief
will be available to tax the gain at 10%.
Companies will pay corporation tax on the gain at 19% if the substantial shareholding
exemption (SSE) does not apply.
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23: ADMINISTRATION, WINDING UP, PURCHASE OF OWN SHARES
Bruce Ltd is a family-run business owned by father and son. The father wishes to retire and the
son does not want to continue in business. They both want to realise cash from the company, so it
was put into liquidation with net assets as follows:
£
Building 150,000
Inventory, cash, receivables 80,000
230,000
Payables (35,000)
195,000
The share capital is split as follows:
Father holds 75,000 shares costing £37,500 in July 1987
Son holds 25,000 shares costing £20,000 in September 1992
In December 2018 net assets are distributed to father (an additional rate taxpayer) and son (a
higher rate tax payer).
Required
(a) Calculate the gains arising on both father and son.
(b) Discuss whether a pre-liquidation dividend may be beneficial.
(c) What difference would it make if the 25,000 shares held by the son were instead held by a
company?
Indexation factors:
Sept 92 – Dec 17 = 0.995
Sept 92 – Dec 18 = 1.057
247
23: ADMINISTRATION, WINDING UP, PURCHASE OF OWN SHARES
Solution
248
23: ADMINISTRATION, WINDING UP, PURCHASE OF OWN SHARES
Distribution method
2.2 (a) Used for individuals unless 'capital gain' treatment conditions satisfied
(b) Distribution = amount paid by company less original subscription price when shares
issued
(c) If shareholder is an individual dividend income
(d) An amount equal to the original subscription price of the shares is treated as disposal
proceeds in a capital gains calculation
Capital method
2.3 (a) Only applied if all of the following are satisfied:
(i) Company unquoted trading company (or holding company of trading group)
(ii) Redemption benefits trade (buy out disruptive shareholder, shareholder dies,
external investor withdrawing)
(iii) Vendor resident in UK
(iv) Vendor owned shares 5 years (3 years if inherited)
(v) Vendor's interest reduced by 25%
(vi) Vendor holds 30% after repurchase.
(b) Shareholder treated as receiving full proceeds for sale of shares
Clearance
2.4 Obtain clearance from HMRC of how it will treat transaction
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23: ADMINISTRATION, WINDING UP, PURCHASE OF OWN SHARES
Greg owns 16,000 of the 40,000 shares in Thomas Ltd. Greg subscribed for the shares at £3.40
each in May 2002. He is not an officer or employee of Thomas Ltd.
Greg has always lived in the UK; has taxable income of £124,000 in 2018/19 which includes
£17,000 dividend income; and uses his annual exempt amount every year.
On 31 July 2018 he sells his shares to the company for £38.60 per share.
Required
Advise Greg on the tax treatment of the proceeds he will receive in respect of the sale of his
shares to Thomas Ltd.
Prepare a calculation of the net (after tax) proceeds from the sale based on your conclusions.
Solution
250
23: ADMINISTRATION, WINDING UP, PURCHASE OF OWN SHARES
3 Chapter summary
Section Topic Summary
1 Liquidations A new accounting period begins when a winding up
commences.
Distributions made during a winding up are capital,
whereas distributions before are treated as a
dividend.
2 Company purchase of A company's purchase of own shares may be treated
own shares as an income distribution or capital distribution but
only if a set of conditions are satisfied.
251
23: ADMINISTRATION, WINDING UP, PURCHASE OF OWN SHARES
END OF CHAPTER
252
Losses and deficits on
non-trading loan
relationships
253
24: LOSSES AND DEFICITS ON NON-TRADING LOAN RELATIONSHIPS
Overview
Trading losses
Other losses
254
24: LOSSES AND DEFICITS ON NON-TRADING LOAN RELATIONSHIPS
1.2 (a) Trading loss is always after deducting capital allowances (consider restricted claim to
capital allowances if loss relief not tax efficient).
(b) The trading income assessment for the loss-making period is nil.
1.3 The rules regarding the carry forward of trading losses changed with effect from 1 April 2017
and you will only be examined on the rules applying to trading losses incurred post
1 April 2017.
1.5 Where an accounting period only falls partly in the preceding 12 months, time-apportioned
to find profit available.
255
24: LOSSES AND DEFICITS ON NON-TRADING LOAN RELATIONSHIPS
(c) If the loss is not fully relieved it continues to be automatically carried forward and
available for offset until it is fully relieved.
(d) The claim to offset the carried forward trade loss must be made within two years of
the end of the accounting period in which the loss is relieved.
(e) Trade losses carried forward can also be relieved via group and consortia relief.
256
24: LOSSES AND DEFICITS ON NON-TRADING LOAN RELATIONSHIPS
Solution
2 Other losses
Property losses (TX)
2.1 All profits and losses on properties are pooled to give a property profit or loss (note that
interest would be dealt with under the loan relationship rules).
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24: LOSSES AND DEFICITS ON NON-TRADING LOAN RELATIONSHIPS
(c) Group relieved against taxable total profits (TTP) of other group companies (see
Chapter 26)
(d) Any NTLR deficit left after any claims above is automatically carried forward into the
next accounting period and a claim can be made to offset the some/all of the deficit
against the next period's total profits. The deficit continues to be carried forward until
it is fully utilised.
3 Loss Planning
3.1 In a single company loss question, the best use of losses will involve consideration of:
Timing of the loss offset and thus cashflow advantage
Avoiding any qualifying charitable donations (QCDs) being wasted
3.2 If the scenario involves a corporate group then loss planning becomes more complicated.
Another key consideration will be trying to minimise the companies in the group paying their
tax in quarterly instalments. This is considered in more detail in Chapter 26.
4 Change of ownership
4.1 Trading losses cannot be carried forward (or carried back) if there is a change in ownership
and either:
(a) A major change in the nature or conduct of the trade (MCINOCOT) within any 5 year
period (that begins no later than the change of ownership and no earlier than 3 years
before the change of ownership); or
(b) After the change in ownership there is a revival of activities which at the time of the
change had been small or negligible.
258
24: LOSSES AND DEFICITS ON NON-TRADING LOAN RELATIONSHIPS
4.2 For example, if a company changes its ownership on 1 July 2020 and there is a MCINOCOT
between 1 July 2017 and 30 June 2025 the carry back and carry forward of losses are
restricted.
259
24: LOSSES AND DEFICITS ON NON-TRADING LOAN RELATIONSHIPS
5 Chapter summary
Section Topic Summary
1 Trading losses Trading losses may be relieved against current total
profits, against total profits of previous 12 months or
carried forward and offset against future total profits.
The decision as to how to best use the loss will be
based on timing and whether QCDs are lost.
Questions may also want consideration of group
relieving losses to minimise companies in the group
paying tax via quarterly instalments.
2 Other losses Be careful to know the different rules that apply to
other losses.
3 Loss planning The decision as to how to best use the loss will be
based on timing and whether QCDs are lost.
Questions may also want consideration of group
relieving losses to minimise companies in the group
paying tax via quarterly instalments.
3 Change of ownership If there is a change in ownership the carry forward of
losses is restricted if there is also a major change in
the nature or conduct of the trade within any period of
five years (beginning no later than the change in
ownership and no earlier than three years before the
change in ownership).
END OF CHAPTER
260
Close companies and
investment companies
261
25: CLOSE COMPANIES AND INVESTMENT COMPANIES
Overview
Close companies and investment
companies
Investment companies
Close companies
262
25: CLOSE COMPANIES AND INVESTMENT COMPANIES
1 Close companies
Identifying a close company
Definition
1.1 (a) UK resident company controlled by either:
(i) Five or fewer shareholders; or
(ii) Any number of shareholding directors.
(b) Applies to most private companies (eg where a married couple own all the shares)
(c) Include associates in working out 'control'
Associates
1.2 An associate includes:
(a) Relatives (no in-laws)
Parents and
remoter forebears
Children and
remoter issue
(b) Business partners
(c) Trustee(s) of any settlement if shareholder or relative (living or dead) was creator
(d) Nominees of shareholder or relative
Exceptions
1.3 Subsidiaries are only close if the parent company is close.
263
25: CLOSE COMPANIES AND INVESTMENT COMPANIES
Solution
264
25: CLOSE COMPANIES AND INVESTMENT COMPANIES
2.2 The tax is due on the normal due date(s) for payment of CT for the accounting period, eg for
companies which are not large nine months and one day after end of the accounting period,
but need not be paid if the loan has been repaid by this date.
Waiver of a loan
2.5 (a) If the loan is written off the company will receive a repayment of any penalty tax paid.
Therefore it is only a cash flow issue for the company.
(b) The shareholder is deemed to receive a dividend equal to the loan written off.
Hoddle Ltd (a close company) makes a loan at commercial rates to Glen (a shareholder in the
company) of £65,000 on 1 May 2016. On 1 May 2017 Glen repays £20,000. On 1 May 2018 the
company waives the balance. Hoddle Ltd has a 31 December year end and is not a large
company. Assume Glen has taxable income of £40,000 in 2018/19 which includes £1,000 of
dividend income. Also assume that the rules and rates for 2018/19 have always applied.
Required
What are the tax implications for both Hoddle Ltd and Glen?
Solution
265
25: CLOSE COMPANIES AND INVESTMENT COMPANIES
Dash and Violet are both shareholders of Incredibles Ltd, a close company. Dash is an employee
of the company but Violet is not.
They are both provided with identical company cars, both with a list price of £20,000, petrol
engines and CO2 emissions of 187g/km.
Required
Calculate the amounts Dash and Violet will be taxed on for their cars, and explain the implications
on Incredibles Ltd for the expenses incurred.
Solution
3 Investment companies
Sections 1 Definition
3.1 An investment company is a company whose business consists wholly or mainly in making
investments, and gets the principal part of its income from investments.
Tax implications
3.2 Rules are identical to trading companies except that expenses incurred in managing the
investments are deducted from total income. Interest on a loan taken out by an individual to
invest in a close investment holding company is not qualifying loan interest for the purpose
of the interest being deductible in the income tax computation (see Chapter 1).
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25: CLOSE COMPANIES AND INVESTMENT COMPANIES
Management expenses
3.3 Common expenses include:
(a) Commissions
(b) CAs on plant used for purpose of management of investment activities unless
otherwise available (eg against rental income)
(c) Reasonable salaries and redundancy payments
(d) Unavoidable expenses of management, eg rent, audit fees
3.4 Expenses relievable elsewhere, eg rental expenses are not included as management
expenses.
3.5 Interest paid on loans taken out to fund investment activities is relieved as a debit on a non-
trading loan in the normal way.
3.6 To the extent that management expenses cannot be relieved against income of the current
accounting period the excess may be carried forward and a claim can be made to offset
some/all of the expenses against the total profits of that next accounting period.
3.7 Alternatively, excess management expenses can be used within a group relief claim.
267
25: CLOSE COMPANIES AND INVESTMENT COMPANIES
4 Chapter summary
Section Topic Summary
1 Close companies A close company is one that is controlled by five or
fewer shareholders or any number of directors.
2 Implications of being a Special rules apply to loans and benefits made by
close company close companies. They are designed to avoid
shareholders extracting wealth from their company
without paying tax.
3 Investment companies Investment companies do not trade. Their
management expenses are deductible from the
income they make from investments and can be
carried forward or group relieved.
END OF CHAPTER
268
Achievement Ladder Step 5
You have now covered the Topics that will be assessed in Step 5 in your Achievement Ladder. This
consists of 30 short questions, about a third of which focus on the shaded topics below with the
remainder being recap questions on earlier topics.
It is vital in terms of your progress towards 'exam readiness' that you attempt this Step in the near future.
You will receive feedback on your performance, and you can use the wide range of online resources and
ongoing BPP support to help address any improvement areas. This will help you to tailor your learning
exactly to your own individual requirements.
Course Notes
Topic name Subtopic/Chapter name
chapter
Principles of income tax 1
Pensions and other tax-efficient
Income tax
investment products 2
Property and other investment income 3
Employment income 4
Employment income – additional
More income tax
aspects 5
Overseas aspects of income tax 10
Trade profits 6
Income tax – businesses Capital allowances 7
Trading losses 8
Partnerships and limited liability
Capital gains tax and partnerships 9
partnerships Chargeable gains: an outline 11
Shares and securities 12
269
Achievement Ladder
Course Notes
Topic name Subtopic/Chapter name
chapter
Chargeable gains: reliefs 13
Chargeable gains: additional aspects 14
More capital gains tax
Self assessment for individuals and
partnerships 15
An introduction to inheritance tax 16
Inheritance tax: valuation, reliefs and
Inheritance tax
the death estate 17
Inheritance tax: additional aspects 18
Corporation tax computation 20
Corporation tax Chargeable gains for companies 21
Corporation tax administration 22
Administration, winding up, purchase
of own shares 23
Losses and deficits on non-trading loan
More corporation tax
relationships 24
Close companies and investment
companies 25
270
Groups and consortia
271
26: GROUPS AND CONSORTIA
272
26: GROUPS AND CONSORTIA
Overview
Transfers of trade/sale of
company
Groups
273
26: GROUPS AND CONSORTIA
1 Groups
1.1 A group exists for taxation purposes where one company is a subsidiary of another.
Different tax consequences exist dependent upon the degree of control that exists between
the companies.
There are four types of relationship:
(a) Common control for allocation of annual investment allowance (AIA)
(b) 75% groups for group loss relief
(c) Consortia – not examined in Taxation (TX – UK)
(d) 75% groups for capital gains
2 Allocation of AIA
2.1 A group of companies receive a single AIA. However, this can be allocated between them in
whatever manner is most tax efficient.
2.2 A group is defined in relation to a parent and will include subsidiaries where the parent has
voting control at the end of the subsidiary's chargeable accounting period.
3 Group relief
Principle (TX)
3.1 (a) Allows companies in 75% group to transfer current accounting period and brought
forward losses to each other
(b) Must be UK resident
Sub-subsidiaries (TX)
3.4 Only include if ultimate parent owns 75%
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26: GROUPS AND CONSORTIA
3.12 The claimant company must use its own losses to the fullest extent possible in working out
the available taxable total profits to receive the carry forward group relief. Carry forward
group relief is given after all other reliefs for the current period but before any relief for any
losses carried back.
275
26: GROUPS AND CONSORTIA
Consider:
(i) Removing companies from the quarterly instalment regime to improve the
group cash flow position
(ii) Using the loss as early as possible (cash flow advantage)
(iii) Avoiding loss of QCDs
Lecture example 1
K plc has one 75% subsidiary, L plc. The results for the group are as follows:
Y/e 31/3/19 Y/e 31/3/18
K plc L plc L plc
£ £ £
Trading profit/(loss) (4,000) (20,700) 0
Non-trading loan relationship income 10,000 2,900 6,200
Chargeable gain 15,000 0 15,000
QCDs (2,000) (3,200) (1,000)
Required
What are the options for L plc to use its loss assuming it does not want to carry the loss forward
and consider which option would be most beneficial?
Solution
276
26: GROUPS AND CONSORTIA
Lecture example 2
X plc has one 75% subsidiary, Y plc. The results for the group for the year ended 31 March 2019
are as follows:
X plc Y plc
£ £
Trading profit 45,000 62,000
Trading loss carried forward at 1 April 2018 (4,000) (150,000)
Non-trading loan relationship income 5,000 6,000
Non-trading loan relationship debit brought forward at
1 April 2018 (500) (4,000)
Chargeable gain 15,000 20,000
Required
What is the maximum carry forward group relief that X plc can claim from Y plc?
Solution
277
26: GROUPS AND CONSORTIA
Y/e 31.12.18
Loss = (20,000)
H Ltd
Y/e 31.3.19
S Ltd
Profit = 30,000
ie £15,000
Note. The remaining £5,000 loss could be surrendered to S Ltd in its y/e 31.3.18.
S(new)
S joins on 1.5.18
Group relief only available for period S is a 75% subsidiary, ie post 1.5.18.
278
26: GROUPS AND CONSORTIA
S
Arrangements S leaves on 1.5.18
for sale made
on 1.3.18
Group relief only available to date S leaves group, or to the date that arrangements for sale
come into effect, if earlier.
Overseas companies
3.18 75% UK subsidiaries of a holding company that is resident anywhere in the world can
transfer trading losses to each other.
3.19 Group relief extends to UK branches of overseas companies and to group companies
resident in the EEA. Such companies can surrender losses to UK companies but only where
there is no alternative relief available in that country. Questions will indicate if a country is in
the EEA.
4 Consortia
Definition
4.1 (a) Two or more companies together own 75% of another company's share capital
(b) Each owns 5%; and
(c) No one company owns 75%
S Ltd V Ltd
60% 40%
T Ltd
S Ltd and V Ltd are consortium members. T Ltd is the consortium-owned company.
279
26: GROUPS AND CONSORTIA
Loss relief
60% 40%
C is the consortium
C
owned company (CC) Consortium
4.3 The losses which can be offset through consortium relief are the same as those which can
be group relieved and this includes carried forward losses.
4.4 If the CC makes a loss it must first be relieved in the CC (even if no claim actually made)
before any remaining loss can be consortium relieved up to a CM.
S Ltd
S Ltd has a trading loss of £1 million. A Ltd has profits of £500,000.
Required
What is the maximum consortium relief claim possible by A Ltd?
Solution
280
26: GROUPS AND CONSORTIA
Solution
Sub-subsidiaries (TX)
5.2 Part of ultimate parent's group if:
75% owned by immediate holding company
>50% owned by ultimate parent.
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26: GROUPS AND CONSORTIA
Implications (TX)
5.3 (a) Capital assets automatically transferred between group members at a no gain/no
loss price (NGNL) (ie indexed cost).
See Lecture Example 5(a).
(b) Gains and losses can be transferred between group companies. The election must be
made within two years of end of accounting period.
(c) Group treated as one unit for rollover relief
ie: (i) One company sells asset Gain can be rolled over
(ii) Another buys an asset within three years
Advantages (TX)
5.4 Can make use of group's capital losses
More chance of rollover relief being available
282
26: GROUPS AND CONSORTIA
Ibiza Ltd owns 90% of Benidorm Ltd. These shares were purchased for £300,000 in February
2008. In June 2013 Ibiza Ltd transferred a building to Benidorm Ltd for £100,000. On this date its
market value was £360,000 and it had cost Ibiza Ltd £150,000 in April 2000.
Assume the following indexation factors:
April 00 to June 13 is 0.468
June 13 to December 17 is 0.114
June 13 to July 18 is 0.127
February 08 to December 17 is 0.316
February 08 to July 18 is 0.332
Required
(a) What are the tax implications of this transfer?
(b) If Benidorm Ltd sells the building for £400,000 to a third party in July 2018 what is the capital
gain arising?
(c) Or if Ibiza Ltd sold its shares in Benidorm Ltd in July 2018 for £500,000, what are the tax
implications?
Solution
283
26: GROUPS AND CONSORTIA
Intangible property
5.10 Rules are similar to capital assets:
Rollover relief can be claimed if an intangible asset is sold by one group company and
another reinvests in a replacement intangible asset.
Transfer of intangible assets between group members is at a value such that no profit
or loss is taxed.
If a company leaves the group having had an intangible asset transferred to it from
another group member in the last six years, then the income gain avoided at transfer
is included in trading profits. This degrouping charge may be transferred to another
group company.
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(d) Next any brought forward losses need to be identified and considered in addition to
any current year losses. This is where a neatly presented loss memo will help
maximise your marks. When thinking about how to use losses the following points can
help you to score marks:
(i) Any capital losses within companies can only be offset against capital gains.
Thus, consider moving current year capital losses and gains around the group
to match the losses and gains together. Think about which companies the net
gains should be left to arise in.
(ii) If any companies within the group are currently paying tax through quarterly
instalments, consider transferring any net gains to other group companies or
allocating group trade losses through group relief to these companies in order
to bring their TTP down to below the threshold and remove them from the
quarterly instalment paying regime.
(iii) If you are given information about prior years do remember to consider a
current year and 12-month carry back trade loss claim – remember a carry
back claim generates a cashflow advantage.
(iv) If any claims waste QCDs ensure you note this in your answer as some of your
loss claim will now not be saving tax.
(v) Generally it is easier to consider allocating capital gains and losses around the
group before considering any group relief claims and then finally dealing with
any consortium relief claims at the end of the question. While this may not give
you a perfect solution every time the structure will give you a process to follow
and will allow you to access the easier marks rather than getting caught up in
the tougher areas such as consortium relief.
(e) Finally, do try to make a reasoned recommendation as to how the losses can best be
utilised. Only quantify the tax saving if the question requires it.
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26: GROUPS AND CONSORTIA
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26: GROUPS AND CONSORTIA
Skye Ltd has owned 100% of Moonshine Ltd for a number of years.
Skye Ltd has been approached with two separate offers for the sale of Moonshine Ltd as follows:
Offer 1 – Sale of shares, we have been offered £520,000 for the whole share capital
Offer 2 – Sale of trade and assets of the business
We have been offered £616,000 for the company's trade and assets as follows:
Offer Cost TWDV
£ £ £
Premises 483,200 392,000 N/A
Plant and machinery 36,800 64,000 52,000
Goodwill 96,000 Nil
616,000
This will leave Moonshine Ltd with net current liabilities of £20,000 which it will pay out of the sale
proceeds.
Both companies are trading companies.
Required
Calculate the after tax proceeds in respect of each of the two offers. Assume indexation allowance
on premises is £50,930.
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26: GROUPS AND CONSORTIA
Solution
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26: GROUPS AND CONSORTIA
8 Chapter summary
Section Topic Summary
1 Groups Make sure you understand the different types of
group relationship which exist for corporate tax
purposes.
2 Allocation of the annual A group of companies share a single AIA which can
investment allowance be allocated across the group in whatever manner is
(AIA) most tax efficient.
3 Group relief Companies in a group relief group can surrender
certain types of losses to other companies within the
group subject to each claimant company being able to
accept only up to its TTP (after any CY loss claim of
the claimants own trade loss).
4 Consortia A consortium exists where two or more companies
together own 75% of another company's share
capital with each company owning 5% but no one
company owning 75%.
Consortium relief allows the same types of losses as
for group relief to be surrendered between a
consortium member and the consortium company in
any direction but not between consortium members.
The maximum consortium relief is the lower of the
consortium member's result and the consortium
member's % of the consortium company's result.
5 Chargeable gains Advantages of being in a gains group include
groups allocation of CY gains and losses around the gains
group, NGNL transfer of capital assets within the
gains group and availability of group rollover relief.
Watch out for a NGNL transfer of an asset around a
group with the company receiving the asset being
sold within six years of the NGNL transfer.
6 Group loss question Group loss exam questions can be daunting
exam technique questions and good approach is essential for ensuring
you pick up the easy marks. Make sure you have an
approach to handling these types of questions should
they come up in your exam.
7 Transfers of trade/sale Exam questions will often deal with a sale of trade
of company and assets or sale of a company – make sure you
understand the difference between these two sale
mechanisms and how they work for tax purposes.
Also ensure you understand that if the transfer of
trade and assets is within companies in a 75% group
that there are different tax consequences.
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END OF CHAPTER
290
Overseas aspects of
corporate tax
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27: OVERSEAS ASPECTS OF CORPORATE TAX
Overview
Branch Subsidiary
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27: OVERSEAS ASPECTS OF CORPORATE TAX
1 Residence
Definition
1.1 Company is UK resident if:
(a) Incorporated in UK
(b) Controlled and managed from UK (on day to day basis)
Implications
1.2 UK resident companies taxable on worldwide income.
1.3 Non-UK resident companies not liable to UK tax (unless trading through a UK permanent
establishment profits of permanent establishment are taxable).
1.4 Only UK resident group companies can surrender losses to each other.
Permanent establishments
1.5 A company may be subject to foreign tax and UK tax if it has a permanent establishment in
Section 5 a foreign country.
Non-resident subsidiary
2.2 (a) Profits are not charged to UK CT. The non-resident subsidiary will pay foreign tax and
remit its profits to the UK parent by way of dividends. Overseas dividends are not
taxable for the UK parent (see Section 3).
(b) Losses not available to set against UK profits since the losses arose in a non-UK
company.
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27: OVERSEAS ASPECTS OF CORPORATE TAX
3.2 Most overseas dividends received are exempt from corporation tax. Taxable overseas
dividends will not be examined at ATX.
3.3 Taxable total profits and corporation tax are calculated as normal and then double taxation
relief is deducted.
Calculation
4.2 (a) DTR restricted to lower of:
(i) Foreign tax suffered on the overseas income
(ii) UK corporation tax on the overseas income
(b) Source by source basis
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27: OVERSEAS ASPECTS OF CORPORATE TAX
Sherman Ltd, a UK resident company which is part of a large group of companies, has trading
profits of £850,000 for y/e 31 March 2019.
Sherman received £150,000 from a foreign property subject to 18% withholding tax.
Sherman also paid a qualifying charitable donation of £100,000.
Required
Calculate the maximum loss that can be surrendered to Sherman Ltd by the other group
companies if relief in respect of the tax suffered overseas is not wasted.
Solution
5 Transfer pricing
5.1 Anti-avoidance rules prevent a UK company from reducing its taxable total profits by selling
to an overseas subsidiary at below market value, or buying from an overseas subsidiary at
above market value.
5.2 Adjustments will be made to the UK taxable total profits to reinstate amounts to a fair market
value.
5.3 Any transfer pricing adjustments must be made by the company in its self assessment tax
return.
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27: OVERSEAS ASPECTS OF CORPORATE TAX
Implications
6.2 Chargeable profits of a CFC are apportioned to UK resident companies (not individuals)
entitled to at least 25% of those profits.
6.3 Chargeable profits are those income profits (not gains) of the CFC which have been
artificially diverted from the UK.
6.4 The apportioned profit does not form part of taxable total profits and so the tax is shown
separately to the tax on TTP. Corporation tax will be due on the apportioned profit at 19%
and a deduction for DTR will be available.
Illustration
A Ltd B Ltd Individuals (UK)
40% 5% 10%
40% 1m = £400k
C Inc
CFC 45%
Extra tax
A Ltd CT = <¾ UK level
£400k 19% = £76k Profit = £1m
Exceptions
6.5 Profits do not need to be apportioned if:
(a) Exempt period exemption – a 12-month exemption from the CFC charge applies
when a non-UK resident company is acquired by a UK resident person.
(b) Tax exemption – the local tax paid is at least 75% of the amount of tax the CFC would
have paid in the UK if it were UK resident.
(c) Excluded territories exemption – the CFC is resident in one of the territories specified.
(d) Low profits exemption – CFC's profits <£500,000 and its non-trading income
<£50,000.
(e) Low profit margin exemption – CFC's accounting profits are no more than 10% of its
expenditure.
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7 Chapter Summary
Section Topic Summary
1 Residence UK resident companies are liable to corporation tax on
worldwide income.
Non UK resident companies are only liable to
corporation tax if they carry on a trade in the UK
through a permanent establishment.
2 The structure of The choice is between a branch (extension of yourself)
overseas operations or a subsidiary (separate legal entity)
3 Calculating corporation Overseas income is grossed up for overseas tax
tax for a UK resident suffered. It is included within taxable total profits and
company with taxed as normal and then double tax relief is given.
overseas income
4 Double tax relief A tax credit to relieve the effects of double taxation.
5 Transfer pricing If transactions with overseas subsidiaries are not at
arm's length, taxable total profits must be adjusted to
market value.
6 Controlled foreign Profits of a CFC are apportioned to UK resident
companies (CFC) companies entitled to at least 25% of those profits.
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END OF CHAPTER
298
Value added tax 1 –
TX – UK assumed
knowledge
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28: VALUE ADDED TAX 1
300
28: VALUE ADDED TAX 1
Overview
Cash
Special Annual
Value added tax 1
schemes
Flat rate
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28: VALUE ADDED TAX 1
1 General
What is value added tax (VAT) charged on?
1.1 VAT is charged on taxable supplies of goods and services in the UK by taxable persons in
the course of their trade.
2 VAT rate
2.1 The following items are:
Standard rated 20% – Most goods/services
Zero rated – Non-luxury food
– Books
– Children's clothing
– Sale of new dwellings
– Export of goods
Reduced rate 5% – Domestic fuel
Exempt – Burial and cremation services
– Postal/health services
– Non-profit making education
– Land where sold/leased, hired
Many items are outside the scope of VAT, eg dividends, salaries.
3 Registration
Who must register?
3.1 (a) Registration is compulsory if at the end of any month taxable supplies over the
previous 12 months have exceeded £85,000 (historic test), or in the next 30 days,
taxable supplies are expected to exceed £85,000 (future test).
(b) This requirement may be waived if you can satisfy HM Revenue & Customs (HMRC)
that taxable supplies in the following 12-month period will be less than £83,000.
(c) 'Taxable supplies' are the VAT-exclusive value of all zero rated and standard rated
supplies.
(d) 30 days to notify HMRC.
(e) Registration effective from:
(i) End of month following the end of the 12-month period (historic)
(ii) Start of 30 days period if future 30-day test applies
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Jack commenced trading as a window cleaner on 1 January 2018. His quarterly turnover (spread
evenly over the quarter) is as follows:
Quarter ended Turnover
£
31 March 2018 9,000
30 June 2018 12,000
30 September 2018 13,000
31 December 2018 24,000
31 March 2019 44,000
30 June 2019 46,000
Required
By what date is he required to notify HMRC that he is liable to register for VAT?
Solution
Deregistration
3.2 If the business ceases to make taxable supplies it must deregister. If in the next year VAT
exclusive taxable supplies will be below £83,000, the business may deregister.
3.3 On deregistration a final VAT return must be prepared. The business must work out what
VAT would be charged if it were to sell all its assets where input VAT has been reclaimed at
market value and, if this VAT exceeds £1,000, then it must be paid over to HMRC.
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Voluntary registration
3.4 This enables input tax to be reclaimed but may not be advantageous if most customers
cannot recover the VAT they are then charged.
Implications of registration
3.5 (a) Traders making standard or zero rated supplies must charge VAT on all taxable
supplies using tax invoices.
(b) These traders can recover related input tax suffered.
(c) However, input tax is not recoverable on:
(i) Cars (if used privately)
(ii) Entertaining UK clients
(iii) Non-business purchases
(d) Exempt traders (eg insurance company):
(i) Cannot register (as they make no taxable supplies)
(ii) Cannot recover input VAT suffered
4.2 The ATX exam will normally use the fuel scale charge.
Impairment losses
4.3 (a) Can claim refund of output tax previously paid if it was a sale of goods originally
supplied but it remains unpaid six months after the original due date for payment and
the liability has been written off in the taxpayer's books.
(b) Issuing a credit note purely to reverse output VAT is ineffective.
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Stanley Ltd, which is registered for VAT, incurred the following expenditure (including VAT) during
the quarter to 31 December.
£
New car for salesmen (private use) 25,800
3 new motor vans 57,960
Second-hand container lorry 60,375
Entertaining – UK customers 8,500
– employees 12,075
Required
How much VAT can be reclaimed in respect of the above?
Solution
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James commenced trading on 1 August 2018 and applied to register for VAT with effect from
1 October 2018.
Prior to registration, he had incurred VAT on the following VAT-exclusive amounts:
£
Accountancy fees – invoice dated 10 March 2018 7,000
Van purchased new on 23 June 2018 9,000
Held in inventory:
Spare parts as on 30 September 2018 14,000
Required
What input VAT can James claim in respect of these items?
Solution
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28: VALUE ADDED TAX 1
Private use
4.5 (a) If an asset is used for private and business use, only the input tax relating to business
use is recoverable.
(b) However, if it is a car accessory invoiced separately from the original car purchase,
then all of the input tax suffered on the accessory is recoverable.
On 14 April Minx Ltd acquired a new BMW motor car costing £28,200 (including VAT) for the
managing director. Subsequently the company purchased a stereo for the car costing £940
(including VAT). The car was used 80% for business purposes.
Required
What is the maximum input VAT recoverable?
Solution
5 Group registration
Effect of group registration
5.1 (a) Allows group companies to nominate one company in the group to prepare VAT
returns for companies within the registration (the 'representative member').
(b) Intra-group transactions are disregarded for VAT purposes.
(c) Administratively much easier. Any VAT balances from individual companies are
adjusted through inter-company accounts.
(d) All members of group registration are jointly and severally liable for VAT liability.
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5.3 Subsidiaries under common control of an overseas company may also apply for group
registration.
5.4 The inclusion of an exempt company in the group VAT registration results in the group being
partially exempt.
Election needed
5.5 Companies must elect to form a VAT group, it is not automatic.
6.4 HMRC has the right to raise an assessment for up to 20 years if due to fraud.
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Tax periods
6.5 The following return periods are possible:
(a) Quarterly returns
(b) Monthly returns – repayment traders may elect for monthly returns
(c) Annual accounting – option available if taxable supplies below £1,350,000 per annum
Note. Payments on account – taxable persons whose annual liability exceeds £2.3 million
must make monthly payments on account of their liability.
All VAT-registered businesses must submit their VAT returns and payments electronically.
The deadline for filing and electronic payment is one month and seven days after the end of
the VAT quarter.
7 Value of supplies
Discounts
7.1 VAT is calculated on the invoice price less all trade discounts. However, if a prompt
payment discount is offered then VAT must be calculated on the actual amount received.
The trader must provide details of the discount on the invoice or must invoice for the full
amount and then issue a credit note if the discount is taken up.
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Sale of goods
UK = Export USA
Zero rated
Purchase of goods
UK = Import USA
8.2 There are special rules for accounting for output VAT on imports where the trader is
approved under the duty deferment scheme or the goods are held in an HMRC warehouse.
Under the duty deferment scheme deferred charges are calculated for imports for
each calendar month and must be paid in one sum by direct debit on the 15th of the
month following the month of importation. This defers payment and simplifies
administration.
If the goods are imported into an HMRC warehouse then the import is disregarded
and output VAT is accounted for either when the goods are removed from the
warehouse or under the duty deferment scheme if the trader is approved.
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Supply of goods
UK = Dispatch EU state
If UK supplier has VAT no. of EU recipient If UK supplier does not have VAT no. of EU
and has evidence goods delivered to recipient or does not have evidence goods
another EU state delivered to another EU state
Supply of goods
UK Acquisition EU state
VAT neutral
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9 Special schemes
9.1 Cash accounting
(a) Who can apply for it?
A trader whose annual taxable revenue (exclusive of VAT) is not expected to exceed
£1,350,000 in the following 12 months.
(b) Effect?
VAT can be accounted for on the basis of cash paid and received, thus giving
automatic impairment loss relief.
(c) A business must cease using the cash accounting scheme as soon as revenue is
expected to exceed £1,600,000 in the following 12 months.
(d) Business will be allowed to continue bringing outstanding VAT into account on a cash
basis for a further six months after leaving the scheme.
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Cool Kids Ltd has annual revenue of £95,000. 85% of the sales are standard rated and 15% are
zero rated. Standard rated expenses are £15,800.
All figures are inclusive of VAT.
The relevant percentage for Cool Kids Ltd trade is 12.5%.
Required
Show the VAT liability if:
(a) Cool Kids Ltd does not use the flat rate scheme
(b) Cool Kids Ltd opts to use the scheme
Solution
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10 Chapter summary
Section Topic Summary
1 General VAT is charged on taxable supplies of goods and
services made by a taxable person in the course of
their trade.
2 VAT rate Some supplies are taxable, others are exempt. Make
sure you understand the VAT implications of this
distinction.
3 Registration Registration is compulsory if turnover exceeds the
registration limit. However, businesses can voluntarily
register for VAT if the benefits outweigh the costs.
4 Deduction of input tax Input VAT is not always deductible for a VAT
registered trader on certain items of expenditure.
5 Group registration Companies under common control can choose to file
one return as a VAT group. The return is filed by the
representative member and intra-group supplies are
disregarded for VAT purposes.
6 Administration and Various penalties exist if a business breaches the VAT
penalties legislation.
7 Value of supplies VAT is charged on the VAT-exclusive price.
Where a discount is offered, VAT is chargeable on the
amount after deducting a trade discount and after a
prompt payment discount if this is taken by the
customer.
8 Imports, exports, Imports from outside the EU are subject to VAT and
acquisitions and exports outside the EU are zero rated.
dispatches Taxable acquisitions from EU states are treated as a
sale and a purchase by the UK business.
Sales to EU states are zero rated.
9 Special schemes Special schemes exist to make VAT accounting easier
for certain types of business. Make sure you know how
annual accounting, cash accounting and the flat rate
scheme work.
END OF CHAPTER
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Value added tax 2 –
Topics new at ATX – UK
315
29: VALUE ADDED TAX 2
Overview
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29: VALUE ADDED TAX 2
1 Partial exemption
1.1 (a) Some traders make both exempt and taxable outputs.
(b) They charge VAT on taxable outputs only and recover input VAT based on the partial
exemption rules:
Partial exemption
Always recoverable
Input VAT
re taxable supplies
Taxable supplies
Unallocated Business
input VAT
Exempt supplies
Input VAT
re exempt supplies
If the business passes one of three tests, it can recover all its input VAT:
(1) (i) Total input VAT ≤£625/month; and
(ii) Exempt supplies ≤50% of total supplies
OR
(2) (i) Total input VAT – input VAT re taxable supplies ≤£625/month and
(ii) Exempt supplies ≤50% of total supplies.
OR
(3)
Recover Recover
Input VAT re taxable supplies X
Input VAT re exempt supplies X
Unallocated input VAT
taxable supplies
Input VAT X X
total supplies
X X
Round up to nearest %.
If ≤£625/month and
≤50% total input VAT
can recover all input VAT!!
(c) Businesses may opt to apply the de minimis tests for an annual period (subject to
conditions eg reasonable grounds for not expecting to incur more than £1 million input
tax during year). During period all the input tax is recoverable. Repayment is made
after the end of the period if de minimis tests are not satisfied.
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(d) Otherwise businesses must use de minimis tests for each VAT period. Businesses
may use actual % for period or % for previous year. Year end adjustment is made to
convert quarterly basis to annual basis.
For the quarter ended 30 June, Jim has allocated his input tax suffered between taxable and
exempt supplies but a balance remains unallocated.
Exempt Taxable Unallocated Total Input Tax
£700 £20,000 £3,200 £23,900
His total (VAT-exclusive) turnover for the quarter was £135,429, of which taxable supplies
amounted to £101,572.
Required
How much of the £23,900 input tax suffered is recoverable by Jim?
Solution
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2.2 Construction of a new building for residential or charitable purposes is zero rated.
2.3 Most other transactions in commercial property (eg sale of an old commercial property or
rent/ lease of a property) are exempt, unless the owner/landlord gives notice to waive
exemption (opt to tax).
2.4 If the landlord has opted to tax, then all supplies (renting or selling) are taxable at the
standard rate.
2.6 VAT status of tenants is important – if they are exempt/not registered for VAT they will not
be able to reclaim the VAT paid on the rental income.
Builder L/lord
< 3yrs
20%
Commercial
property L/lord can't Tenant
recover Rent +
20%
Is tenant
Unless OTT registered?
• recover input tax
3.2 When, however, the business is sold as a going concern then the supply of assets is outside
the scope of VAT and no VAT is chargeable.
3.3 There are conditions for the transfer of a going concern (TOGC) to apply:
The purchaser of the business must also be VAT registered
The same kind of a business will be carried on
There is no significant break in trading
3.4 Where land and buildings are included in the transfer and ordinarily they would be standard
rated, VAT must be applied to these assets. This can be avoided, however, if the purchaser
opts to tax the building.
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4.2 In VAT year of purchase, input VAT is recovered based on use of asset for the quarter of
purchase, adjusted at end of VAT year. For each subsequent VAT year over the recovery
period of five or ten years, an adjustment is made to the VAT recovery.
4.3 Adjustment is equal to difference in % use between first VAT year and VAT year now 1/5
(for computers) or 1/10 (for land and buildings) input VAT.
Adjustment is made in the second VAT return following end of VAT year.
Lecture example 2
R Ltd buys a computer on 1 April 2018 for £60,000 + VAT and uses it 68% for taxable use in the
quarter of purchase and 70% for taxable purposes in the first year to 31 March 2019. In the
following year taxable use falls to 60%.
Required
Calculate the input tax recovery for the first year and the adjustment required in the second year.
Solution
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4.4 If the capital item is sold within the adjustment period, two adjustments are made:
(a) The normal adjustment as if the item was used for the whole year
(b) A further adjustment for each remaining VAT year of recovery calculated, assuming
100% use for taxable supplies; this cannot exceed VAT charged on sale item
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5 Chapter summary
Section Topic Summary
1 Partial exemption A partially exempt trader may be unable to recover all
of his input tax unless the amounts attributable to
exempt supplies are below certain de minimis limits.
2 Commercial property Transaction in land may be zero rated, standard rated
or exempt.
3 Transfer of a going Normally outside the scope of VAT.
concern (TOGC)
4 Capital goods scheme Scheme is designed to ensure VAT claimed on
purchase accurately reflects taxable usage of asset.
END OF CHAPTER
322
Impact of taxes and
tax planning
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30: IMPACT OF TAXES AND TAX PLANNING
324
30: IMPACT OF TAXES AND TAX PLANNING
325
30: IMPACT OF TAXES AND TAX PLANNING
Overview
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30: IMPACT OF TAXES AND TAX PLANNING
Tax planning
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1 Ethics
1.1 There will always be five marks within the paper on ethics. These should always be
Section 5 considered in a question even if not expressly mentioned in the requirements.
1.2 The ACCA Code of Ethics and Conduct details the following fundamental principles which
should underlie all members' professional behaviour:
(a) Integrity
(b) Objectivity
(c) Professional competence and due care
(d) Confidentiality
(e) Professional behaviour
1.3 The examining team has identified the following areas within ATX when ethics should be
considered:
(a) Prospective clients
Before accepting a new client, members should consider whether acceptance of the
client or the particular engagement would create any threats to compliance with the
fundamental principles.
They should contact the existing tax advisers to ascertain if there are any matters
they should be aware of when deciding whether to accept the appointment or not.
(b) Conflicts of interest
A member should take reasonable steps to identify circumstances that could pose a
conflict of interest. For example, acting for both husband and wife in a divorce
settlement.
Members should obtain consent of the relevant parties to act. If consent is refused
then the member must not continue to act for the parties in the matter that has given
rise to the conflict of interest.
(c) Disclosure of information
A member may disclose confidential information if:
(i) Disclosure is permitted by law and is authorised by the client
(ii) Disclosure is required by law
(iii) There is a professional duty or right to disclose
(d) Money laundering
Members are bound by legislation to implement preventative measures and to report
suspicions to the appropriate authority. Failure to follow these legislative requirements
is a criminal offence, which could lead to a fine and/or imprisonment.
If members know or suspect that funds are directly or indirectly the proceeds of crime
they should report their suspicions to the National Crime Agency.
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2.2 An example of an abusive tax arrangement would be one that significantly reduces income,
profits or gains and therefore results in a tax advantage, ie a reduction in tax.
2.3 HMRC can counteract tax advantages by simply increasing the taxpayer's liability, on a just
and reasonable basis. A penalty will also be imposed if the taxpayer enters into
arrangements which are countered by the GAAR. The penalty would be 60% of the tax
advantage gained.
3.2 In this chapter we will look at both sources of personal finance and means for investment for
individuals before considering the situation for businesses.
Credit cards
HP facilities
4.2 Tax relief on borrowings is only available in limited circumstances if the loan is qualifying, for
example investing in close companies or partnerships.
5 Investment products
5.1
Savings and Investments
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Conditions
Subscriptions (max £1m pa)
Keep three years
Cannot be connected (but this does not apply to deferral relief)
Seed enterprise investment scheme (SEIS)
50% tax reducer, maximum tax reducer £50,000
Venture capital trusts (VCT)
Quoted investment trusts – invest in unquoted trading companies
IT relief @ 30%
CGT-exempt (losses not allowed and no minimum holding period)
Dividends tax-free
Conditions
Subscription (max £200k pa)
Keep five years (IT relief)
8 Business finance
8.1 Sources of finance:
Owner's own capital
Bank overdrafts
Bank loans
Loans secured by mortgages of land
Leasing and HP arrangements
Sale and leaseback arrangements
Loans from private individuals
Share issues
Loan stock issues
Venture capital institutions
Loan finance
9.2 If raised for trading purposes, interest is deductible for trading income; otherwise it is
deducted from investment income.
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10 Tax Planning
Section 4 Employment vs self-employment
10.1 Factors which may be of importance:
(a) Control over how work is done
(b) Whether provides own equipment
(c) Whether hires own helpers
(d) What degree of financial risk is taken
(e) What degree of responsibility for investment and management worker has
(f) Whether and how far there is an opportunity for profiting from sound management
(g) How many people does worker work for
Contracts
It has been held that:
Employment is a contract of service
Self-employment is a contract for service
Income tax and National Insurance consequences of being employed or self-employed:
Employed Self-employed
(a) Pensions: personal/occupational Personal
(b) NICs: Class 1 Classes 2, 4
(c) Expenses: wholly, exclusively and Wholly and exclusively
necessarily
(d) Basis of assessment: taxed under Taxed as trading income on CYB
employment income on amounts
received in the tax year
(e) Payment dates: tax is collected under Payments on account will be due on
PAYE at the time of receipt of 31 January in the tax year and 31 July
remuneration following the tax year, with a final
payment on 31 January after the year
of assessment
332
30: IMPACT OF TAXES AND TAX PLANNING
Remuneration packages
10.2 Factors to consider when deciding whether to provide an individual with a benefit or cash
alternative:
Individual Company
(a) Benefit Taxable? Deductible expense?
Class 1A NIC
(b) Cash Extra tax payable Deductible
Class 1 NIC Class 1 NIC
(primary contribution) (secondary contribution)
333
30: IMPACT OF TAXES AND TAX PLANNING
Incorporation of a business
10.4 Sale of assets to a company by a sole trader.
Why incorporate?
Advantages Disadvantages
Limited liability to shareholders Potential double capital gains charge on
assets
Company has a more respectable image Trading losses restricted to set off against
than a sole trader or partnership? corporate profits
Retained profit subject to only CT not IT or No carry back of trading losses in opening
NIC years
Easier to dispose of shares than interest in a Statutory requirement for audits, keeping
business books, filing accounts. Increased disclosure
due to published accounts
More generous pension provisions Tax payment dates for a company and its
employees are generally in advance of those
for self-employed
Easier to obtain loan finance
Tax implications of incorporating
Company
335
30: IMPACT OF TAXES AND TAX PLANNING
11 Chapter summary
Section Topic Summary
1 Ethics The fundamental principles of ethics should underlie
all members' professional behaviour.
2 General Anti-Abuse The primary objective of the GAAR is to deter
Rule (GAAR) taxpayers from entering into abusive arrangements
that result in a tax advantage for the taxpayer and a
loss of revenue for HMRC. HMRC can make a just and
reasonable adjustment to counteract advantage.
3 Personal financial Every individual needs to consider their financial
management needs during their lifetime.
4 Sources of personal There are many sources of finance available, long or
finance short term, secured or unsecured.
5 Investment products Deposit-based investments are low risk with a low rate
of interest.
Equities are high risk investments with neither income
or capital secure.
6 Individual savings ISAs offer tax-free interest.
account (ISAs)
7 Venture capital EIS scheme offers tax incentives for the investor as
schemes well as helping high risk, unlisted trading companies
raise finance.
8 Business finance There are various forms of business finance.
9 Tax implications of Equity finance returns (dividends) are disallowed.
equity finance and loan Loan finance interest is an allowable expense.
finance
10 Tax planning Various situations offer tax planning opportunities.
END OF CHAPTER
336
Achievement Ladder Step 6
In the final run up to your exam, you should attempt Step 6 as the final check that you are fully prepared to
move on to the revision phase of your studies. As a reminder, Step 6 must be completed and submitted in
order to be able to qualify for Pass Assurance. It is Written Assessment 2 and can also be found at the
back of these Course Notes.
It covers all the Topics in your course. As ever, you will receive feedback on your performance, and you
can use the wide range of online resources to help address any final areas where you need to fine tune
your knowledge or technique.
Course Notes
Topic name Subtopic/Chapter name
chapter
Principles of income tax 1
Pensions and other tax-efficient
Income tax
investment products 2
Property and other investment income 3
Employment income 4
Employment income – additional
More income tax
aspects 5
Overseas aspects of income tax 10
Trade profits 6
Income tax – businesses Capital allowances 7
Trading losses 8
Partnerships and limited liability
Capital gains tax and partnerships 9
partnerships Chargeable gains: an outline 11
Shares and securities 12
Chargeable gains: reliefs 13
Chargeable gains: additional aspects 14
More capital gains tax
Self assessment for individuals and
partnerships 15
337
Achievement Ladder
Course Notes
Topic name Subtopic/Chapter name
chapter
An introduction to inheritance tax 16
Inheritance tax: valuation, reliefs and
Inheritance tax
the death estate 17
Inheritance tax: additional aspects 18
Corporation tax computation 20
Corporation tax Chargeable gains for companies 21
Corporation tax administration 22
Administration, winding up, purchase
of own shares 23
Losses and deficits on non-trading loan
More corporation tax
relationships 24
Close companies and investment
companies 25
Groups and consortia 26
Groups and overseas aspects
Overseas aspects of corporate tax 27
of corporate tax
Stamp taxes 19
Value added tax 1 28
VAT and impact of taxes Value added tax 2 29
Impact of taxes and tax planning 30
338
Answers to
Lecture Examples
339
31: ANSWERS TO LECTURE EXAMPLES
340
31: ANSWERS TO LECTURE EXAMPLES
Chapter 1
Answer to Lecture Example 1
Personal allowance
£
Geraldine PA 11,850
½ (103,750 (W) – 100,000) (1,875)
9,975
341
31: ANSWERS TO LECTURE EXAMPLES
Chapter 2
Answer to Lecture Example 1
(a) Adjusted net income 200,000 – (39,000 100 80 ) = £151,250
(c)
£
Earnings/Net income (no PA as adjusted net income > £123,700) 200,000
Income tax liability
£
83,250 20% 16,650
115,500 40% 46,200
1,250 45% 562
200,000 –
63,412
342
31: ANSWERS TO LECTURE EXAMPLES
Clawback = sale proceeds effective rate of IT relief originally received = £10,000 14.6% =
£1,460.
(c) Shares sold at a loss within 3 years.
CGT position
Base cost reduced by IT relief not clawed back.
£
Proceeds 10,000
Cost 60,000
(8,760 – 1,460) (7,300)
(52,700)
Allowable loss (42,700)
343
31: ANSWERS TO LECTURE EXAMPLES
Chapter 3
Answer to Lecture Example 1
Mo
Cash basis as property income does not exceed £150,000. £
Rental income (£2,000 11) 22,000
Less 50% finance costs (50% £4,000) (2,000)
Less other allowable expenses (3,000)
Property income 17,000
Income tax liability on property income
£17,000 40% (higher rate taxpayer) 6,800
Less property finance cost tax reducer
£4,000 50% 20% (400)
Income tax liability in respect to rental income 6,400
Note. There is no deduction for the capital repayments on the mortgage.
344
31: ANSWERS TO LECTURE EXAMPLES
Chapter 4
Answer to Lecture Example 1
£
Vauxhall Vectra g/km 148
Less baseline (95)
53/5 = 10.6
Working:
Income from relevant engagements 80,000
Less 5% statutory deduction (4,000)
Less travel expenses (1,500)
Less salary (48,000)
Less employer's NIC on actual salary (£48,000 – £8,424) 13.8%) (5,461)
(no employment allowance as Alan is sole employee of company)
21,039
Less employers' NIC on deemed payment 13.8%/113.8% £21,039 (2,551)
Deemed employment income 18,488
Note. Because Alan is treated as receiving deemed employment income from the company the dividend
received from the company is not also subject to income tax.
345
31: ANSWERS TO LECTURE EXAMPLES
Chapter 5
Answer to Lecture Example 1
£
PILON 2/
12 30,000
5,000
Lump sum (34,500 + 1,300 – 30,000) 5,800
10,800
10,000 = £25,000
Capital gain on disposal
Proceeds 5.50 Proceeds 5.50
MV (exercise) (4.00) Cost (1.50)
1.50 4.00
Chapter 6
Answer to Lecture Example 1
30 June 2018 – falls into 2018/19
taxed in 2018/19
346
31: ANSWERS TO LECTURE EXAMPLES
Overlap profits
1.1.18 – 5.4.18 3/18 18,000 3,000
Overlap profits
1.6.18 – 5.4.19 10/18 36,000 20,000
347
31: ANSWERS TO LECTURE EXAMPLES
Chapter 7
Answer to Lecture Example 1
Private
SR use
AIA Main Pool pool SLA (80%) Total
£ £ £ £ £ £
Y/e 31.3.19
TWDV b/f 180,000 15,000 10,000
Purchase 1.5.18 200,000
Purchase 1.7.18 120,000
Purchase 1.8.18 210,000
Purchase 1.9.18 24,000
* AIA allocated to additions qualifying for 8% rate of WDA in priority to those qualifying for the 18% rate
of WDA
348
31: ANSWERS TO LECTURE EXAMPLES
Chapter 8
Answer to Lecture Example 1
2017/18 2018/19 2019/20 2020/21
£ £ £ £
Trading income 20,000 – 8,000 4,000
Carry forward relief (3) (8,000) (4) (4,000)
Property income 80,000 120,000 70,000 60,000
Relief against general income (1) (70,000) (2) (50,000)
Net income 30,000 70,000 70,000 60,000
Loss memorandum
Y/e 30.9.18 (2018/19) 140,000
General income PY 17/18 (1) (70,000) (20,000 +
50,000*)
CY 18/19 (2) (50,000)
20,000
Carry forward 19/20 (3) (8,000)
20/21 (4) (4,000)
8,000
* Note. The amount offset against trading income is unrestricted (£20,000) but the amount used against property
income is restricted to the higher of £50,000 or 25% of £100,000, ie £50,000.
Gains 28,000
Loss relief against gains (W1) (2) (16,000)
12,000
Capital losses b/fwd
(restricted) (300)
11,700
AE (11,700)
–
Working:
Maximum offset lower of:
(1) Loss remaining 40,000 – 15,000 = 25,000
(2) Gains less capital losses b/fwd
28,000 – 12,000 16,000
Loss memorandum
Y/e 31.12.18 40,000
Relief against general income (1) (15,000)
Relief against gains (2) (16,000)
Trade loss left 9,000
Capital loss c/fwd 12,000 – 300 = £11,700
349
31: ANSWERS TO LECTURE EXAMPLES
28,000
Terminal loss relief
18/19 (1) (4,000)
17/18 (2) (10,000)
16/17 (3) (8,000)
Loss remaining 6,000
Chapter 9
Answer to Lecture Example 1
Total Eric Ernie
£ £ £
1.9.17 – 28.2.18
Salary 6/12 2,500 1,000 1,500
Balance 3 : 2 37,500 22,500 15,000
6/ 80,000 40,000 23,500 16,500
12
1.3.18 – 31.8.18
1: 1 40,000 20,000 20,000
6/ 80,000 80,000 43,500 36,500
12
350
31: ANSWERS TO LECTURE EXAMPLES
To 31.12.18
Salary 7/12 3,792
Balance 1 : 1 : 1 2,236 2,236 2,236
11,361 4,403 2,236
Y/e 31.12.19
Salary 6,500
Balance 1: 1 : 1 7,833 7,833 7,834
14,333 7,833 7,834
Assessments
Hamish and Angus, continuing partners CYB
H A
£ £
2017/18
Y/e 31.12.17 14,000 6,000
2018/19
Y/e 31.12.18 11,361 4,403
2019/20
Y/e 31.12.19 14,333 7,833
Finbar commencement
2018/19 1.6.18 – 5.4.19
1.6.18 – 31.12.18 2,236
1.1.19 – 5.4.19 3/12 7,834 1,958
4,194
Overlap profits
1.1.19 – 5.4.19 3/12 7,834 1,958
351
31: ANSWERS TO LECTURE EXAMPLES
Chapter 10
Answer to Lecture Example 1
(a) No, Abbey will not be treated as UK-resident under the second automatic overseas test. She was not
resident in any of the three previous years and spends less than 46 days in the UK in the current tax year.
(b) Yes, Zoe meets the second automatic UK test, so will be treated as UK-resident in the current tax year.
(c) Yes, Oliver will be treated as UK-resident in the current tax year. He has been resident in the UK for one
of the previous three years so would only need two ties to be resident, as he has been in the UK for 91 to
120 days.
He has an accommodation tie and has spent more than 90 days in the UK in one of the previous two tax
years (no family tie, no country tie, no UK work tie).
IT liability
25,000 20% 5,000
Annual tax charge on unremitted income 30,000
Income tax liability if remittance basis claimed 35,000
No claim to use remittance basis (tax on arising basis on worldwide income)
Non-savings
income
£
UK trading income 10,000
Foreign income 80,000
Net income 90,000
Less PA (11,850)
Taxable income 78,150
IT liability
34,500 20% 6,900
43,650 40% 17,460
78,150 24,360
352
31: ANSWERS TO LECTURE EXAMPLES
Working:
Exclude property income first as it suffers highest rate of foreign tax.
Non-savings Savings
Income income
£ £
Employment income 35,400
Interest 6,000
Net income 35,400 6,000
PA (11,850)
Taxable income 23,550 6,000
353
31: ANSWERS TO LECTURE EXAMPLES
Chapter 11
Answer to Lecture Example 1
£
Gains (48,000 + 30,000) 78,000
Less loss (54,300)
23,700
Less capital loss b/f (restricted) (12,000)
11,700
Less annual exempt amount (11,700)
Taxable gains –
354
31: ANSWERS TO LECTURE EXAMPLES
Proceeds 24,000
Less cost (deemed proceeds) (9,600)
Chargeable gain 14,400
Proceeds 15,000
Less cost (deemed cost to her husband due to NGNL transfer) (10,000)
Chargeable gain 5,000
Necklace
Proceeds 20,000
Less cost (probate value) (30,000)
Chargeable gain/ (loss) (10,000)
355
31: ANSWERS TO LECTURE EXAMPLES
Residential
Normal rates property
£ £
Gain on residential property 204,300
Gain on part disposal of land 247,645
Gain on painting 5,000
CY capital loss (10,000)
b/f capital loss (5,000)
AE (11,700)
Taxable gains 252,645 177,600
Rate of tax (HRTP) 20% 28%
CGT 50,529 49,728
Chapter 12
Answer to Lecture Example 1
Match with acquisition 20 August 2018
£
Proceeds
(32,000/4,000 500) 4,000
Cost (2,800)
Gain 1,200
Match with share pool
£
Proceeds
(32,000/4,000 3,500) 28,000
Cost (12,056)
Gain 15,944
Share pool No. Cost
£
1 September 1994 3,000 8,000
1 May 2002 1,500 7,500
4,500 15,500
Disposal (3,500) (12,056)
1,000 3,444
Gain
Total gains = 1,200 + 15,944
= £17,144
356
31: ANSWERS TO LECTURE EXAMPLES
Chapter 13
Answer to Lecture Example 1
£
Proceeds 145,000
Less cost (45,000)
100,000
Less PPR exemption (W1) (20,513)
Less letting relief (W2) (20,513)
Chargeable gain 58,974
357
31: ANSWERS TO LECTURE EXAMPLES
Workings
1
Exempt Letting Other
months months months
1.4.99 – 30.9.01 30
1.10.01 – 30.9.05 48
1.10.05 – 31.3.17 138
1.4.17 – 30.9.18 18
48 138 48
PPR exemption 48/234 100,000 = 20,513
2 Letting relief is the lowest of:
(i) PPR exemption 20,513
(ii) maximum exemption 40,000
(iii) gain in letting period
138 100,000 58,974
234
= 20,513
358
31: ANSWERS TO LECTURE EXAMPLES
Workings
1 Freehold warehouse
£ £
Disposal proceeds 522,000
Less: cost 258,000
enhancement expenditure: extension 99,000
enhancement expenditure: floor 0
(357,000)
Chargeable gain 165,000
Rollover relief (143,000)
Taxable now 22,000
Proceeds 522,000
Reinvested (500,000)
22,000
Tutorial note. The cost of replacing the warehouse floor is revenue expenditure as the floor is a
subsidiary part of the property.
The base cost of the replacement factory is £357,000 (500,000 – 143,000).
Entrepreneurs' relief is not available on the gain as this is a disposal of an asset, not all or part of a sole
trader business.
359
31: ANSWERS TO LECTURE EXAMPLES
Tutorial note. In calculating the principal private residence exemption, any periods of absence while
working overseas, a maximum of four years' absence while working elsewhere in the UK, and a
maximum of three years' absence for any reason, are treated as deemed occupation, usually provided
that they are preceded and followed by a period of actual occupation. The second period working
overseas is therefore not a period of deemed occupation as it was not followed by a period of actual
occupation.
360
31: ANSWERS TO LECTURE EXAMPLES
5 Letting exemption
Lowest of:
(i) Gain in letting period £210,000 × 10/210 £10,000
(ii) Gain exempt under PPR (W2) £200,000
(iii) Maximum exemption £40,000
6 Reward shares
£
Deemed proceeds 98,400
Less cost (39,000)
Gain before hold over relief 59,400
Gift relief (59,400 460,000/540,000) (50,600)
Taxable now 8,800
Hold over relief is restricted to £50,600 (£59,400 460,000/540,000), being the proportion of chargeable
business assets to chargeable assets. Entrepreneurs' relief is not available, as Mick is not an employee.
£
MV of shares acquired 650,000
Less incorporation relief
(103,594 + 73,125) (176,719)
Base cost of shares 473,281
361
31: ANSWERS TO LECTURE EXAMPLES
Chapter 14
Answer to Lecture Example 1
£
Proceeds 40,000
% 24 yrs
Cost 35,000
% 30 yrs
79.622
35,000 (31,911)
87.330
Chargeable gain 8,089
362
31: ANSWERS TO LECTURE EXAMPLES
Working:
Total
ownership Exempt Chargeable
Period Period months months months
6.4.15–5.4.16 Actual occupation, UK resident 12 12 0
6.4.16–5.10.20 Absent 54 0 54
6.10.20–5.4.22 Last 18 months 18 18 0
84 30 54
Chapter 15
No lecture examples
Chapter 16
Answer to Lecture Example 1
£
Before transfer (75%) 370,000
After transfer (45%) (200,000)
IHT value 170,000
MV for CGT = gift of 30% holding = £105,000
363
31: ANSWERS TO LECTURE EXAMPLES
364
31: ANSWERS TO LECTURE EXAMPLES
365
31: ANSWERS TO LECTURE EXAMPLES
2 August 2017
£
PET (2 AE available) 260,000
Less: annual exemption 2017/18 (3,000)
annual exemption 2016/17 b/f (3,000)
254,000
Inheritance tax liability £254,000 @ 40% (no NRB available) 101,600
366
31: ANSWERS TO LECTURE EXAMPLES
The son will be responsible for paying the inheritance tax of £101,600.
Death estate £
Main residence 660,000
Less outstanding mortgage (94,300)
Shares 192,600
Car 21,900
Less credit card debt (not verbal debt) (9,400)
Less funeral expenses (5,800)
Chargeable estate 765,000
RNRB (including 100% unused RNRB from wife) (250,000))
No NRB remaining.
515,000
Inheritance tax liability £515,000 @ 40% 206,000
The personal representatives of James' estate will be responsible for paying the inheritance tax of £206,000.
Chapter 17
Answer to Lecture Example 1
Death tax
£
(1) CLT 14.8.10 – no additional tax since >7 yrs before death
No tax payable since covered by remaining nil band of 325,000 – 105,000 = 220,000
£ £
(3) PET 2.10.17 Gift 210,000
AE 2017/18 (3,000)
2016/17 b/f (3,000)
PET 204,000
Nil band at date of death 325,000
Less chargeable transfer <7 years (original
value) (224,000)
Available nil band (101,000)
103,000
367
31: ANSWERS TO LECTURE EXAMPLES
368
31: ANSWERS TO LECTURE EXAMPLES
Death Tax:
20 March 2010 – PET
Outside seven years – Exempt
3 June 2013 – PET
£
Value before: 10/30 1,050,000 350,000
Value after: 5/25 750,000 (150,000)
Fall in value 200,000
AE 2013/14 (3,000)
2012/13 b/f (3,000)
194,000
Nil rate band at death (325,000)
No death tax
14 October 2013 – PET
Valuation rules
Lower of: £ £
2.00 + 1/4 (2.10 – 2.00) = £2.025
½ (1.98 + 2.06) = 2.02
170,000 2.02 343,400
No BPR (quoted with no control)
343,400
Nil band at death 325,000
Less chargeable transfers in previous seven years (194,000)
Available nil band (131,000)
212,400
IHT @ 40% 84,960
Less taper relief four to five years, 40% (33,984)
IHT payable 50,976
9 June 2014
All gifts covered by small gift exemption.
23 November 2014 – CLT
£
Gift 335,000
A/E: 20014/15 (3,000)
2013/14 (used by PET) –
332,000
Nil band at death 325,000
Less chargeable transfers in previous seven years (537,400)
(194,000 + 343,400) –
332,000
IHT @ 40% 132,800
Less taper relief three to four years, 20% (26,560)
Less lifetime tax (1,400)
IHT payable 104,840
39,200
Average rate = 15.8704%
247,000
Tax on UK free estate
£
207,000 15.8704% 32,852
– paid by executors
– borne by residuary legatee (son)
Tax on foreign free estate
40,000 15.8704% 6,348
– paid by executors
– borne by beneficiary (daughter)
370
31: ANSWERS TO LECTURE EXAMPLES
Chapter 18
Answer to Lecture Example 1
£ £
Chargeable estate 360,000
IHT payable
(360,000 – 325,000) 40% 14,000
371
31: ANSWERS TO LECTURE EXAMPLES
Jaguar
The E-type Jaguar is not a chargeable asset for CGT purposes, so again can be given in lifetime without any
capital gains tax effect. The gift would again be a potentially exempt transfer for IHT purposes and, subject to the
practical difficulties that may arise if Stephen does not actually have a car, a gift in lifetime would be most
effective.
Aardvark Shares
The disposal of the shares in Aardvark Ltd in lifetime would be a market value disposal for capital gains tax
purposes and a potentially exempt transfer for IHT purposes. A gain of £300,000 (400,000 – 100,000) will arise if
Stephen gives the shares away in lifetime, but, because this is an unquoted trading company, gift relief will be
available to defer part of the gain. The part of the gain that relates to the investment activities in Aardvark Ltd
cannot be deferred under the gift relief provisions. This means a gain of £45,000 (W1) will arise and, assuming a
full annual exempt amount is available, a CGT liability of £6,660 will arise for Stephen.
If Stephen is a director or employee of Aardvark Ltd, the capital gain of £45,000 may qualify for entrepreneurs'
relief. If entrepreneurs' relief is available, the CGT liability would be £3,330 (W2).
If the potentially exempt transfer becomes chargeable for IHT purposes (because Stephen dies within seven
years) business property relief (BPR) is potentially available, but again this relief is restricted to the business (not
investment) activities so 15% of the potentially exempt transfer will be subject to IHT on death. This is, however,
subject to the condition that the recipient still owns the shares when the potentially exempt transfer becomes
chargeable.
If the shares are gifted through the death estate, there is an automatic capital gains tax uplift to market value
(which removes the CGT liability of £6,660 above) but the shares will be included in the death estate at their
current market value, although BPR will again be available to restrict the amount chargeable with the 15% of the
company value that relates to investments.
If the shares are given through the death estate, this is a significantly better result for CGT purposes (as the gift
relief option is merely a deferral, rather than an exemption from CGT). It means that the recipient of the shares
could sell them immediately without triggering any CGT liability.
Chattels
Chattels are generally not subject to capital gains tax on a disposal in lifetime, so these assets could be given
away without any CGT liability arising. Such a gift would be a potentially exempt transfer, but could be covered
by the use of lifetime exemption such as the annual exemption or, possibly, the marriage exemption if
appropriate.
Workings
£
1 Proceeds 400,000
Cost (100,000)
300,000
Less gift relief (85%) (255,000)
45,000
Less annual exempt amount (11,700)
33,300 @ 20% = 6,660
372
31: ANSWERS TO LECTURE EXAMPLES
Chapter 19
No lecture examples.
Chapter 20
Answer to Lecture Example 1
Lucky Ltd corporation tax computation for the five-month period ended 30 April 2018
£
Operating profit 432,600
Advertising 0
Depreciation 14,700
Amortisation 9,000
Deduction for lease premium £46,800/12 5/12 (1,625)
Capital allowances (W1) (97,413)
Trading profit 357,262
Interest income 700
Taxable total profits 357,962
373
31: ANSWERS TO LECTURE EXAMPLES
4 The motor car has CO2 emissions up to 50 grams per kilometre and therefore qualifies for the 100% first
year allowance.
374
31: ANSWERS TO LECTURE EXAMPLES
Chapter 21
Answer to Lecture Example 1
The disposal does not meet the conditions for the substantial shareholding exemption as Orange Ltd has not had a
10% holding in Lemon Ltd for a continuous 12-month period in the last six years. Consequently a gain will arise.
£
Proceeds 500,000
Cost (7/11 260,000) (165,455)
Unindexed gain 334,545
Less indexation allowance
- none as acquisition is post December 2017 -
Gain 334,545
Corporation tax at 19% 334,545 63,564
After tax proceeds (500,000 – 63,564) 436,436
Orange Ltd should wait until after May 2019 to dispose of the shares. The conditions for the substantial
shareholding exemption would then be met and Orange Ltd would keep the full £500,000 disposal proceeds.
Chapter 22
Answer to Lecture Example 1
Option 1 – Hamish as sole trader
£
Trading profit 60,000
Less: Income tax on trade profits (W1) (12,360)
Class 2 NIC (W2) (153)
Class 4 NIC (W2) (3,686)
Net income from business 43,801
(W1) Income tax calculation
NSI
£
Trade profits 60,000
PA (11,850)
Taxable income 48,150
Tax: 34,500 @ 20% 6,900
13,650 @ 40% 5,460
48,150 12,360
(W2) NIC liabilities
Class 2 NIC = 52 £2.95 153
Class 4 NIC
(46,350 – 8,424) @ 9% 3,413
(60,000 – 46,350) @ 2% 273
3,686
Option 2 – Hamish forms a company ('Hamish Ltd') and pays himself a salary of £8,424 and the residue as a dividend
Hamish Ltd £
Hamish Ltd profits 60,000
Salary to Hamish (8,424)
Employer NIC on salary (below threshold) Nil
Trading income 51,576
CT liability in Hamish Ltd £51,576 19% (9,799)
Maximum dividend payable to Hamish 41,777
375
31: ANSWERS TO LECTURE EXAMPLES
Hamish £
Salary received 8,424
Dividend received 41,777
Less: Income tax (W3) (3,688)
NIC on salary (below threshold) Nil
NIC on dividend (N/A) Nil
Chapter 23
Answer to Lecture Example 1
1.1.18 – 5.7.18 To the date trade ceased
6.7.18 – 17.10.18 Commencement of winding up brings an AP to an end
18.10.18 – 17.10.19 AP cannot exceed 12 months
18.10.19 – 2.2.20 AP ends when winding up complete
376
31: ANSWERS TO LECTURE EXAMPLES
377
31: ANSWERS TO LECTURE EXAMPLES
Chapter 24
Answer to Lecture Example 1
Bat Ltd
Y/end Y/end Y/end
30.6.18 30.6.19 30.6.20
Trading profit 15,000 Nil 20,000
Interest income 5,000 5,000 5,000
Gains 3,000 – –
Total profits 23,000 5,000 25,000
Less current and carry back relief (23,000) (5,000) –
Less carry forward relief (24,000)
Less QCD – – (1,000)
Taxable total profits – – –
Wasted QCD's 1,000 1,000
Loss memorandum
£
Loss for y/end 30.6.19 53,000
Current year relief y/e 30.6.19 (5,000)
Carry back relief y/e 30.6.18 (23,000)
25,000
Carry forward relief y/e 30.6.20 (24,000)
Trade loss to carry forward 1,000
Capital loss
Loss for y/end 30.6.19 10,000
Used in y/end 30.6.20 (7,000)
Capital loss to carry forward 3,000
Chapter 25
Answer to Lecture Example 1
The five largest shareholders and their associates are:
%
Paul and wife (18 + 3) 21
Jacky and son (5 + 4) 9
Holly 8
Guy (or Matthew) 7
Joe 7
Total 52
Company is controlled by five shareholders so Nelson Ltd is a close company.
378
31: ANSWERS TO LECTURE EXAMPLES
Chapter 26
Answer to Lecture Example 1
L plc can either (1) make a current year and 12-month carry back claim to use the loss itself or (2) can group
relieve the loss to K plc in the current year.
(1) L plc can make a current year and 12-month carry back claim to use the loss itself.
Y/e 31/3/19 £
Trade profit 0
Non-trading loan relationship income 2,900
Total profits 2,900
Less current year trade loss relief (2,900)
Qualifying charitable donations (£3,200 wasted) (0)
Taxable total profits 0
Trade loss left to carry back £17,800 (20,700 – 2,900).
There would also be £300 of excess QCDs in y/e 31/3/19 which could be group relieved to K to generate
a tax saving of £57 (300 19%).
Y/e 31/3/18 £
Trade profit 0
Non-trading loan relationship income 6,200
Gains 15,000
Total profits 21,200
Less trade loss carried back (17,800)
Less qualifying charitable donations (1,000)
Taxable total profits 2,400
379
31: ANSWERS TO LECTURE EXAMPLES
Maximum group relief that K plc can claim from L Ltd (lower of £21,000 and £19,000) 19,000
K plc must take account of its current year trading loss in working out available taxable total profits, even
if it does not actually make a claim for current year relief.
The group relief claim will save £3,610 (19,000 19%) of corporation tax this year.
Conclusion
The immediate tax savings are better if the group makes a group relief claim from L plc to K plc. This also
has the advantage that not all of the trade loss is utilised in this claim leaving £2,000 of trade loss
(assuming the QCDs are group relieved first) to carry forward to be utilised in the next accounting period
achieving further tax savings. It does, however, not have the cash flow advantage of the tax rebate from
the carry back claim.
Maximum group relief that X plc can claim from Y plc (lower of £66,000 and £60,500) 60,500
380
31: ANSWERS TO LECTURE EXAMPLES
381
31: ANSWERS TO LECTURE EXAMPLES
Workings
1 Corporation tax £
Gain on sale of premises (W2) 40,270
Balancing allowance on plant and machinery (36,800 – 52,000) (15,200)
Profit on sale of goodwill 96,000
121,070
CT @ 19% 23,003
382
31: ANSWERS TO LECTURE EXAMPLES
Chapter 27
Answer to Lecture Example 1
Corporation tax computation for y/e 31.3.2019
Overseas
Total UK income
£ £ £
Trading profit 850,000 850,000
Overseas income (150,000 100/82) 182,927 182,927
Less qualifying charitable donation (100,000) (100,000)
Taxable total profits 932,927 750,000 182,927
DTR is the lower of:
(1) Foreign tax 18% £182,927 = £32,927
(2) UK tax on overseas income 19% £182,927 = £34,756
Therefore in order not to waste the double tax relief the UK tax on the overseas income must be at least £32,927.
Sherman Ltd can choose to offset the qualifying charitable donation and the group relief in the most tax efficient
manner. Accordingly the qualifying charitable donation and group relief will be deducted first from the UK profits,
reducing these to zero. It should then be used to reduce the overseas income to the amount that results in the
UK corporation tax being equal to the tax suffered overseas.
The overseas income should not be restricted to below £173,300 (£32,927/19%).
The maximum loss that should be surrendered to Sherman Ltd is:
£
UK profits less qualifying charitable donation 750,000
Overseas income (£182,927 – £173,300) 9,627
Maximum loss to be surrendered to Sherman Ltd 759,627
Chapter 28
Answer to Lecture Example 1
As his annual turnover does not exceed £85,000 until 31 March 2019 (on a month-by-month basis) he has not
become liable until then. He must then notify within 30 days, ie by 30 April 2019. He is then registered from
1 May 2019 or an earlier date by mutual agreement.
383
31: ANSWERS TO LECTURE EXAMPLES
Chapter 29
Answer to Lecture Example 1
Partial exemption
Test 1
Total input tax is £23,900/3 = £7,967 > £625 per month.
Value of exempt supplies is £135,429 – £101,572 = £33,857 <50% of total supplies
Test failed (both conditions need to be satisfied)
Test 2
Input tax directly attributable to taxable supplies is £20,000/3 = £6,667. Total input tax less input tax directly
attributable to taxable supplies is £7,967 – £6,667 = £1,300 >625 per month.
Value of exempt supplies is <50% of total supplies (as above)
Test failed (both conditions need to be satisfied)
Test 3
Taxable supplies £
– directly allocated 20,000
– indirectly allocated
101,572 2,432
3,200 (76%)
135,429
Recoverable 22,432
384
31: ANSWERS TO LECTURE EXAMPLES
Exempt supplies £
– directly allocated 700
– indirectly allocated
(3,200 – 2,432) 768
1,468
Monthly amount = 1,468/3
= £489
This is ≤£625 per month and <50% of input tax relates to exempt supplies. Both conditions satisfied. Test
passed.
... all of the £1,468 is recoverable, in addition to the £22,432 relating to taxable supplies.
Chapter 30
No lecture examples.
385
31: ANSWERS TO LECTURE EXAMPLES
386
Appendix A:
Tax tables
387
32: APPENDIX A: TAX TABLES
388
32: APPENDIX A: TAX TABLES
SUPPLEMENTARY INSTRUCTIONS
1. You should assume that the tax rates and allowances for the tax year 2018/19 and for the financial year
to 31 March 2019 will continue to apply for the foreseeable future unless you are instructed otherwise.
2. Calculations and workings need only be made to the nearest £.
3. All apportionments may be made to the nearest month.
4. All workings should be shown.
TAX RATES AND ALLOWANCES
The following tax rates and allowances are to be used in answering the questions.
Income tax
Normal rates Dividend rates
Basic rate £1 – £34,500 20% 7.5%
Higher rate £34,501 – £150,000 40% 32.5%
Additional rate £150,001 and over 45% 38.1%
Property income
Basic rate restriction applies to 50% of finance costs.
Pension scheme limits
Annual allowance £40,000
Minimum allowance £10,000
Threshold income limit £110,000
Income limit £150,000
Cash basis
Revenue limit £150,000
Cap on income tax reliefs
Unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income.
Corporation tax
Rate of tax – Financial year 2018 19%
– Financial year 2017 19%
– Financial year 2016 20%
Profit threshold £1,500,000
390
32: APPENDIX A: TAX TABLES
Inheritance tax
£
Nil rate band
6 April 2018 to 5 April 2019 325,000
6 April 2017 to 5 April 2018 325,000
6 April 2016 to 5 April 2017 325,000
6 April 2015 to 5 April 2016 325,000
6 April 2014 to 5 April 2015 325,000
6 April 2013 to 5 April 2014 325,000
6 April 2012 to 5 April 2013 325,000
6 April 2011 to 5 April 2012 325,000
6 April 2010 to 5 April 2011 325,000
6 April 2009 to 5 April 2010 325,000
6 April 2008 to 5 April 2009 312,000
6 April 2007 to 5 April 2008 300,000
6 April 2006 to 5 April 2007 285,000
6 April 2005 to 5 April 2006 275,000
6 April 2004 to 5 April 2005 263,000
Rate of tax on excess over nil rate band – Lifetime rate 20%
– Death rate 40%
Inheritance tax: taper relief
Years before death Percentage
reduction
Over 3 but less than 4 years 20%
Over 4 but less than 5 years 40%
Over 5 but less than 6 years 60%
Over 6 but less than 7 years 80%
Capital gains tax
Normal Residential
rates property
Rates of tax Lower rate 10% 18%
Higher rate 20% 28%
Annual exempt amount £11,700
Entrepreneurs' relief Lifetime limit £10,000,000
Rate of tax 10%
National insurance (not contracted out rates)
Class 1 Employee £1 – £8,424 per year Nil
£8,425 – £46,350 per year 12.0%
£46,351 and above per year 2.0%
Class 1 Employer £1 – £8,424 per year Nil
£8,425 and above per year 13.8%
Employment allowance £3,000
Class 1A 13.8%
Class 2 £2.95 per week
Small profits threshold £6,205
Class 4 £1 – £8,424 per year Nil
£8,425 – £46,350 per year 9.0%
£46,351 and above per year 2.0%
391
32: APPENDIX A: TAX TABLES
Stamp duty
Shares 0.5%
END OF APPENDIX A
392
ACCA Advanced Taxation
(ATX – UK) FA 2018
Achievement Ladder
Step 4 Questions
Questions
394
ACHIEVEMENT LADDER STEP 4 QUESTIONS
1 William 59 mins
William is a widower who is in good health. He will be made redundant from Acute Ltd on
31 March 2019.
His remuneration package for the year ended 5 April 2019 is as follows:
Salary £36,000 (PAYE £5,990)
Ford Focus car, list price £19,000
2 CO emissions 112 g/km
All diesel fuel, monthly contribution towards total £20
Free meals in the company canteen, cost to Acute Ltd £800
On William's redundancy he will be given the car as an ex gratia gift; at that time its market value
will be £5,000.
His only other income for the year is dividends of £7,000 from his portfolio of shares, and interest
of £600 on his ISA account.
In order to raise finance to buy a seaside apartment, William plans to make the following disposals
on 31 March 2019:
Anfield plc shares 6,000 shares to be sold for £18,500. 8,000 shares were purchased for
£8,000 in February 1992. There was a 1 for 2 rights issue in June 2005 at
£2 per share and William took up all his rights.
William has never worked for Anfield plc.
Painting Collector's item. Will be sold for £21,200. Purchased in July 1991 for
£11,400.
Vintage motor car Sale proceeds expected to be £15,000. He bought the car as an investment
in May 2001 for £5,000.
William has agreed to carry out consultancy work, following his retirement, for Acute Ltd and two of
its clients. He will commence this work on 1 June 2019, and has prepared the following statement
of budgeted income and expenditure for his first period of account.
STATEMENT OF INCOME AND EXPENDITURE
FOR THE PERIOD 1 JUNE 2019 TO 31 AUGUST 2020
Income £ £
From Acute Ltd 40,625
From clients of Acute Ltd 21,875 62,500
Expenditure £ £
General (all deductible for tax) 15,500
Motor (Note) 5,000
(20,500)
42,000
Net income
Note. Motor expenses are for William's own motor car with CO2 emissions of 152 g/km, for which
he charges 25p per mile for business journeys.
395
ACHIEVEMENT LADDER STEP 4 QUESTIONS
Required
Prepare a report for William. The report should be in two sections, addressing the issues set out
below, and should, where appropriate, include supporting calculations.
(a) 2018/19 income tax and capital gains tax liabilities
Advise William how much income tax he needs to pay for 2018/19.
Provide an estimate of the capital gains tax payable on the planned disposals on 31 March 2019.
Advise William how the planned disposals could be made to minimise the capital gains tax
payable, and calculate the tax saved. (13 marks)
(b) Consultancy income
Advise William of the factors that will be considered in deciding whether he will be treated
asself-employed or as an employee in respect of his consultancy income and state with
reasons the likely tax treatment.
For each alternative treatment of the consultancy income, advise William:
(i) What taxes might be chargeable on the consultancy profits
(ii) How his assessable income will be calculated for 2019/20 and 2020/21.
Briefly identify the key taxation issues which William should consider if he were to
contemplate incorporating his consultancy business. Outline the differences in taxation
treatment of an unincorporated business compared to an incorporated business. (15 marks)
Appropriateness of the format and presentation of the report and the effectiveness with which its
advice is communicated. (2 marks)
You may assume that the tax rates and allowances for the tax year 2018/19 and the Financial Year
to 31 March 2019 will continue to apply for the foreseeable future.
(Total = 30 marks)
396
ACHIEVEMENT LADDER STEP 4 QUESTIONS
397
ACHIEVEMENT LADDER STEP 4 QUESTIONS
398
ACCA Advanced Taxation
(ATX – UK) FA 2018
Achievement Ladder
Step 6 Questions
Questions
400
ACHIEVEMENT LADDER STEP 6 QUESTIONS
1 Adam 68 mins
Your manager has had a meeting with Adam Snook and has sent you a copy of the following
memorandum.
To The Files
From Tax manager
Date 1 December 2018
Subject Adam Snook
Adam Snook has been entertaining children at parties as a hobby for the last two years. On
1 June 2018 his aunt gave him shares in Brill plc, a quoted company, worth £88,040. As a result
Adam intends to give up his job on 31 December 2018 (he is a regional sales manager with
Rheims Ltd) and purchase a small theatre from which he will carry on a business of providing
entertainment for children's parties.
The business
Adam will begin advertising and charging for attending children's parties on 1 January 2019. He
estimates that his net profit for the first five months (until the theatre opens) will only be £400 per month.
Accordingly he has agreed to work part-time for his existing employer from 1 January 2019 until
31 May 2019 for a salary of £1,050 per month.
Adam will purchase the theatre on 1 April 2019. He estimates that it will take six weeks or so to
renovate the theatre such that is should be ready for business by 1 June 2019 at the latest. Adam
will seek to rent out the theatre for the days when it is not required for his business.
We agreed that the business should prepare accounts to 31 March each year. Adam does not wish
to form a limited company.
The supply of entertainment at the theatre will be standard rated for the purposes of value added
tax (VAT) and Adam will register for VAT on 1 June 2019.
The finance required
The costs of establishing the business, exclusive of recoverable VAT, are set out below.
£
Purchase price of the theatre 215,000
Renovation of the theatre 45,000
Equipment and other costs 50,000
Finance required 310,000
The finance available
Adam sold 42,600 shares in Snapper plc for £104,870 on 1 December 2018 and intends to sell
£25,000 6% Snapper plc non-convertible loan stock next week for £29,900. He will use the net
proceeds of these sales to finance the business and obtain the balance of the funds required via a
bank overdraft at an annual interest rate of 15%.
The shares and loan stock in Snapper plc were acquired as follows:
Adam was given 14,200 shares in Brill plc by his aunt on 1 June 2017. At that time the shares
were worth £88,040.
401
ACHIEVEMENT LADDER STEP 6 QUESTIONS
On 1 November 2017 Brill plc was acquired by Snapper plc. Both Brill plc and Snapper plc are UK
resident trading companies.
Adam received 42,600 shares in Snapper plc together with £25,000 6% Snapper plc non-
convertible loan stock (a qualifying corporate bond) in exchange for his shares in Brill plc.
The shares and the loan stock were worth £97,980 and £28,400 respectively as at 1 November 2017.
Other background information
Adam is 35 years old. His full time salary with Rheims Ltd is £23,333 per annum. He is provided
with a diesel company car which had a list price when new of £13,950 and a CO2 emission rate of
132 grams per kilometre.
He is not provided with free fuel. He will return the car to the company on 31 December 2018.
Adam's aunt is 71 years old and is domiciled in the UK. This is the first substantial gift that she has
made to Adam although he suspects that she has made similar gifts to other relatives in the past.
Tax manager
402
ACHIEVEMENT LADDER STEP 6 QUESTIONS
Required
Prepare the memorandum required by your manager.
Marks are available for the components of the memorandum as follows:
(a) Explanations of the various matters. (16 marks)
(b) (i) Calculations to support the amount of external finance required. You should state any
assumptions you have made in preparing the calculations. (7 marks)
(ii) A proposal which will increase the after tax proceeds from the sale of the Snapper plc
loan stock and a reasoned recommendation of a more appropriate form of external
finance. (4 marks)
(c) The inheritance tax payable by Adam in respect of the gift from his aunt. (4 marks)
Additional marks will be awarded for the appropriateness of the format and presentation of the
memorandum and the effectiveness with which the information is communicated. (4 marks)
Note. You should assume that the tax rates and allowances for the tax year 2018/19 will continue
to apply for the foreseeable future.
(Total = 35 marks)
403
ACHIEVEMENT LADDER STEP 6 QUESTIONS
2 Sirene 49 mins
An extract from an email from your manager is set out below.
404
ACHIEVEMENT LADDER STEP 6 QUESTIONS
Required
Prepare the paragraphs for inclusion in your manager's letter as requested in his email, together
with the amended corporation tax computation. The following marks are available:
(i) The Chase deal (5 marks)
(ii) Degrouping charges (8 marks)
(iii) VAT (value added tax) (6 marks)
(iv) Automatic Ltd – amended budgeted corporation tax computation, together with brief
explanations, for the year ending 31 March 2020 (6 marks)
You should assume that the tax rates and allowances for the Financial Year to 31 March 2019 will
continue to apply for the foreseeable future.
(Total = 25 marks)
405
ACHIEVEMENT LADDER STEP 6 QUESTIONS
3 Fedora 39 mins
Fedora wants to improve the overall financial position of his family and his company, Smoke Ltd.
He is considering three possibilities: repaying a loan to the company, employing his wife, Wanda,
in the business, and selling a piece of land owned by the company.
The following information has been obtained from a telephone conversation with Fedora and from
client files.
Fedora:
Fedora's only income is his annual salary of £80,000 from Smoke Ltd together with annual
taxable benefits of £6,600.
Smoke Ltd:
Is wholly owned by Fedora
Manufactures precision engineering tools
Has a year end of 31 March
Fedora's plans:
Repay an interest-free loan of £18,400 made to him by Smoke Ltd in February 2013
Smoke Ltd to employ Wanda
Smoke Ltd to sell part of the land surrounding its factory
Smoke Ltd to employ Wanda:
Wanda would carry out duties currently performed by Fedora and would be paid an annual
salary of £20,000.
Wanda's salary would represent an arm's length price for the work that she would perform.
Fedora's salary would be reduced by £20,000 to reflect the reduction in the level of his duties.
Wanda's only income is bank interest of £2,100 per year.
Smoke Ltd to sell land:
The land is currently used by Smoke Ltd for parking vehicles.
The land was purchased together with the factory on 1 April 2002 for £174,000.
The land would be sold on 1 February 2020 for £22,000.
The value of the factory together with the remaining unsold land on 1 February 2020 will be
£491,000.
Smoke Ltd will use £19,000 of the sales proceeds to acquire engineering machinery in
March 2020.
Required
(a) Explain, with the aid of supporting calculations, the tax implications for both Fedora and
Smoke Ltd of the proposed repayment by Fedora of the loan from Smoke Ltd. (4 marks)
(b) Calculate the annual net effect on the total of the tax liabilities of Fedora, Wanda and Smoke
Ltd of Smoke Ltd employing Wanda under the arrangements set out above. (7 marks)
406
ACHIEVEMENT LADDER STEP 6 QUESTIONS
(c) Calculate the taxable gain arising on the sale of the land in the year ending 31 March 2020
on the assumption that any beneficial claim available is made. Explain in detail the beneficial
claim available, state the amount of the gain relieved and the manner in which any deferred
part of the gain will be charged in the future. (9 marks)
You should assume that the tax rules and rates for 2018/19 and Financial Year 2018 continue to
apply in subsequent years.
(Total = 20 marks)
Note. The following indexation factors should be used (where applicable);
April 2002 to February 2020 0.701
April 2002 to December 2017 0.583
An official rate of interest of 2.5% should be used.
407
ACHIEVEMENT LADDER STEP 6 QUESTIONS
408
409
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