Professional Documents
Culture Documents
Acca Atx Course Notes Fa2022
Acca Atx Course Notes Fa2022
Advanced Taxation
(ATX - UK) Course
notes
In the exam ............................................................................................... 4
Syllabus A1: Income Tax ...........................................................................6
Syllabus A1a. TX - UK Recap The scope of income tax .....................................................6
Syllabus A1a. TX - UK Recap Income from employment ..................................................11
Syllabus: A1a. TX - UK Recap Income from self-employment ............................................49
Syllabus A1a. TX - UK Recap Property and investment income .......................................110
Syllabus A1a. TX - UK Recap The Comprehensive computation of taxable income ..........135
Syllabus A1a. TX - UK Recap National insurance contributions ........................................143
Syllabus A1a. TX - UK Recap Exemptions and reliefs .....................................................152
Syllabus A1b. The Scope of Income Tax .......................................................................165
Syllabus A1c. Income from employment .......................................................................181
Syllabus A1d. Income from self employment ..................................................................195
Syllabus A1e. Property and investment income ..............................................................202
Syllabus A1f. Income tax computation and income tax liability ..........................................212
Syllabus A1g. Exemptions and Reliefs for I.T. .................................................................215
Syllabus A2: Chargeable Gains For Individuals ......................................220
Syllabus A2a. TX - UK Recap The scope of the taxation of capital gains ...........................220
Syllabus A2a. TX - UK Recap The basic principles of computing gains and losses ............223
Syllabus A2a. TX - UK Recap Gains and losses on the disposal of property .....................236
Syllabus A2a. TX - UK Recap: Gains and losses on the disposal of shares and securities ..246
Syllabus A2a. TX - UK Recap Entrepreneurs’ relief/Business Asset Disposal Relief ............251
Syllabus A2b. Chargeable gains ...................................................................................270
Syllabus A2c. Trusts ...................................................................................................287
Syllabus A2d. Principles of computing gains and losses .................................................289
Syllabus A2e. Disposal of movable and immovable property ............................................295
Syllabus A2f. Disposals of shares and securities ............................................................307
Syllabus A2g. Exemptions and Reliefs for C.G.T. ............................................................316
Syllabus A3: Inheritance Tax ..................................................................326
Syllabus A3a. TX - UK Recap: Basic principles of computing transfers of value .................326
Syllabus A3a. TX - UK Recap: IHT arising on lifetime transfers and on death .....................338
Syllabus A3a. TX - UK Recap: Exemptions to defer / minimise IHT ...................................350
Syllabus A3b. The scope of IHT ...................................................................................354
Syllabus A3c. Computing transfers of value ................................................................... 361
Syllabus A3d. IHT liabilities on lifetime transfers during life and death .................................372
1
Syllabus A3e. Trusts ...................................................................................................390
Syllabus A3f. IHT planning ........................................................................................... 393
Syllabus A3g. IHT administration ...................................................................................394
Syllabus A4: Corporation Tax ................................................................402
Syllabus A4a. TX - UK Recap: The scope of corporation tax ...........................................402
Syllabus A4a. TX - UK Recap: Taxable total profits .........................................................406
Syllabus A4a. TX - UK Recap: Chargeable gains for companies ......................................456
Syllabus A4a. TX - UK Recap: The comprehensive computation of corporation tax liability ..474
Syllabus A4a. TX - UK Recap: Group corporate structure for C.T. ...................................479
Syllabus A4b. The scope of CT ...................................................................................489
Syllabus A4c. Taxable total profits .................................................................................499
Syllabus A4d. The corporation tax liability .......................................................................510
Syllabus A4e. Group Structure for C.T. ......................................................................... 517
Syllabus A5: Stamp Taxes .....................................................................527
Syllabus A5a. The scope of stamp taxes ...................................................................... 527
Syllabus A5b. Liabilities arising on transfers ....................................................................528
Syllabus A5c/d. Exemptions and Reliefs .......................................................................532
Syllabus A6: Value Added Tax ............................................................... 534
Syllabus A6a. TX - UK Recap: The VAT registration requirements .....................................534
Syllabus A6a. TX - UK Recap: Computation of VAT liabilities ............................................546
Syllabus A6a. TX - UK Recap: The effect of special schemes .........................................569
Syllabus A6b. TX - UK Recap: The overall function and purpose of taxation. .....................582
Syllabus A6b. TX - UK Recap: Principal sources of revenue law and practice ...................585
Syllabus A6b. TX - UK Recap: The systems for self-assessment and the making of returns .....
591
Syllabus A6b. TX - UK Recap: The Time Limits ..............................................................593
Syllabus A6b. TX - UK Recap: Compliance checks, appeals and disputes .......................598
Syllabus A6b. TX - UK Recap: Penalties for non-compliance ...........................................600
Syllabus A6bi. Offshore Matters ...................................................................................602
Syllabus B: Financial Decisions made by a business ..............................603
Syllabus B2. Alternative ways of achieving outcomes ......................................................603
Syllabus B3. Different types of finance and investment ....................................................604
Syllabus C. Ethics .................................................................................606
Syllabus C5/6. Ethics ................................................................................................. 606
2
Syllabus D. Communication in an appropriate manner ...........................609
Syllabus D. Communication .........................................................................................609
3
In the exam
The style and format of the Advanced Taxation (ATX - UK) exam
The whole of the syllabus is examinable throughout both sections of the exam.
The Section A questions require candidates to analyse the information provided and to
use any guidance given to help address the requirements.
Both questions are likely to deal with a number of different taxes and Question 1 will require
a report, letter, memo or meeting notes as part of the answer.
Section A questions are relatively large and so careful time management is important, and
candidates are advised to use the number of marks allocated to each requirement to
determine how much time to spend on each part.
The Section B questions contain an introductory paragraph, which outlines the technical
areas within the question, together with concise structured information and sub-headings to
make them easier to assimilate and navigate.
Throughout the exam, candidates are expected to be able to identify issues, as well as
demonstrate detailed knowledge of the tax system.
In line with this emphasis on practicality, questions may require candidates to address ‘the
UK tax consequences’ of a given situation without indicating which particular taxes to
consider.
It is up to candidates to identify the relevant taxes, and the issues in respect of those taxes,
before beginning their answers.
Calculations are normally only required in support of explanations and advice, and not in
isolation.
4
Again, it is often up to candidates to decide what calculations to produce in order to do this
in the most efficient manner.
The ability of candidates to be able to explain their treatments and opinions is vital.
It is important to note that this does not mean that candidates need to have perfect
grammar or spelling; it means that they need to make themselves understood.
ATX - UK has 4 marks within Question 1 for professional skills, known as professional
marks.
In order to score well, candidates first have to satisfy the requirement in relation to the style
and format of the document requested.
Further marks are then available for providing clear explanations and coherent calculations.
It is quite possible that the technical content of a ATX - UK question could be drawn almost
wholly from the TX - UK syllabus.
However, such a question will require the analysis of information provided, and the
application of technical knowledge to the situation in order to solve the problem.
The ATX - UK syllabus extends the coverage of income tax, corporation tax, capital gains
tax and inheritance tax and introduces stamp taxes (stamp duty land tax and stamp duty).
While no part of the syllabus is more important than any other, it should be recognised from
the above that knowledge of the technical areas that are exclusive to ATX - UK will not, on
its own, be sufficient to pass the exam.
Candidates are required to explain, calculate and apply their knowledge of the system of
taxation in the UK.
5
Syllabus A1: Income Tax
The contents of the Paper TX - UK study guide for income tax and national insurance, under
headings:
- The scope of income tax
If a person is UK resident in a particular tax year they must pay income tax on their
UK and overseas income.
If a person is not UK resident, then they do not pay UK income tax on their overseas
income, they only pay on their UK income.
6
STAGE 1: Is the person automatically resident overseas?
If one of the two tests below are satisfied, then the person is automatically resident
overseas and will only pay UK income tax on his UK income.
In UK for less than 16 days in the tax Employed overseas and visits UK for
year. less than 91 days during the tax year.
OR
Illustration:
Shayna is in the UK for 40 days during the tax year. She was not previously UK resident.
Solution:
No - Shayna satisfies Test 1 – Short stay in the UK. This is because she is in the UK for
less than 46 days and has not been UK resident previously.
7
STAGE 2: Is the person automatically UK resident?
If any of the tests below are satisfied, then the individual is automatically UK resident
and will pay UK income tax on his worldwide earnings. If none of the above tests are
met, then there are detailed rules to follow to determine residency.
Illustration:
Hemant is in the UK for 60 days during the tax year, his only house is in the UK.
Solution
Yes - Hemant will be considered to be UK resident for this tax year because he satisfies
Test 2 – nowhere else to go.
8
The foundation of the detailed rules is based on:
How many days did they spend in the UK in this tax year?
Do they have the amount of UK ties necessary to be considered UK resident in this tax
year?
Not previously UK
Days in the UK Previously UK resident
resident
Less than 16 Automatically not UK Automatically not UK
days resident resident
Automatically not UK
16-45 Resident if 4 UK ties
resident
Ties
2. House in the UK which is used during the tax year. (at least 1 night during the tax year)
4. In the UK for more than 90 days in either of the previous 2 tax years.
9
Illustration:
During this tax year she purchased a villa in India where she lived for most of this tax
year.
She has a house in the UK where her husband and children stay. During this tax year
she spent 100 days in the UK.
Solution:
This is because:
10
Syllabus A1a. TX - UK Recap Income from employment
The contents of the Paper TX - UK study guide for income tax and national insurance, under
headings:
- Income from employment
Employed or self-employed?
11
If there is no contract of service, the following suggest employment:
Factors Explanation
Illustration:
Liam is a driver of luxury cars and started working for Super Cars Ltd on 6 April.
He works a set number of hours each week and is paid an hourly rate for the work that
he does.
When Liam works more than the set number of hours, he is paid overtime.
Liam is under an obligation to accept the work offered by Super Cars Ltd., and the work
is carried out under the control of the customer services manager.
All the vehicles used by Liam are provided by Super Cars Ltd.
What are the factors that indicate that he should be treated as an employee?
12
Solution:
Risk – none. He works for a set number of hours and is paid at an hourly rate. If he
works more than the set number of hours, he is paid overtime.
Control – the customer services manager controls the manner in which the work is
done.
Equipment – all of the cars driven are provided by Super Cars Ltd.
Conclusion:
Liam will pay income tax under the employment income rules.
Super Cars Ltd will pay Employer's Class 1 NIC and Class 1 A NIC on behalf of Liam.
13
Which employment income to tax in a tax year?
Emoluments
Emoluments are amounts that an employee will pay income tax and national insurance
contributions on.
They include:
• salary
• bonus
• benefits
Example
Peter became entitled to be paid a bonus on 31 January 2023 (Tax year 22/23).
He was actually paid the bonus on 30 April 2023 (Tax year 23/24).
Illustration:
Note His salary is due for a tax year which runs from 6th April - 5th April and salaries
accrue evenly over a tax year.
Therefore, the salary per month must be calculated and then totalled to give a figure for the
entire year.
14
Additionally, Frank receives the following bonuses based on the company’s results:
For the year ending 31/12/2021 £3000. He became entitled to the bonus on 31/12/21 and
was paid the bonus on 31/5/22.
For the year ending 31/12/2022 £10,000. He became entitled to the bonus on 31/12/22 and
was paid the bonus on 31/5/23.
• Required:
Solution:
His bonus of £3,000 will be taxed in the tax year 21/22 as he became entitled to it on 31
December 2021.
His bonus of £10,000 will be taxed in the tax year 22/23 as he became entitled to it on 31
December 2022.
Conclusion:
Salary= £37,500
Bonus = £10,000
15
What is taxable employment income?
1. Salary
2. Wages
3. Bonus
4. Commission
5. Benefits in kind - there are 2 types of benefits - taxable benefits and exempt benefits.
Only taxable benefits will have income tax paid on them, exempt benefits will not.
16
Expenses that you are allowed to deduct from
employment income
Salary x
Commission x
Benefits in kind x
= Gross emoluments x
Allowable deductions:
Note that Payments to a personal pension scheme are NOT allowable deductions.
2. Travel, subsistence and entertaining incurred wholly, exclusively and necessarily in the
performance of duties of employment
Note that payments for gym memberships are NOT allowable deductions.
5. Donations to charity
6. Capital allowances are available for plant and machinery provided by an employee for
us in his duties Topic Capital allowances
17
Illustration:
He also paid £1,000 for travel to Scotland for business purposes entirely.
Solution:
Salary £30,000
Less:
18
The authorised mileage allowances
This arises when an employee uses their own car on employer’s business.
• The employee is entitled to receive this mileage allowance from their employer to
compensate for additional costs of running the vehicle due to business miles.
Anything in excess that is received from the employer will be taxable, and anything
below the allowance that is received from the employer will be deductible.
Illustration:
She uses her own car for employer’s business, the mileage allowance received from her
employer is 50p per mile.
Solution:
19
Conclusion:
Salary £20,000
Illustration:
Solution:
Salary £20,000
Note Travelling between home and work does not count as business miles. This is
considered to be ordinary commuting.
Note Travelling between work and client's offices will count as business miles.
20
The system for paying income tax for employed
individuals
Most tax in respect of employment income is deducted under the PAYE system.
The objective of the PAYE system is to collect the correct amount of tax over the year.
An employee’s PAYE code is assigned to ensure that their allowances etc. are given
evenly over the year.
The PAYE system applies to most cash payments, other than reimbursed expenses, and
to certain non-cash payments.
• In addition, PAYE applies to round sum expense allowances and payments instead
of benefits.
It is the employer’s duty to deduct income tax and national insurance contributions from
the pay of his employees.
If he fails to do this, he must pay over the tax which he should have deducted and the
employer may be subject to penalties.
It is now possible for an employer to choose to include most taxable benefits within
their normal payroll, with the employee’s income tax liability being collected under
PAYE. This is referred to as the payrolling of benefits. Living accommodation benefits
and beneficial loans must still be reported on the P11D.
Any “Payrolled” benefits do not now have to be reported on the P11D. The P11D is a
form submitted by the employer that lists the benefits provided to an employee in a tax
year.
PAYE codes
An employee’s PAYE code indicates the amount of tax free pay he is entitled to.
The PAYE code will include the employee’s personal allowance and any allowable
deductions and be restricted be various taxable amounts.
The employer must act according to the code unless further notified by HMRC, even if
the employee appeals against the code.
21
PAYE Forms
This form shows the employee's code and details of his income and tax paid to date
and is a two part form handed to the employee.
If the employee takes up a new employment, he must hand the other part of the form
P45 to the new employer.
Following the end of each tax year, the employer must submit the P11D to HMRC by 6
July.
A copy of the form P11D must also be provided to the employee by 6 July.
The details shown on the P11D include the full cash equivalent of all benefits, so that
the employee may enter the details on his self-assessment tax return.
Specific reference numbers for the entries on the P11D are given to assist with the
preparation of the employee's self assessment tax return.
At the end of each tax year, the employer must provide each employee with a form
P60
This shows total taxable earnings for the year, tax deducted, code number, NI number
and the employer's name and address.
22
Use benefit
If an employer lends an asset (e.g. a computer) to an employee, and the employee uses
this asset privately, then the employee must pay income tax on this benefit.
1. Computers
2. TV sets
3. Boats
4. Furniture
5. Motorcycles
1. We must find the market value of the asset when it was first given to the employee.
3. Multiply this value by the number of weeks/months the employee had access to the
asset.
For example, multiplying by 9/12 means that the employee had access to the asset
for 9 out of 12 months in the tax year.
4. Deduct any rent that the employee pays to the employer to use the asset.
23
Proforma:
Use benefit X
Illustration:
Manish’s employer purchased a dishwasher for Manish’s use on 1 April costing £900.
Manish paid his employer £150 to use the dishwasher for the tax year.
Use benefit 30
24
Gift benefit
After an employer has given the employee an asset to use privately, the employer may
then decide to give this asset to the employee as a gift.
For example, an employer gave his employee a computer to use for private purposes
for 2 years and the employee was taxed on a benefit for the use of the asset in each of
those 2 years.
After 2 years, the employer then decided to give this computer to the employee as a gift
and the employee was then taxed on an additional benefit for the gift.
The employee will need to pay income tax on the monetary value of gift benefit.
Figure 1:
• Find the cost to the employer (the original market value of the asset).
• Deduct any use benefits that the employee has already paid income tax on.
For example, if the computer cost the employer £750 2 years ago when he purchased it,
and the use benefit that the employee paid income tax on for each year was £150, then
the gift benefit will be:
Year 1 (£150)
Year 2 (£150)
Figure 2:
• Find the market value of the asset at the date of the gift to the employee.
For example, after 2 years, if the computer had a market value of £500, the benefit
would be:
Therefore, the Gift benefit is £500 as this is the higher of the two figures.
25
Note that we must take the higher figure out of Figure 1 and Figure 2:
• Figure 1: £450
• Figure 2: £500
Illustration:
On 06/04/2022 Manish was given the dishwasher by his employer. It’s market value
then being £200.
Solution:
Use benefit 80
Figure 1: £
Figure 2: £
26
Higher of:
Figure 1 : £320
Figure 2 : £200
27
Living accommodation benefit
If an employer provides an employee with a home to live in, without the home being
necessary for the employee to do his or her job, the employee will have to pay income
tax on a living accommodation benefit.
If the home is necessary for the employee to do his or her job, then this benefit will not
arise.
1. A nanny needs to live in the same home that their child lives in to do their job.
Otherwise, they will not be able to do their job. In this case, providing
accommodation will be considered to be work related and a benefit will not arise.
2. Someone in an army needs to live at the army base, otherwise they will not be able
to do their job.
3. A hotel-worker being provided living accommodation at the hotel will help them
perform their duties better.
• If the employer owns the home, then the home’s annual value will be used.
• If the employer is renting the home, then the amount of the benefit is the higher of
the rent paid by the employer and the annual value.
• The amount paid by the employee to the employer will be deducted to give the living
accommodation benefit.
28
Illustration - If the employer is renting the home
Ashok, a sales manager, lives in a flat that his employer has given him to live in.
The employer pays rent of £5,000 per annum for the flat, and Ashok pays the employer
£1,000 per year to use the flat. The annual value of the flat is £4,900.
• What is the living accommodation benefit that Ashok will have to pay income tax
on?
Solution:
The flat has an annual value of £4,000 and she pays the employer £500 per annum to
use the flat.
• What is the living accommodation benefit that she will have to pay income tax on?
Solution:
29
Additional benefit
There is an additional benefit that can arise if the employer owns the home and it cost
the employer more than £75,000 when they purchased it.
Did the employer buy the home more than 6 years before he gave it to the employee to
use?
1. No
(Cost - £75,000) * Official rate of interest (2% for 22/23) = Additional benefit
Note
The Cost will include the actual cost of the home plus any amount spent on extending/
enhancing the home before the start of the current tax year.
2. Yes
Note:
The market value of the home when it was first given to the employee to be used (the
purchase price is not used here).
The employer bought this flat 5 years ago and paid £85,000.
What additional benefit that will she have to pay income tax on?
Solution:
£400 is the additional benefit that Vandana will have to pay income tax on.
30
Illustration - MORE than 6 years
She has occupied this flat for the last 7 years, and moved in when the flat had a market
value of £100,000.
The employer bought this flat 15 years ago and paid £85,000.
What additional benefit that will she have to pay income tax on?
Solution:
£500 is the additional benefit that Vandana will have to pay income tax on.
Conclusion:
The normal benefit and the additional benefit are added together to give the total living
accommodation benefit that the employee will pay income tax on.
£3,500 + £400 = £3,900 (Flat was not purchased more than 6 years ago)
or
£3,500 + £500 = £4,000 (Flat was purchased more than 6 years ago)
31
Motor cars - ACCA ARTICLE
If an employer gives an employee a motor car to use for business and private purposes,
then a benefit will arise which income tax must be paid on by the employee.
The list price of the car will be given to you in the exam.
The list price includes the list price of any accessories fitted to the motor car.
If an employee pays a capital amount towards receiving the car from the employer, then
this list price will be reduced by this capital contribution.
The list price can be reduced by a maximum of £5,000 - even if the employee has
contributed more than this, it will only be reduced by £5,000.
For example the list price of a car is £15,000 and an employee has made a capital
contribution towards it of £7,000 - the list price of the car will only reduce to £10,000
(£15,000 - £5,000).
Then, this list price will be multiplied by a percentage to give the amount of benefit to be
taxed on.
Electric cars
For hybrid electric motor cars with CO2 emissions between 1-50 grams per
kilometre, the electric range of the motor car is relevant
Electric range
32
As emissions ride beyond 50 grams, the following percentages apply:
The base percentage of 16% rises in 1% for each 5 grams per kilometre above the
base level of 55 grams per kilometre, up to a maximum of 37%.
The percentage rates are increased by 4% for diesel cars unless the diesel car in
question is registered after 1 September 2017 and it meets the RDE2 standards.
You will be told in the exam if the car meets the RDE2 standards.
Reductions
1. If the motor car is unavailable for periods of at least 30 days of the tax year for
example if the car was not available to the individual for one month in the tax
year, then the benefit will be multiplied by 11/12 - because the car was only
available for 11 months in the tax year, and
2. Where the employee makes a contribution to the employer for the use of the
motor car, this is also known as making a contribution towards the running costs
of the car.
Note contributing towards the running costs of a car are different to the capital
contribution to reduce the list price of a car.
For example An employer gave an employee a motor car to use for private and
business purposes that had a list price of £17,000 - the employee made a capital
contribution of £8,000 towards the list price. The employee also contributed
£1,200 per annum towards the running costs of the car.
33
The taxable benefit would be:
Pool cars
The use of a pool car does not result in a company car benefit.
A pool car is one provided for the use of any employee to use for business
purposes and is kept at the business place of work.
Illustration:
Arora plc provided the following employees with company motor cars:
The motor car has a list price of £13,500 and an official CO2 emission rate of
97 grams per kilometre.
Lina had an accident in October and was unable to use the car for 2 months,
however the car was always available to her to use.
• 2) Naina was provided with a hybrid electric company car throughout the tax
year. The car had a list price of £32,200 and an official CO2 emission rate of 24
grams per kilometre and an electric range of 90 miles.
• 3) Falak was provided with a new petrol powered company car throughout the
year.
The motor car has a list price of £22,600 and an official CO2 emission rate of
239 grams per kilometre.
Falak paid Arora plc £1,200 for the use of the motor car.
34
• 4) Jayna was provided with a new petrol powered company car throughout the
year.
The motor car had a list price of £16,000 and an official CO2 emission rate of
52 grams per kilometre.
The motor car had a list price of £11,000 and an official CO2 emission rate of
55 grams per kilometre. The car meets the RDE2 standards.
Required:
Calculate the taxable benefit for Lina, Naina, Falak, Jayna and Saaya.
Solution:
1) Lina
was provided with a diesel powered company car. The CO2 emissions are 97g/km.
The CO2 emissions are rounded down to 95g/km so that it is divisible by five.
The base level percentage of 16% is increased in 1% steps for each complete 5
grams per kilometre above the base level, so the relevant percentage is 28% (16%
+ 4%(diesel car) + (95-55/5) 8%)
The motor car was only available for 8 months during the year, so the benefit is
£2,520 (13,500 × 28% × 8/12).
Note that even if Lina was unable to use the car herself for 2 months, the fact that
the car was available for her to use at all times means that the benefit will not be
reduced because of these 2 months.
2) Naina
With CO2 emissions between 1-50 grams, the electric range of the motor car is
relevant. This is between 70 - 129 miles, so the relevant percentage is 5%.
The motor car was available throughout the tax year so the benefit is £32,200 x 5%
= £1,610
35
3) Falak
The CO2 emissions are above the base level figure of 55 grams per kilometre.
The relevant percentage is 52% (16% + 36% (235 – 55 = 180/5)), but this is
restricted to the maximum of 37%.
The motor car was available throughout the year so the benefit is £7,162 (22,600 ×
37% = 8,362 - 1,200).
The contribution by Falak towards the use of the motor car reduces the benefit.
4) Jayna
The CO2 emissions are between 51 grams per kilometre and 54 grams per
kilometre so the relevant percentage is 15% as it is a petrol car.
5) Saaya
The CO2 emissions is 55g per kilometre and the relevant percentage is 16% (16% +
0% (diesel car)). (diesel car meeting the RDE2 standards does not have the 4%
supplement).
1. The car benefit also covers the running costs of the car BUT does not take
account of fuel provided for private use.
The fuel benefit is reduced proportionately where private use fuel is withdrawn
(and not reintroduced during the year) or the car is only given part way through
the tax year.
3. No reduction is made if the employee contributes towards the cost of petrol for
private use.
If he pays for all fuel used for private motoring the charge is cancelled.
36
Illustration:
Calculate the fuel benefit for Lina, Naina, Falak, Jayna and Saaya assuming also
that Falak pays Arora plc £600 during the year towards the cost of private fuel,
although the actual cost of this fuel was £1,000.
Solution:
Lina
Naina
£25,300 × 5% = £1,265
Falak
There is no reduction for the contribution made by Falak since the cost of private
fuel was not fully reimbursed.
Jayna
Saaya
37
Vans and heavier commercial vehicles
1. Where an employee uses an employer’s van for journeys between home and work
and other private use is insignificant there is no benefit.
2. Where private use is not insignificant the tax charge is £3,600 p.a.
3. An additional charge is made for fuel provided for unrestricted private use equal to
£688 p.a.
4. Both benefits are time apportioned if the van is unavailable to the employee for 30
days or more during any part of the tax year.
5. Vans producing zero CO2 emissions (zero emission vans) have a zero benefit charge.
There is also no fuel benefit for zero emission van.
Van benefit
If an employer gives an employee a van to use for private journeys, if the amount of
usage is not significant, then no benefit will arise that an employee needs to pay income
tax on.
However, if the private usage of the van is significant, then a benefit will arise that an
employee will pay income tax on
Therefore, if the van was only provided for 9 months in the tax year, then the tax charge
would be £3,600 * 9/12 = £2,700
If the employer also provides the employee with fuel for their private journeys, another
benefit will arise that the employee must pay income tax on.
Therefore, if the fuel for private journeys were only provided for 9 months in the tax year,
then the benefit for the private fuel provided would be £688 * 9/12 = £516
38
Illustration:
An employee is given use of his employer’s van on 01/06/2022 and uses it for a
significant number of private journeys.
The employer also pays for the fuel for the employee’s private journeys.
What taxable benefit would arise in 2022/23 because of the employer paying for private
fuel?
Solution:
39
Beneficial Loan Benefit
This benefit arises when an employer gives an employee a loan at an interest rate that is
cheaper than the official interest rate (2% for 22/23).
For example, a beneficial loan benefit would arise if an employer gave an employee a
£15,000 loan at 1% per annum.
Carefully note – if the loan is £10,000 or less, no beneficial loan benefit will arise at all.
If the loan is above £10,000 – then a benefit on the full amount of the loan will arise.
Proforma
There are 2 ways to calculate the monetary value of the loan benefit.
The average method applies automatically but the taxpayer or HMRC can elect for the
strict method if it is more beneficial for them
eg the taxpayer will elect when the strict method produces a smaller benefit figure and
HMRC can elect if the strict method gives a MUCH higher benefit figure.
1. Average method
(Loan outstanding at start of year + Loan outstanding at end of year)/2 * Official interest
rate = £x
2. Strict method
You must find the interest payable for the actual loan outstanding at all times. (Much
easier to understand with an example)
40
Illustration - Average method
Vijay was given a loan of £35,000 by his employer on 06/04/2022. Interest is payable on
this loan at 1% per annum.
On 01/06/2022, Vijay repaid £5,000 of the loan and on 01/12/2022 Vijay repaid another
£15,000 of the loan.
• What is the taxable benefit of the beneficial loan using the average method?
Solution:
Average method £
£242 – is the beneficial loan benefit that Vijay would have to pay income tax on IF the
average method was used.
From £35,000 *
(2 months) Vijay paid 1% interest on
06/04/2022 – 1% * 2/12 =
£35,000 loan outstanding =
01/06/2022 £58.30
41
Illustration - Strict method
Vijay was given a loan of £35,000 by his employer on 06/04/2022. Interest is payable on
this loan at 1% per annum.
On 01/06/2022, Vijay repaid £5,000 of the loan and on 01/12/2022, Vijay repaid another
£15,000 of the loan.
• What is the taxable benefit of the beneficial loan using the Strict method?
Solution:
Strict method £
Monetary value of the loan benefit Vijay should have paid (w1) 517
Vijay actually paid (figure
Less: (258)
from previous example)
Beneficial loan benefit 259
£35,000 *
From (2 months) Vijay should pay 2% interest on 2.25% *
06/04/2022 –
£35,000 loan outstanding = 2/12 =
01/06/2022
£117
£30,000 *
From (6 months) Vijay should pay 2% interest on
2.25% *
01/06/2022 – £30,000 loan outstanding (£5,000 was repaid)
6/12 =
01/12/2022 =
£300
£15,000 *
From (4 months) Vijay should pay 2% interest on
2.25% *
01/12/2022 – £15,000 loan outstanding (another £15,000
4/12 =
05/04/2023 was repaid) =
£100
Conclusion
42
Which one will he pay income tax on?
Vijay will pay tax on the loan benefit arising from the average method - £242 - as this is
the automatic method and the strict method is not so different that HMRC would elect
for it.
Summary
1. A beneficial loan is one made to an employee below the official rate of interest
(2%)
2. The benefit is the interest on the loan at the official rate, less any interest actually
paid by the employee.
3. There is no benefit if the loans do not exceed £10,000 in total at any time in the
tax year
4. The benefit is calculated using the average method or the strict method.
Average method
This uses the loan outstanding at the beginning and the end of the tax year.
If the loan is taken out or paid back during the tax year, that date is used instead of the
beginning or end the tax year.
Strict method
Either the taxpayer or HMRC can elect to use the strict method. HMRC will elect if the
benefit is significantly higher under this method.
43
Other benefits
Generally, the basis for calculating the taxable value of any other benefit is the cost to
the employer.
Although correctly identifying the tax treatment of such a benefit may result in only a
half mark or one mark, it is important that you correctly identify such benefits so that
time is not wasted with unnecessary calculations.
Finally, there is no exhaustive list of benefits, but you must keep in mind that if an
employee is using something for personal purposes and the employer is paying for it,
then the benefit that is likely to arise is the cost to the employer.
For example if an employer provides education for an employee's child that cost the
employer £600, then the benefit that will arise on the employee is the cost to the
employer of £600.
An employee can claim a deduction for the additional cost of working from home, such
as expenditure on lighting and heating.
Employers can pay up to £6 per week (without the need for supporting evidence of the
costs incurred by the employee).
Illustration:
44
The telephones had each cost £250 when purchased by Vary plc in January.
The company paid for all of Denzil’s business and private telephone calls.
2) Emily had her health club membership fee of £710 paid for by Vary plc
The company paid him a daily allowance of £10 to cover the cost of personal expenses
such as telephone calls to his family.
4) Grace was paid £11,000 towards the cost of her removal expenses when she
permanently moved to take up her new employment with Vary plc, as she did not live
within a reasonable commuting distance.
The £11,000 covered both her removal expenses and the legal costs of acquiring a new
main residence.
5) Hillary’s three year old daughter was provided with a place at Vary plc’s workplace
nursery.
The total cost to the company of providing this nursery place was £10,800 (240 days at
£45 per day)
6) June had the use of Vary plc’s company gym which is only open to employees of the
company.
The cost to Vary plc of providing this benefit to June was £340.
7) Kristin was provided with free meals in Vary plc’s staff canteen.
8) Larry regularly works from home two days per week, and was paid an allowance of
£288 (48 weeks at £6 per week) to cover the extra light and heat costs that were incurred
due to this home working.
9) Marge was given a watch valued at £750 as an award for her 20 years of employment
at Vary plc.
10) Nile had £440 of her medical costs paid for by Vary plc.
She had been away from work for two months due to an injury, and the recommended
medical treatment was to assist her return to work.
45
Solution:
1) Denzil
Providing one mobile phone to an employee does not result in a taxable benefit.
If additional mobile phones are provided to employees then 20% of the market value of
the phone will be the tax benefit assessed on the employee.
• The provision of one mobile telephone does not give rise to a taxable benefit.
• The taxable benefit for the use of the second telephone is £50 (250 x 20%).
2) Emily
• The benefit of the health club membership is the cost to Vary plc of £710.
3) Frederick
• Payments for private incidental expenses are exempt up to £10 per night when
spent outside the UK, so the allowance does not result in a taxable benefit.
4) Grace
• Only £8,000 of the relocation costs is exempt, and so the taxable benefit is £3,000
(11,000 – 8,000).
5) Hillary
• The provision of a place in a workplace nursery does not give rise to a taxable
benefit.
6) June
• The use of a company gym does not give rise to a taxable benefit as the benefit is
available to all employees.
7) Kristin
• The provision of meals in a staff canteen does not give rise to a taxable benefit as
the benefit is available to all employees.
8) Larry
46
• Payments for home working are exempt up to £6 per week, so the allowance does
not result in a taxable benefit.
9) Marge
10) Nile
• The payment of medical costs of up to £500 does not result in a taxable benefit.
47
RTI reporting
Employers must send income tax and NIC information to HMRC electronically every
time employees are paid, and make their PAYE payments electronically on the 22nd of
the month under the Real Time Information reporting system.
• There are penalties if submissions made during the tax year are made late, though
there is no penalty for the first month in a tax year that submissions are paid late.
• Thereafter a monthly late filing penalty of between £100 and £400 is charged
depending on the number of employees.
An additional penalty of 5% of the tax and NIC due may be charged where the
submission is more than 3 months late.
48
Syllabus: A1a. TX - UK Recap Income from self-
employment
The contents of the Paper TX - UK) study guide for income tax and national insurance, under
headings:
- Income from self-employment
The basis of assessment for a sole trader is the taxable trade profits (self-employed
income) for a 12 month period of account ending in a tax year.
Whichever tax year that ending date falls into, the profits of that entire year will be assessed
in that tax year.
For example If an individual has a year ending of 30 November, then for the year ending 30
November 2022 - this ends in the tax year 22/23 (06/04/22 - 05/04/23), therefore the profits
for that year ending 30 November 2022 will be assessed to tax in the tax year 22/23.
49
Badges of trade
These are used to help differentiate whether a person is trading or whether they
are selling their capital assets.
Badges
1. Subject matter
– anything can be trading stock but some items are more likely to be so than others.
For example, the purchase and resale of a substantial number of toilet rolls is
considered trading.
For example an item that is held for less than 12 months will be considered trading
stock, but an item that is held for more than 12 months is likely to be considered a
capital asset.
– the more often a deal takes place, the greater the assumption that it is a disposal of
trading stock.
For example if cars are bought and sold throughout the year, this will be considered to
be the trading of cars; however if there is a one time sale of one car, then that is likely to
be considered to be the sale of a capital asset.
4. Subsequent work
For example, buying bulk marble for flooring and breaking it down into smaller saleable
units to use for individual floors, will be considered trading. Also, advertising and
making the item more marketable may be indicative of trading.
50
5. Circumstances
– sudden emergency, for example the urgent need of cash can negate the presumption
of trading.
For example selling a vintage car from a collection of vintage cars because of the
urgent need of cash will be considered to be the sale of capital assets.
This is because the motive is not to trade cars, it is to obtain cash quickly.
If the sale is to pay off a business loan then this would be considered to be trading and
subject to income tax on the profit.
6. Motive
For example, selling cars at a loss just to get immediate cash will not be considered
trading, but waiting to sell cars at a price that will earn a profit will indicate trading.
51
Illustration:
On 1 May, Tony was made redundant from his job as a marketing executive. Tony
decided to purchase a house for £180,000.
• Tony lived in the house as his main residence and whilst living there he
refurbished it at a cost of £27,700. The renovations were completed on 10
August.
After completing the refurbishment, he was offered a new job and he immediately put
the house up for sale; and it was sold for £275,000 on 31 August.
Solution:
Trading income
Badge Reason or Capital
Gain?
Length of period
Less than one year Trading
of ownership
Frequency of
None before Capital
similar operations
Subsequent
Yes the house was refurbished Trading
work
Circumstance New job resulted in sale Capital
As there are 4 badges pointing towards this being a capital gain and only 3 pointing
towards this being trading income, the profit made on sale will be considered to be a
capital gain.
52
Adjusting the accounting profit
The main adjustments are to disallow for tax certain non-allowable expenses and to
exclude any non-trading income.
You must keep in mind that allowable expenses are usually expenses incurred directly
because of the business.
The general rule is that expenditure not wholly and exclusively for the purpose of the
trade is not allowable
Net profit X
Note:
When preparing this calculation, be careful to start with the NET profit per accounts.
53
Disallowable expenses
Therefore, if they have been deducted to arrive at net profit, they must be added back.
For example, if the net profit is £10,000 and a disallowed expenses (£1,000) has been
deducted, then tax adjusted profit will be £10,000 + £1,000 = £11,000
Note:
Repair to an asset is revenue expenditure and is allowable
For example, purchasing a building to carry out trade in is a capital expense and
disallowed, but repairing this building is revenue expense and allowed.
• Reliefs
- such as qualifying loan interest payments are not allowable as they are dealt with
as a deduction from total income.
54
• Subscriptions and donations
Charitable donations (made under Gift Aid) these are not allowable as tax relief is given
by extending the tax bands when calculating income tax.
Disallowed unless the fine is paid on behalf of an employee and incurred whilst on
business
For example, if the employee receives a parking ticket whilst delivering goods to a
customer, this is generally allowable by HMRC
• The owner’s salary, or drawings or interest on capital invested in the business are
disallowed
For example, if the owner of the business pays himself 10% interest on the capital that
he has invested of £200,000 - this £20,000 interest is disallowed and cannot be
deducted.
• Interest paid on overdue tax is not deductible and interest received on overpaid
tax is not taxable
For example, if interest is payable of £100 due to the late payment of tax - this is not
allowed and cannot be deducted to arrive at taxable income.
These are allowable; the tax treatment follows the accounting treatment
However non trade write offs are not allowable and so the expense is added back.
For example if an item of trading inventory was sold on credit, but the actual cash
never came from the customer, then this is an irrecoverable debt which is an allowable
expense.
For example a loan was made to an employee and then the employee left without
paying it back and it was written off, then this is an irrecoverable debt, but it is
disallowed because it is not a trading item.
55
Allowable expenses
If they have not been deducted to arrive at tax adjusted profit, they must be.
For example if net profit is £10,000 and there is an allowed expense of £1,000 that has
not been deducted, then the tax adjusted profit will be £10,000 - £1,000 = £9,000
However, If they are correctly deducted, you will indicate these expenses with 0 in the
exam, because these items do not require adjustment.
For example if net profit is £10,000 and there is an allowed expense of £1,000 that has
been deducted, then the tax adjusted profit will be £10,000 and you will indicate the
allowed expense with 0.
• they cost less than £50 per person per year, and
• the gift is not food, drink, tobacco or vouchers exchangeable for goods and services
For example as Christmas presents, a sole trader can give his customers pens with the
company logo printed on them as gifts, as long as they cost less than £50 per
customer.
• if it is wholly and exclusively for trading purposes (e.g promoting business’ name), and
it is to a local charity then it is allowable
For example if a donation was made to a local charity and in return, at the charity
fundraiser, the business was shown as a sponsor/organiser, then this would be an
allowable expense.
Allowable if connected with the trade and are not related to capital items specifically
allowed by statute:
56
For example if a loan was taken out to purchase inventory for trading, the legal costs
associated with obtaining this loan and the interest cost of the loan are considered to be
allowable expenses.
4. Interest payable
For example if a loan was taken out to purchase inventory for trading, the interest cost
of the loan are considered to be allowable expenses.
If the owner uses a car in the business and 20% of his mileages private, then only 80%
of motor expenses are allowable.
However if the owner provides an employee with a car, and 20% of the mileage is for
private use by the employee, then the full amount of motor expenses is allowable. (The
employee is taxed on the private use under Employment Income).
6. Any salary paid to the family of the owner of the business must not be excessive.
Only salary at the commercial rate for the work done is allowable.
57
For example John ran his business as sole trader and employed his wife Mary to work
for him as a sales executive. Other sales executives are paid £750 per week, but his
wife was paid £1,000. Only £750 will be an allowable expense, because the remaining
£250 will be considered to be excessive.
7. If an owner removes goods from the business for his own use he must add back the
item as a sale at market value, unless the owner accounts for the cost of the goods
in the business accounts then they need only add back the lost profit on the item.
For example if the owner of a business takes goods from his store that cost him £750
and would normally be sold for £1,000. He must either record the sale of £1,000 and
deduct cost of £750 - therefore increasing the profit of his store by £250.
Or, he can simply add £250 to the net profit in his accounts. This would only work if the
owner has not included the purchase figure in the accounts.
Read the question carefully, for example, if the owner had included the item in
purchases, then the sale of £1,000 would need to be added to profits in order for there
to be an overall profit of £250 left to tax.
8. Pre-trading expenditure
58
Illustration:
£ £
Gross Profit 140,880
Expenses:
Depreciation 4,760
Light and heat (Note 1) 1,525
110,680
Notes
Sunny and his wife live in a flat that is situated above the clothing shop.
Of the expenditure included in the statement of profit or loss for light, heat, rent and
rates, 40% relates to the flat.
During the year, Sunny drove a total of 12,000 miles, of which 9,000 were for private
journeys.
59
Note 3: Professional fees
Legal fees in connection with the purchase of the clothing shop 1,200
Total 2300
The figure of £5,660 for repairs and renewals includes £2,200 for decorating the clothing
shop, and £1,050 for decorating the private flat.
The figure of £2,990 for sundry expenses, includes £640 for gifts to customers of food
hampers costing £40 each, £320 for gifts to customers of pens carrying an
advertisement for the clothing shop costing £1.60 each, £100 for a donation to a
national charity, and £40 for a donation to a local charity’s fete.
The fete’s programme carried a free advertisement for the clothing shop.
The figure of £84,825 for wages and salaries includes the annual salary of £15,500 paid
to Sunny’s wife.
The other sales assistants doing the same job are paid an annual salary of £11,000.
During the year, Sunny took clothes out of the shop for his personal use without paying
or accounting for them.
The cost of these clothes was £460, and they had a selling price of £650.
60
Note 8: Plant and machinery
(In the actual examination you may be required to prepare a capital allowances
computation and work out this figure. - see Topic Capital allowances)
Solution:
£ £
4,760
Depreciation
18,860
(13,060)
Less: Capital allowances (given - note 8)
61
Note: Personal taxation expense has been added to the net profit because personal
expenses are not allowable.
Note: The legal fees for the purchase amount for the shop has been added back
because this is not a trading revenue expense, this is a capital expense.
Note: The donation to the local charity is allowable but the donation to the national
charity is not allowable.
62
Small businesses are allowed to use the cash basis
This basis may result in a lower profit to be taxable, and therefore will reduce the
income tax payable.
• The business may continue to use the cash basis until the turnover exceeds
£300,000.
Calculation of profit
1. Total cash receipts of the business plus the sale of capital items are included.
For example If the business sells trading stock worth £25,000 and sells a capital asset
worth £50,000, both of these will be included to give a sales figure of £75,000.
2. Total cash expenses of the business including purchase of capital items used for
business are deducted.
For example If the business purchases trading stock worth £25,000 and purchases a
capital asset worth £50,000, both of these will be included to give a purchase figure of
£75,000.
3. There is an exception of the purchase of motor cars, these will not be included in the
calculation of profit under the cash basis. (Vans purchased will be allowable).
For example, a motor car was purchased for £40,000. Even though this is a capital
item, this will not be included in the purchases of the businesses under the cash basis.
Illustration:
Sales for the period were £61,000 of which £4,000 was still owed by business
customers at the end of the period.
Purchases and expenses of the period (all allowable) amounted to £29,000 of which
£2,000 was still owed to suppliers at the end of the period.
63
Solution:
Normal Basis £
Revenues 61,000
33,800
Cash Basis £
30,000
Understanding operation
The above calculation of profit only includes cash item, therefore things such as:
receivables, payables, opening and closing inventory will be ignored.
The business will only pay income tax on its cash profits.
Cash sales of plant and machinery in the tax year (not car) x
Less:
64
Motor expenses
The purchase capital expense of motor cars and the running expenses will not be
allowed.
This is:
For example, the motor car that was purchased for £40,000, drove 15,000 business
miles.
The allowable deduction will be (10,000 miles * 0.45) + (5,000 miles *0.25) = £5,750
Illustration:
6. Other expenses (allowable) cost £17,600 with a further £400 owed as a payable at
05/04/2023.
Calculate the tax adjusted trading profit according to the accruals basis and the
cash basis.
65
Solution:
A) Accruals basis
Sales £81,750 W1
COS (£19,320) W2
W1
W2
W3
• The motor running expense must be adjusted for business use only, as private
expenses are not allowable.
W4
W5
• AIA £2,500
66
B) The Cash Basis
AMAP (£5,000) W1
W1
AMAP
Barry should choose to elect into the cash basis scheme as this results in a
lower taxable profit for him
67
When does trading commence?
However, the trader would have incurred expenditure before this date, for example,
advertising expenditure and/or rent paid in advance.
Pre-trading expenditure will get tax relief by being treated as though it was incurred on
the first day that a sale is made, if the following conditions are satisfied.
• 2) It is an allowable expense.
• For example, if goods were purchased for sale for the business 4 years before the
business had its first sale; this purchase price will be deducted from the first profits
also.
Illustration:
• Will this expenditure be deducted from the sales revenue to arrive at tax adjusted
trading profit?
Solution:
Yes, this expenditure will be deducted from his sales revenue to arrive at the tax
adjusted trading profit.
This is because money spent on materials used in the business are an allowable
expense and it was incurred within 5 months of the trade starting.
68
Assessable profits on commencement
The first tax year is the year during which the trade commences.
For example:
if a trade commences on 1 June 2022 the first tax year is 2022/23 (06/04/2022 –
05/04/2023)
The basis period for the first tax year runs from the date the trade starts to the next 5 April.
So a trader commencing a business on 1 June 2022 will be taxed on profits arising from 1
June 2022 to 5 April 2023 in 2022/23.
• YES
o ≥ 12 months long
• NO
Therefore, profits from 06/04/2022-05/04/2023 will be taxed in the second tax year (22/23).
69
The second tax year (TY2) - 2023/24
• Does the accounting date (31 May 2023) fall in Tax Y2 (2023/24)?
YES
≥ 12 months long
Therefore, calculate profits for the 12 months to the accounting date ending in TY2:
So, let's go back to our example (assuming they continue to make accounts up to 31
May each year):
If the same profits have been taxed two times, at the end of the question, mention how
much profit has been taxed 2 times.
The first tax year would be 21/22 (01/01/2022-05/04/2022) and 3 months of profit would be
of £3,000 (3/12*£12,000) would be taxed.
The second tax year would be 22/23 and as the accounting period is 12 months long, the
full £12,000 would be taxed.
Therefore, the £3,000 of 21/22 has been taxed 2 times, this is the overlap profit.
70
Illustration 1: ≥ 12 months long
1/1/2022 - 5/4/2022
YES
Calculate profits for the 12 months to the accounting date ending in Y2
1/4/2022 - 31/3/2023
Profit = £24,000
71
Illustration 2: < 12 months long
• What trading profits will be assessed for 21/22, 22/23 and 23/24?
Solution:
1/1/2022 - 5/4/2022
YES
Profits £33,600
4. Overlap profits
72
Illustration 3 - when the accounting date doesn't fall in Tax Y2
Calculate the tax adjusted trading profit for the period ended 30/04/2022.
Solution
> 12 months long therefore tax the last 12 months of the long period
01/05/21 - 30/04/22 = £10,000 * 12/16 = £7,500
4 Overlap profits
Overlap profits created: £1,875 + £7,500 + £7,500 - £10,000 = £6,875
73
Assessable profits on cessation
Cessation of a business
1. Actual trading profits from the end of the previous accounting period to the date
of cessation.
2. Deduct any overlap profits to find the trading profit assessment of the final year.
Illustration:
Barry has been trading for many years and making up his accounts to 31/01. He ceases
to trade on 31/05/2022, with trading profits as follows:
74
Solution:
Profits £6,000
Illustration:
In the final period of trading, 01/02/2022 - 31/05/2022, Barry had a tax written down
value on his main pool of £1,000 and sold the main pool assets for £600.
Solution:
75
Capital allowances
• CA are given for a period of account eg for a year ended 31/12/22, and are
deducted in the adjustment of profits calculation to reach the Trading Profits
figure
Rates of allowance %
Capital allowances are now also available on integral features of a building including lifts
and escalators, electrical systems, heating and air cooling system.
Main pool
The following asset acquisitions should be allocated to the special rate pool:
76
For example, electrical, thermal, cooling systems.
These are assets, when new, with an expected economic working life of 25 years or
more when total expenditure based on a 12-month accounting period exceeds
£100,000
W.D.A.’s are given on main pool assets and special rate pool assets.
For main pool assets, the W.D.A. is 18% for a 12 month period
For example Assets in the main pool had a brought forward value of £100,000 at
01/01/2022
The writing down allowance on these assets will be £18,000 (£100,000*18%) in the year
ending 31/12/2022.
Note if the above period was for 6 months, then the WDA for the main pool would be
£9,000 (£100,000*18%*6/12) in the period ending 31/12/2022.
For special rate pool assets, the W.D.A. is 6% for a 12 month period.
For example Assets in the special rate pool had a brought forward value of £100,000 at
06/04/2022
The writing down allowance on these assets will be £6,000 (£100,000*6%) in the year
ending 05/04/2023.
Note if the above period was for 6 months, then the WDA would be £3,000
(£100,000*6%*6/12) in the period ending 05/04/2023.
These are given for new motor cars with zero CO2 emissions.
This is a 100% allowance on the cost of the car and it is given in the period of
acquisition.
The F.Y.A. is not time apportioned for a period of less than 12 months.
The first year allowance for this car will be £100,000 ( £100,000*100%).
Note if the above period was for 6 months, then the FYA would still be £100,000 - it is
not reduced for a period of less than 12 months.
77
Annual investment allowance
This is given to an individual for a 12 month period and is time apportioned if the period
is below 12 months.
Ideally, this A.I.A should be allocated to special rate pool assets purchased first
because the allowances on these assets are only 6% per year, therefore tax relief on
these assets is received over a longer period.
Once allocated to special rate pool assets purchased in the tax year, then if any of the
allowance is remaining, it can be allocated to main pool assets purchased in the year.
The A.I.A cannot be given to motor cars purchased in the tax year.
(Note: prior to 1 January 2019, the AIA was £200,000. You will not be tested on this in
the ATX exam)
For example a business purchased equipment worth £1,300,000 in their year ending
31/03/2023.
For the remaining £300,000 (£1,300,000- £1,000,000), a writing down allowance will be
available.
As equipment is a main pool asset, the writing down allowance will be £54,000
(£300,000*18%).
The total capital allowances available will be AIA + WDA = £1,054,000 (£1,000,000
+ £54,000)
Note if the above purchase was made in a 6 months period, then the AIA would be
(£1,000,000*6/12) = £500,000 + WDA ((£1,300,000 - 500,000)*18%*6/12) = £72,000.
This would total to £572,000 of capital allowances for the 6 month period.
78
Illustration:
Buzzy Ltd. in the year ended 05/04/2023 made the following transactions..
01/05/2022 Ventilation system and lift for his freehold office £1,278,000
building
26/06/2022 Machinery purchased and alterations made to £29,300
office building to install the machinery
The tax written down value on the main pool was £87,800 on 06/04/2022.
Solution:
Ventilation
£1,278,000
system and lift
79
Notice how the AIA was first allocated to special rate pool assets.
Illustration:
Computer
20 October 2022 580,000
equipment
80
Solution:
Main
6 month period to 31 December 2022 Allowances
Pool
Additions (AIA):
650,000
Additions (AIA)
81
Assets with private use
• A company
This is because all of the people who work in the company are considered to be
employees of the company.
Therefore, the capital allowances given are not reduced by the % of private usage by an
employee of a company.
• A Sole trader
If an asset is used privately by the owner of the business, the capital allowance given
must be reduced by the % of private usage.
If an asset is used privately by an employee of the business, the capital allowance given
is not reduced by the % of private usage.
Illustration (a company)
The company bought computer for £3,000 which is used by the sales manager 30%
privately.
Solution:
WDA = £3,000 x 18% = £540
Note: The private use of the computer by the employee is not relevant for capital allowance
purposes.
No adjustment is ever made to a company's capital allowances to reflect the private use of
an asset.
82
Illustration (a sole trader)
She bought computer for £3,000 which she uses 70% in her business and 30% privately.
Solution:
WDA = £3,000 x 18% = £540
Capital Allowances (business use only) £540 x 70% = £378
The F.Y.A is given to new motor cars purchased that have zero CO2 emissions.
For cars with a CO2 emission less than or equal to 50g, an 18% W.D.A. is given,
therefore these are considered to be main pool assets.
For cars with a CO2 emission of more than 50g, an 6% W.D.A. is given, therefore these
are considered to be special rate pool assets.
Illustration (a Company)
Cow Ltd.:
Purchase of car for £10,600. The car had CO2 emissions of 46g/
25/06/2022
km.
Purchase of car for £18,000. The car had CO2 emissions of
16/02/2023
142g/km.
14/03/2023 Purchase of car for £22,000. The car had zero emissions.
83
Solution:
Special
Main Capital
Particulars F.Y.A. rate
Pool allowances
pool
Additions:
Zero CO2
(£22,000) £22,000
Car £22,000
Solution:
84
Capital
Main Special
Particulars F.Y.A. allowan
Pool rate pool
ces
Additions:
Zero CO2
(£22,000) £22,000
Car £22,000
W1:
W2:
The tax written down value carried forward is calculated using the entire W.D.A.
85
Disposal of the assets
Use LOWER OF
1. Proceeds
2. Original cost
When an item of plant or machinery is sold - the lower of the sale proceeds received or the
original cost of the asset is deducted from the written down value of the relevant pool.
For example, if the written down value is 100 and sale proceeds received are 120 but the
original cost of the asset is 110, then 110 will be deducted from the pool to give a balancing
charge of 10. The difference between proceeds and original cost will be treated as a capital
gain.
Instead, balancing allowances and balancing charges are computed on each pool.
A balancing allowance will be deducted from trading profit to find tax adjusted trading profit
and a balancing charge will be added to trading profit to find tax adjusted trading profit.
Illustration:
The company ceased to trade on 05/04/2023 on which all of its plant and machinery was
sold for £8,000.
The written down value on its main pool at 06/04/2022 was £11,000.
Solution:
Additions £4,000
Total £15,000
Disposals (£8,000)
86
Structural and Buildings Allowance
The SBA is is a new type of capital allowance available when a building (or a structure) has
been constructed / purchased for use in the trade. For example, offices, retail and
wholesale premises, factories and warehouses all qualify for the SBA.
This allowance is also available if an unused building/structure has been renovated for use
in the trade.
The rate of the allowance is 3% per annum and is given for a period of 33 years and 4
months.
- Expenditure which qualifies as plant and machinery (and therefore will get the AIA) cannot
also qualify for the SBA and vice versa.
- The SBA can only be claimed from when the building / structure is brought into use in the
trade. This means that the SBA will be time apportioned for the period when it is first
brought into use, this is unlike capital allowances for plant and machinery which are given
the full allowance in the period of purchase.
- When the building / structure is sold, this will not result in a balancing allowance or
balancing charge. For the seller, he allowances already given at the date of sale will be
added to the sale proceeds when calculating the chargeable gain / capital loss for capital
gains tax. For the buyer, the 3% p.a. will continue to be given for the period remaining out
of the 33 years and 4 months.
Illustration
On 1/7/2022 a newly constructed factory was purchased from a builder for £500,000
(including land cost of £130,000).
Solution
The allowance will be given from September 2022 (date it was brought into use).
Illustration
87
Anaya Ltd sold the factory above on 31/3/2023 for £600,000.
What will the SBA be for the year ended 31/3/2024 for the buyer?
Solution
The SBA will be given normally for the year ended 31/3/2024 to the buyer:
£370,000 x 3% = £11,100
= £606,475
Short life assets are main pool assets that have an expected life of 8 years or less.
A de-pooling election can be made so that the asset gets its own W.D.A.’s and on sale of
the asset, a balancing allowance or balancing charge can arise.
The benefit of this election is that a balancing adjustment will arise within 8 years, which
would not have arisen, if this de-pooling did not take place.
If the asset is not sold within the 8 years of acquiring the asset, then the written down value
is added back to the main pool.
This happens on the 8th anniversary of the end of the accounting period in which the asset
was acquired.
88
Illustration:
On 01/09/2022 Aadi purchased a printer for £8,000 and made a short life asset election.
Calculate the capital allowances for the two years ending 05/04/2024
Solution:
Year ended
05/04/2023
Particulars AIA Main Short Capital
pool life allowances
asset
Additions:
Machinery £1,020,000
Printer £8,000
89
Year ended 05/04/2024
Any asset (including a car) bought on hire purchase (HP) is treated as if purchased
outright for the cash price. Therefore:
The buyer normally obtains capital allowances on the cash price when the agreement
begins
He may write off the finance charge as a trade expense over the term of the HP contract
Long-term leases (those with a term of five or more years) are treated in the same way
as HP.
90
Relief for trading losses - for individuals
1) Trading losses carried forward against the Trading income of future years
Illustration:
Trading loss of (£50,000) will be relieved against the trading income generated next year.
Loss memo:
91
c/f loss relief £20,000
2) Trading losses relieved against Current year total income plus capital gains
Trading losses can be relieved against the total income of the current year and the total
income of the previous 12 months.
If the total income of the year has been used, then the chargeable gains of that year can
also be used to relieve the loss remaining.
1. Trading income
2. Property income
3. Interest income
4. Employment income
Other Income
For example:
1. Property income
2. Interest income
3. Employment income
For using the loss against other income (not including trading income), there is a
maximum limit which applies, this is the greater of £50,000 or 25% of total income
(including trading income).
92
For example:
if you have a trading loss of £300,000 and employment income (other income) is
£250,000, the amount that can be relieved is the greater of £50,000 or (25% x £250,000)
= £62,500.
Therefore, the amount of loss that would be relieved against employment income that
year is £62,500.
Note, this applies to the carryback claim against total income also.
However, the previous year's trading profit can be entirely used, it only applies to other
income.
For example:
This year, you have a trading loss of £300,000 and no other income.
Last year, there was a trading profit of £10,000 and other income for the year was
£250,000, the amount that can be relieved is the greater of £50,000 or (25%* £260,000)
= £65,000 PLUS £10,000 from trading profit, therefore £75,000 of loss can be relieved.
Illustration
Last year, He had a trading income of £2,000 and other income of £300,000.
How much of his trading loss can he relieve using the carry back total income claim?
Solution
Therefore, he can relieve £2,000 + £75,500 = £77,500 of his trading loss using the carry
back total income claim.
93
Chargeable gains of the year
Once the total income of a year has been relieved against, and there is still trading loss
remaining, then the loss can be used against the chargeable gains of the year.
The amount of trade loss available to offset against chargeable gains is the lower of:
- current year capital gains less current year capital losses less the full amount of
capital losses brought forward.
Chargeable gains do not have to be utilised in the loss claim but if the taxpayer chooses
to use the trade loss against capital gains of the same year then the loss is treated as a
current year capital loss and so it cannot be restricted to preserve the annual
exemption.
The only times you can restrict a capital loss to preserve the annual exemption are on
capital losses b/f and capital losses in the year of death.
For example Kathy had a capital gain of £44,000. She has a capital loss brought
forward of £4,000 and has trading losses available of £24,000 - after a claim against the
total income of this tax year
Gain 44,000
Illustration:
Jane had a trading loss of £100,000 and uses £45,000 against her current year total
income claim.
She had chargeable gains of £50,000 and a loss b/f of £1,000. She wants to use the
loss against chargeable gains.
How much of the trading loss will she relieve against the chargeable gains?
94
Solution:
Gain 50,000
*the loss b.f of £1,000 does not need to be used this year as the gain that is left after
using the cy trade loss is covered by the annual exemption. The £1,000 capital loss and
the remaining trade loss of £6,000 (55,000-49,000) will be carried forward.
95
Illustration:
Peter made the following income for the year ended 05/04/2022:
Peter made the following income for the year ended 05/04/2023:
Peter made the following income for the year ended 05/04/2024:
How can the trading loss of the year ended 05/04/2023 be relieved against the
current year total income and carried back against total income for 12 months?
Solution:
£65,000 of the trading loss of (£75,000) incurred in the year ended 05/04/2023 will be
carried back against the total income generated in 05/04/2022 and Peter will receive a
refund of any tax paid for 2021/22. This wastes the personal allowance unfortunately.
The remaining loss of £10,000 will be used against total income of the current year
2022/23. This leaves total income of £15,000 of which will be mostly covered by the
personal allowance.
96
It would not be advisable to use the £10,000 remaining loss against the gains of
£15,000 in either year as most of the gains would be covered by the annual exemptions.
97
Notice here that the capital gains could not be used because there was not enough trading
loss left after making the carry back claim against total income.
Loss memo:
Note carefully that it is a carry back claim against total income for 12 months.
Therefore, if there is a shorter chargeable accounting period before the loss making year,
then the claim extends back for a full 12 months.
If a loss is made within the first 4 tax years of trading (after applying the opening year
rules) …
… then the loss can be relieved against total income of the individual for the previous 3
tax years on a FIFO basis.
Illustration:
Mary started trading in 2019/20. She had never worked before she opened her
business.
She made the following trading profits/losses in the following tax years.
How can Mary apply the opening years relief for trading losses?
98
Solution:
Note
That the opening years relief has to be applied on a FIFO basis, therefore the personal
allowance for 19/20 was wasted.
If a trading loss occurs in the final 12 months of trading, then this trading loss can be offset
against any trading profits of the final tax year of trade and then carried back for 3 tax years
against the trading profits of the company on a LIFO basis.
Once again, the loss cannot be restricted to save any personal allowances.
Additionally, for the years in which tax has already been paid, this will result in a repayment
of tax.
99
This is:
Illustration:
• Mr. Unlucky, ceased trading on 30/09/2022 and incurred a loss for the 9 months of
(£13,500).
• The trading profits for the year ended 31/12/2021 were £22,500.
• What is the terminal loss that Mr. Unlucky can claim terminal loss relief on?
Solution:
100
Illustration:
How would Mr. Unlucky obtain terminal loss relief for this loss?
Solution:
• Terminal loss relief states that the terminal loss must be relieved against trading
profits from the same trade of the last 3 tax years on a LIFO basis.
Therefore,
The factors that will influence the choice of loss relief claims are:
Illustration:
If Mr Unlucky had trading profits of £4,000 in the year ended 31/12/21 instead of
£22,500, the terminal loss calculation would have been as follows:
The key difference to note between the two illustrations is the figure prior to 5/4. In the
first illustration it produced a profit and so it was ignored. In the second illustration it
produced a loss and as such it was included in the terminal loss figure.
101
Partnerships and limited liability partnerships
What is a partnership?
A partnership is a single trading entity, but for taxation purposes each partner is treated
individually.
1. The trading income or trading loss is divided between the partners according to their
profit sharing arrangements.
The balance of any trading profit (or loss) will then be allocated in the profit sharing ratio
(PSR).
Illustration 1
• Required:
What will Peter's and Paul's share of tax adjusted trading profit be?
Solution:
102
A change in the profit sharing agreement
If the profit sharing agreement is changed during a period of account, the profit must be
time apportioned before allocation under the different agreements.
Illustration 2
The partnership's tax adjusted trading profit for the year ended 5 April 2023 is
£120,000.
The partners have always shared profits equally, and continued to do so after Paul
resigned.
All partners have overlap profits of £5,000, which they incurred on the start of trading.
• Required:
What will Peter's share of tax adjusted trading profit be for the year ending 05/04/2023?
What will Paul's share of tax adjusted trading profit be for the year ending 05/04/2023?
Solution:
• 1/1/2023 - 5/4/2023
103
Illustration 3
Profits are shared between Canda and Panda in this ratio 3:2, after paying salary of
£3,000 to Canda.
Solution:
If the question had asked for her total profit share then she would have been entitled to
her salary of £3,000 plus the residual profit share of £9,000, giving a total income from
the partnership of £12,000.
104
Illustration 4
The trading income for the year ended 30 September 2022 was £18,000
• Up to 30 June 2022 profits were shared between Doug and Rob 3:2, after paying
salaries of £3,000 and £2,000 per annum.
• From 1 July 2022 profits were shared 2:1 after paying salaries of £6,000 and £4,000
per annum.
• Required:
Show the allocation of trading profits for the Accounting Period ended 30 September
2022.
Solution:
£ £ £
1/10/2021 to 30/6/2022
1/7/2022 to 30/9/2022
105
Partnership capital allowances
Illustration 5
The partnership's tax adjusted trading profit is £120,000. this figure is before taking
account of capital allowances.
• Required:
What will Peter's and Paul's share of tax adjusted trading profit be?
Solution:
106
Commencement and cessation
1. The rules for commencement and cessation are the same as for a sole trader.
2. The profit is allocated between the partners for accounting periods and then the
assessment rules are applied.
3. Each partner is effectively taxed as a sole trader on his/her share of the adjusted
trading profit
7. Each partner has his own overlap profit available for relief.
As long as there is at least one partner common to the business before and after
the change, the partnership continues.
Illustration 6
Ann and Beryl have been in partnership since 1 July 2020 making up their accounts to
30 June each year. On 1 July 2022 Clair joins the partnership.
107
1) Show the amounts assessed on the individual partners for all relevant tax years
of assessment.
£ £ £
2) Compute each partner’s trading income as though they were a sole trader
Clair will be treated as commencing on 1 July 2022, and will be assessed on her
share of the partnership profits as follow:
108
Partnership losses
2. Loss relief claims available are the same as for sole traders.
3. A partner joining the partnership may claim under opening years loss relief, for
losses in the first four tax years of his membership of the partnership.
4. A partner leaving a partnership may claim under terminal loss relief. This relief is not
available to partners remaining in the partnership.
Illustration 7
John, James and Paul are in partnership making up their accounts to 5 April.
During the year Paul left the partnership and George joined in his place.
• Required:
State the loss relief claims that will be available to the partners.
Solution:
Paul will be entitled to terminal loss relief since he has actually ceased trading.
George will be entitled to claim opening years relief since he has actually
commenced trading.
John and James will not be entitled to either of the above reliefs.
All the partners will be entitled to relief against total income of the current or
previous tax year and against gains.
All the partners except Paul will be entitled to carry forward relief.
109
Syllabus A1a. TX - UK Recap Property and investment
income
The contents of the Paper TX - UK study guide for income tax and national insurance, under
headings:
- Property and investment income
Income from land and buildings in the UK will be liable to assessment under property
income.
This includes: rent received/receivable under any lease or tenancy agreement and the
premium received on the grant of a short lease
Less: capital element of the premium received in the tax year (x)
From 2019/20 the default method for the calculation of property income is the cash
basis - rental income received less allowable expenses paid. This gives automatic bad
debt relief as rental income is not taxed unless it is received.
110
Rental income and allowable expenses will be assessed on an accruals basis
when:
• An election is made for the accruals basis to apply (elect by 31 January 2025 for
2022/23 tax year
Under the accruals method, whatever income is allocated to the tax year and whatever
expenses are allocated to the tax year will be taxable in that tax year.
When this income is actually received in hand or when the expenditure is actually paid
out does not matter.
For premiums received due to grant of a short lease, the entire income element of the
premium will be assessed in the tax year that it is received.
This calculation will be illustrated in Topic Premiums granted for short leases.
NOTE: in your exam you should assume that the cash basis applies unless told
otherwise.
Illustration:
Penny owned two properties which were let out unfurnished until both properties were
sold on 31 December 2022.
Solution:
111
Illustration:
Anne bought a property and rented it out for the first time on 01/07/2022.
The rent of £1,000 is paid in arrears on the last day of each month. The payment for
March 2023 was not received until 10 April 2023.
She paid allowable expenses of £300 in November 2022 and £500 in May 2023 for
repairs that were completed in March 2023.
• Required:
Calculate the property income for 2022/23 using (i) the cash basis and (ii) the accruals
basis.
Solution:
£8,000
(rent is accrued for
Rent received / receivable (1 July -
(March rent was the whole period
5 April)
not received until from 1 July 2022 to
after 5 April 2023). 5 April 2023).
(£500)
Note
On the cash basis the March 2023 rent was not received before the tax year end and so
it is not taxed in 2022/23. The expense of £500 was not paid until after the tax year end
and so it is excluded from the calculation. Both of these items will be dealt with in the
tax year 2023/24.
112
Allowable expenses:
These are expenses incurred by the landlord and reduce the taxable property business
profits.
1. Insurance
2. Agent’s fees
4. Repairs
Capital expenditure is NOT allowed, therefore repairs are allowable, however capital
expenditure to improve the property are not allowed.
This differentiation can be made simpler by asking yourself whether the expenditure
improved the income earning capacity of the property, if it did, it is likely to be capital
expenditure.
Capital allowances may be claimed for expenditure on plant and machinery used for the
maintenance of the property.
7. Decorating
8. Impairment losses
e.g. A tenant left owing 1 month’s rent which you were unable to recover.
9. Advertising costs
11.Motor expenses
If a landlord uses their own vehicle to travel to and from the property they can either
deduct the actual motoring costs or use the approved mileage allowance which we saw
in the Topic The authorised mileage allowances.
12.Replacement furniture allowance (this replaces the old wear and tear
allowance and is available for all properties (except furnished holiday lets)
whether fully or part furnished)
113
Individuals and companies deduct the actual cost of replacing furniture and furnishings
when calculating the property income from renting out a residential property.
Furnishings include items such as beds, televisions, fridges and freezers, carpets and
floor coverings, curtains, and crockery and cutlery.
There is no relief for the initial cost of furniture and furnishings, there is only relief when
assets are replaced.
The amount of relief is reduced by any proceeds from selling the old asset which has
been replaced (Replacement cost - sale proceeds = replacement furniture relief).
Also, relief is not given for any cost which represents an improvement, for example, if a
washing machine is replaced with a washer-dryer, only the cost of an equivalent
washing machine qualifies for relief.
Example, during April 2022, Fred furnished a residential property with a cooker costing
£440, a washing machine costing £330, and floor coverings costing £2,200.
The cooker was sold during December 2022 for £110, and replaced with a similar model
costing £460.
The washing machine was scrapped, with nil proceeds, during March 2023.
It was replaced by a washer-dryer costing £670, although the cost of a similar washing
machine would have been £360.
Note:
No relief is available for the initial cost of the cooker, washing machine and floor
coverings.
Relief for the replacement cooker is reduced by the proceeds of £110 from the sale of
the original cooker.
No relief is given for that part of the cost of the washer-dryer which represents an
improvement over the original washing machine.
Howard had an unfurnished property and charged rent of £800 per month payable at
the end of each month.
The property was let from 06/04/2022 - 31/12/2022 when the tenant left owing 1
month’s rent which Howard was unable to recover. Allowable expenses paid in the
period amounted to £500.
• What is Howard’s property income assessable for 2022/23 using the accruals basis?
114
Solution:
Note: impairment losses do not exist under the cash basis as property income is based
on rental income actually received.
Pre-trading expenditure
Illustration:
She paid mortgage interest of £700 on the loan taken out to acquire the property.
On 01/06/2022 she incurred advertising fees of £500 and paid an insurance premium of
£300 for the year to 31/05/2023.
The flat remained empty until 01/12/2022 when it was rented for £500 payable monthly
in advance.
Solution:
Allowable expenses:
115
Property income £800
Note: under the cash basis the whole of the insurance premium is accounted for in the
tax year because it was paid in the tax year. Under the accruals basis, when calculating
the insurance premium payable, the premium has been paid for 12 months to
31/05/2023, but we only need the premium applicable until 05/04/2023, this is why
10/12 months are taken.
Note if there was furniture that was replaced for this property, then this would also be
deducted when calculating the property loss.
Note from 2017/18 there is a restriction on the amount of mortgage interest relating to a
loan on a residential property that can be deducted from property income. In 2022/23,
none of interest can be deducted from property income. The entire interest amount is
taken off the income tax liability at the basic rate of 20%. This means that any higher
rate or additional rate taxpayers will not get full relief for the interest expense.
So in this illustration, Hailey deducts no interest from property income and then would
deduct £140 (100% x £700 x 20%) from her income tax liability.
116
Furnished holiday lettings
2. Annual investment allowance is 100%. (This is a part of capital allowances and can
be seen in Topic Capital allowances)
3. Relevant earnings when calculating the maximum amount that can be invested in a
registered pension scheme includes income from a furnished holiday letting. (Refer
to Topic Pensions)
4. Rollover relief is available if the owner invests in another furnished holiday letting.
(Refer to Topic Rollover relief, Holdover relief)
5. Gift relief is available on the gift of a furnished holiday letting. (Refer to Topic Rollover
relief, Holdover relief)
Note - the restriction to mortgage interest does not apply to furnished holiday lets.
2. The accommodation must be available for letting for at least 210 days in the tax
year.
3. The accommodation must actually be let for 105 days in the tax year.
This means that no one person should occupy the letting for more than 31 consecutive
days in the tax year.
For example if the letting is let for 105 days in the tax year, it cannot be let by one
person for more than 31 days at a stretch.
117
Rent a room relief
This relief is based upon letting a room out in your main residence where you live.
There are 2 methods under which the income from letting this room can be assessed.
Method 1:
If an individual lets a room, furnished, in their main residence – the gross rent up to
£7,500 is exempt.
Gross rent x
Less: rent a room relief (£7,500)
Property income x
Method 2:
Ordinary calculation:
Gross rent x
Property income x
The election for 2022/23 must be made by 31/01/2025 and stays in force until it is
revoked.
118
Illustration:
Sunder rents a room in his main residence. Gross rents are £145 per week and
expenses amount to £120 per year.
• What is his property income assessable and when does the relevant election need to
be made?
Solution:
Ordinary calculation:
Sunder will decide to elect the rent a room relief exemption as this produces the lower
property income assessable. He will have to make this election by 31/01/2025 for
income receivable in 2022/23.
119
Premiums granted for short leases
When a tenant takes on a new lease, he may pay a one off premium to the landlord in
addition to the annual rent.
• This premium is paid to the landlord for the lease to secure the property space for a
number of years by the person renting the space.
• If this lease is for less than 50 years, then it is considered to be a short lease and a
part of it will be taxable in the year that it is received
• The part that is not taxable is known as the capital element of the premium received.
• Capital element:
• Income element:
Illustration:
Amanda was granted a 22 year lease of a property on 01/05/2022. She paid the
landlord a premium of £6,900 and also pays rent of £2,100 per month.
• What will the property income assessable be for the landlord in 2022/23?
Solution:
120
Therefore,
£6,900-£2,898 = £4,002 is the income element that will be taxed
If a trader paid a premium for a short lease he may deduct the following annual amount
against his trading profit in each of the year’s of the lease in which the property is used
in the trade.
Illustration:
• What will be the allowable deduction from property income in 2022/23 for Amanda?
Solution:
121
Property income finance costs
If a loan is taken out to either purchase or repair a residential property, there is a restriction
on the amount of interest expense that will be allowable.
2) The entire interest cost will be use to create a tax credit (a deduction from the income
tax liability) at 20%.
1) Companies
The restriction has no impact on basic rate taxpayers but it still applies to them.
Illustration:
Freddie purchased a freehold house.
The property was then let throughout the tax year at a monthly rent of £1,000 (all rent was
received in the year).
Freddie partly financed the purchase of the property with a repayment mortgage, paying
mortgage interest of £4,000.
The other expenditure on the property amounted to £1,300, and this is all allowable.
Solution:
Freddie’s property income is:
122
Less:
Total £90,700
Income tax
£37,700 * 20% = £7,540
£40,430*40% = £16,172
Total £23,712
123
Property business loss relief
If total expenses exceed total income, the property income assessable is NIL and the
excess property loss is carried forward and offset against future property income profits
ONLY.
Illustration:
• In 2021/22 a trading income of £6,000 was generated and a property loss of (£1,000)
was generated.
• In 2022/23 a trading income of £1000 was generated and property income of £800
was generated.
• What property income will be assessable to income tax in the years 21/22 and
22/23?
Solution:
2021/22 – Nil (as if property loss is incurred, the income assessed is Nil and can only be
used against future property profits)
2022/23
Note that for a furnished holiday letting loss, this can only be carried forward against
future furnished holiday letting profits, it cannot be relieved against other property
income.
For example, if there was a FHL loss of £1,000 in 21/22 and property income of £1,000
(from a different property) in 22/23 - the FHL loss would not be relieved against the
other property income in 22/23.
124
Tax payable on savings and dividend income/Income
tax computation/Income tax payable
An Income Tax Computation is prepared for each taxpayer and records the income to
be taxed for that individual for a tax year.
The tax year 2022/23 runs from April 6, 2022 to April 5, 2023.
Therefore each source of income requires its own basis of assessment to determine
how much income is to be assessed to tax in each such tax year.
125
Proforma income tax computation
Trading Profit X X
Property Income X X
Dividends from UK companies X X
TOTAL INCOME X X X X
Less
Qualifying interest (X) (X)
NET INCOME X X X X
Less: Personal Allowance (X) (X)
TAXABLE INCOME X X X X
126
Non savings income
This includes income from employment, income from self employment and property
income.
Savings income
Savings income is all types of interest income, and for the exam, it is received gross -
therefor you just need to include the received amount in the income tax computation.
Savings income now benefits from a 0% rate, because there is a savings income nil
rate band.
For basic rate taxpayers, the savings income nil rate band for the tax year 2022/23 is
£1,000, and for higher rate taxpayers it is £500. Additional rate taxpayers do not benefit
from any savings income nil rate band.
Do not confuse this with the personal allowance, this savings nil rate band is only
for savings income, if there is no savings income then it cannot be used against
any other types of income.
Also do not confuse this with the savings income starting rate of £5,000 which
applies if there is taxable non savings income of less than £5,000.
Savings income in excess of the savings income nil rate band is taxed at the basic rate
of 20% if it falls below the higher rate threshold of £37,700, at the higher rate of 40% if
it falls between the higher rate threshold of £37,700 and the additional rate threshold of
£150,000, and at the additional rate of 45% if it exceeds the additional rate threshold of
£150,000.
127
• Example of a higher rate payer
For the tax year 2022/23, Jina has a salary of £48,500 and savings income of £1,800.
Savings income
Savings income £1,800
£500 at 0% = £0
£1,270 at 20% (£37,700 - £35,930 - £500) = £254
Note if she was a basic rate taxpayer, then the savings nil rate band would have been
£1,000 and if she was an additional rate taxpayer, then there would be no nil rate band
available.
Also notice that the nil rate band uses up some of the basic rate band.
128
Dividend income
The first £2,000 of dividend income for the tax year 2022/23 benefits from a 0% rate.
This £2,000 nil rate band is available to all taxpayers, regardless of whether they pay tax
at the basic, higher or additional rate.
For the tax year 2022/23, Eesha has a salary of £56,000 and dividend income of £6,800.
Dividend income
Dividend income £6,800
2,000 at 0% =£Nil
4,800 (6,800 – 2,000) at 33.75% = £1,620
Tax liability (7,540 + 2,292 + 1,620) = £11,452
Carefully note
These nil rate bands are not deductions, they just allow some savings and dividend
income to be taxed at 0%.
They also use up the bands so, if there is taxable non savings income of £23,000 and
taxable savings income of £15,000, even though £500 of the savings income is at 0% it
still uses the band and so £38,000 is taxable in total meaning that this taxpayer is higher
rate.
Only the personal allowance is a deduction which must be first given to non savings
income, then savings income and then dividend income.
129
Income that is exempt from income tax
The difference between an income tax liability and income tax payable
Income tax liability is a taxpayers total tax liability for the year.
Tax payable is the amount of tax that is still owing at the end of the year.
For example, if you are an employee with no other income, you are unlikely to have any
tax to pay at the end of the year as it has all been deducted at source by your employer
via PAYE.
You would still calculate your tax liability, then deduct any tax paid at source via PAYE to
leave you with a tax payable figure.
Therefore,
£1-£37,700 at 20% (basic rate band) (unless the starting rate is available and then it is
£0 - £5,000 at 0% and £5,001 to £37,700 at 20%)
130
Remember to use your dividend nil rate band!
Illustration:
For the tax year 2022/23, Joe has a salary of £40,000, savings income of £2,000 and
dividend income of £9,000.
During the year, he paid interest of £300 which was for a qualifying purpose.
Solution:
Type of income £
Employment income 40,000
Income tax:
27,130 (40,000 – 300 – 12,570) x 20% = £5,426
500 at 0% = £0
Note
Joe is a higher rate taxpayer, so his savings income nil rate band is £500.
The dividend 0% nil rate band used up some of the basic rate band leaving £6,570 of
the basic rate band for some of the dividends with the remainder of the dividends being
taxed at the higher rate.
131
Savings income starting rate band
There is a tax rate of 0% for savings income within the savings income starting rate
band (£5,000) (don't confuse this with the Savings income nil rate band, that you have
seen in the previous topic)
The savings income starting rate only applies where the savings income falls wholly or
partly below the starting rate limit.
The savings income starting rate band counts towards the basic rate limit of £37,700.
• Solution
NSI
13,000 - PA 12,570 = £430 x 20% = £86
SI
Savings income starting rate band: £5,000 - £430 = £4,570 x 0% = £0
Savings nil rate band: basic rate taxpayer = £1,000 x 0% = £0
(£9,000 - £4,570 - £1,000) = £3,430 x 20% = £686
Note: We used the Savings starting rate band here because the Non-savings taxable
income was below £5,000. In fact, it was £430, therefore we could still use £4,570
(5,000 - 430) savings starting rate band and use 0% rate.
132
Example (where you can't use the Saving starting rate band)
• Solution
NSI
46,350 - PA 12,570 = £33,780 x 20% = £6,756
Peter is a higher rate taxpayer since his Total taxable income is more than £37,700
(£33,780 + £9,000 = £42,780).
SI
Savings nil rate band: higher rate taxpayer = £500 x 0% = £0
(£37,700 - £33,780 - £500) = £3,420 x 20% =£684
Note: We could NOT use the Savings starting rate band here because the Non-
savings taxable income was more than £5,000. In fact, it was £33,780
133
Individual Savings Accounts and other tax exempt
investments
Individual Savings Accounts (ISA’s) have for many years been the most common form
of tax efficient investment.
The individual savings account (ISA) investment limit for the tax year 2022/23 is
£20,000.
The £20,000 limit is completely flexible, so a person can invest £20,000 in a cash ISA, or
they can invest £20,000 in a stocks and shares ISA, or in any combination of the two –
such as £10,000 in a cash ISA and £10,000 in a stocks and shares ISA.
1. Income is free of income tax (since the introduction of the savings income nil rate
band for basic and higher rate taxpayers this is less likely to be an advantage for
most individuals. However, it would still be an advantage to an additional rate
taxpayer and other taxpayers who have already used their nil rate band)
2. Disposals of investments within an ISA are free from capital gains tax.
Components of an ISA
National savings
These offer a variety of products some of which are tax free, e.g. National Savings
Certificates
However, some National Savings & Investments (NS&I) products are taxable, namely:
134
Syllabus A1a. TX - UK Recap The Comprehensive
computation of taxable income
The contents of the Paper TX - UK study guide for income tax and national insurance, under
headings:
- The comprehensive computation of taxable income and the income tax liability
Personal allowance
Personal allowance
If an individual makes income above this allowance amount, then income tax will be
charged on that additional income and the relevant rates.
For the tax year 2022/23 the personal allowance is £12,570 but it is reduced if the
taxpayer has adjusted net income for the year in excess of £100,000.
If the adjusted net income exceeds £100,000 then the personal allowance is reduced by
½ of the excess of £100,000.
Therefore, the personal allowance is reduced to Nil if the adjusted net income is
£125,140. (£125,140-£100,000)/2 = £12,570.
Net income = Total income – qualifying interest payments – trading loss reliefs.
135
How does this all look?
TOTAL INCOME X
Less:
NET INCOME X
Less:
TAXABLE INCOME X
Illustration:
Bubble has net income of £103,150 and has a gross personal pension contribution of
£2,000.
Solution:
• £12,570
• (£575)
Total income
136
Transferable Personal Allowance
• The maximum amount that can be transferred from the non taxpaying spouse is:
£1,260. This reduces their available personal allowance to £11,310 (£12,570-£1,260)
• This transfer will be given in the form of a 20% tax credit to the spouse who is taking
it: 20% * (£1,260) = £252 is the maximum tax credit that can be given to the spouse
who is paying tax.
• Thus, this amount will be deducted from their income tax liability to reduce their
income tax payable.
• The election to transfer must be made within 4 years of the end of the tax year to
which it should apply, and remains automatically effective until it is withdrawn.
Illustration:
A husband has trading income of £30,000. His wife only has employment income of
£8,000.
• How much of her unused personal allowance can she transfer to her husband?
£1,260
• How will this reduce his income tax payable? TAX REDUCER OF £252 (£1,260*20%)
137
Solution:
Wife
Husband
138
Qualifying loans
Certain interest payments made on loans taken are deducted from trading income and
property business income.
These include taking out a loan for trading purposes and taking out a loan to purchase
an investment property.
The interest payments here will be deducted from their respective headings that they
relate to.
• Here, we will look at the interest payments which will reduce a taxpayer’s total
income.
• Interest paid on certain loans are deductible from a taxpayer’s total income is
known as interest paid on qualifying loans.
1. Loan to purchase plant and machinery which is necessarily acquired for the use in
the employment of the taxpayer
Illustration:
Purchasing a computer to use for employment, if a loan was taken out to make this
purchase, then the interest payable is deducted from total income.
2. Loan to purchase plant and machinery for the use in the business of a partnership, in
which the taxpayer is a partner.
Illustration:
A partner would have taken out a personal loan to purchase a computer for use in the
partnership, here interest payable would be deducted from total income
139
3. Loan to purchase an interest in a partnership.
Illustration:
Partner A puts in £20,000 into the partnership bank account to fund the business.
If he has borrowed this £20,000 from a bank at 7% p.a., then he can deduct the £1,400
payable from his total income.
This is allowable as long as the taxpayer owns at least 5% of the ordinary share capital
or works for the greater part of his time in the management of the company.
140
Gift aid donations
There are 3 tax benefits available for making personal gift aid
donations:
For example, if an individual want to make a gift aid donation of £1,000, he needs to
pay 80% and HMRC will make the remaining 20% donation on his behalf.
Therefore, he will pay £800 and HMRC will pay £200 to the fund.
2. Increase the basic and higher rate bands by the gross gift aid donation.
Therefore, this same individual will increase his basic rate band to 37,700 + 1,000 =
£38,700 and his higher rate band to 150,000 + 1,000 = £151,000.
This will result in an additional £1,000 being taxed at the lower rate of 20% instead of
40%, and an additional £1,000 being taxed at the higher rate of 40% instead of 45%.
3. Gross gift aid donation are deducted from net income to arrive at adjusted net
income.
Adjusted net income is used to determine the amount of personal allowance available.
(Topic Personal allowance)
141
Illustration:
Eli has a trading profit of £60,000 and he paid £2,400 to charity under the gift aid
system.
Solution:
Benefit 1:
Benefit 2:
Benefit 3:
142
Syllabus A1a. TX - UK Recap National insurance
contributions
The contents of the Paper TX - UK) study guide for income tax and national insurance, under
headings:
- National insurance contributions for employed and self-employed persons
2. Employer’s Class 1
Paid by employers
3. Class 1A
Paid by employers
4. Class 2
Paid by the self-employed
5. Class 4
143
NIC for the employed
There are 3 types of contributions that are payable for those who are employed:
1. Employee’s Class 1
2. Employer’s Class 1
3. Class 1A
For the tax year 22/23 the rates of employee class 1 NIC is 13.25% and 3.25%.
£12,571- 13.25%
£50,270
£50,271 - 3.25%
onwards
144
Illustration - Employee’s Class 1
Cow plc has one employee who is paid £57,000 per year.
Solution:
12,570 * 0% = £0
£50,270-£12,570 = £37,700 * 13.25% = £4,995
£57,000 – £50,270 = £6,730 * 3.25% = £219
Note that when you are calculating the NIC payable, you need to start paying from
£12,570.Therefore, you will subtract £12,570 from £50,270 and so forth.
There is an employment allowance of £5,000 (given in the exam) available per employer
to reduce the employer’s Class 1 Secondary NIC payable.
Note: this allowance is not available to companies where the only employee is the
Director.
• The rate of employer class 1 NIC is 15.05% and is paid on all earnings over £9,100
in the tax year.
£9,101
15.05%
onwards
145
Illustration - Employer’s Class 1
Cow plc has three employees who are each paid £55,000 per year.
Solution:
£9,100 * 0% = £0
£55,000 – £9,100 = £45,900 * 15.05% = £6,908
Note that you may have to calculate the monetary value of the benefits, and then
calculate the Class 1 A NIC payable, based on the benefit's monetary value.
Benefits provided to
Class I A Employer No limits 15.05%
employee
146
Illustration Class 1A NIC
Solution:
John has been given a petrol car to use for private purposes during the tax year
2022/23.
The car has a list price of £10,000 and it has a CO2 emission of 135g.
Solution
147
Class 2 and 4 NIC
The small earnings exemption is £6,725 which means that if the trading profits are
below this figure no Class 2 NIC is payable.
If trading profits are above this amount then £3.15 is paid per week.
Paid on behalf
NIC Paid by Limits Rates
of
£0-£11,908
0%
Self Self employed
Class 4 £11,909-£50,270
10.25%
employed cash earnings
£50,271 -onwards 3.25%
148
Illustration:
Calculate the NIC payable by Shobha if she is self-employed in 22/23 has self-
employed income of £57,000.
Solution:
149
The annual employment allowance
Employment allowance
• This will reduce the liability that results from the calculation of Employer’s Class 1
NIC by £5,000.
Illustration:
150
Solution:
£12,570 * 0% = £0
There is no Class 1 A because the employee was not given any employment benefits.
151
Syllabus A1a. TX - UK Recap Exemptions and reliefs
The contents of the Paper TX - UK study guide for income tax and national insurance, under
headings:
- The use of exemptions and reliefs in deferring and minimising income tax liabilities
Pensions
An employee can contribute into the scheme and an employer can contribute into the
scheme on behalf of the employee.
• The contribution made by the employee is deducted from their salary in arriving at
taxable income.
Illustration 1:
During the year he has contributed £1,000 into his occupational pension scheme.
152
Solution:
Salary £20,000
Less:
Less:
There are 3 tax benefits available for making personal pension contributions into a
registered scheme.
They are exactly the same as the tax benefits available for making gift aid donations.
These are:
Therefore, he will pay £800 and HMRC will pay £200 to the fund.
2. Increase the basic and higher rate bands by the gross personal pension
contribution.
Therefore, this same individual will increase his basic rate band to £38,700 and his
higher rate band to £151,000.
This will result in an additional £1,000 being taxed at the lower rate of 20%, and an
additional £1,000 being taxed at the higher rate of 40%.
3. Gross personal pension contributions are deducted from net income to arrive at
adjusted net income.
Adjusted net income is used to determine the amount of personal allowance available.
153
Illustration 2:
Eli has a trading profit of £55,000 and he paid £2,400 (net) to a registered personal
pension scheme in the tax year 22/23.
Solution:
Benefit 1:
Benefit 2:
154
Benefit 3:
However, there are 2 limitations under which contributions must be to qualify for the tax
relief outlined.
These are:
1. They must be within the relevant earnings of the individual. If not, a certain amount
of the contribution will be taxable.
2. If they are within the relevant earnings, they must be also within the annual
allowances of the individual. If they are not, a certain amount of the contribution will
be taxable.
155
What are relevant earnings?
• £3,600 and
100% of:
• Income from furnished holiday lettings (e.g.) rental income from a FHLA
For example
if an individual has trading profits of £50,000, then the greater of £3,600 and £50,000
will be chosen as relevant earnings, £50,000 will be the relevant earnings.
if an individual has trading profits of £3,000, then the greater of £3,600 and £3,000 will
be chosen as relevant earnings, £3,600 will be the relevant earnings.
The individual can use the allowance yearly, and the amount unused is carried forward for 3
years but only if they are a member of a pension scheme in those years.
• Therefore, at any particular time, an individual can use their current year allowance plus
3 years’ b/f unused annual allowances on a FIFO basis.
The gross contributions are deducted from the annual allowances.
2019/20 £40,000
2020/21 £40,000
2021/22 £40,000
2022/23 £ 40,000
156
Illustration 3:
Sally's trading income for the year ended 05/04/2023 were £60,000.
Sally made contributions of £56,000 (gross) into a personal pension scheme during the tax
year 22/23.
She has made gross pension contributions of £30,000 per annum for the last 10 years.
Solution:
What happens if the gross contributions are above the relevant earnings or annual
allowance available?
The additional amount is added to the total income, on top of other income, therefore it is
chargeable to income tax at the highest rate that the individual pays.
Annual allowances only start to accumulate in the first year that an individual makes a
contribution.
157
Illustration 4:
Her trading income for the year ended 05/04/2023 were £95,000.
Jenny made contributions of £56,000 (gross) into a personal pension scheme during the tax
year 22/23.
She has made gross pension contributions of £39,000 per annum for the last 10 years.
Solution:
Total income
Trading income £95,000
Annual allowance charge £13,000
Total income £108,000
158
Basic Band extension: £37,700 + £56,000 = £93,700
159
Tapered annual allowance
• If AI (Adjusted income) is more than £240,000 then the CURRENT year Allowance is a
tapered allowance
• It means that the normal annual allowance of £40,000 is reduced by £1 for every £2 by
which a person’s adjusted income exceeds £240,000, down to a minimum tapered
annual allowance of £4,000.
This is similar to how personal allowances are reduced, except the adjusted net
income in this case needs to be £240,000 to reduce, not £100,000.
Therefore, a person with adjusted income of £312,000 or more, will only be entitled to
an annual allowance of £4,000 (£40,000 – ((£312,000 – £240,000)/2) = £4,000).
Tapering applies on a tax year basis, so a taxpayer with variable income might find
themselves entitled to the full £40,000 annual allowance for some years, and a tapered
annual allowance in other years.
For example
A.I. For the employed = Net income + employer contributions to the pension
scheme + employee contributions to the pension scheme
Remember that it is only the 2016/17, 2017/18, 2018/19, 2019/20, 2020/21, 2021/22
and 2022/23 annual allowances that you will apply this tapering to, the other
allowances are always given in full
160
• If the annual allowance is not fully used in any tax year, then it is possible to carry
forward any unused allowance for up to three years on a FIFO basis
For this exam, you will be carrying forward annual allowances from 2019/20 onwards
based on the £40,000 that was applicable in that year.
If there is any annual allowance remaining from 2022/23, after the tapering has been
done to the allowance, this can also be carried forward in the normal way.
Therefore, for any year in which a person is not a member of a pension scheme the
annual allowance is lost.
2019/20 £32,000
2020/21 £31,000
2021/22 £19,000
2022/23 £48,000
Solution:
The pension contribution of £48,000 for 2022/23 has used all of Peter’s annual allowance of
£40,000 for 2022/23 and £8,000 (48,000 – 40,000) of the unused allowance of £8,000
(40,000 – 32,000) from 2019/20.
161
Illustration AI>£240,000
2019/20 £32,000
2020/21 £31,000
2021/22 £19,000
2022/23 £3,000
His adjusted income for the year is £350,000. This is the first time that his AI has been
above £240,000.
Solution:
No.
Chirag’s tapered annual allowance for 2022/23 is the minimum of £4,000 because his
adjusted income exceeds £312,000.
His contribution this year is only £3,000 - therefore it is within the tapered annual allowance
of £4,000 and he will have £1,000 to carry forward to 2023/24.
Lifetime allowance
In 2022/23 the lifetime allowance is £1,073,100. This is the total amount of funds that can
be built up within a person’s pension scheme.
If a pension fund grows above this amount the excess will be subject to a tax charge of
either 55% if it is taken out of the pension fund as a lump sum or 25% if it is taken out in
any other way eg pension payments or cash withdrawals.
162
Tax planning
When we dealt with jointly owned assets, we illustrated the tax advantage to be gained
from transferring ownership of an income producing asset, such as a rental property
from a higher rate taxpayer to a spouse who was only a basic rate taxpayer, or even
greater tax savings to be had when the transferee spouse was not even a basic rate
taxpayer and was not therefore using some or all of their personal allowance.
This would allow income that would have been taxed at 40% to now be taxed at 20%
or indeed not taxed at all if the income fell within the available personal allowance of the
transferee spouse.
The introduction of nil rate bands for savings income and dividend income has created
opportunities for spouses to reduce their overall charge to income tax and may even
give an advantage to transferring such income from a basic rate taxpayer spouse to a
higher rate taxpayer spouse!
Example
Donald and Theresa are a married couple and have regular annual income as follows:
Donald
Salary £60,000
Theresa
Salary £18,000
Interest £2,000
Dividends £9,000
It is clear from the above information that Donald is a higher rate taxpayer with taxable
income of £47,430 (60,000 – 12,570) and Theresa is a basic rate taxpayer with taxable
income of £16,430 ((18,000 + 2,000 + 9,000) – 12,570).
In this situation it would normally be the case that for tax planning purposes it would be
advisable to see if any investment income could be moved from the higher rate taxpayer
to the basic rate taxpayer.
The introduction of the nil rate bands, however, means that in the above example tax
savings can be achieved if firstly, £500 of the interest income could be made by Donald
and therefore use his savings income nil rate band of £500 that is currently being
wasted.
This income is being taxed at 20% on Theresa as she has savings income in excess of
her nil rate band of £1,000.
163
If she transferred £500 to her husband, he would use his nil rate band and she would
save: £500 * 20% = £100
The second transfer would be of sufficient shares to move £2,000 of dividend income
from Theresa to Donald in order that both may use their dividend income nil rate bands
of up to £2,000.
Currently Theresa is being taxed at 8.75% on £2,000 of her dividend income, so a tax
saving of £175 (£2,000 * 8.75%) would be possible here.
Clearly in practice choosing the right amount of interest bearing securities and shares to
transfer to Donald to allow usage of the available nil rate bands may be a little difficult to
precisely achieve.
Carefully keep in mind that it is now not necessary to transfer from a higher rate payer
to a basic rate payer to save tax, it can be the other way round.
164
Syllabus A1b. The Scope of Income Tax
i) Explain and apply the concepts of residence, domicile and deemed domicile and advise on
the relevance to income tax
Illustration – UK resident
John is UK resident and earns a trading profit in the UK of £60,000 p.a. and he earns
rental income from a villa in Spain of £10,000.
165
Solution
John is not UK resident and earns a trading profit in the UK of £63,000 p.a. and he
earns rental income from a holiday home in New Zealand of £10,000. He is not a citizen
of the EEA.
Solution
Note: as John is not a UK resident, nor a citizen of the EEA, it is unlikely that he will be
able to claim a personal allowance.
166
Domicile and deemed domicile
Domicile
2. Domicile of dependency - if, whilst under 16, father’s domicile changes then domicile
changes with that of the father
3. Domicile of choice - once 16, can sever ties with old country and move to settle
permanently in another country
Deemed domicile
An individual can be deemed domicile in the UK for income tax and capital gains tax if
they satisfy one or both of the following conditions:
2. The individual is a long-term UK resident who has been UK resident for at least 15 of
the 20 years immediately before the relevant tax year.
Illustration
Jake was born in the UK and his father was domiciled in the UK. At the age of 3 Jake
acquired a domicile of dependency when is father became domiciled in Spain. Jake
returned to the UK on 6 April 2022 and intends to stay for the foreseeable future.
Jake passes the statutory residence test and so will be treated as UK resident in
2022/23.
167
1) Remittance Basis
– whatever overseas income/gain exists, you only pay UK income tax on the amount
of income that you send back to the UK.
If the remittance basis is claimed, the taxpayer will not be entitled to a Personal
Allowance (PA) for Income Tax or Annual Exempt Amount (AEA) for Capital Gains.
The remittance basis will automatically apply if unremitted income (income that has not
been sent back to the UK) is below £2,000.
In this situation, there is no need to elect for the remittance basis and no RBC will be
charged. The taxpayer also gets to keep their PA and AEA
For example
John is UK resident but not UK domiciled/deemed domiciled.
He has investment income arising in Barbados of £10,000.
He remits £9,000 of this income back to the UK.
Will the remittance basis automatically apply?
Solution
Yes it will automatically apply as unremitted income is below £2,000.
There will be no Remittance Basis Charge (see below).
168
2) Arising Basis
– whatever overseas income/gain exists, UK income tax is paid on it entirely.
John is UK resident but not UK domiciled/deemed domiciled and earns a trading profit
in the UK of £63,000 p.a. and he earns rental income from a villa in Spain of £10,000.
How much UK Income tax will he pay if he chooses the remittance basis (RB)?
Solution
Trading profit £63,000
Overseas income £3,000
Total income £66,000
Less:
P.A. (£Nil) - he is not entitled to the PA if he chooses the RB
Taxable Income £66,000
£37,700 * 20% = £7,540
(£66,000 - £37,700) * 40% = £11,320
UK Income tax payable £18,860
John is UK resident but not UK domiciled/deemed domiciled and earns a trading profit
in the UK of £63,000 p.a. and he earns rental income from a villa in Spain of £10,000.
How much UK Income tax will he pay If he chooses the arising basis?
Solution
Trading profit £63,000
Overseas income £10,000
Total income £73,000
Less:
P.A. (£12,570)
Taxable Income £60,430
£37,700 * 20% = £7,540
(£60,430 - £37,700) * 40% = £9,092
UK Income tax payable £16,632
Conclusion:
The Remittance basis looks like the expensive option because John loses his
entitlement to the Personal Allowance. The decision whether or not to claim the
169
remittance basis should be considered year by year as, depending on the level of
unremitted income, sometimes it will be the cheaper option.
• If income not sent back to the UK is LESS than £2,000 then the remittance basis is
automatic, otherwise it must be elected.
If the remittance basis is automatic, then there is no remittance basis charge.
If prior to the current tax year an individual (over the age of 18) has been UK resident for
at least 7 of the last 9 tax years then by making the remittance basis election they must
pay HMRC a remittance basis charge. This charge increases once they have been in the
UK for at least 12 of the last 14 years.
This is similar to paying tax on their unremitted income, except that it’s just a flat
charge.
If prior to the current tax year a person has not been UK resident for at least 7 tax years
then if they make the remittance basis election, there is no remittance basis charge.
• Prior to the current tax year the person was UK resident for at least 7 out of the last 9
tax years
RBC £30,000
• Prior to the current tax year the person was UK resident for at least 12 out of the last
14 tax years
RBC £60,000
Illustration
She has been resident in the UK since 06/04/2015 and earns an annual salary of
£80,000.
She has a property in India from which she earns rental income of £24,000 and from this
remits £15,000 to the UK annually.
170
Which basis should she choose to tax the overseas rental income in 2022/23?
Solution
Remittance basis
She has been resident in the UK from 06/04/2015 – 05/04/2023 = 8 out of the last 9 tax
years.
Therefore the R.B.C. will be £30,000.
Income tax computation:
Salary £80,000
Remitted Income £15,000
Total income £95,000
(No P.A.)
£37,700 * 20% = £7,540
(£95,000 - £37,700) * 40% = £22,920
Arising basis
Salary £80,000
Overseas Income £24,000
Total income £104,000
Less:
P.A. (W1) (£10,570)
Taxable income £93,430
Income tax
£37,700 * 20% = £7,540
(£93,430 - £37,700) * 40% = £22,292
Total I.T. payable £29,832
W1
Income>£100,000
(£104,000 - £100,000)/2 = £2,000 – reduce P.A.
P.A. £12,570
Less (£2,000)
Available P.A. £10,570
Conclusion
The remittance basis results in a payment to HMRC of £60,460
The arising basis results in a payment to HMRC of £29,832
The arising basis should be chosen as it saves £30,628
171
Syllabus A1b.
iii) Advise on the tax position of individuals coming to and leaving the UK
However, there are some circumstances where a tax year can be split and an individual is
deemed to be UK resident for only part of the tax year (UK part) and not UK resident for a
part of the year (overseas part).
For the split year basis to apply, the individual must be UK resident in the tax year under the
automatic tests or sufficient ties tests.
Leaving the UK
The split year basis applies in the tax year if the individual:
172
Reason 1
• Conditions
They do not spend more than a permitted number of days in the UK after they leave
(less than 91 days per tax year, reduced proportionately in the year of leaving).
Illustration
Seeta has been living in the UK since she was born and is UK resident for tax purposes.
She has taken up a job in India as a teacher and signed a 2 year contract to work there.
One week after she moved to India, she started her work there on 01/11/2022.
Will the split year basis apply? When will it be applicable from?
• Solution
Yes it will apply because, she has been UK resident in the current and previous tax years
and she is ceasing to be UK resident in the following tax year.
She has left the UK for one of the acceptable reasons for the split year treatment to apply –
working abroad full time and she spends a limited amount of time in the UK.
It will be applicable from the date she starts the overseas work 01/11/2022.
UK Part 06/04/22-31/10/22
Overseas Part 01/11/22-05/04/23
173
Reason 2
They accompany or later join their partner to continue to live with them.
• Conditions
Their partner must satisfy the first test above of working full time abroad.
The partner must be a spouse/civil partner with whom they have lived with at some point
during the tax year.
They have no home in the UK or if they do, they spend the greater part of their time in the
overseas home.
Illustration
As Seeta left the UK to start working in India (seen above), Seeta’s husband Vishan has
been a UK resident since birth, for tax purposes.
He sold their home in the UK and moved to India to live with her on 01/02/2023.
Will the split year basis apply? When will it be applicable from?
• Solution
Yes it will apply because, he has been UK resident in the current and previous tax years and
he is ceasing to be UK resident in the following tax year.
He has left the UK for one of the acceptable reasons for the split year treatment to apply –
joining his wife to continue to live with her, and they have sold their home in the UK.
It will be applicable from the date he moves to live with her on 01/02/2023.
UK Part 06/04/22-31/01/23
Overseas Part 01/02/23-05/04/23
174
Reason 3
• Conditions
They spend minimal time in the UK (less than16 days) and they establish ties with
the overseas country, for example, they buy a home there.
Illustration
Shane and Sophie have been UK residents for the last 5 years.
They are moving to India on 01/02/2023, they sell their home in the UK and purchase one in
India on 01/03/2023.
Will the split year basis apply? When will it be applicable from?
• Solution
Yes it will apply because, they have been UK resident in the current and previous tax years
and they are ceasing to be UK resident in the following tax year.
They have sold their home in the UK and formed a tie with India by purchasing a home
there.
UK Part 06/04/22-28/02/23
Overseas Part 01/03/23-05/04/23
175
Arriving in the UK
The split year basis applies in the tax year if the individual:
Reason 1
They begin to work in the UK full time.
Conditions
For >=365 continuous days and did not have sufficient ties in the UK to be UK resident
prior to entry.
Reason 2
They accompany or later join their partner to continue to live with them in the UK.
Conditions
Their partner must satisfy the first test above.
The partner must be a spouse/civil partner with whom they have lived with at some point
during the tax year.
Reason 3
They buy a home in the UK.
Conditions
They did not have sufficient ties in the UK to be UK resident prior to purchasing a home in
the UK.
176
Illustration
Brenda has been working in Spain for many years but on 01/07/2022, she came to the UK
in search of other employment.
She has no ties in the UK and has not been UK resident in the past.
She secured herself a three year contract of employment and started work on 22/08/2022.
Will the split year basis apply? When will it be applicable from?
• Solution
Yes it will apply. This is because she is not resident in the previous tax year and she is
resident in the current tax year (she will spend at least 183 days in the UK).
The condition for working full time in the UK has been satisfied.
It will be applicable from the date she starts the overseas work 22/08/2022.
177
Syllabus A1biv/v/vi. Determine the income tax treatment of overseas income
and
Understand the relevance of the OECD model double tax treaty to given situations
and
Calculate and advise on the double taxation relief available to individual
Under UK tax law an individual who is resident in the UK must pay UK income tax on his
worldwide income.
In the case of income arising in another country, that income may also be taxed in the
foreign country, and will be taxed in the UK, if the individual is UK resident.
The rules that apply to the taxing of overseas income are set out in the Organisation for
Economic Co-operation and Development Model (OECD).
This model states that if there is no double taxation treaty between 2 countries, then double
taxation relief is available. (There will never be a treaty in your exam, you will always have to
calculate DTR)
Therefore, in order to avoid being taxed on the same income two times, double taxation
relief (DTR) is available, usually as a tax credit against the UK income tax liability.
Where there is more than one source of overseas income, DTR on each source must be
considered separately.
178
Illustration
John owns a home in Barbados and rents it out for £30,000 p.a.
• Solution
Therefore, he will pay 40% UK IT, however, in Barbados, the tax rate is 45% - which is
higher than the UK.
Illustration
Jeremy is resident and domiciled in the UK and has the following income.
You should assume that no double tax treaty exists between the UK, Barbados and India.
What is the income tax liability after considering all available reliefs?
• Solution
179
Analysis of income:
• Income tax:
Non-savings income
£37,700 × 20% = £7,540
£53,180 × 40% = £21,272
Savings income:
£500 × 0% =£Nil
£3,600 x 40% =£1,440
Dividend income:
£2,000 x 0% =£Nil
£5,000 x 33.75% =£1,688
• W1
• W2
180
Syllabus A1c. Income from employment
Syllabus A1ci) Advise on the tax treatment of share option and share incentive schemes.
Incentive Schemes
An employee incentive scheme provides financial incentives for employees to improve their
work performance.
Pay No income tax or NIC, (If you hold the shares for more than 5 years)
Pay No I.T. or NIC (If you hold the shares for more than 5 years)
1. Shares must be offered to all employees who have been working in the company for
more than 18 months (It can NOT be selective)
2. Maximum value of shares that the employer can give to the employee each tax
year can not exceed £3,600
181
Consequences of withdrawing the shares before 5 years from SIP
• Capital gains tax the base cost of the share is the market value at the time they are
withdrawn from the share incentive plan.
Illustration
Jake receives 100 shares valued at £2 from an approved SIP from his employer.
• Solution
No income tax will be payable in the year that the shares are received as this is an
approved plan.
Selling in 2 years
Income tax and class 1 primary national insurance is payable in the tax year of withdrawal
based on the market value when withdrawn.
Benefit:
182
• Selling in 4 years
Income tax and class 1 primary national insurance is payable in the tax year of withdrawal
based on the lower of:
• Selling in 6 years
As the shares are held for more than 5 years in the approved plan, there is no income tax or
NIC payable.
The cost of the shares are the market value of the shares when they leave the plan.
Therefore if withdrawn in 2 years (M.V. £4 is cost), 4 years (M.V. £6 is cost) and 6 years (M.V.
£8 is cost)
Share options
The pre-determined fixed price is usually below the market value of the shares at that time.
The taxation consequences of share options depends on whether or not they are approved
by HMRC as follows.
The tax advantaged share option schemes are the company share option plan (CSOP), the
enterprise management incentive share option scheme (EMIs) and the Save As You Earn
(SAYE) share option scheme.
183
Share option plans
Pay CGT: (Market value @ sale date - Market value @ grant date) x CGT tax rate
Illustration
Jake wants to offer share options to 5 of his employees under the EMI scheme.
On grant: 10,000 shares/employee when the shares have a market value of £2 and the
exercise price is £1.75.
They can be exercised in 6 years when they have a market value of £5.
• Solution
Conditions to be satisfied
The cost of shares will be the market value at the grant date.
Therefore,
S.P £5
Less cost (£2)
Capital gain £3*10,000 shares = £30,000
184
Approved EMI scheme conditions
There are conditions that the company and the employee must satisfy for the share options
to get the tax advantaged treatment
2) Employee must own less than 30% of the shares in the company
There are conditions that the company and the employee must satisfy for the share options
to get the tax advantaged treatment
1) Maximum value of share options that can be issued is £30,000 per employee
185
SAYE scheme
Employees are granted an option to buy shares and then save through a tax-free savings
scheme in order to raise funds to exercise the option.
There is favourable tax treatment for share option schemes that are linked to a SAYE (Save
As You Earn) contract.
Each employee pays a minimum of £10 per month and a maximum of £500 per month into
a SAYE scheme, for a period of 3 or 5 years.
At the end of the scheme the money can be used to exercise the share options or the
employee may just withdraw the money on their own.
No income tax or national insurance will be charged on the grant of the option.
No income tax or national insurance will be charged on the exercise of the option.
1) The amount saved must be at least £10 per month but cannot exceed £500 per month.
3) The scheme must be available to all employees (full and part-time) who have worked for
a specified qualifying period (which cannot exceed five years).
4) The exercise price must be at least 80% of the shares’ market value at the time that the
option is granted.
186
Illustration
The scheme is available to all employees who have worked for at least 3 years.
• Solution
3) The scheme is available to all employees who have worked for 3 years.
4) The exercise price is 82% (£3-£2.48/£3*100%) of the market value at the grant date.
187
Syllabus A1cii) Advise on the tax treatment of lump sum receipts
• Exempt payments
On the loss of office, and individual is entitled to £30,000 statutory redundancy pay.
Any amount given above this will be taxable. This can be known as non-statutory pay/
compensation for loss of office/ex gratia payments.
Whatever it is called, any amount above £30,000 is taxable as employment income for the
employee, and the employer will pay Class 1 A NIC on the excess.
These are payments made when an individual is asked to leave office immediately, without
giving them the proper notice period.
If these payments are contractual, then the employee will pay income tax on them, and
Class 1 NIC will be payable on them by both the employee and employer.
If these payments are non contractual and it is not custom to give such payments by the
employer, then any amount paid as a PILON that would have normally been paid to work
during the notice period will be subject to income tax (employee) and Class 1 NIC
(employee and employer).
Any additional amount given can be qualifying expenditure and if it falls within the £30,000 -
they will be tax free, but any excess will be subject to income tax (employee) and Class 1 A
NIC (employer).
188
Illustration
His annual salary was £120,000 and he received 3 months salary as payment in lieu of
notice, as part of his contract of employment.
• Solution
Statutory redundancy = exempt (but uses up some of the £30,000 exempt amount)
When lump sum pension receipts are received by an individual, the entire receipt is not
taxable, subject to a total tax free lump sum amount of 25% of the fund value.
The lump sum amount is limited to 25% of the lifetime allowance limit of £1,073,100 for
2022/23.
189
Syllabus:
Syllabus A1ciii) Identify personal service companies and advise on the tax consequences of
providing services via a personal service company
and
A4vi) Identify personal service companies and advise on the tax consequences of services
being provided via a personal service company
An individual offering services to a client, therefore being employed by the client will not get
the income tax and national insurance advantages that a company would get from offering
the same services to the client.
One way in which an individual might seek to avoid being classed as an employee is to
form a limited company (a personal service company) and then to hire out his or her
services in the name of the company.
This would allow the individual to get the tax and national insurance advantages that are
available to a company but not an individual.
Personal service companies have been coming under a lot of scrutiny recently as HMRC
are trying to crack down on arrangements that are created purely to avoid income tax and
national insurance. For example, someone leaving their employer, setting up a limited
company and then working for the previous employer though the new limited company.
HMRC will deem this person to be an employee of the previous employer and tax them as
such.
190
Illustration
Mary works for Jake Ltd. and earns a salary of £60,000 per annum.
• Solution
Illustration
Mary owns 100% of the share capital of Mary Ltd. and is employed full time by Mary Ltd.
Mary Ltd. offers services to Jake Ltd and earns £60,000 per annum from this contract.
If Mary does not take a salary from Mary Ltd then there will be no NIC implications for Mary
or Mary Ltd.
Anti-avoidance legislation (the “IR 35” legislation) was created to stop this kind of disguised
employment but it seems that amendments need to be made to this legislation as personal
service companies still exist and are still created.
For example, if Mary Ltd. did not exist, Mary would be employed by Jake Ltd directly, and
therefore receive employment income from Jake Ltd and pay income tax and national
insurance on that income.
It is only because Mary Ltd. exists that the services are being offered through the
intermediary to save tax.
If an intermediary company receives income from a relevant engagement during a tax year
and this income (less allowable expenses) is greater than the worker’s employment income
received from the intermediary in that year, then the excess is treated as a deemed salary
payment made on the last day of the tax year.
The deemed payment is subject to both income tax and national insurance contributions.
191
Conditions to be classified as a personal service company:
• The company enters into a contract to provide services to the client
• If the services were carried out under a contract between the individual and the
client, then the individual would be regarded as an employee of the client
• The individual must own >=5% of the share capital in the intermediary company
As a result of the changes introduced by Finance Act 2021, the rules for off payroll working
in the public sector (introduced in 2017) will now apply to workers in the private sector
where the client is a medium or large sized organization.
In this situation, the PSC (ie the intermediary company) is required to determine whether or
not the IR35 rules apply.
Where the rules do apply, the PSC is required to treat the income from relevant
engagements as if it were a salary paid to the employee, and to account for income tax and
class 1 national insurance contributions (NIC) on the deemed employment payment.
Less:
Statutory deduction (5% × £A) (X)
NICs paid by employer (X)
Expenses paid by the employer which would be deductible under employment income rules
(X)
Pension contributions by employer (X)
Salary paid by employer (X)
Deemed salary including employer’s NICs £B
Deemed salary £C
192
Illustration:
Jake has formed a limited company which is a PSC. Jake is the only employee of the
PSC. During the year ending 31 March 2023, Jake will perform services via the PSC
for a client which is classified as a small organisation for the purposes of the IR35
legislation. The budgeted fee income of the PSC for the year ending 31 March 2023
in respect of relevant engagements is £80,000. The PSC will pay Jake a gross salary
of £35,000 for this period.
Solution:
76,000
37,102
193
The PSC has the obligation to calculate and pay income tax and NIC on the deemed
employment payment.
In order to prevent double taxation, dividends paid by the PSC to the worker out of
this income, are exempt from income tax.
Where it is determined that the IR35 rules apply, the client is then required to
calculate and pay the income tax and NIC on the deemed direct payment (DDP).
The DDP is calculated as follows:
DDP X
Illustration:
Maria provides services via her PSC to a client which is classified as a medium or
large sized organisation. The client has issued her with a Status Determination
Statement stating that her services fall within the IR35 rules.
Maria sends her client an invoice for £10,000 (net of VAT). The PSC incurred
deductible expenses of £750 and the direct cost of materials in respect of the
services provided was £500.
The DDP is therefore £8,750 (£10,000 – £750 – £500). This payment will be
chargeable to tax and NICs (employee and employer) in the same way as if Maria
was a direct employee of the client.
In order to prevent double taxation, the DDP is deducted from any payment made by
the PSC to the worker before calculating the tax and NICs due in respect of such
payment.
194
Syllabus A1d. Income from self employment
3. Simplicity
• The change of accounting date must be notified to HMRC by the 31/01 following the
tax year in which the change was made.
• The first accounts to the new accounting date must not exceed 18 months in length.
• A change of accounting date must not have occurred within the previous 5 years
195
When an accounting date is changed, if the accounts are prepared to a period that is longer
than 12 months, then overlap profits can be deducted.
(Note: overlap profits cannot be deducted to the extent that they create a period of less
than 12 months).
However, if the accounts prepared to a period are shorter than 12 months, then 12 months
to the new accounting date must be taxed, which will create more overlap profits.
His trading profits for the year ending 31/12/2021 are £15,000.
He wants to change his accounting date to 31/3 and will prepare accounts to 31/3/2023.
Solution:
22/23
Note: you cannot reduce a long period to less than 12 months so in this case we could only
use 3 of the 4 months of overlap. The remaining overlap profits of £4,000 will be carried
forward for use on cessation or if there is another change of accounting date in the future.
196
Illustration for change of accounting date (Period shorter than 12 months):
His trading profits for the year ending 31/12/2021 are £15,000.
He wants to change his accounting date to 30/4 and will prepare accounts to 30/4/2022.
Solution:
22/23
197
Syllabus: A1dii) Advise on the relief available for trading losses following the transfer of a
business to a company
If the owner of a business transfers that business to a limited company, there is a change in
the legal ownership of the business and the seller is deemed to have stopped
trading.
Any trading loss which the seller still has before the date of transfer cannot be carried
forward and set against the company’s trading profits.
However, there is a relief that the sole trader can use if their business is transferred to a
limited company, provided that the following conditions are met:
2. The seller of the business continues to hold those shares throughout the tax year in
which the relief is given.
Then the seller may set unrelieved trading losses against the first available income that he
or she receives from the company in the most tax efficient manner.
For example, if the seller receives dividends from the company, then they can set the
unrelieved trading loss off against the first dividend received.
198
Illustration
Jake transferred his manufacturing business to Jim Ltd. for 10,000 shares in the company
which he intends to hold for many years.
When he transferred his business, there were unrelieved trading losses of (£20,000).
• Solution
Loss Relief
Dividends received £8,000
C/f loss used (£8,000)
199
Syllabus:
A1diii) Advise on the allocation of the annual investment allowance between related
businesses
and
A4ei) Advise on the allocation of the annual investment allowance between group or related
companies
Related companies
Companies owned by the same individual will be regarded as related where they are:
This could be the case if an individual runs two companies from home, the AIA will be split
between the two companies.
In such circumstances, the owner of the companies can choose to how to share the single
AIA between.
200
Groups of companies
Only one AIA is available to a group of companies.
Note that
- A group for this purposes is where the parent company holds a majority shareholding in the
subsidiary.
- The group members can allocate a maximum of £1,000,000 across the group in any way
wanted.
- The AIA does not need to be divided equally between the companies
- All of the allowance can be given to one company, or any amount can be given to any
number of companies within the group.
Illustration
Jane owns Jake Ltd.
Jane also wants to know whether she should purchase Jill Ltd. (Jake Ltd. will then purchase
all of the components from Jill Ltd.)
• Solution
If Jake Ltd. purchases Jill Ltd. directly, then Jake Ltd. will own 100% of the share capital of
Jill Ltd. and there will be one AIA for the group.
1) Jake Ltd. and Jill Ltd. are run from the same premises or,
2) Jake Ltd. and Jill Ltd. are engaged in the same activities,
Then, Jake Ltd. and Jill Ltd. will share one AIA – otherwise they will not.
201
Syllabus A1e. Property and investment income
• If assets are owned jointly then the rule is that any income generated from the asset must
be split 50:50.
• It is possible to make a declaration of beneficial interest in order that the joint income is
split in order to the actual entitlement.
• If one spouse does not own any shares in the property, shares can be transferred to that
spouse to result in actual entitlement.
Transferring just 5% of shares can result in actual entitlement of 50% to income. If more
shares are transferred, then more income can be legally transferred.
• Ideally, to be tax efficient, the declaration should assign more income to the individual
who is a lower rate tax payer and potentially has some unused personal allowance.
202
Illustration:
The husband contributed nothing towards the purchase of the house and the wife
contributed 100% towards the purchase of the house.
Solution:
If no declaration is made, then the income will be split in the following manner:
Husband £50,000
Wife £50,000
Illustration:
For the same couple above, the following information relates to their yearly income aside
from the property income.
If the declaration is made to split the income according to actual entitlement, how
much income tax will be saved as a couple?
Solution:
Current situation
Husband
Salary £100,000
Property income £50,000
Total income £150,000
P.A. Nil (Income above £125,000)
Taxable income £150,000
203
Wife £
P.A. -12,570
Husband
£37,700 * 20% = £7,540
(£150,000 - £37,700) * 40% = £44,920
Total £52,460
Wife
£37,430 * 20% = £7,486
Total £7,486
• The husband is already paying tax at a higher rate and with the £50,000 property
income, he will not have any personal allowance remaining.
• Therefore, the husband and wife should make a declaration so that the husband is
able to use his personal allowance as well.
• A declaration should be made to transfer 100% of the property income to the wife,
so that the both individuals can utilise their personal allowances fully.
• This will save them tax at £12,570 x 40% = £5,028 (At ATX - UK this kind of short
cut calculation is expected. The long version is shown below for completeness)
204
After declaration:
Husband
Salary £100,000
P.A. (12,570)
Wife
Property income £100,000
Income tax liability (same calculation for both husband and wife as they both now
have income of £100,000 less the personal allowance)
£
£37,700 * 20% = 7,540
(£87,430 - £37,700) * 40% = 19,892
Total 27,432
205
Note:
A joint bank account will always be taxed 50:50 regardless of who contributions what
amount
If shares are owned, dividends are always divided according to the exact proportion to
which each is actually entitled, it is never assumed that it is in equal proportions.
206
Syllabus: A1eii) Recognise the tax treatment of savings income paid net of tax
Although most interest is now paid gross, companies are still required to deduct 20%
income tax from interest paid to individuals (unless the interest is in respect of a quoted
Eurobond).
Interest paid net will need to be grossed up by 100/80 for inclusion in the income tax
computation and there will then be a tax credit equal to the tax deducted.
This credit is deducted from the income tax liability (together with any PAYE) in arriving at
income tax payable.
Illustration
Solution
Non savings:
Salary £60,000
Less P.A. (£12,570)
Taxable income £47,430
Savings:
Interest Income (£16,000 * 100/80) = £20,000
Less: (NRB £500)
Taxable income: £19,500
207
Syllabus: A1eiii) Income from trusts and settlements: Understand the income tax position of
trust beneficiaries
What is a trust?
2. To the trustees
5. Therefore:
Settlor --> Property passes into a trust --> Trustees are given the legal title to the property
IIP can be the legal right to receive income generated by the trust assets and/or use the
trust asset or live in a property owned by a trust.
Types of trusts
1. Discretionary trusts
Discretionary trusts
• No interest in possession exists
• The beneficiaries have no legal right to benefit from the income or capital of the trust
• The trustees decide how the trust assets are invested and managed
208
• Any distribution of income or capital out of the trust is at the complete discretion of
the trustees
• The life tenant has a legal right to benefit from the income of the trust
• The trustees will distribute the life tenant’s full entitlement every year
The trustees are subject to income tax on the income arising in respect of trust assets each
tax year and they distribute income to the beneficiaries.
• The trustees account for income tax on the receipt of income by the trust each tax
year under self assessment.
• Trustees distribute income to the beneficiaries according to the terms of the trust.
• The life tenant is assessed in the tax year of entitlement (not receipt).
• The income of an IIP trust is received by the beneficiary net of 20% tax.
209
Discretionary trusts
They are taxed on the gross trust income in their personal income tax computations and
they can deduct from their income tax liability, any tax deducted at source by
• The beneficiary of a discretionary trust only received income at the discretion of the
trustees.
Illustration
How much income tax will John have to pay on this trust income?
• Solution
210
Illustration
Jake has put a house and some cash into an I.I.P. trust.
She lives in the house and the cash has been invested in shares which generate dividends
of £5,000/year.
• Solution
As she is the life tenant, she will be taxed on the dividend fully each year.
Tax
211
Syllabus A1f. Income tax computation and income tax
liability
Syllabus: A1fi) Understand the allocation of the personal allowance to different categories of
income.
The personal allowance to be offset against income in the most tax-beneficial manner.
This may require the personal allowance to be offset against dividend income before it is
offset against savings income.
Illustration
Able has pension income of £8,000, savings income of £4,500 and dividend income of
£9,000.
• Solution
212
Pension income
£8,000 covered by the P.A.
Savings income
£4,500 covered by the 0% starting rate
Dividend income
£4,570 covered by the P.A.
£2,000 at 0% (Dividend NRB)
£2,430 * 8.75% = £213
• Note
The personal allowance has been offset against the dividend income in priority to the
savings income in order to maximise the tax saved.
If the personal allowance had been offset against the savings income, there would have
been an additional £4,570 of dividend income which would have been subject to income
tax at 8.75%.
There is a 0% starting rate for savings income which falls within the first £5,000 of taxable
income, and, possibly, a savings income nil rate band of either £500 or £1,000. These must
be taken advantage of if at all possible.
Accordingly, it will not be tax-efficient for savings income to be relieved by the personal
allowance if it would otherwise be taxable at 0%.
213
Syllabus: A1fii) Advise on the income tax position of the income of minor children
Children are taxed on their own income from birth, this means that they will have their own
income tax computation.
They will have their own personal allowance and reliefs. If needed, tax returns will be
completed by the parent/guardian.
For minor children, if income comes from a source set up by a parent and exceeds £100
p.a. that income is taxed on the parent, and not on the child, provided the child is < 18
years and unmarried.
The capital can be provided by setting up a formal trust or can be a gift of money, for
example, opening a bank account in the child’s name.
A child receiving investment income from capital that has been provided by the parent, this
income will be treated as belonging to the parent.
Illustration
Jake sets up a bank account in Jim's name (Jim is his two year old son).
Jake provides the capital and Jim received £2,000 interest income per annum.
Solution
1) He is the parent and the source of the capital that provides the income
2) It is more than £100 per annum
3) Jim is under 18 years of age
The income will be covered by the personal allowance, so there will be no taxable income,
but his income tax return must be completed.
214
Syllabus A1g. Exemptions and Reliefs for I.T.
Syllabus: A1g) The use of exemptions and reliefs in deferring and minimising income tax
liabilities: i) Understand and apply the rules relating to investments in the seed enterprise
investment scheme and the enterprise
investment scheme
C1. Identify and advise on the types of investment and other expenditure that will result in a
reduction in tax liabilities for an individual and/or a business.
C2. Advise on legitimate tax planning measures, by which the tax liabilities arising from a
particular situation or course of action can be mitigated.
C3. Advise on the appropriateness of such investment, expenditure or measures given a
particular taxpayer’s circumstances or stated
objectives.
C4. Advise on the mitigation of tax in the manner recommended by reference to numerical
analysis and/or reasoned argument.
There are conditions to be a qualifying investor, qualifying company and for the maximum
amount of relief available.
Note: the conditions that a company must meet in order to qualify as an EIS / SEIS
company are not examinable.
215
EIS Relief
1. Individual at least 18 years and must subscribe for newly issued shares.
4. Must not be an employee of the company before making the investment, but can
become a paid director of the company after making the investment.
1. In the tax year in which investor subscribes for the shares he can claim EIS relief at
30%.
This means that he can reduce his income tax liability by: (Amount invested *30%). EIS
relief cannot create an Income Tax repayment it can only bring the bill down to £0.
The maximum relief that can be given is £300,000, therefore if more than £1,000,000 is
invested, only £300,000 EIS relief can be claimed.
2. Dividends received by investors from the EIS company are subject to income tax at
8.75%, 33.75% and 39.35%.
4. If the EIS shares are sold within 3 years of ownership, the relief given will need to be
paid back to HMRC.
Illustration
Tom is not an employee of A Ltd (an unquoted company) and owns < 30% of shares in A
Ltd.
Tom subscribes for 10,000 new ordinary shares in A Ltd for £30,000 on 30 June 2022.
How much can Tom reduce his income tax liability by?
Solution
Tom can reduce his income tax in the tax year in which he buys the Enterprise Investment
Scheme shares (or the prior year) by EIS relief at 30%.
Tom can reduce his income tax by £9,000 (30% * 30,000) in 2022/23 or 2021/22.
216
SEIS Relief
An SEIS is similar to the EIS but is intended to promote investment in smaller early stage
trading companies.
1. Individual at least 18 years and must subscribe for newly issued shares.
4. Must not be an employee of the SEIS company before making the investment but
can become a paid director of the company after making the investment.
• In the tax year in which investor subscribes for the shares he can claim SEIS relief at
50% (tax reducer).
• Dividends received by investors from the SEIS company are subject to income tax
at 8.75%, 33.75% and 39.35%.
• If investor sells the shares within three years income tax relief is withdrawn - an
adjustment will need to be made in the assessment for the year in which the relief
was originally claimed.
• The upper limit on SEIS relief is £50,000 (50% x 100,000) each tax year.
Illustration
Tommy is not an employee of A Ltd (an unquoted company) and owns no shares in A Ltd.
Tommy subscribes for 10,000 new ordinary shares in A Ltd for £30,000 on 30 June 2022
under the SEIS.
Solution
Tommy can reduce his income tax in the tax year he buys the SEIS shares by SEIS relief at
50%.
Tommy can reduce his income tax by £15,000 maximum (50% x 30,000) in 2022/23 and /or
2021/22.
Tommy must repay the income tax saving to HMRC is he sells the shares within three years.
217
Syllabus: A1gii) Understand and apply the rules relating to investments in venture capital trusts
If an individual invests in Venture Capital Trust shares, they can reduce their tax liability by a
% of their investment.
There are conditions to be a qualifying company and on the reduction of the I.T. Liability
Note: the conditions that a company must meet in order to qualify as a VCT company are
not examinable.
• The maximum VCT relief available is £60,000 as a tax deduction, therefore even if
more than (£200,000*30%=£60,000) was invested - the maximum of £60,000 would
be relief.
• Dividends received by investor from VCT are exempt from income tax if they relate
to shares acquired within the £200,000 permitted maximum.
• If investor sells the shares within five years he must repay this VCT relief to HMRC.
218
Illustration
Tom subscribes for 10,000 new ordinary shares in a venture capital trust (VCT) on 30 June
2022 for £30,000.
• Solution
Tom can reduce his income tax in 2022/23 (the tax year he buys the VCT shares) by VCT
relief at 30%.
Tom can reduce his income tax by £9,000 (30% * 30,000) in 2022/23.
Tom must repay the income tax saving to HMRC if he sells the VCT shares within five years.
219
Syllabus A2: Chargeable Gains For Individuals
The contents of the Paper TX - UK study guide for chargeable gains for individuals under
headings:
- The scope of the taxation of capital gains
Capital gains tax will be paid on the disposal of the 5 hectare part.
The disposal proceeds will be Nil and therefore a capital loss of (£5,000) will be realised
on destruction.
The painting was insured and insurance proceeds of £10,000 were received because of
the loss of the painting.
220
Capital gains tax should be paid on (£10,000-£5,000) = £5,000.
Chargeable assets
Chargeable person
1. Companies pay corporation tax on their capital gains whereas individuals pay capital
gains tax.
2. Companies have an indexation allowance up to December 2017 which allows for the
adjustment of the cost of an asset for inflation, whereas individuals have an annual
exemption.
3. Companies can use rollover and holdover relief with respect to their chargeable
gains whereas individuals have a much wider array of reliefs available to them.
5. Loss relief is dealt with differently between both companies and individuals.
221
Assets which are exempt
• Debtors
• Cash
• Corporate bonds
• Government securities
• Trading stock
• Shares in a VCT
222
Syllabus A2a. TX - UK Recap The basic principles of
computing gains and losses
The contents of the Paper TX - UK study guide for chargeable gains for individuals under
headings:
Disposal proceeds X
Valuation fees
Legal costs
Advertising costs
223
Capital expenditure incurred in enhancing the asset
Enhancement expenditure is capital expenditure which enhances the value of the asset.
Excluding:
- Cost of repairs
- Cost of insurance
Illustration
She incurred estate agency fees of £500 and legal costs of £200 on the sale.
Solution:
Gain £7,800
224
Illustration:
Solution:
225
Incidental cost to disposal can also include advertising cost and agency fees.
• The original cost of the asset of £5,000 is classified as the acquisition cost.
Taxable Gains X
This is an amount of capital gain that will not be subject to capital gains tax.
226
The rates of capital gains tax are:
• Rate 10%
After considering a person's taxable income, any remaining amount falling within the
basic rate band is charged at 10%
• Rate 20%
Once the entire basic rate band has been used, then a rate of 20% is applied.
The same treatment applies as explained above, except that the 10% rate is replaced
with 18% and the 20% rate is replaced with 28%.
• Rate 10%
This rate is used for capital gains that qualify for entrepreneur's relief/business asset
disposal relief.
There are conditions that need to be met in order to be able to use this rate.
Illustration 1
Peter sold a capital asset and this resulted in a taxable gain of £40,000.
Calculate Peter's capital gain tax.
Solution:
227
Illustration 2
Peter sold a residential property and this resulted in a chargeable gain of £40,000.
Required:
Calculate Peter's capital gain tax.
Solution:
Illustration 3
Katherine has a trading profit of £35,600 in 2022/23. (Basic rate band: £37,700)
Additionally, she sold a capital asset giving a rise to a taxable gain of £15,000.
Note A taxable gain is after the deduction of the annual exempt amount.
Solution:
228
Illustration 4
Solution:
Less:
A/E (£12,300)
The rate used is 10% because the taxable gain of £2,700 fell entirely into the remaining
basic rate band of £14,670 that remained.
Capital gains tax is payable on the 31 January following the tax year.
When a residential property is disposed of, a payment on account of CGT must be made
within 30 days of the disposal for this gain.
(Annual exemption)
Tax on this taxable gain will be paid at 18% or 28% (Depending on whether the individual is
a basic or higher rate taxpayer for the year).
CGT Liability
229
(POA)
This POA on the disposal of a residential property has nothing to do with the payments on
account that are made for income tax.
Illustration
What is the payment on account for the residential property and the final capital gains tax
payment?
Solution
POA:
= £20,356 is the POA to be made on 30/9/2022 (30 days from the sale)
230
Gain on disposal of shares £28,400
At 20% = £5,680
Note that the capital losses and annual exemption are given to the residential property gain
first as that gain pays tax at 28%, whereas the other gain pays tax at 20%
231
The treatment of capital losses
Capital losses
1. Current year capital losses are set against current year capital gains in the same tax
year.
2. The set off is made to the maximum possible extent and cannot be restricted to
avoid wasting the annual exemption.
3. If there are insufficient gains to set off the capital losses in the year they arise, the
unrelieved capital losses may be carried forward.
4. The capital losses brought forward are offset after the deduction of the annual
exemption and therefore do not waste the annual exemption.
5. Any unrelieved capital losses brought forward are carried forward to the next year to
be set off against capital gains.
Illustration:
Fiona and Jane made capital gains and capital losses for the years 2021/22 and
2022/23 as set out below:
Fiona Jane
2021/22
Capital gains 15,000 7,000
Capital losses 10,000 10,000
2022/23
Capital gains 17,500 15,000
Capital losses 5,200 2,000
Calculate the taxable gains for Fiona and Jane for both 2021/22 and 2022/23 and the
amount of any losses carried forward at the end of 2022/23.
Solution:
232
Net capital
£5,000 £12,300
gains/loss
Annual
(£5,000) (£12,300)
exemption
Annual
Wasted -£ 12,300
exemption
Capital losses
brought forward (£700)
Explanation:
Jane had a loss of 3,000 in 21/22 which was carried forward to 22/23.
After deducting the annual exemption in 22/23, 700 of the loss brought forward was
used, therefore 2,300 is carried forward to 23/24.
Note that the current year losses must be set off to a maximum without any restriction
and thus wastage of the annual exemption.
However, capital losses brought forward will only be offset if a gain remains after
deduction of the annual exemption.
233
Allowable expenditure on a part disposal
A part disposal
If an individual owns a chargeable asset and disposes of only part of it, a capital gain
will arise.
For example, if an individual owns a large piece of land and decides to only dispose of a
part of it, this is known as a part disposal.
Or, if an individual owns 5 antique vases, bought as a set, then disposing of only 2 from
the set is considered to be a part disposal of the whole set.
A cost from the entire asset cost must be given to the part of the asset being disposed
of.
This is known as the allowable cost. This allowable cost is then deducted from the
proceeds received for the part disposal, to arrive at a capital gain.
How much cost can you deduct from the disposal proceeds?
Where:
Illustration:
He sells the garden for £100,000 in August 2022, incurring selling costs of £1,000.
Solution:
234
Proceeds received (A) = £100,000
This is because, this is the amount of cost that relates only to the part of the asset being
disposed of.
It relates to cost that will be used to calculate the capital gain when the remainder of the
asset is disposed of.
Illustration:
The base cost of remaining house is: Original purchase cost – Allowable costs used.
If the remainder of the house was disposed of for £120,000 after one year, what
taxable gain would arise then?
235
Syllabus A2a. TX - UK Recap Gains and losses on the
disposal of property
The contents of the Paper TX - UK study guide for chargeable gains for individuals under
headings:
Chattels
A chattel is a piece of tangible, movable property (something that you can touch and
move).
For example, items of household furniture, paintings, cars, items of plant and machinery
fixed to a building.
Plant and machinery (with a life of less than 50 years) on which capital allowances have
been claimed are treated as non wasting chattels.
A capital gain needs to be calculated on their disposal, but a capital loss will not be
allowable on their disposal. It is possible that they are exempt under the non-wasting
chattel exemption (being bought and sold for less than or equal to £6,000).
236
Non wasting chattels:
Non wasting chattels with a life of more than 50 years are chargeable to capital gains
tax in the usual way.
However, if both the proceeds and the cost are less than £6,000, the chattel will be
exempt from capital gains tax.
Note: the detailed calculations for chattels where the cost or proceeds are less than
£6,000 are not examinable in ATX.
Illustration:
1. An antique table which had cost £3,000 and was sold for £5,000
2. A painting which had cost £2,000 and was sold for £10,000
3. An antique vase which had cost £8,000 and was sold for £3,000
4. A set of china which had cost £7,000 and was sold for £8,000.
Solution:
1. The table is exempt as it was bought and sold for less than £6,000
237
2. The painting:
Proceeds £10,000
Cost (£2,000)
3. The vase:
Cost (£8,000)
The proceeds are deemed to be £6,000 as it was bought for more than £6,000 and
sold for less than £6,000.
4. The china:
Proceeds £8,000
Cost (£7,000)
This is the normal calculation as the set of china had been bought and sold for more
than £6,000.
238
Principal private residence relief
What is it?
• But you will have to if you didn't live there all the time or used it for business
purposes.
• FULL exemption
• Partial exemption
There are however periods of absence which are deemed to be full occupation
1. Last 9 months - if the property was the individuals main residence at some point
in time.
2. Any periods during which the individual was required by his employment to live
abroad.
The person must come back to live in the house after this period in order for this time to
be considered to be deemed occupation.
239
For capital gains tax purposes the 4 years during which the individual lived abroad will
be considered to be deemed occupation by the individual.
This is because the reason for living abroad was employment purposes and he moved
back to the house when he returned.
3. Any period up to four years during which the individual is required to live
elsewhere in the UK due to employment.
The person must come back to live in the house after this period in order for this time to
be considered to be deemed occupation.
For capital gains tax purposes the 4 years during which the individual lived elsewhere in
the UK will be considered to be deemed occupation by the individual.
This is because the reason for living elsewhere in the UK was employment purposes
and it was for 4 years only, and he moved back to the house when he returned.
The person must come back to live in the house after this period in order for this time to
be considered to be deemed occupation.
For capital gains tax purposes the 3 years during which the individual was travelling will
be considered to be deemed occupation by the individual.
This is because the reason up to 3 years for any reason is allowable and he lived in the
house when he returned.
For points 2 and 3, where an individual is not living in their main residence due to work,
if they do not return to their house to live in it after because of another work
engagement immediately after the first one, this will still be considered deemed
occupation.
240
Illustration:
Jane occupied the house as her main residence from the date of purchase until 31
March 2006.
The house was then unoccupied between 1 April 2006 and 31 December 2009 due to
Jane moving to Chicago for work.
From 1 January 2010 until 31 December 2016, Jane again occupied the house as her
main residence.
The house was then unoccupied until it was sold on 30 September 2022.
Solution:
The total period of ownership of the house is 240 months (180 + 60), of which 180
months qualify for exemption as follows because the unoccupied period from 1 January
2017 to 31 December 2021 is not a period of deemed occupation because it was not
followed by a period of actual occupation.
232,500
241
1 January 2010 to
31 December 2016
84
(occupied)
180 60
Illustration:
She came back and lived in the house for another 174 months.
Dolly never returned to the house and it was sold 108 months later in December 2022
for £150,000.
Solution:
The total period of ownership of the house is 357 months, out of which 210 months
qualify for the PPR exemption.
242
Less PPR relief (W1) (82,353)
Actual 3
Working overseas 24
Actual 174
4 years work in UK 48
Last 9 months 9
210 147
Business use
Where part of a residence is used exclusively for business purposes throughout the
period of ownership, the gain in relation to that part is not covered by relief.
Illustration:
Throughout the period of ownership, the house was occupied by Henry as his main
residence, but one of the house’s five rooms was always used as Henry's office
premises.
243
Solution:
This is because 1 out of 5 rooms of the house has always been used only for business
purposes.
Letting relief
If an individual lives in a property as their main residence and while living in the property
lets part of the residence for residential purposes;
on the disposal of this property, in addition to claiming PPR relief, the letting relief is
also available to reduce the capital gain.
• £40,000
Illustration
Susan purchased a house for £150,000 in 2000, selling it for £300,000 in 2022.
Throughout that time, she lived in the house as her only residence but let out two
spare rooms amounting to 25% of the property to tenants who had exclusive use
of their rooms.
244
Solution:
W1:
2) £40,000
245
Syllabus A2a. TX - UK Recap: Gains and losses on the
disposal of shares and securities
The contents of the Paper TX - UK study guide for chargeable gains for individuals under
headings:
1. Step 1
Value the shares using:
Lower quoted price + 1/2 (higher quoted price - lower quoted price)
Note: the share valuation rules are different for IHT so be careful not to confuse them
2. Step 2
Calculated Disposal proceeds
= Number of shares given * value per share (step 1)
246
Illustration:
Megha gifted 1,000 shares in N plc when they were quoted at 400-408 pence per share,
with marked bargains on that day of 398p, 402p, and 407p.
Solution:
Note: the marked bargains are not relevant for CGT life gifts but they would be relevant
for IHT
247
Share matching rules for individuals
The problem
When shares are disposed of, a problem arises in finding their allowable cost, if the
shares were acquired over a long period of time.
The solution
To make this simpler, HMRC uses a set of rules to determine the acquisition date and
cost of the shares being disposed of.
Illustration:
She acquired 1,500 shares in the company on 31/05/2020 for £20,000, and 500 shares
on 30/06/2021 for £10,000.
• Calculate Benazir’s capital gain on the disposal of the shares in February 2023.
Solution:
Let us apply our matching rules to see which shares we are disposing of.
248
FIRST MATCH –
SECOND MATCH – 30 days THIRD MATCH –
same day
following disposal acquisition share pool
acquisition
800 shares
07/03/2023 – 200 shares for
None. needed from
£4,000.
share pool.
Share pool:
2,000
Total £30,000
shares
(800
Disposal from share pool (800/2000) * £30,000 = (£12,000)
shares)
1,200
Remaining in share pool £18,000
shares
Specially note how the cost of the shares from the share pool is calculated.
(No. of shares to be disposed from pool/Total shares in pool) * Total cost in pool =
Average cost that we apply to our disposal
Acquisition cost:
07/03/23 (£4,000)
• You also might want to try to draw a timeline to ensure that you do not miss any
acquisition dates!
249
Exemptions available for gilt-edged securities and
qualifying corporate bonds
Exemptions
Disposals of gilt edged securities and qualifying corporate bonds are exempt from
capital gains tax.
• In sterling
250
Syllabus A2a. TX - UK Recap Entrepreneurs’ relief/
Business Asset Disposal Relief
The contents of the Paper TX - UK study guide for chargeable gains for individuals under
headings:
- The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the
disposal of capital assets
covers the first £1,000,000 of qualifying chargeable gains that a person makes in their
lifetime.
1. The asset must have been owned for at least two years prior to the disposal.
2. The election for the relief must be made by the anniversary of the 31/01 following the
tax year of the disposal.
Therefore, if the tax year of disposal is 22/23, then the election must be made by
31/01/25.
251
Qualifying assets include:
The assets must have been used in the trade to qualify for the relief.
Also, the entire business must be disposed of, if a single trading asset is disposed of it,
it will not qualify for the relief.
Note the disposal of assets must take place within three years of cessation of trade.
The difference here is that the entire business is not being sold, it is being shut down.
Therefore, no trading activity will continue and this is why the assets can be disposed of
within 3 years of cessation
Illustration:
He had been the advertising director of Numbers Ltd since the company’s incorporation
on 1 December 2021.
He had 40% shares in the company since its incorporation on 1 December 2021.
Will this disposal qualify for entrepreneurs’ relief/business asset disposal relief?
Solution:
This disposal will not qualify for entrepreneurs’ relief/business asset disposal relief
because:
252
Illustration:
Sunder disposed of his business to an unconnected person. The business had the
following asset values:
• Goodwill £150,000
• Debtors £30,000
• Cash £50,000
• Which of the assets will qualify for entrepreneurs’ relief/business asset disposal
relief on disposal of the entire business?
Solution:
The investment property does not qualify for entrepreneurs' relief/business asset
disposal relief as only assets that are used in the trade can qualify.
An investment property is just held for investment, not used in the trade.
Market
Asset Capital gains tax treatment
Values
Investment
£100,000 Taxed normally at 10% or 20%.
property
253
Illustration:
He had been an employee of Cow Ltd. since January 2021, when he acquired the
shares.
Solution:
This is because he has owned the shares and worked in the company for more than two
years.
Illustration:
On 30 October 2022, Bhumi sold a business that she had run as a sole trader since 1
February 2015 to an unconnected person. The disposal resulted in the following
chargeable gains:
Goodwill 150,000
730,000
The warehouse had never been used by Bhumi for business purposes.
Bhumi has taxable income of £6,000 for the tax year 2022/23.
She has unused capital losses of £30,000 brought forward from the tax year 2021/22.
254
Solution:
Other gains
Explanation:
• The capital losses and the annual exemption are set against the gains that do not
qualify for entrepreneur’s relief/business asset disposal relief.
• This is because it saves more tax to set the losses and exemptions against gains
that are taxed at a higher rate of 20%.
• £31,700 (37,700 – 6,000) of Mika’s basic rate tax band is unused, but this remaining
band limit is first set against the gains qualifying for entrepreneurs’ relief/business
asset disposal relief of £550,000 even though this has no effect on the 10% tax rate.
• If there is any basic rate band remaining, then it will be used for gains that do not
qualify for entrepreneurs’ relief/business asset disposal relief.
Things to note:
• a) Gains that qualify for entrepreneurs’ relief/business asset disposal relief will take
priority in using up the basic rate band limit first.
Therefore, it is likely that other capital gains will normally fall into the higher band
and pay CGT at 20%.
255
• b) The annual exemption and relief for losses is not automatically given to the gains
which qualify for entrepreneur’s relief/business asset disposal relief.
Therefore 2 separate calculations should be made and gains which do not qualify
should be given the annual exemption and losses carried forward first, in order to
save CGT at a higher rate.
Note: From 6 April 2019, where an unincorporated business has been sold to a
company wholly or partly in exchange for shares, and incorporation relief has been
applied, the period when the individual owned the unincorporated business now
counts towards the qualifying two year period.
256
Rollover relief
If you sell your warehouse and buy a new one, you can decrease the Capital gain by
deducting the new warehouse's purchase costs.
Conditions:
1. The new and old assets must be used for business purpose.
2. You have to replace the asset 12 months prior to the sale or 36 months post the sale.
3. No Rollover relief is available if the amount not reinvested exceeds the chargeable gain.
(See below)
Qualifying assets:
257
Step by step approach
Disposal proceeds X
The Original Purchase costs (X)
Legal fees (X)
Chargeable gain X
4. Step 4 - Check whether the amount NOT reinvested (Step 3) exceeds the
Chargeable gain (Step 2)
No Rollover relief is available if the amount NOT reinvested exceeds the chargeable
gain.
Disposal proceed X
The Original Purchase costs (X)
Chargeable gain X
Rollover relief (Balancing figure) (X)
The new Chargeable gain (Step 3) X (proceeds not reinvested)
Basically, the Purchase costs of the NEW asset less the Rollover relief
This base cost will be used as the cost of the new office when it is disposed of in the
future.
258
Illustration 1
Required:
Calculate the chargeable gain.
Disposal proceed 200,000
The Original Purchase costs (150,000)
Legal fees (10,000)
Chargeable gain 40,000
4. Step 4 - Check whether the amount NOT reinvested (Step 3) exceeds the
Chargeable gain (Step 2)
Amount NOT reinvested (Step 3) = £100,000 > Chargeable gain (Step 2) = £40,000
No Rollover relief is available if the amount NOT reinvested exceeds the chargeable
gain.
259
Illustration 2
Required:
Calculate the chargeable gain.
4. Step 4 - Check whether the amount NOT reinvested (Step 3) exceeds the
Chargeable gain (Step 2)
Amount NOT reinvested (Step 3) = £100,000 < Chargeable gain (Step 2) = £150,000
260
Illustration 3
Solution:
• This base cost will be used as the cost of the new office when it is disposed of in
the future.
Assets that are not used in the business entirely will have restrictions for roll over relief
on sale.
The amount of gain that cannot be rolled over, and must be realised now is:
261
Illustration:
However, he did not require the entire property for his business and rented out 20% of
the property.
The property cost him £400,000 on 06/06/2012 and he sold it for £800,000 on
06/06/2022.
He bought another property for use in his business on 12/12/2022 for £900,000.
Solution:
W1:
All proceeds relating to the business element of the property were reinvested
(80%*£800,000) BUT 20% of the property was not used in business (£80,000 = 20% *
£400,000)
Therefore, Rollover relief is restricted to £320,000 (£400,000 - £80,000)
262
Holdover relief
Holdover relief
If the new asset purchased is a depreciating asset (an asset with an expected life of 60
years or less at the time of acquisition) for example, leasehold land and buildings or
fixed plant and machinery the gain arising on the disposal of the old asset is not rolled
over and cannot be deducted from the cost of the new asset.
Illustration:
In June 2021 he sold it for £300,000 and purchased a leasehold factory with a 55-year
lease for £350,000 in December 2021.
Craig then sold the leasehold factory in October 2022 for £400,000.
• What capital gain will be chargeable in the tax year 21/22 and in 22/23?
Solution:
263
• 22/23 Capital gain:
W1:
• Therefore, the entire gain (£200,000) will be held over as all of the disposal
proceeds are reinvested.
Note:
The £200,000 capital gain held over becomes chargeable in the tax year 2022/23
because the asset against which it was held over has been sold.
Also note that the gain held over was not deducted from the cost of the new asset, it
was held over in its own right.
Qualifying business assets are basically assets that are used in the business, not assets
held for investment (chargeable assets).
Illustration:
On 5 October 2022, Tina made a gift of her entire holding of 20,000 £1 ordinary shares
in Banana Ltd, a personal company, to her daughter.
264
The shares had been purchased on 1 January 2020 for £140,000.
On 5 October 2022, the market value of Banana Ltd’s chargeable assets was £150,000,
of which £120,000 was in respect of chargeable business assets.
Tina and her daughter have elected to hold over the gain as a gift of a business asset.
Solution:
WI
265
Investors’ Relief
£10m lifetime limit (in addition to the entrepreneurs’ relief/business asset disposal relief
limit)
Investor must not be an employee or director of the company whilst holding the shares
in that company.
Illustration
Elise’s shareholding does not qualify for Entrepreneurs’ Relief/Business asset disposal
relief as she was not an employee and did not hold 5% or more of the share capital of
Oz Ltd.
However, she does qualify for Investors’ Relief - newly issued shares acquired by
subscription and owned for more than 3 years.
AE £(12,300)
266
Capital gains tax planning
Gifting or selling assets has 2 results for tax - inheritance tax and capital gains tax,
therefore the choice to gift must be made carefully, in order to avoid both taxes!
Example
A Ltd has 100,000 £1 ordinary shares in issue all of which were subscribed for at par by
A in 2005, from which date A has been the managing director of the company.
What are the tax implications of gifting 20,000 of his shares to his daughter?
For IHT purposes the gift would be a potentially exempt transfer (PET) and have no
immediate tax implications.
If A died within 7 years of the transfer the PET would become chargeable at either nil
rate and / or 40% rate depending upon what other transfers had been made by A prior
to this gift.
If A survived for at least 3 years then any IHT computed would be reduced by taper
relief.
Any such IHT payable would be payable by the donee, V and should be paid within 6
months of the end of the month in which the death occurred.
The value of the PET would be the fall in value of the estate of A.
267
Capital gains tax implications
The shares are £1 ordinary shares which were subscribed for at par, so the cost is £1
per share.
The gain that arises would be included in the net gains of the tax year from which the
annual exempt amount would be deducted to derive the taxable gain.
Shares in unquoted trading companies are a qualifying business asset for purposes of
entrepreneurs’ relief/business asset disposal relief and as A owns the minimum required
5% shareholding and is an employee of the company, a claim for entrepreneurs’ relief/
business asset disposal relief is available and will result in a 10% tax rate being applied
to the taxable amount of the gain.
There is however another RELIEF that is available where such an asset is gifted!
This would allow the entire gain to be deferred, such that the donor, A, would not now
be chargeable and the daughter, V would be deemed to acquire the shares at the
original cost to the father of £20,000 instead of a cost of £200,000 (20,000 x £10ps).
Without gift relief the shares are deemed to be acquired by V at their open market value
of £200,000. With gift relief, that cost is reduced by the amount of the deferred gain
(£180,000) and thus a cost to V of £20,000 would then apply.
NOTICE how the value for IHT and CGT are different. For CGT you value the asset that
is given away, eg a 20% shareholding. For IHT you look at how much the gift reduces
the donor’s estate by. In this case it reduced it from a 100% holding of shares to an
80% holding of shares.
Conclusion:
For those taxpayers with both a capacity and a willingness to make gifts in lifetime and
not just on death, the further guidance that they may request from you is whether to
make such gifts in lifetime or wait and gift the assets upon their death.
If assets are gifted on death there will be no CGT and the beneficiaries will acquire
those assets at their then value, thus wiping out any accrued gains on those assets.
The assets, however at their then open market value (probate value) will then be
included within the chargeable estate at death, which being in excess of the available nil
rate band will be charged to IHT at a rate of 40%.
268
Therefore to avoid IHT it would be better to gift in lifetime as when a PET is made there
is no immediate charge to IHT and the PET will only become chargeable if the donor
dies within 7 years.
The further advantages for IHT of gifting in lifetime are that if the taxpayer at least
survives for 3 years then taper relief will reduce any IHT payable, plus the value of the
PET is “frozen” at the date of the transfer meaning that an appreciating asset will have a
lower value charged to IHT than if it had been kept until death.
The problem of course with gifting in lifetime as we have already seen is CGT, as a gift
in lifetime is a chargeable disposal and a gain must be computed using the open market
value of the asset.
This, however will only happen if the asset is a chargeable asset so that exempt assets
such as cash, chattels and cars could be gifted without any CGT arising.
If assets are chargeable assets then they may still be gifted if the gains arising each tax
year do not exceed the AEA, for example if the taxpayer gifts an asset valued at
£50,000 and it cost £40,000, there will be a chargeable gain of £10,000 which will be
covered by the AEA of the taxpayer.
This will have removed £50,000 of value from the taxpayer’s estate which at death may
have been charged to 40% IHT.
If chargeable assets will give rise to more substantial gains then as we have seen
above, if the asset is a qualifying asset for gift relief then the gain may be deferred by a
claim for gift relief.
If the asset was the principal private residence of the taxpayer then PPR relief would be
available to exempt any gain arising but there could be a potential IHT charge if the
Gifts with Reservation of Benefits rules apply (see later Topic)
You should keep all of these things in mind for written sections in the exam!
269
Syllabus A2b. Chargeable gains
Syllabus: A2bi) Determine the tax implications of independent taxation and transfers between
spouses
• If a husband transfers an asset to his wife, she would be treated as though she
acquired the asset on the same date and at the same cost as husband did.
Illustration:
On 01/05/2022 he transfers it to his wife when the market value of the land is £80,000.
Solution:
The wife would be treated as though she acquired the asset on 01/05/2009 for £10,000.
Therefore, this transfer would have been made at no gain/no loss and no capital gain
would be assessable.
270
Illustration:
Solution:
Cost (£10,000)
• Note: As the father made a gift to the daughter and no sale proceeds were
actually received, the market value of the land will be considered to be the value
that the asset is sold for.
This treatment is beneficial if one spouse does not have any capital gains and is a basic
rate taxpayer.
• It would be wise to transfer the chargeable asset to this spouse so that they can fully
utilise their annual exemption and pay capital gains tax at the lower rate of 10%
since their basic band is not fully being used (unless it is a residential property, then
the lower rate is 18%).
• IF the asset stays with the spouse who is a higher rate payer and already has capital
gains, then an annual exemption allowance would be wasted and capital gains tax
would be paid at 20% (unless it is a residential property, then the higher rate is
28%).
271
Illustration:
For the tax year 22/23, he has taxable income of £50,000 and already has net capital
gains of £20,000.
• Greg’s wife is a housewife and does not have any income or capital gains of her
own.
He thinks that it is wise to transfer the asset to his wife and let her sell it.
Solution:
W1:
Cost (£40,000)
• This is because he has used his entire basic rate band up with his taxable
income. (Explained in Topic: The treatment of capital gains)
272
Transferred the asset to wife and she sold it:
• Cost (£40,000)
Capital gains tax is payable at 10% because this taxable gain falls entirely into the basic
rate band = £12,700 * 10% = £1,270
Savings:
Saving: £3,730
273
Syllabus: A2bii/iii)
Identify the concepts of residence, domicile and deemed domicile and determine their
relevance to capital gains tax and
Advise on the availability of the remittance basis to non-UK domiciled individuals
UK Residence
An individual’s residence status must be determined because, if they are UK resident – they
will pay UK capital gains tax on their worldwide gains, but if they are not, they will only pay
UK capital gains tax on their UK situated land and buildings.
Illustration – UK resident
John is UK resident and has capital gains of assets situated in the UK of £60,000 and an
overseas gain from the sale of a villa in Spain of £10,000.
Solution
UK gains£60,000
Overseas gains £10,000
Total gains £70,000
Less:
A.E. (£12,300)
Taxable Income £57,700
£57,700 * 20% = £11,540
UK capital gains tax payable £11,540
274
Non-UK resident
Domicile
An individual’s domicile is usually the country in which they have their permanent home.
An individual acquires a domicile of origin at birth, which is the permanent home of the
father.
Individuals retain this domicile until they acquire a different domicile, either through
dependency if under 16 and their father changes his domicile, or by severing ties with the
old country and acquiring a domicile of choice.
Deemed Domicile
An individual may be deemed domicile if they are not domicile under general law but they
satisfy either one of two conditions.
First condition, which is relevant to formerly UK domiciled residents, is that the individual
will be deemed domicile if the individual:
Second condition, which is relevant to long-term UK residents, is that the individual will be
deemed domicile if they have been resident in the UK for 15 of the 20 years immediately
preceding the relevant tax year.
Clare was born in the UK and her father was domiciled in the UK until he and the family
moved to New Zealand when Clare was 10 years old. Her father became domiciled in New
Zealand and so Clare acquired a domicile of dependency in New Zealand. Clare is UK
resident in the tax year 2022/23.
Solution
Clare will be deemed UK domiciled in the UK in the tax year 2022/23 because she satisfies
all three parts of the first condition.
Tom was born in Australia, his father had a UK domicile and so Tom had a UK domicile of
origin. Tom moved to the UK in 2015/16 and became UK resident in that tax year.
Solution
275
No. Tom only satisfies 2 of the 3 parts of condition one and he does not satisfy condition
two as he has not been UK resident for 15 years.
John has been resident in the UK for one year and has capital gains of assets (not
residential property) situated in the UK of £60,000 and an overseas gain from the sale of a
villa in Spain of £10,000.
How much UK capital gains tax will he pay If he chooses the remittance basis?
Solution
UK gain £60,000
Overseas gain £3,000
Total gain £63,000
Less:
A.E. (£nil) - remember that the AE is not available to taxpayers using the remittance basis
Taxable Gains £63,000
£63,000 * 20% = 12,600 (higher rate tax payer and non residential property)
276
Illustration – Arising basis (same details as the previous scenario)
John has been resident in the UK for one year and has capital gains of assets (not
residential property) situated in the UK of £60,000 and an overseas gain from the sale of a
villa in Spain of £10,000.
How much UK capital gains tax will he pay If he chooses the arising basis?
Solution
UK Gain £60,000
Overseas gain £10,000
Total gain £70,000
Less:
A.E. (£12,300)
Taxable Income £57,700
Conclusion
The Remittance basis looks like the expensive option because John loses his entitlement to
the Annual Exemption.
The decision whether or not to claim the remittance basis should be considered year by
year as, depending on the level of unmerited income, sometimes it will be the cheaper
option.
Once the taxpayer has been resident in the UK for more than 7 years, the remittance basis
is likely to be the more expensive option due to the remittance basis charge.
277
Remittance Basis Charge
If prior to the current tax year a person has been UK resident for at least 7 tax years then by
making the remittance basis election they must pay HMRC a remittance basis charge.
This is similar to paying tax on their unremitted income, except that it’s just a flat charge.
• Prior to the current tax year the person was UK resident for at least 7 out of
the last 9 tax years
RBC £30,000
• Prior to the current tax year the person was UK resident for at least 12 out of
the last 14 tax years
RBC £60,000
Illustration
He has been UK resident since 01/04/2015 and earns a salary of £125,000 p.a.
He realises chargeable gains every year equal to his annual exempt amount.
He sold a property in India for £200,000 and realised a chargeable gain of £70,000.
Which is more beneficial for him, the remittance or arising basis in 2022/23?
Solution
Remittance basis
UK resident 06/04/2015 - 5/4/2023 = 8 tax years
R.B.C £30,000
Capital gains tax computation:
Capital gain = £20,000 * 20% = £4,000 + £30,000 = £34,000 (no AE available)
Arising basis
Capital gain £70,000 * 20% = £14,000
Conclusion
He should choose the arising basis as this saves him (£34,000 - £14,000) = £20,000.
278
Syllabus: A2biv)
Determine the UK taxation of foreign gains, including double taxation relief
If you are UK resident, you will pay UK CGT on your worldwide gains.
However, if you have a property located outside of the UK – if you sell it, you will have to
pay CGT in the country of sale and in the UK.
This means, that you are paying tax two times on the same capital gain.
The government offers relief for this in the form of double tax relief.
Double tax relief is available to offset any double tax suffered on assets disposed of abroad.
Illustration
During 2022/23 he earns £50,000. He has a residential property in Spain which he sells in
October 2022 for £80,000, incurring Spanish taxes of £8,000.
He had bought the villa in June 1998 for £25,000, and uses it only for holidays
279
Solution
CGT payable on disposal of the villa in Spain
Disposal of the villa 2022/23
280
Syllabus: A2bv)
Conclude on the capital gains tax position of individuals coming to and leaving the UK
Temporary Absence
Temporary non-residence
If the individual leaves the UK for a period of less than five years and also were UK
resident for at least four out of the previous seven tax years, individuals have to pay UK
CGT in respect of assets acquired before leaving the UK.
1 Any gains made during the tax year of departure – chargeable in that year.
2 Any gains made in subsequent years – chargeable in the tax year the
individual becomes UK resident again.
This is only for assets that were sold, which were acquired by the individual
before they left the UK.
3 It does not apply to the disposal of assets acquired after leaving the UK.
4 This makes it difficult for individuals to avoid UK CGT by selling assets when
they are not UK resident (in the period of temporary absence), and then
return to the UK.
If a person is overseas for more than 5 years they are exempt from CGT on all disposal of
UK located chargeable assets and overseas located chargeable assets, when they sell the
assets - even if they become UK resident after the 5 years of being non-resident.
281
Illustration
Solution
As he has been UK resident for 4 out of the previous 7 tax years and he will return the UK
within 5 years, he will pay UK CGT on:
1) Any capital assets that he owned before leaving the UK and sold while he was in
Barbados.
2) Any UK residential and non residential properties owned.
3) Any disposals that he makes after returning to the UK.
282
Syllabus: A2bvi)
Advise on the UK taxation of gains on the disposal of UK land and buildings owned by non-
residents
These rules apply to both individuals and companies although in ATX the rules that
apply to companies will only be relevant in the following circumstances:
• Where entities that derive at least 75% of their value from UK property and the person
making the disposal has a substantial interest (25% or more) in the entity holding the
property.
Where the property was acquired prior to 6 April 2019 the amount that will be within the
scope of CGT will be either:
• the whole of the gain calculated in the normal way. This alternative method requires
an election.
If the disposal is of a business asset, rollover relief may be available if the replacement
asset is UK land/buildings.
283
Gift relief is also available despite the individual being non-UK resident and regardless of
the residence status of the donee.
The non-resident individual must submit a non-resident CGT return to HMRC within 30
days of completion regardless of whether or not there is a taxable gain (eg where
chargeable gain is covered by the annual exemption).
• UK land sold by a non-UK resident will always be acquired after 5 April 2015 (the
date when disposals of UK property by non-UK resident individuals became
taxable).
Illustration:
Jake was not UK resident in 05/04/23 but sold a non residential property for £300,000
during the tax year.
Solution:
Method one:
284
Method two (by election):
Gain £150,000
Jake should not elect for NORMAL method one should be chosen to calculate the
capital gain.
285
Syllabus: A2bvii)
Identify the occasions when a capital gain would arise on a partner in a partnership on the
disposal of a partnership asset
Partnership Disposals
Partnership CGT
This is based on the agreed capital profit sharing ratio in the partnership agreement.
• Each partner should include their share of the gain in their own capital gains
computation.
Illustration
They introduced capital into the business of £30,000 and £20,000 respectively and agreed
to share profits 60%:40%.
In September 2022 the partnership sold the premises for £495,000 and continued to trade
in a rented premises.
What are the chargeable gains arising on Paul and Phil in 2022/23 in respect of the
partnership disposal?
Solution
Sale proceeds £495,000
Cost (£125,000)
Capital gain £370,000
Paul Capital Gain: £370,000 * 60% = £222,000
Phil Capital Gain: £370,000 * 40% = £148,000
286
Syllabus A2c. Trusts
Syllabus: A2ci/ii) Advise on the capital gains tax implications of transfers of property into trust
and
Advise on the capital gains tax implications of property passing absolutely from a trust to a
beneficiary.
Trusts
CGT Implications
Any type of gift into a trust will be treated as a sale for market value.
But remember, that any gift into and out of a trust is eligible for gift holdover relief, therefore
no capital gains tax will arise as the capital gain will be held over.
As gift holdover relief applies here, the capital gain will be held over, what will the
base cost of the shares be for the trustee?
Market value £50,000
Less: gain deferred (£40,000)
Base cost £10,000
Therefore, if the trustee decides to sell the shares, they will use a cost of £10,000 when
calculating the capital gain.
Remember that this capital gain will only arise if the shares are sold while they are in the
trust, because gift holdover relief will apply for assets going into or coming out of the trust.
287
Selling assets while they are in the trust
The trustees can dispose of chargeable assets outside of the trust, however they will only:
Illustration
For the example used above, the trustees sold the shares for £60,000.
Solution
Sale proceeds £60,000
Base cost (£10,000)
Capital gain £50,000
Less A/E (£6,150)
Taxable gain £43,850
CGT £43,850 *20% = £8,770
Illustration
For the example above, the shares passed to the beneficiary when their market value was
£75,000.
What will the base cost of the shares be for the beneficiary?
Solution
A gift passing out of a trust will be a sale at market value, however, it is eligible for gift
holdover relief.
Sale proceeds £75,000
Base cost (£10,000)
Capital gain £65,000
Base cost
Market value £75,000
Less capital gain deferred (£65,000)
Base cost £10,000
This cost will be used when the beneficiary wants to sell the shares.
Recap
1) Gifting into an out of trusts are eligible for gifts holdover relief
2) An asset sold while it is in a trust will give rise to a chargeable gain, the trustees will get
1/2 of the annual exemption and pay CGT at 20%.
288
Syllabus A2d. Principles of computing gains and losses
Syllabus: A2di) Identify connected persons for capital gains tax purposes and advise on the tax
implications of transfers between connected persons
Connected Persons
CGT Implications
• Spouse's Relatives
This excludes disposals to spouse/civil partner, as these are exempt for CGT.
289
Illustration
Jane is planning on ceasing her business, and passing the assets to her daughter.
Assets:
Trading premises
Cost £100,000
M.V. £200,000
Inventory
Cost £10,000
M.V. £11,000
If Jane gifts the business to her daughter, what capital gain will arise?
Solution
Sale proceeds (M.V.) £200,000
Less cost (£100,000)
Capital gain £100,000
Inventory is an exempt asset for capital gains tax.
Note, the daughter is a connected person - therefore the sale is deemed to take place at
market value, even though no consideration has been given.
1) As a going concern
2) To a connected person
290
Illustration:
Julie has been trading as a sole trader since 2010 and has always prepared her
accounts to 31 December.
She wants to retire on 31/12/2022 and either sell her business to an unconnected
person or give the business to her daughter so that she can continue to run the
business.
TWDV £24,000
MV £37,000
What are the tax consequences if she sells the business to an unconnected
person?
What are the tax consequences if she gives the business to her daughter and she
continues to run it?
Solution:
291
Syllabus: A2dii)
Advise on the impact of dates of disposal
Date of disposal
A chargeable disposal occurs on the date of the contract, whether verbal or written. This
may not be the same as the date the asset is transferred to the new owner.
It is important to consider the timing of disposals - for example, have you already used your
annual exemption for the year? Are you a higher rate tax payer this year but expect to be a
basic rate taxpayer next year? In these situations it may be advisable to delay the disposal
if practical to do so. Does the taxpayer qualify for any reliefs? Eg entrepreneurs’ relief/
Business asset disposal relief? If they delay the sale would they then meet the conditions?
All of these things need to be considered when advising a tax payer on the date of disposal.
292
Syllabus: A2diii)
Evaluate the use of capital losses in the year of death
Capital losses can be offset against current or future capital gains without time limit.
However, capital losses realised in the tax year of death, occurs where an individual makes
a disposal of a chargeable asset(s) in the period from 6 April up to the date of death and a
net capital loss is realised.
Net capital losses incurred in the year of death cannot be carried forward in the usual
manner, in these circumstances only; the capital loss may instead be carried back and set
off against the chargeable gains of the previous three years on a LIFO basis.
This may generate a refund of CGT previously paid. The amount carried back to a particular
tax year is restricted to preserve the annual exempt amount.
Illustration
Nemo died on 1 November 2022. Nemo had annual taxable income of around £20,000
since 2019/20.
Before his death he made the following sales of quoted shares with the following results:
Solution
Date of Nemo death 1 November 2022; Tax year of death = 2022/2023
Net capital loss realised in tax year of death is (£9,100) (£17,100-£8,000)
The net capital loss realised in the tax year of death can be carried back for three years on
a LIFO basis.
The amount carried back to a particular tax year is restricted so that the annual exempt
amount is preserved in all tax years. (assume 2022/23 tax rates apply throughout)
293
21/22 Capital gain £14,000
Less A/E (£12,300)
Taxable gain £1,700
Capital loss (£1,700)
£5,100 loss used therefore (£9,100 - £5,100) £4,000 Capital loss unrelieved.
294
Syllabus A2e. Disposal of movable and immovable
property
Syllabus: A2ei) Advise on the tax implications of a part disposal, including small part disposals
of land
Normally, if you are selling a part of an asset, you will use the formula (a/(a+b)*total cost) to
find the allowable cost for your part disposal and then calculate the capital gain.
There is one exception to this part disposal rule and it applies if it is a small part disposal of
land.
2 Sale proceeds received must not exceed 20% of the market value of the
land and the amount of the disposal must not exceed £20,000
3 total amount of all disposals of land in the year does not exceed £20,000
The sale proceeds are deducted from the original cost of the land, and then that reduced
cost will be used to calculate the capital gain when the remainder of the land is sold.
295
Illustration
He sold 1 hectare for £10,000. This was his only disposal of land in the year.
Solution
The following conditions are satisfied:
3) the proceeds from all sales of land in the year are less than £20,000
Therefore, the sale proceeds will be deducted from the original cost of the land.
£500,000
(£10,000)
£490,000 - is the cost that will be used to calculate the capital gain when the remaining
land is sold.
296
Syllabus: A2eii)
Determine the gain on the disposal of leases and wasting assets
1 Chattels (These are tangible, movable assets - and you know how to
calculate capital gains for these already)
Sale proceeds
Capital gain
(Note: for leases you need to use the lease percentage tables rather than the years. These
will be provided to you in the exam)
297
Illustration
Solution
Allowable cost:
If the intangible asset is a lease, the lease percentage tables will need to be used - these
will be provided in the exam.
Illustration
Jack bought a short lease in March 2001 for £50,000 and he sold it in March 2023 for
£30,000 when it had 10 years left to run.
Proceeds £30,000
Gain £ 3,871
298
Syllabus: A2eiii)
C3 Gains and losses on the disposal of movable and immovable property and
Establish the tax effect of capital sums received in respect of the loss, damage or destruction
of an asset
When a chargeable asset is destroyed/lost/damaged and the value of the asset has
become negligible (very small value), then a person can make a negligible value claim.
The asset will be treated as though it has been disposed of at its current, negligible
value, therefore the person can realise a capital loss.
The asset does not actually have to be disposed of, it is just a way of realising a loss.
When the asset is sold in the future, the negligible value will be used as its cost.
299
Illustration:
Solution:
• This capital loss will be relieved against current year capital gains, and if it
cannot be relieved fully, it will be carried forward to be relieved against future
capital gains.
• Note the painting could be valued at any amount and this same treatment would
apply.
For example, if the painting was valued at £100,000 at the time it was damaged, then
the capital loss realised would be:
The disposal proceeds are the amount of money received from the insurance company.
The disposal is treated as though it occurred in the tax year that the insurance proceeds
are received.
300
Illustration:
Holly owned a vase which was destroyed on 06/04/2022, she had paid £28,000 for it on
01/05/2011.
The market value when it was destroyed was £80,000 however she only received
£68,000 of insurance proceeds.
What will the capital gains treatment be if she does not decide to reinvest the
proceeds?
Solution:
Note the insurance proceeds received are £68,000, this will be used in the computation.
It does not matter that the market value at the time of disposal was £80,000 - the actual
insurance proceeds received will be used.
You get IRR if the insurance proceeds received are reinvested into another replacement
asset within 12 months of the proceeds being received.
• However, if only some of the proceeds are reinvested, then the proceeds which
are not reinvested will be taxable immediately.
For example:
Insurance proceeds received £1,000
Asset costing £900 was destroyed
Reinvestment in a new asset £950
The £50 of insurance proceeds not reinvested (£1,000 - £950) will be taxable
immediately.
The remaining £50 of capital gain will be deferred to be taxed at a later date.
301
It is deducted from the cost of the replacement asset.
This base cost will be used as the cost of the replacement asset when it is disposed.
Illustration:
What if Holly used the insurance proceeds to buy a replacement vase for £59,000 on
01/03/2023?
Solution:
Working 1:
Cost to acquire the new vase – Capital gain rolled over = Base cost of replacement vase
302
Cost of new vase £59,000
IRR (£31,000)
What if Holly disposes of the new vase after 10 years for £100,000?
Base cost (£28,000)
If an individual receives insurance due to the damage of an asset and spends the
insurance proceeds on restoring the asset plus an additional amount, the base cost of
the asset will be treated as:
Cost £X
(Insurance proceeds received) (£X)
+ Additional amount spent £X
Base Cost £X
303
Illustration:
The timepiece had been purchased for £99,000. Kamal received insurance proceeds of
£54,000 and he additionally spent a total of £45,000 on restoring the timepiece to
working condition again.
Solution:
Cost £99,000
Proceeds (£54,000)
Additional spent £45,000
Base cost £90,000
304
Syllabus: A2eiv)
Advise on the tax effect of making negligible value claims
If an asset is acquired at market value and then later on the market value of the asset is
lower than when acquired, it is said that the asset has fallen in value.
If the asset which has fallen in value is disposed of then a capital loss would be realised.
If it is evident that an asset has fallen in value (e.g. as a result of a company going into
liquidation) then the taxpayer can claim relief for a fall in value of the asset and will be
treated as if the asset has been disposed of for market value.
A capital loss is then treated as being realised even although the taxpayer has not actually
disposed of the asset.
This loss can then be offset against total income of the current or previous year - it is not
restricted to being offset against capital gains. You cannot restrict the loss to preserve your
personal allowance.
Illustration
Bob has 5,000 shares in Willis Ltd, an unquoted company based in the UK.
He subscribed for these shares in August 2006, paying £3 per share. On 1 December 2022,
Bob received a letter informing him that the company had gone into liquidation.
305
The liquidators dealing with the company estimated that on the liquidation of the company,
he would receive no more than 10p per share for his shareholding.
If Bob makes a negligible value claim, what capital loss will he realise and how can he
obtain loss relief for this?
Solution
As the capital loss is realised on the disposal of unquoted shares, this allows the loss to be
relieved against the taxpayer total income for the year in which the loss arose, and/or
against the total income of the previous year.
This will give Bob income tax relief at 40% saving income tax of £5,800 (40% x 14,500).
The alternative option is the carry the loss forward against capital gains of future years,
which will give him maximum relief at 20%.
306
Syllabus A2f. Disposals of shares and securities
Syllabus: A2fi) Extend the explanation of the treatment of rights issues to include the small part
disposal rules applicable to rights issues
Rights issues
If a shareholder who is offered the rights issue does not wish to purchase more shares in
the company they can sell the right to buy the new shares to another person.
The capital gains tax treatment of a 'sale of rights nil paid' depends on the amount of sale
proceeds received.
1 If the sale proceeds received are >5% of the value of the shares on which
the rights are offered and >£3,000 then this is deemed to be a part
of the original shares held and a normal part disposal computation is required.
2 If the sale proceeds received less than 5% of the value of the shares on
which the rights are offered or less than £3,000 then this will not be
considered to be a chargeable disposal and the sale proceeds received are
deducted from the original cost of the shares.
Illustration
On 13/08/2022 there was a 1:5 rights issue for £2.35 (M.V. £2.65).
307
Solution
The sale proceeds are below £3,000 and 5% value of his ownership is (£2.65*12,000*5%) =
£1,590.
Therefore this will be considered to be a small part disposal and the sale proceeds will be
deducted from the original cost of the shares leaving a base cost of:
308
Syllabus: A2fii)
Define a qualifying corporate bond (QCB), and understand what makes a corporate bond
non-qualifying. Understand the capital gains tax implications of the disposal of QCBs in
exchange for cash or shares
Qualifying corporate bonds are debt securities (loan notes) that are exempt for capital gains
tax purposes.
This means that if they are sold they will not give rise to any capital gains, and no capital
loss will be allowable.
309
Syllabus: A2fiii)
C4 Gains and losses on the disposal of shares and securities and
Apply the rules relating to reorganisations, reconstructions and amalgamations and advise on
the most tax efficient options available in given circumstances
Bonus Issues
• For example, if you owned 500 shares and a 1:5 bonus issue was declared, you
would receive (500/5) *1 = 100 bonus shares.
• These shares are deemed to be acquired at the same date and at the same cost
as the original shares to which they relate.
Therefore, in your share pool, a bonus issue will only result in an increase in the number
of shares, and no increase in the cost of shares
Illustration:
• How many shares will Mina receive under the bonus issue?
310
Solution:
A rights issue
occurs where a company offers its existing shareholders the right to buy extra shares.
Rights issues are similar to bonus issues in that the number of shares offered to each
shareholder is generally in proportion to his or her existing shareholding.
• The price for the shares is normally lower than current market value, in order for
the existing shareholders to be attracted to taking up the issue.
Illustration:
• Dec 2022 Took up 1:5 rights issue for £2.00 per share
• What will the rights issue cost Jack if he decides to subscribe to the issue fully?
Solution:
• The rights shares will have a cost of £2.00 * 1,380 shares = £2,760
• Note carefully that these bonus issues and rights issue will follow the same
matching rules for shares when they are disposed.
• The bonus issues will be included in the share pool at no cost and the rights
issue shares will be included in the share pool at their respective cost.
311
Takeovers/Reorganisations
They attempt to change the structure and ownership of a company by having another
company take over the individual company.
This will result in the identity and management changed of the individual company, in
the hope of better decisions being made for the company in the future, resulting in a
longer life for the company.
We will deal with both of these situations separately via the use of illustrations.
• If a takeover is for a share for share exchange, then no capital gains tax arises
immediately.
• The market value of the new holding provided will be used to apportion our initial
holding cost.
• Then when we ultimately dispose of this new holding, we will use the original
holding cost, and this will result in a capital gain assessable.
Illustration:
Jayna owned 2000 shares in A plc. which cost her £2,000 in 2012, and A plc was being
taken over by B plc in 2023.
• Jayna was offered by B. plc 1,500 ordinary shares with a market value of £3,000
and 500 preference shares with a market value of £1,000.
• If not, when Jayna sells these new ordinary shares and new preference shares,
what cost would be attributed to each?
Solution:
There will be no immediate charge to CGT as this is a ‘paper for paper’ exchange -
there is no cash involved.
The original cost of the A Plc shares will just need to be apportioned between the new
ordinary and preference B Plc shares.
312
Total market value of new holding: £3,000 + £1,000 = £4,000
Market value of ordinary shares/Total market value of new holding * original cost
Market value of preference shares/Total market value of new holding * original cost
• Jayna needs to use this “attributed costs” as the acquisition cost when she
decides to sell the shares in B. plc.
(She cannot use the market value of the shares when they were given to her).
• If a takeover is for a share for cash exchange, capital gains tax will arise
immediately for the proportion of cash given compared to the total market value
of the new holding.
• The market value of the new holding provided will be used to apportion our initial
holding cost to be used.
Illustration:
Jayna owned 2000 shares in A plc. which cost her £2,000 in 2012, and A plc was being
taken over by B plc in 2022.
• Jayna was offered by B. plc 1,500 ordinary shares with a market value of £3,000
and cash of £1,000.
Solution:
Yes - CGT will arise immediately because there is a cash element to the consideration
which implies that some of the shares have been disposed of.
313
Total market value of new holding: £3,000 + £1,000 = £4,000
Market value of ordinary shares/Total market value of new holding * original cost
• Jayna needs to use this £500 as the acquisition cost of the shares disposed of
for the cash received.
Capital gains:
314
Syllabus: A2fiv)
Establish the relief for capital losses on shares in unquoted trading companies
Capital losses
Relief
Capital losses are normally carried forward and used to reduce future chargeable gains.
Relief against total income is available if – the loss arises on the disposal of unquoted
trading company shares.
With this claim, the capital loss can be set off against total income of the current year and
previous year, this allows the loss to attract tax relief at the higher rates of 45%.
Illustration
Drey subscribed for 5,000 shares in W Ltd., an unquoted trading company in August 2011
for £3 per share.
On 1 December 2022, the company made major losses and that the shares were now
valued at 10p per share.
If he sells the shares at the current market value, how can he claim relief for his capital
loss?
Solution
Capital loss
S.P. 5,000 * 0.1 = £500
Cost 5,000 * £3 = (£15,000)
Capital loss £14,500
Claim against total income of the current year
Total income £45,000
Less
Capital loss (£14,500)
Total income £30,500
315
Syllabus A2g. Exemptions and Reliefs for C.G.T.
Syllabus: A2gi) Understand and apply enterprise investment scheme reinvestment relief
In order for EIS Reinvestment Relief to be claimed the individual must be resident in the UK
when the gain arises and the reinvestment is made.
The reinvestment must also occur within a qualifying time period, between 12 months
before and up to 36 months after the gain arises.
The reinvestment must be wholly for cash, in new shares in an unquoted trading company,
trading wholly or mainly in the UK.
The amount of gain to defer by way of EIS Reinvestment Relief can be chosen by the
taxpayer in order to utilise losses and the annual exemption, but it cannot exceed the
amount invested in unquoted shares.
The EIS Reinvestment Relief is applied to the gain with any balance not deferred being
reduced by the annual exempt amount.
316
Any gain deferred is held over until the EIS shares are disposed of when the deferred gain
will again crystalise.
Sale Proceeds £x
Capital Gain
Less:
Chargeable gain
Less:
A/E (£x)
Taxable gain
Note, you should work backwards and make sure that your capital gain uses the capital
losses and annual exempt amount entirely, and then use the remaining capital gain against
the EIS relief.
First gain
The gain that is held over by the EIS Reinvestment Relief will become chargeable once the
EIS shares are sold.
EIS Gain
If he sells them at a loss within or after three years he gets relief for his capital loss.
The capital loss is realised on the disposal of unquoted shares and can be relieved against
total income of the current and previous tax years.
Note - we have already seen this capital loss relief available on the sale of unquoted
shares.
317
Illustration
Grace sold a vase in November 2022 for £275,000 realising a capital gain of £150,000.
Grace subscribes for qualifying EIS shares in W Ltd, a trading company, the following
month at a cost of £268,000.
She has no other capital transactions in 2022/23 but Grace has £9,300 of capital losses
brought forward at 6 April 2022.
Three years later in 2025/26 Grace sells the EIS shares making a profit of £175,000.
What are the capital gains tax implications on the purchase and on the sale of the EIS
shares?
Solution
Capital gain on purchase of EIS shares
Grace can claim relief for any amount up to £150,000, because she has invested more than
this in EIS shares.
However, to claim this full amount will mean that she does not make full use of her annual
exempt amount for 2022/23.
The EIS relief claim should therefore be £128,400 as follows:
The gain on the EIS shares will be exempt from CGT as they are held for at least three
years.
318
Syllabus: A2gii)
Understand and apply seed enterprise investment scheme reinvestment relief
Conditions
To qualify for SEIS reinvestment relief, the individual must be resident in the UK when the
gain arises and the reinvestment is made.
The reinvestment must be made in the same tax year as the disposal against which relief is
claimed.
Any gain exempted under SEIS reinvestment relief will become chargeable if there is a claw
back of SEIS income tax relief. This includes the following events
Lower of:
2 50% x the cost of the shares purchased in the SEIS (upper limit on the cost
of the shares is £100,000)
319
Illustration
Shawna sold a holiday cottage in August 2022 for £75,000 realising a capital gain of
£35,000.
Shawna subscribes for qualifying SEIS shares in Victoria Ltd (a trading company), in March
2023 costing £60,000.
She has no other capital transactions in 2022/23 but Shawna has £8,800 of capital losses
brought forward at 6 April 2022.
Solution
Shawna should claim SEIS reinvestment relief on £13,900 of her capital gain as this ensures
that she gets early relief for her capital loss brought forward and ensures her annual exempt
amount is preserved.
Capital gain £35,000
Less:
SEIS Relief (£13,900)
Chargeable gain £21,100
Less:
320
Syllabus: A2giii)
Advise on the availability of entrepreneurs’ relief/business asset disposal relief in relation to
associated disposals
Associated Disposals
Normally, to qualify for E.R.(Business asset disposal relief) an entire interest in a business or
partnership must be disposed of.
Only disposing of one asset cannot qualify for E.R. (Business asset disposal relief)
If an individual owns a building personally and it is being used in their sole trader/
partnership for business purposes, and that individual is disposing of his entire interest in
the business as well as the building, the building will qualify as an associated disposal, and
both disposals will attract E.R.(Business asset disposal relief)
3 The premises and the shares have been owned for at least two years.
321
Illustration
Jake disposed of his entire interest in a partnership which he owned for 3 years and
realised a capital gain of £100,000.
He also disposed of the building premises which was used by the partnership to conduct
it's trade, he owned it for 3 years and realised a capital gain of £50,000.
Solution
Both of these disposals qualify for E.R./Business asset disposal relief as the following
conditions have been met:
Therefore,
Capital gain £100,000
Capital gain £50,000
Total £150,000
Less A/E (£12,300)
Taxable gain £137,700
CGT £137,700 * 10% = £13,770
322
Syllabus: A2giv)
Understand and apply the relief that is available on the transfer of an unincorporated business
to a limited company
Incorporation Relief
All of the following conditions must be satisfied for the relief to be obtained.
2 All of the assets of the business (other than cash) are transferred to a
company.
3 The consideration received for the transfer of the business must be received
wholly or partly in the form of shares in the company.
If the consideration is fully in shares, then the whole capital gain is deferred by deducting it
from the cost of shares, producing a lower base cost, which will be used to calculate the
capital gain when the shares are disposed of.
If the consideration is only partly in shares, then the following formula is used to calculate
the amount of gain deferred:
Deferred gain = Total capital gain * (M.V. of the shares received/M.V of the total
consideration)
This deferred gain is deducted from the cost of the shares, to produce a lower base cost,
which will be used to calculate the capital gain when the shares are disposed of.
323
Illustration
Jake has been a sole trader for the last 5 years and now intends to sell his business to Jake
Ltd.
His business is valued at £540,000 and he will receive shares in Jake Ltd in respect of the
market value.
This will result in a chargeable gain of £160,000 in respect of the business premises and
£30,000 on goodwill.
He is a higher rate tax payer and has uses his annual exempt amount in full.
Should he allow the automatic incorporation relief to apply or should he specially elect for it
not to apply?
Solution
With incorporation relief
He has received the consideration fully in shares with a market value of £540,000 -
therefore the entire gain can be deferred.
Market value £540,000
Less C. gain (£160,000 + £30,000)
Base cost of shares £350,000
Sale of shares
Sale proceeds £600,000
Less base cost of shares (£350,000)
Chargeable gain £250,000
CGT (£250,000 * 10%) = £25,000 (ER relief applies as he has held an interest in the
business (sole trade + shares) for more than 2 years.)
Note: remember that if incorporation relief has applied on the sale of an unincorporated
business to a company, the two year qualifying period on the disposal of the shares
includes the period for which the individual owned the unincorporated business.
324
CGT on disposal of the sole trade £22,000
However, in this situation, on the sale of the shares, the 2 year qualifying period would not
have been met and as such Entrepreneurs’ relief/business asset disposal relief will not
apply on the disposal of the shares.
Conclusion
He should not elect to disapply incorporation relief as this results in a lower total payment
of CGT.
325
Syllabus A3: Inheritance Tax
Syllabus A3a. TX - UK Recap: Basic principles of
computing transfers of value
The contents of the Paper TX - UK study guide for inheritance tax, under headings:
Chargeable persons
Chargeable persons
A person who is domiciled in the UK is liable to IHT in respect of their worldwide assets.
Married couples (and registered civil partnerships) are not chargeable persons because
each spouse (or civil partner) is taxed separately.
326
Diminution in value principle
e.g. gifting a property worth £250,000 or cash of £100,000, but for some assets, notably
shares in unquoted companies the transfer of value may be considerably higher than the
market value of the asset being gifted.
The transfer of value will be calculated as the difference in estate value before and after the
gift of the asset.
Illustration:
A owns 60% of the shares in A Ltd. A Ltd has 100,000 £1 ordinary shares in issue.
Required:
Compute the transfer of value if A were to die leaving his shares to his daughter, or
alternatively if he were to make a lifetime gift of 20,000 shares to his daughter.
Solution:
• If A died owning his 60,000 shares, a 60% shareholding, they would be valued at
£25 per share i.e. 60,000 @ £25 = £1,500,000.
• If, however, he were to give 20,000 shares in lifetime the transfer of value would not
be based on the value of a 20% interest i.e. £10 per share, but would be computed
as the difference between the value of his estate before and after the transfer:
327
Before 60,000 shares (60%) @ £25 = 1,500,000
A transfer of value will arise by the gift of an asset either in lifetime and / or on death.
For most taxpayers, as stated above, their only transfers of value will arise as a result of
their death.
Illustration:
B owns 80% of the shares in B Ltd. B Ltd has 100,000 £1 ordinary shares in issue.
20% @ £10/share
40% @ £15/share
60% @ £25/share
80% @ £40/share
Compute the transfer of value and IHT payable if B were to die 2 years after leaving 20,000
shares to his daughter.
All exemptions and Nil Rate Band have been used up.
Solution:
If B died owning his 80,000 shares, an 80% shareholding, they would be valued at £40 per
share i.e. 80,000 @ £40 = £3,200,000.
If, however, he were to give 20,000 shares in lifetime the transfer of value would not be
based on the value of a 20% interest i.e. £10 per share, but would be computed as the
difference between the value of his estate before and after the transfer:
Value of PET
£3,200,000 - £1,500,000 = £1,700,000
328
7 year accumulation principle
2 things to remember
1. Firstly, every individual receives a nil rate band. If their total chargeable transfers exceed
this nil rate band, only then is inheritance tax payable.
2. Secondly, if a transfer is made MORE than 7 years before an individual dies, then
inheritance tax on death will not be paid on that transfer.
The nil rate band is £325,000, and for previous years it has been:
2007-08 3,00,000
2008-09 3,12,000
2009-10 3,25,000
2010-11 325,000
2011-12 325,000
2012-13 325,000
2013-14 325,000
2014-15 325,000
2015-16 325,000
2016-17 325,000
2017-18 325,000
2018-19 325,000
2019-20 3,25,000
2020-21 3,25,000
2021-22 3,25,000
329
This is the rate that is charged on:
• any additional tax payable on CLTs made within seven years of death
The rate of IHT payable on CLTs at the time they are made is 20% (half the death rate). This
is the lifetime rate.
The tax rates information that will be given in the tax rates and allowances section of
the exam in this period is:
£1 – £325,000 Nil
Where nil rate bands are required for previous years then these will be given to you within
the question.
Illustration 1:
Death estate
£
Chargeable estate 600,000
IHT liability
325,000 at nil% 0
Illustration 2:
330
331
Solution:
The IHT must be calculated for the gift £240,000, because Ming gave it to her son
The PET utilises £240,000 of the nil rate band of £325,000. No IHT is payable.
Death estate
£
Chargeable estate 300,000
IHT liability
(325,000 - 240,000) = 85,000 at nil% 0
(300,000 - 85,000) = 215,000 at 40% 86,000
86,000
Only £85,000 (325,000 – 240,000) of the nil rate band is available against the death estate.
332
Illustration 3:
The nil rate band for the tax year 2019/20 is £325,000.
£
Chargeable transfer 400,000
IHT liability
325,000 at nil% 0
(400,000 - 325,000) = 75,000 at 20% 15,000
15,000
The gift to a trust is a CLT. The lifetime IHT liability is calculated using the nil rate band for
2019/20.
The additional liability arising on death is calculated using the nil rate band for 2022/23.
333
Death estate
£
Chargeable estate 750,000
IHT liability 750,000 at 40% 300,000
The CLT made on 12 November 2019 has fully utilised the nil rate band of £325,000.
A NRB is given every year, therefore the CLT used the NRB of 19/20 when lifetime tax
was calculated
The NRB of 22/23 is used to calculate tax paid on death, it is first given to the CLT and
then the death estate because it is allocated in chronological order
Illustration 4:
01/11/2021 £333,000 into a trust for his son (the trustees paid any life tax)
14/11/2022 £50,000 cash to his daughter
What is his IHT payable during his lifetime and on his death?
Ignore annual exemptions.
The NRB of 21/22 and 22/23 are £325,000.
Solution:
On death:
NRB is £325,000 (New NRB for 22/23)
This is allocated on chronological order - first to the CLT, then PET, then death estate.
CLT £333,000
NRB (£325,000)
£8,000 *40% = £3,200
IHT paid (£1,600)
IHT due £1,600
334
The 7 year cumulation period
In most of the illustrations so far, all the lifetime transfers, both PET’s and CLT’s have taken
place within the 7 years prior to death and have all therefore been chargeable to IHT on the
death of the taxpayer.
Very important note The earliest / oldest transfers within this period are first to use the nil
rate band with the later transfers and / or the chargeable estate at death then being taxed
at 40%.
Basically, the nil rate band must be applied in chronological order - it is given to the gift
made earliest.
If PET’s have been made more than 7 years before the date of death
• they were neither chargeable when made nor chargeable on death, they are exempt
from IHT and are ignored.
• These transfers were chargeable when made using the nil rate band in force at that date
but are not chargeable on death as the taxpayer has survived for the required 7 years.
The 7 year cumulation period, however means that when computing the IHT on either a
PET or CLT made within the 7 years of death it is necessary to take account of any CLT
made within the 7 years prior to it, so as to determine how much nil rate band, if any,
remains to use against that transfer.
For example
If an individual dies in January 2023 having made a CLT in June 2012 of £255,000, this CLT
will not be taxable on the death as he survived for more than 7 years.
If he had also made a PET in August 2018 of £200,000 this will be taxable.
In computing the nil rate band available to go against the PET, however, the £325,000 will
be reduced by the amount of the June 2012 CLT as this was within the 7 years prior to the
PET.
Illustration:
335
NRB in 2022 is £325,000.
Solution:
He will have to pay death tax when he dies, his NRB of 2022 will first go to the PET BUT,
the PET must share it with the CLT because it was within 7 years of the PET.
Note: the CLT is more than 7 years before death and as such it will not be subject to death
tax.
Then, for his death estate - the NRB will only be shared with the PET as that is within 7
years of the date of date.
Illustration:
NRB is £325,000.
Solution:
He will have to pay death tax when he dies, his NRB of 2022 will first go to the 2016 PET of
£255,000 BUT, the PET will not share it with the 2012 PET of £200,000 because that was
given more than 7 years before death and therefore exempt from IHT.
336
NRB (£255,000)
Nil payable
The NRB for the death estate will only be shared with the 2016 PET of £255,000 as that is
within 7 years.
Note on death, NRB is shared with PET's that occur within 7 year's of death.
Note
When a gift is made during lifetime, the value of the gift is frozen and will only become
chargeable to IHT when the person who made the gift dies.
Therefore, if a grandmother makes a gift to her grandchild - IHT will only be paid once by
the grandmother and the second time when the grandchild dies, this avoid's the additional
IHT payable if the grandmother made a gift directly to her child.
337
Syllabus A3a. TX - UK Recap: IHT arising on lifetime
transfers and on death
The contents of the Paper TX - UK study guide for inheritance tax, under headings:
When calculating the tax liability on lifetime transfers, there are three aspects that are a bit
more difficult to understand and can therefore cause problems.
The situation where a chargeable lifetime transfer (CLT) is made before a potentially exempt
transfer (PET) is fairly straightforward, and was covered previously.
However, where the sequence of gifts is reversed, the IHT calculations are more
complicated because the PET will use some or all of the nil rate band previously given to
the CLT.
Illustration:
Ali died on 3 March 2023. He had made the following lifetime gifts:
The nil rate band for all the tax years is £325,000.
338
IHT liabilities are as follows:
Lifetime transfers £
1 August 2020
21 November 2021
No lifetime IHT is payable because the CLT is less than the nil rate band for 2021/22.
1 August 2020
Potentially exempt transfer 360,000
The nil rate band for 2022/23 of £325,000 has been fully utilised by the PET made on 1
August 2020.
339
Grossing up
So far, in all of the examples concerning a CLT, the trust (the donee) has paid any lifetime
IHT at the rate of 20%.
However, when the donor of the gift is paying IHT on the gift into the trust the rate of 20/80
(25%) is used as the gift is deemed to be the net amount of money that is leaving the
donors estate. The estate value falls by the gift plus the tax in this case.
For the death tax calculations, the amount of the gift will need to be grossed up by the
amount of the tax. Any available annual exemptions are deducted prior to grossing up.
The annual exemptions are explained in Topic Exemptions - there is an annual exemption of
£3,000 each year that is allowed, and if the annual exemption of £3,000 of the previous year
has not been used, this can be brought forward and used in the current year, after
allocating the current year annual exemption
For example if a cash gift was made into a trust in February 2023 of £100,000 and no other
gifts had been made previously, then the annual exemptions of £3,000 (22/23) and £3,000
(21/22) would be deducted first.
£100,000 - £3,000-£3,000 = £94,000 would be the value of the transfer and IHT would be
calculated on the 94,000.
Illustration:
On 17 June 2019, Annie made a gift of £406,000 to a trust. She paid the IHT arising from
the gift.
Annie has not made any other gifts since 6 April 2019.
The nil rate band for the tax year 2019/20 is £325,000.
340
The lifetime IHT liability is calculated as follows:
£ £
Annual exemptions
2019/20 3,000
2018/19 3,000
(6,000)
IHT liability
325,000 at nil% 0
The amount of lifetime IHT payable by Annie is £18,750. This figure can be checked by
calculating the IHT on the gross chargeable transfer of £418,750:
IHT liability
325,000 at nil% 0
18,750
Once the gross chargeable transfer has been calculated, then this figure is used in all
subsequent calculations.
CLTs are never re-grossed up on death, even if the nil rate band is reallocated as a result of
a PET becoming chargeable.
341
Illustration:
12 March 2023 £
IHT liability
325,000 at nil% 0
30,000
When an IHT question involves a CLT, then make sure you know who is paying the IHT.
Grossing up is not necessary if the trust (the donee) pays.
Jayne died on 18 March 2023 leaving an estate valued at £450,000. She had made the
following lifetime gifts:
These figures are after deducting available exemptions. In each case, the trust paid any IHT
arising from the gift.
Note: if the question in the exam does not say who pays the tax then you will always
assume that the donor pays the tax and use 20/80 (25%).
The nil rate band for the tax year 2014/15 is £325,000, and for the tax year 2020/21 it is
£325,000.
342
IHT liabilities are as follows:
No lifetime IHT is payable because the CLT is less than the nil rate band for 2014/15.
The CLT made on 1 August 2014 is within seven years of 1 November 2020, so it utilises
£200,000 of the nil rate band for 2020/21.
1 August 2014 £
Chargeable transfer 200,000
There is no additional liability because this CLT was made more than seven years before the
date of Jayne’s death on 18 March 2023.
1 November 2020 £
Chargeable transfer 280,000
IHT liability
125,000 at nil% 0
155,000 at 40% 62,000
IHT already paid (31,000)
Additional liability 31,000
The CLT made on 1 August 2014 utilises £200,000 of the nil rate band for 2022/23 of
£325,000 because it was made 7 years before this CLT.
343
Death estate
£
Chargeable transfer 450,000
IHT liability
45,000 at nil% 0
162,000
The CLT made on 1 August 2014 is not relevant when calculating the IHT on the death
estate because it was made more than seven years before the date of Jayne’s death on 18
March 2023.
Therefore, only the CLT made on 1 November 2020 is taken into account, and this utilises
£280,000 of the nil rate band of £325,000.
Total IHT: life tax £31,000 + death tax £31,000 + 162,000 = £224,000
Illustration:
The same situation as in example 4, except that on 1 November 2020 Jayne made a gift of
£280,000 to her daughter rather than to a trust.
Lifetime transfers £
1 August 2014
1 November 2020
344
Additional liabilities arising on death
£
1 August 2014
Chargeable transfer 200,000
1 November 2020
Potentially exempt transfer 280,000
IHT liability
(325,000 - 200,000) = 125,000 x 0%
(280,000 - 125,000) = 155,000 x 40% 62,000
The CLT is entirely covered by the NRB, therefore there is no lifetime tax payable, and
it was made 7 years before death, therefore there will be no additional death tax
payable.
Notice that the PET does not pay lifetime tax, and on death it used NRB first,
therefore paying no death tax either.
Death estate
345
Transfer of unused NRB between spouses
What if a spouse does not use their entire nil rate band?
Any unused nil rate band on a person’s death can be transferred to their surviving spouse
(or registered civil partner).
The nil rate band will often not be fully used on the death of the first spouse because any
assets left to the surviving spouse are exempt from IHT (see the following section on
transfers to spouses).
A claim for the transfer of any unused nil rate band is made by the personal representatives
who are looking after the estate of the second spouse to die.
The amount that can be claimed is based on the proportion of the nil rate band not used
when the first spouse died.
Even though the first spouse may have died several years ago when the nil rate band was
much lower, the amount that can be claimed on the death of the second spouse is
calculated using the current limit of £325,000.
Illustration:
None of her husband’s nil rate band was used when he died on 5 May 2008.
When calculating the IHT on Nun’s estate a nil rate band of £650,000 (325,000 + 325,000)
can be used because a claim can be made to transfer 100% of her husband’s nil rate band.
Note: the nil rate band in 2008/09 was not £325,000 but it is the unused percentage that is
carried forward and not the amount of unused nil band. Therefore, Nun can use 100% of
the current value of the nil band as well as her own nil band.
Illustration:
Win died on 24 February 2023 leaving an estate valued at £800,000. Only 60% of his wife’s
nil rate band was used when she died on 12 May 2009.
On 10 May 2018, Win had made a gift of £200,000 to his son. This figure is after deducting
available exemptions.
The nil rate band for the tax year 2018/19 is £325,000
346
Lifetime transfer – 10 May 2018
Death estate
IHT liability
Win’s personal representatives can claim the wife’s unused nil rate band of £130,000
(325,000 x 40%).
The amount of nil rate band is therefore £455,000 (325,000 + 130,000), of which £200,000 is
utilised by the PET made on 10 May 2018.
347
Residence NRB
An additional nil rate band has been introduced where a main residence is inherited on
death by direct descendants (children and grandchildren).
For the tax year 2022/23, the residence nil rate band is £175,000.
Illustration:
Sophie died on 26 May 2022 leaving an estate valued at £800,000. Under the terms of her
will, Sophie’s estate was left to her children. The estate included a main residence valued at
£250,000.
Solution:
The inheritance tax (IHT) liability is:
IHT liability:
£325,000 at 0% (NRB)
The residence nil rate band of £175,000 is available because Sophie’s estate included a
main residence and this was left to her direct descendants.
Illustration:
Trevor died on 19 June 2022 leaving an estate valued at £700,000. Under the terms of his
will, Trevor’s estate was left to his children. The estate included a main residence valued at
£300,000.
Trevor’s wife died on 5 May 2009. She used all of her nil rate band of £325,000.
348
Solution:
Trevor’s IHT liability is:
IHT liability:
Trevor’s personal representatives can claim the wife’s unused residence nil rate band of
£175,000 even thought the residence nil rate band did not exist when Trevor’s wife died.
The amount of residence nil rate band is therefore £350,000 (175,000 + 175,000).
Note:
1) The value of the main residence is after deducting any repayment mortgage or
interest-only mortgage secured on that property (as normal).
2) If a main residence is valued at less than the available residence nil rate band, then
the residence nil rate band is reduced to the value of the residence.
If an individual’s death estate is valued at more than £2 million then the residence
NRB is reduced by £1 for every £2 that the estate is over £2 million. The whole
residence NRB will be withdrawn once the value of the estate exceeds £2,350,000
million.
349
Syllabus A3a. TX - UK Recap: Exemptions to defer /
minimise IHT
The contents of the Paper TX - UK study guide for inheritance tax, under headings:
Exemptions
Transfers to spouses
Gifts to spouses (and registered civil partners) are exempt from IHT. This exemption applies
both to lifetime gifts and on death.
Illustration:
Under the terms of her will, Sophie divided her estate equally between her husband and her
daughter.
The nil rate band for the tax year 2018/19 is £325,000.
Lifetime transfers
350
Death estate
£
Value of estate 900,000
Spouse exemption (900,000/2) (450,000)
Chargeable estate 450,000
IHT liability
325,000 at nil% 0
125,000 at 40% 50,000
50,000
There are a number of other exemptions that only apply to lifetime gifts.
Gifts up to £250 per person in any one tax year are exempt.
This exemption can not be used to reduce the value of a greater gift.
For example, a gift of £249 to one person will be wholly exempt, but if the gift is £251 it will
be wholly taxable. It is possible to use the exemption any number of times by making gifts
to different donees.
Illustration:
During the tax year 2022/23, Peter made the following gifts:
The gifts on 18 May 2022 and 20 March 2023 are both exempt because they do not exceed
£250.
The gift on 5 October 2022 for £400 does not qualify for the small gifts exemption because
it is more than £250.
The whole amount of £400 will be chargeable unless it can be covered by Peter’s annual
exemption for 2022/23 (see the next section).
351
Annual exemption
If the whole of the annual exemption is not used in any tax year, then the balance is carried
forward to the following tax year.
However, the exemption for the current tax year must be used first, and any unused
brought forward exemption cannot be carried forward a second time.
Therefore, the maximum amount of annual exemptions available in any tax year is £6,000
(£3,000 x 2).
Illustration:
The gift on 10 May 2021 utilises £1,400 of Simone’s annual exemption for 2021/22.
The gift on 25 October 2022 utilises all of the £3,000 annual exemption for 2022/23 and
£1,000 (4,000 – 3,000) of the balance brought forward of £1,600.
Because the annual exemption for 2022/23 must be used first, the unused balance brought
forward of £600 (1,600 – 1,000) is lost.
The annual exemption is applied on a strict chronological basis, and is therefore given
against PETs even when they do not become chargeable.
Illustration:
The gift on 17 May 2021 utilises Nigel’s annual exemptions for 2021/22 and 2020/21.
The gift on 25 June 2022 utilises Nigel’s annual exemption for 2022/23. The 2021/22 annual
exemption is not available as it has been used by the PET.
The value of the CLT is £97,000 (100,000 – 3,000). No lifetime IHT liability is payable
because this is within the nil rate band for 2022/23.
Ideally the gift to the trust should have been made before the gift to the son.
352
Normal expenditure out of income
Therefore, regular annual gifts of £2,500 made by a person with an annual income of
£100,000 would probably be exempt.
A one-off gift of £70,000 made by the same person would probably not be, and would
instead be a PET or a CLT.
This exemption covers gifts made in consideration of a couple getting married or registering
a civil partnership.
The amount of exemption depends on the relationship of the donor to the donee (who must
be one of the two persons getting married):
• £2,500 if the gift is made by a grandparent or by one of the couple getting married to the
other.
Illustration:
On 19 September 2022, William made a gift of £20,000 to his daughter when she got
married.
The gift is a PET, but £5,000 will be exempt as a gift in consideration of marriage and
William’s annual exemptions for 2022/23 and 2021/22 are also available.
The value of the PET is therefore £9,000 (20,000 – 5,000 – 3,000 – 3,000).
This remaining £9,000 will only be chargeable to IHT if William dies before 19/09/2029
(within 7 years of making the gift)
Note: the marriage exemption is deducted from the value of the gift BEFORE the annual
exemptions.
353
Syllabus A3b. The scope of IHT
Syllabus: A3bi)
Explain the concepts of domicile and deemed domicile and understand the application of
these concepts to inheritance tax.
Domicile
Domicile
What is domicile?
Domicile means place of permanent home and an individual can only have one domicile at
a particular point in time.
• Domicile of dependency – if your father changes his domicile before you are
16, then your domicile will change with his.
For example, if your father moves to France from London before you are 16
years old, and that is his permanent home now, both of you will be
French domiciled
354
• Domicile of choice – an individual can change their domicile from one
country to another if they show permanent intention to change the country of
permanent home.
Showing permanent intention means not retaining property, moving burial
arrangements and changing nationality/citizenship from one country to the
other.
For example, if you were UK domiciled since birth but you emigrated to
France with the intention of remaining there permanently (you sold all
property in London, you changed your nationality and you created burial
arrangements in France), then you will be French domiciled.
For example, Tom was born in the UK in 1975 and his father was UK
domiciled. In 2003 he moved to Australia. He returned to the UK in August
2022. He will be deemed UK domicile in 2022/23.
355
UK Domicile election
3 The election can be backdated for up to 7 years, but not before 6 April 2013.
4 The election is irrevocable, but if a person makes the election and is non-UK
resident for four consecutive tax years, the election will lapse
Gifts to spouses (and registered civil partners) are exempt from IHT. This exemption applies
to both lifetime gifts and on death.
356
Syllabus: A3bii/iii)
Identify excluded property and
Identify and advise on the tax implications of the location of assets
Excluded Property
357
Illustration
Sam has lived in the UK for the last 6 years, however he is not UK domiciled.
Solution
• The shares is USA Inc. are registered in the USA and are therefore not a
chargeable asset for IHT.
358
Syllabus: A3biv)
Identify and advise on gifts with reservation of benefit
Why would the donor make the gift if they still want to use the asset?
Gifting appreciating assets during lifetime is beneficial because the value of the gift will be
frozen at the date of gift, therefore if the value increases when the donor dies, tax will only
be paid on the value at the time of gift.
HMRC has introduced special anti-avoidance rules for a GWR to ensure that they do not
escape the correct IHT payment.
For a GWR, HMRC will choose the value of the asset to use for taxation at the time of
death. If the value of the asset is higher at the time of death, then they will use the market
value at the time of death.
If the donor pays market value for the benefit of still using the asset, then the GWR rules will
be lifted and it will be treated as a normal lifetime gift.
359
For example, if a donor gifts a house and continues to use it, but pays full market rent to
the donee while living in the house, then he has paid for the benefit fully and this will not fall
under the GWR rules.
Illustration
Priya gave her house to her son Sushil on 01/04/2017 when it was worth £360,000. She
had made no previous lifetime gifts.
Solution
Less:
Taper relief (5-6 years 60% * £11,600) = (£6,960) (see topic Taper Relief)
The higher amount of £4,640 will be payable and it will be treated as part of the death
estate.
Note: the RNRB is not available against life gifts. It is only available in the death estate,
360
Syllabus A3c. Computing transfers of value
Syllabus: A3ci) Advise on the principles of valuation
Principles of valuation
Valuation rules
Principles
Generally assets are valued at their open market value, but there are other rules that often
need to be applied.
The market value at the time of the transfer is the lower of:
The lower quoted value plus one-quarter of the difference between the lower and the higher
value.
Take the higher and add it to the lower and take the average value by
dividing by two.
361
Illustration
Harry died on 5 October 2022 he left his £1 ordinary shares in Peel plc to his two children.
Harry owned 100,000 £1 ordinary shares in Peel plc a quoted company with an issued
share capital of 10,000,000 £1 ordinary shares.
On 5 October 2022 the price for these shares was quoted at 200–208 pence per share.
On 5 October 2022, the mid recorded bargains were 200p, 203p, 207p per share.
What value should be included in the death estate for the shares in Peel plc?
Solution
Lower of:
1/4 up method:
200 + 1⁄4 x (208-200) = 202p
Mid recorded bargain method:
200p+207p/2 = 203.5p
Take the lower value of 202p.
Individuals who are UK domiciled must pay IHT on their UK and foreign assets.
The foreign property is valued using professional valuation and then converted into sterling.
The value of the property can be reduced by administration expenses limited to a maximum
of 5% of the property's value.
362
Illustration
Jake owned a piece of land in Barbados and on his death it was valued at £45,000.
Solution
Value of land £45,000
Less admin expenses (5%*£45,000) = (£2,250)
Value £42,750
Note, even though the administration expenses amounted to £5,000, the maximum that
could be deducted was (5%*£45,000) = £2,250.
Property is “related” to the donor’s property if it is part of the same asset owned by:
363
Illustration
Harriet owns three antique plates which are part of a set of six.
Harriet’s husband owns two plates and her son owns one plate.
1 plate £1,000
2 plates £2,200
3 plates £3,800
4 plates £6,000
5 plates £10,000
6 plates £20,000
If Harriet gives her son one plate on 1 January 2023 as a wedding present what is the value
of the PET before deducting relevant IHT reliefs.
Solution
In order to calculate the value of the PET, the diminution in value principle must be used.
Before she makes the gift Harriet has 3 plates and afterwards she has 2 plates.
When determining the value before and after we must also include the plates owned by her
husband a related party
364
Therefore:
Value before £6,333
Less value after (£3,000)
Value of transfer £3,333
In respect of shares, the valuation is determined by the number of shares the individual
holds in relation to the total number of shares (inclusive of related property) multiplied by
the combined valuation.
Illustration
On 15 June 2022 Joan gave 20,000 of her 40,000 ordinary shares in Rouen Ltd, an
unquoted trading company to her son Michael.
On 15 June 2022 the relevant values of Rouen Ltd shares were as follows:
100% £22.30
80% £17.10
60% £14.50
40% £9.20
20% £7.90
Joan purchased her 40,000 shares in Rouen Ltd during 1991 for £96,400.
What is the value of the PET for IHT of the gift made by Joan on 15 June 2022 before all
IHT reliefs?
Solution
The market value of the lifetime gift (PET) is computed by determining the diminution in
value of her estate.
Before
Joan 40,000
Husband 40,000
Total 80,000 shares at £17.10
After
Joan 20,000
Husband 40,000
365
Total 60,000 at £14.50
Value before
40,000 * 17.10 = £684,000
Value after
20,000 * £14.50 = (£290,00)
Value of PET = £394,000
Illustration
Jimmy owns 5,000 units in Growing Unit Trust. At the time of his death, they are quoted at
125p-133p.
Solution
5,000 units * 125p = £6,250
366
Syllabus: A3cii)
Advise on the availability of business property relief and agricultural property relief
BPR is a very important relief that significantly reduces the value of lifetime gifts and the
value of an individual’s death estate if certain conditions are satisfied.
2. The property must have been owned for a continuous two years prior to the
transfer.
3. If the property has been transferred from a spouse the periods owned by
each spouse can be added together on the second transfer to see if BPR is
available.
For example, if a husband owned relevant property for 1 year and transferred it to his
wife, then the wife owned it for another year and transferred it to their son, BPR will be
available on the transfer to the son because the total time of ownership for husband and
wife can be added up.
4. Where the property was a lifetime gift, the business property must either still be owned
by the donee or have been replaced with other relevant business property at the date of
the donor’s death in order to get BPR on the additional tax payable by the donee.
For example,if a father gifted his son an unquoted shares holding during his
lifetime, this will be a P.E.T. and IHT will only be payable if the father dies
within 7 years of making the gift. If the son sells the shares, he must replace them with
relevant property for BPR in order to get the relief when the father dies.
5. Where relevant business property was inherited and was eligible for BPR at the time of
transfer one, there is no minimum ownership period for BPR on transfer two.
This is called the successive transfers rule.
For example, if a father gifted his son unquoted trading shares on his death
which he had owned for 4 years and were eligible for BPR, if the son dies within 1 year of
367
the gift and gives them to his brother on death, this second transfer will automatically be
eligible for BPR because the first transfer was eligible for BPR.
6. BPR is not available for excepted assets which are assets held for investment purposes.
7. Any business involved wholly or mainly in dealing in land or buildings and making or
holding investments is not entitled to BPR.
There is no upper limit on the amount of the relief and it applies to assets situated anywhere
in the world.
Illustration
Solution
1 100%
368
Illustration
On 31/05/2022 Wane gifted 40,000 shares in ABC Ltd, an unquoted trading company to his
nephew.
Wane had owned the shares since 2004 and on the date of the gift, the shares were worth
£200,000.
On this date, ABC Ltd. owned assets worth £500,000 which included an investment
property valued at £50,000.
Solution
31/05/2022:
Less:
Notice carefully that BPR is only available for trading assets, it is not available for assets
held for investment.
APR is a 100% relief and is very similar to BPR, but gives relief for transfers of agricultural
property.
1 The property must be relevant agricultural property situated in the UK, the
Channel Islands, The Isle of Man, or in the European Economic Area.
2 It must have been owned for the minimum period of ownership, two years for
owner occupied farms and seven years for tenanted farms.
For example, if someone is farming the land themselves, this is a owner
occupied farm which has a minimum ownership period of 2 years, and if
someone has rented the farm to someone else, this is a tenanted farm which has a
minimum ownership period of 7 years.
369
What is relevant agricultural property for APR?
5 This does NOT include cost of the stock, the cost of plant and machinery or
the cost of goodwill
Illustration
Greg has lived on the farm and worked the business for the last 10 years.
Total £1,130,000
Solution
Less
Note carefully that BPR will be available for the developmental value, animals and inventory
and plant and machinery because these are assets of the trade that is being given away.
370
Syllabus: A3ciii)
Identify exempt transfers
Exempt transfers
Exempt transfers
• spouse
• civil partner
• charity
• political party
371
Syllabus A3d. IHT liabilities on lifetime transfers during life
and death
Syllabus: A3di) D1 The basic principles of computing transfers of value and
Advise on the tax implications of chargeable lifetime transfers
Any transfer that is made to another individual is a potentially exempt transfer (PET).
If the donor survives for seven years then the PET becomes exempt and can be
completely ignored.
A PET only becomes chargeable if the donor dies within seven years of making the gift.
So, remember:
• If the donor dies within seven years of making a PET then it becomes chargeable.
• Tax will be charged according to the rates and allowances applicable to the tax year
in which the donor dies.
• However, the value of a PET is fixed at the time that the gift is made.
372
Illustration:
By 23 January 2023, the value of the house had increased to £655,000. Sophie did not live
in the house after the gift.
Solution:
Because the PET was made more than seven years before the date of Sophie’s
death it is exempt from IHT.
• The gift to Sophie’s daughter on 12 August 2020 is a PET for £610,000 and is
initially ignored.
It becomes chargeable as a result of Sophie dying within seven years of making the
gift, and the transfer of £610,000 less annual exemptions of £3,000 pa for 2020/21
and 2019/20 will be charged to IHT based on the rates and allowances for 2022/23.
No taper relief will apply because Sophie dies within 3 years of making the gift.
• There is no legal definition of what a trust is, but essentially a trust arises where a
person transfers assets to people (the trustees) to hold for the benefit of other
people (the beneficiaries).
For example, parents may not want to make an outright gift of assets to their young
children.
Instead, assets can be put into a trust with the trust being controlled by trustees
until the children are older.
• Unlike a PET, a CLT is immediately charged to IHT based on the rates and
allowances applicable to the tax year in which the CLT is made.
An additional tax liability may then arise if the donor dies within seven years of
making the gift.
Just as for a PET, the value of a CLT is fixed at the time that the gift is made, but the
additional tax liability is calculated using the rates and allowances applicable to the
tax year in which the donor dies.
373
Illustration:
Solution:
• The gift to the trust on 2 November 2015 is a CLT for £420,000, and will be
immediately charged to IHT based on the rates and allowances for 2015/16.
There will be no additional tax liability as the gift was made more than seven years before
the date of Lim’s death.
• The gift to the trust on 21 August 2020 is a CLT for £615,000, and will be
immediately charged to IHT based on the rates and allowances for 2020/21.
Lim has died within seven years of making the gift so an additional tax liability may
arise based on the rates and allowances for 2022/23.
Saving IHT
This is because if the grandparent gave it to their child and then their child gave it to their
child - IHT would be paid 3 times as all 3 individuals would die, whereas if the grandparent
gave the gift directly to their grandchild, IHT would only be paid twice as there would only
be 2 death's involved for IHT - the gift never went to the third person.
374
Syllabus: A3dii)
D1 The basic principles of computing transfers of value and
Advise on the tax implications of transfers within seven years of death
Taper Relief
This is:
It would be somewhat unfair if a donor did not quite live for seven years after making a gift
with the result that the gift was fully chargeable to IHT.
Therefore, taper relief reduces the amount of tax payable where a donor lives for more than
three years, but less than seven years, after making a gift. The reduction is as follows:
Although taper relief reduces the amount of tax payable, it does not reduce the value of a
gift for cumulation purposes.
The taper relief table will be given in the tax rates and allowances section of the exam.
Illustration:
Winnie died on 9 January 2023. She had made the following lifetime gifts:
2 February 2016 – A gift of £473,000 to a trust. The trust paid the IHT arising from this gift.
375
These figures are after deducting available exemptions.
The nil rate band for the tax year 2015/16 is £325,000, and for the tax year 2019/20 it is
£325,000
Lifetime transfers £
2 February 2016
Chargeable transfer 473,000
IHT liability
325,000 at nil% 0
148,000 at 20% 29,600
29,600
16 August 2019
Potentially exempt transfer 320,000
2 February 2016
Chargeable transfer 473,000
IHT liability
325,000 at nil% 0
148,000 at 40% 59,200
Taper relief reduction – 80% (47,360)
11,840
IHT already paid (29,600)
Additional liability 0
The taper relief reduction is 80% because the gift to the trust was made between six and
seven years of the date of Winnie’s death.
Although the final IHT liability of £11,840 is lower than the amount of IHT already paid of
£29,600, a refund is never made for life tax paid, it can only reduce the IHT liability to zero.
376
16 August 2019
£
102,400
The taper relief reduction is 20% because the gift to the son was made between three and
four years of the date of Winnie’s death.
377
Syllabus: A3diii)
Advise on the tax liability arising on a death estate
Until now, the examples have simply given a figure for the value of a person’s estate.
A person’s estate includes the value of everything that they own at the date of death such
as property, shares, motor vehicles, cash and other investments.
A person’s estate also includes the proceeds from life assurance policies even though the
proceeds will not be received until after the date of death.
The actual market value of a life assurance policy at the date of death is irrelevant.
• Funeral expenses
• Debts due by the deceased provided they can be legally enforced. Therefore,
gambling debts cannot be deducted, nor can debts that are unenforceable because
there is no written evidence.
Illustration:
• A main residence valued at £425,000 - - this was not left in his will to a direct
descendent and as such the residence nil rate band will not apply.
378
• Motor cars valued at £63,000.
• A life assurance policy on his own life. On 31 December 2022, the policy had an
open market value of £85,000 and proceeds of £100,000 were received following
Andy’s death.
On 31 December 2022, Andy owed £700 in respect of credit card debts and he had also
verbally promised to pay the £800 legal fee of a friend.
£ £
Property 425,000
Mortgage (180,000)
245,000
562,000
(5,000)
IHT liability
325,000 at nil% 0
379
92,800
The promise to pay the friend’s legal fee is not deductible because it is not legally
enforceable.
Unlike capital gains tax, there is no exemption for motor cars, individual savings accounts,
saving certificates from NS&I or for government securities.
The IHT liability on the life assurance policy could have easily been avoided if the policy had
been written into trust for the beneficiaries of Andy’s estate.
The proceeds would have then been paid directly to the beneficiaries, and not form part of
Andy’s estate.
Illustration:
Joe Kerr died on April 6 2022, leaving £25,000 to his friend and the remainder to his
nephew.
His principal private residence valued at £300,000 upon which the outstanding repayment
mortgage at the date of death was £80,000. The house was not left to a direct descendent
and as such the residence nil rate band does not apply.
A life assurance policy with an open market value on April 6 2022, of £125,000 from which
proceeds of £140,000 were received into trust following Joe’s death.
Joe's wife only used 50% of her NRB at the date of her death and Joe never made any gifts
previous to his death, so his NRB is fully available.
Solution:
Death estate
House £300,000
Less: Repayment mortgage (£80,000)
Holiday home £140,000
Bank deposits £230,000
Shares (12,000*£20) = £240,000
380
NRB available (£325,000 + 0.5*£325,000) = (£487,500)
£830,000 - £25,000 (gift to friend) - £137,000 (IHT paid from estate) = £668,000
Note: the life assurance policy was written into trust for the beneficiaries and so it does not
become chargeable to IHT in the death estate.
381
Syllabus: A3div)
Advise on the relief for the fall in value of lifetime gifts
Value of a gift
The chargeable amount of a lifetime gift (CLT and PET) is calculated and fixed at the time of
gift.
If the gift becomes chargeable on death (donor dies within 7 years of making the gift):
2) A decrease in value of the gift will get relief for the fall in value
The asset must still be owned by the done at the date of death, or if it has been sold, it
must have been sold in an arms length transaction.
Note
When applying the 7 year accumulation principle for nil rate band availability, the value that
will be used for this gift is the original gross value, not the value after the relief has been
given.
Illustration
On 1 May 2021 Preeti’s aunt gave her a property worth £92,000 but now it is only worth
£40,000.
Preeti’s aunt made other gifts, so no annual exemptions or nil rate band was available for
this gift.
382
What is the IHT payable for this gift?
Solution
383
Syllabus: A3dv)
Advise on the operation of quick succession relief
Quick succession relief applies where an individual dies and within the previous 5
years
• - they had inherited an asset on someone else’s death and IHT was charged
on the inheritance.
For example, two members of a family dying within 5 years of each other,
and one having given a gift to the other
• - they received a lifetime gift and IHT was charged on the gift
Appropriate Percentages
384
IHT paid on the first death
This is normally given in the question, but if it is not, it can be calculated as follows:
Total IHT paid on first death estate/Gross chargeable estate value of first death * Value of
the asset gifted out of the first estate
Note
QSR is given before DTR but after the deduction of taper relief and life tax, and it is not
necessary for the second person to still own the asset on death.
Illustration
In June 2018, Denny had been left £28,000 from his brother’s estate.
Inheritance of £75,000 was paid on a total chargeable estate of £450,000 because of his
brother’s death.
Solution
385
Syllabus: A3dvi)
Advise on the operation of double tax relief for inheritance tax
This means
that IHT is payable in the UK on these overseas assets and possibly death duties were paid
overseas as well (two lots of tax (double)).
• When this is the case the individual is allowed to reduce the UK IHT payable
on these assets by something called Double Tax Relief (DTR)
Calculation of DTR:
• Estate rate: IHT on the estate after QSR/Gross chargeable estate value
Note:
Remember from valuation of assets for IHT that the value of a foreign asset is the value
after deducting any additional expenses incurred in realising or managing the property
(which may be subject to a maximum of 5%)
386
Illustration
No lifetime transfers have been made and he left his entire estate to his son.
Solution
IHT Payable
Less:
NRB (£325,000)
W1
387
Syllabus: A2gv/A3dvii)
Understand the capital gains tax implications of the variation of wills and
Advise on the inheritance tax effects and advantages of the variation of wills
Deed of variation
It is possible to change a person’s will after they have died, but why?
• A variation may benefit the estate and its beneficiaries by reducing the IHT
on the estate.
If the variation increases charitable legacies sufficiently the estate may
benefit from the reduced rate of IHT at 36%.
• If an estate is left to children, who have enough property of their own, then
the variation can leave property for grandchildren instead of the children,
therefore skipping one generation of IHT payable.
1 By court order
2 By a deed of variation
1 The deed must be in writing and signed by all beneficiaries that are affected
by the deed.
4 State that it is intended to be effective for tax (IHT and/or CGT) purposes.
388
Illustration
Faisal died on 8 August 2022 leaving his entire estate to his son.
The estate is valued at £500,000 after deducting exemptions and reliefs including a
donation to charity of £18,000.
a) What amount of charitable legacy must be made to benefit from the reduced rate of
36%?
b) What is the net increase in the estate if the charitable legacy is increased by executing a
deed of variation?
Solution
Total £193,000
Illustration
Jake dies on 01/01/23 and gifts his home to his son John.
John intends to give the home to his daughter a few months later.
How will a variation in Jake's will be beneficial for CGT?
Solution
On Jake's death, any gifts made will not be liable to CGT.
However, when John gifts the house to his daughter - he will be liable to CGT.
Therefore, Jake should gift the house directly to John's daughter to avoid the payment of
CGT!
389
Syllabus A3e. Trusts
Syllabus: A3ei-ii)
i) Define a trust
ii) Distinguish between different types of trust
What is a trust?
Definition of a trust
- To the trustees
Therefore:
Settlor -> Property passes into a trust -> Trustees are given the legal title to the property
IIP can be the legal right to receive income generated by the trust assets and/or use the
trust asset or live in a property owned by a trust.
Types of trusts
• Discretionary trusts
390
Discretionary trusts
2 The beneficiaries have no legal right to benefit from the income or capital of
the trust
3 The trustees decide how the trust assets are invested and managed
3 The life tenant has a legal right to benefit from the income of the trust
4 The trustees will distribute the life tenant’s full entitlement every year
It is now not possible to create an Interest In Possession Trust but they may still exist.
Most trusts that you will see in your exam will be Relevant Property Trusts which is a
generic name for most trusts and these are treated for tax purposes in the same way as
Discretionary Trusts.
391
Syllabus: A3eiii-v)
iii) Advise on the inheritance tax implications of transfers of property into trust
iv) Advise on the inheritance tax implications of property passing absolutely from a trust to a
beneficiary
v) Identify the occasions on which inheritance tax is payable by trustees
Trusts
IHT implications
There are 2 IHT charges when property passes into/out of a trust for inheritance tax
Principal Charge
This must be paid every 10th anniversary by the trustees.
It is 6% of the value of the property every 10th anniversary.
For example, property passed into a trust in 2013 when it was valued at £1,000,000 and in
2023, it is valued at £1,500,000.
The principal charge will be 6% * £1,500,000 = £90,000.
Exit Charge
This must be paid when the property leaves the trust.
For example, property passed into a trust in 2013 when it was valued at £1,000,000, the
donor died in 2022 and the property will be passed on to the beneficiary in 2022 when it is
valued at £1,200,000.
The exit charge will be 6% * £1,200,000 = £72,000.
This is all you need to know about these charges. You will not be asked to compute the
them in your exam.
392
Syllabus A3f. IHT planning
Syllabus: A3fi) Advise on the use of reliefs and exemptions to minimise inheritance tax liabilities,
as mentioned in the sections above.
IHT planning
IHT planning
The overall objective is to ensure that the HMRC get as little as possible and the next
generations get as much as possible.
The total inheritance payable can be reduced if a person makes lifetime gifts rather than
death gifts.
Lifetime exemptions can apply to reduce the total inheritance tax payable.
• Make lifetime gifts each year sufficient to use the Annual Exemption – £3,000.
• Make as many small gifts of £250 per donee per tax year.
• On the marriage of a son, daughter, grandchild, nephew and niece make gifts covered
by the marriage exemption.
• Make lifetime gifts of appreciating assets and those which do not generate a significant
CGT liability.
• Lifetime gifts to other individuals can reduce IHT as they will not give rise to any IHT
when the gift is made and will be totally exempt from IHT if the donor lives for > 7 years.
• If the donor dies within 7 years then IHT may become payable on death but provided
the donor lives for > 3 years the IHT payable will be reduced by taper relief.
• There is no IHT saving by lifetime giving of assets that qualify for BPR or APR at 100%.
• Ensure that estates of husband and wife are shared so that each spouse will fully use
their nil bands in the event that they should die at the same time.
393
Syllabus A3g. IHT administration
Syllabus: A3gi) Identify the occasions on which inheritance tax may be paid by instalments.
Payment by instalments is in 10 equal annual instalments, the first instalment being due 6
months after the end of the month of death, therefore the first payment is the normal due
date and the remaining 9 payments will be annual after that.
Interest will be due on the remaining 9 instalments for the following assets:
394
b) Investment company shares
Interest will only be due on the other assets if the actual instalment is paid late.
The instalment option is only available provided the instalment asset is still owned by the
donee, and if it is sold the whole of the outstanding IHT on that asset becomes payable
immediately.
• For example, if land and buildings were given to the donee, and the
instalment option was used, if the land and buildings were sold by the
donee, then all of the remaining IHT payable would be due immediately
because of the sale of the asset.
395
Syllabus: A3gii)
Advise on the due dates, interest and penalties for inheritance tax purposes.
The donor is primarily responsible for any IHT that has to be paid in respect of a CLT.
However, a question may state that the donee is to instead pay the IHT.
Remember that grossing up is only necessary where the donor pays the tax.
• 30 April following the end of the tax year in which the gift is made.
• Six months from the end of the month in which the gift is made.
Therefore, if a CLT is made between 6 April and 30 September in a tax year, then any IHT
will be due on the following 30 April.
If a CLT is made between 1 October and 5 April in a tax year, then any IHT will be due six
months from the end of the month in which the gift is made.
The donee is always responsible for any additional IHT that becomes payable as a result of
the death of the donor within seven years of making a CLT.
The due date is six months after the end of the month in which the donor died.
396
For potentially exempt transfers
The donee is always responsible for any additional IHT that becomes payable as a result of
the death of the donor within seven years of making a PET.
The due date is six months after the end of the month in which the donor died.
The personal representatives of the deceased’s estate are responsible for any IHT that is
payable.
The due date is six months after the end of the month in which death occurred.
However, the personal representatives are required to pay the IHT when they deliver their
account of the estate assets to HM Revenue and Customs, and this may be earlier than the
due date.
Where part of the estate is left to a spouse, then this part will be exempt and will not bear
any of the IHT liability.
Where a specific gift is left to a beneficiary, then this gift will not normally bear any IHT. The
IHT is therefore usually paid out of the non-exempt residue of the estate.
Illustration:
Alfred died on 15 December 2022. He had made the following lifetime gifts:
• 20 November 2020 – A gift of £420,000 to a trust. Alfred paid the IHT arising from
this gift.
Alfred’s estate at 15 December 2022 was valued at £850,000. Under the terms of his will, he
left £250,000 to his wife, a specific legacy of £50,000 to his brother, and the residue of the
estate to his children. The residue of the estate did not include a residential property.
The nil rate band for the tax years 2020/21, 2021/22 and 2022/23 is £325,000.
397
IHT liabilities are as follows:
Lifetime transfers
20 November 2020
£
Net chargeable transfer 420,000
IHT liability
325,000 at nil% 0
95,000 x 20/80 23,750
Gross chargeable transfer 443,750
The due date for the IHT liability of £23,750 payable by Alfred was 31 May 2021.
8 August 2021
20 November 2020
IHT liability
325,000 at nil% 0
398
The due date for the additional IHT liability of £23,750 payable by the trust is 30 June 2023.
8 August 2021
The CLT made on 20 November 2020 has fully utilised the nil rate band.
The due date for the IHT liability of £144,000 payable by Alfred’s son is 30 June 2023.
Death estate
£
Value of estate 850,000
The due date for the IHT liability of £240,000 payable by the personal representatives of
Alfred’s estate is 30 June 2023.
Alfred’s wife will inherit £250,000, his brother will inherit £50,000, and the children will inherit
the residue of the estate of £310,000 (850,000 – 250,000 – 50,000 – 240,000).
399
If the death estate is distributed with:
Step 1:
Step 2:
Step 3:
Illustration:
He left £400,000 in cash to his son, and the remainder of his estate to his wife.
What is the gross chargeable estate value, the IHT payable and the amount of the
estate that is left to his wife?
400
Solution:
401
Syllabus A4: Corporation Tax
Syllabus A4a. TX - UK Recap: The scope of corporation tax
The contents of the Paper TX - UK study guide for corporation tax under headings:
Period of account
A period of account is the period for which a company prepares its accounts.
Normally, a period of account is for 12 months, however it may be longer or shorter than
this.
This will normally occur when the company starts to trade, ceases to trade or changes its
accounting date.
Normally, a company’s chargeable accounting period is the same as it’s period of account.
The difference between both is that a chargeable accounting period must be equal to or
less than 12 months.
402
However, a period of account can exceed 12 months.
The first one for the first 12 months and the second one for the remaining months in
the period of account.
A CAP will normally start immediately after the end of a previous CAP.
• A CAP will also start when a company commences to trade, or when its profits
become liable to corporation tax.
• A CAP will normally finish 12 months after the beginning of the period or at the end
of a company’s period of account.
• A CAP will also finish when a company ceases to trade, or when its profits otherwise
cease being liable to corporation tax.
• FY 22 = 01/04/2022 - 31/03/2023
• There is a single rate of corporation tax of 19% regardless of the size of the
company.
• For the ATX - UK examination, students will be required to calculate a hybrid rate of
corporation tax when a chargeable accounting period spans an earlier financial year
although this is unlikely as the corporation tax rate has been 19% since FY 17 (20%
FY 16).
403
Illustration:
A company prepares accounts for the 15 month period from 01/01/2022 - 31/03/2023.
Solution:
Period of account:
01/01/2022 – 31/03/2023
2 corporation tax computations will be prepared, one for each chargeable accounting
period.
Note: in the case of the first chargeable accounting period, 3 months fall in FY21 and 9
months fall in FY22 but as the rates of corporation tax haven’t changed we can go a
straightforward TTP x 19%.
Illustration:
Solution:
It starts on 01/11/2022, this is because the company commenced trading on this date.
Note normally the accounting period starts after the previous one has finished, however as
Smarty Ltd. does not have a previous accounting period, their accounting period starts
when they commenced to trade.
404
Residency of a company
2. It is centrally managed and controlled in the UK for example, M. Inc. which was
incorporated overseas has majority of its board meetings held in the UK, and most
of its directors are resident in the UK.
Illustration:
Solution:
Yes, the company will be considered to be UK resident and therefore pay UK Corporation
Tax.
This is because, even though it has been incorporated overseas, it is centrally managed
from the UK.
405
Syllabus A4a. TX - UK Recap: Taxable total profits
The contents of the Paper TX - UK study guide for corporation tax under headings:
Allowable expenses 0*
- Non trading income (X)
* At the exam you will start the adjustment with the profit before taxation of £X and deal with
all the items listed and you will indicate with a zero (0) any items which do not require
adjustment.
Allowable expenses
You will indicate these expenses with 0 in the exam, because these items do not require
adjustment.
• Staff costs
406
• Impairment losses
• Legal fees:
• Income element of premium paid for grant of short lease for trading premises
• Repairs
For example:
- Repairs to warehouse following a flood
- Repainting the exterior of the company's office building
• Accountancy
• Entertaining employees
Illustration 1:
Required:
407
Solution:
Note: All expenses were indicated with 0, because these items do not require adjustment,
they were all allowable.
Disallowable expenses
Meaning these items were included in PBT, but should not have been there, therefore we
have to take them away by ADDING them to PBT.
An Example:
The expense of £10 is included in PBT (e.g. £100) but should not have been there, so you
need to take the expense away from PBT and therefore you add the expense to PBT (100 +
10 = £110) and therefore you will increase Profit.
Note:
The only exception to the non-deductibility of entertaining expenditure is when it is
in respect of employees.
408
• Depreciation / Amortisation (usually given in the question)
• Legal costs:
• Dividends
• Capital expenditure
e.g.
- costs of new computers
- Extending the office building in order to create a new reception area
- Improvement of the building rather than repair
• Donations:
- to political parties
- paid under the gift aid scheme
- they cost MORE than £50 per recipient per year (e.g. pens costing £60)
- are of food, drink, tobacco (e.g. food hampers)
- are vouchers for exchangeable goods
- don't carry an advertisement for the company making the gift (e.g pens not
displaying company's name)
Illustration 2:
409
Required:
Solution:
+ Disallowed expenses:
+ Donations 25
+ Depreciation 500
Allowable expenses:
Entertaining employees 0
Accountancy 0
Illustration:
410
Solution:
Note:
This means that a company can spend up to £1,000,000 on capital items, for
example computers and be allowed the full expenditure to be an allowable expense
in the tax year.
As companies will have shareholders (people who own the company) and directors/
employees (people who work for the company) separated, there are some
differences between the rules for unincorporated traders and companies:
These include:
Basically, there will not be any personal use of expenses because everyone who uses
the company’s money or facilities will be an employee, not an owner.
411
Relief for pre-trading expenditure
However, the trader would have incurred expenditure before this date, for example,
advertising expenditure and/or rent paid in advance.
• Pre-trading expenditure will get tax relief by being treated as though it was
incurred on the first day that a sale is made, if the following conditions are
satisfied.
• 2) It is an allowable expense.
• For example, if goods were purchased for sale for the business 4 years
before the business had its first sale; this purchase price will be deducted
from the first profits also.
412
Illustration:
Manny Ltd. made their first sale in his packaging business on 04/05/2022.
• Will this expenditure be deducted from the sales revenue to arrive at tax
adjusted trading profit?
Solution:
Yes, this expenditure will be deducted from their sales revenue to arrive at the tax
adjusted trading profit.
This is because money spent on materials used in the business are an allowable
expense and it was incurred within 5 months of the trade starting.
413
Capital allowances
• CA are given for a period of account eg for a year ended 31/12/22, and
are deducted in the adjustment of profits calculation to reach the Trading
Profits figure
Rates of allowance %
Capital allowances are now also available on integral features of a building including
lifts and escalators, electrical systems, heating and air cooling system.
Main pool
414
The following asset acquisitions should be allocated to the special rate pool:
These are assets, when new, with an expected economic working life of 25
years or more when total expenditure based on a 12-month accounting
period exceeds £100,000
W.D.A.’s are given on main pool assets and special rate pool assets.
For main pool assets, the W.D.A. is 18% for a 12 month period
For example Assets in the main pool had a brought forward value of £100,000 at
01/01/2022
Note if the above period was for 6 months, then the WDA for the main pool
would be £9,000 (£100,000*18%*6/12) in the period ending 31/12/2022.
For special rate pool assets, the W.D.A. is 6% for a 12 month period.
For example Assets in the special rate pool had a brought forward value of
£100,000 at 06/04/2022
The writing down allowance on these assets will be £6,000 (£100,000*6%) in the
year ending 05/04/2023.
Note if the above period was for 6 months, then the WDA would be £3,000
(£100,000*6%*6/12) in the period ending 05/04/2023.
This is given to an individual for a 12 month period and is time apportioned if the
period is below 12 months.
415
Ideally, this A.I.A should be allocated to special rate pool assets purchased first
because the allowances on these assets are only 6% per year, therefore tax
relief on these assets is received over a longer period.
Once allocated to special rate pool assets purchased in the tax year, then if any
of the allowance is remaining, it can be allocated to main pool assets purchased
in the year.
The A.I.A cannot be given to motor cars purchased in the tax year.
As equipment is a main pool asset, the writing down allowance will be £54,000
(£300,000*18%).
Note: if the above purchase was made in a 6 months period, then the AIA would be
(£1,000,000*6/12) = £500,000 + WDA ((£1,300,000 - 500,000)*18%*6/12) = £72,000.
This would total to £572,000 of capital allowances for the 6 month period.
416
Enhanced capital allowances for companies only
For a two-year period from 1 April 2021 to 31 March 2023, companies can benefit
from enhanced capital allowances when they purchase new plant and machinery:
• For expenditure which would fall into the main pool, there is a 130% super
deduction. This means that for every £100 of expenditure, a first year
allowance of £130 is available.
• For expenditure which would fall into the special rate pool, there is a 50% first
year allowance.
•
For expenditure falling into the main pool, the 130% super deduction should be
claimed rather than the 100% annual investment allowance.
However, for expenditure falling into the special rate pool, the 100% annual
investment allowance should be claimed in preference to the 50% first year
allowance.
Enhanced capital allowances are not available to sole traders or partnerships. Only
expenditure on new plant and machinery qualifies, not expenditure on second-hand
assets. Motor cars do not qualify.
Illustration:
During the year ended 31 March 2023, Anaya Ltd purchased new equipment for
£1,650,000, of which £350,000 is main pool expenditure and £1,300,000 is special
rate pool expenditure.
What is Anaya Ltd’s capital allowance claim for the year ended 31 March 2023?
Solution:
Allowance £
417
Illustration:
Buzzy Ltd. in the year ended 31/03/2023 made the following transactions.
01/05/2022 Ventilation system and lift for his freehold office £1,278,000
building
26/06/2022 Machinery purchased and alterations made to £29,300
office building to install the machinery
The tax written down value on the main pool was £87,800 on 01/04/2022.
Solution:
Allowance £
Notice how the AIA was first allocated to special rate pool assets.
Also notice that the expenditure on the decorative wall is not eligible for capital
allowances as this does not qualify as plant and machinery.
418
Compute capital allowances for motor cars
This is a 100% allowance on the cost of the car and it is given in the period of
acquisition.
The F.Y.A. is not time apportioned for a period of less than 12 months.
The first year allowance for this car will be £100,000 ( £100,000*100%).
Note if the above period was for 6 months, then the FYA would still be £100,000
- it is not reduced for a period of less than 12 months.
The F.Y.A is given to motor cars purchased that have zero CO2 emissions
For cars with a CO2 emission of less than or equal to 50g CO2 emissions, an 18%
W.D.A. is given, therefore these are considered to be main pool assets.
For cars with a CO2 emission of more than 50g, an 6% W.D.A. is given, therefore
these are considered to be special rate pool assets.
Cow Ltd.:
Purchase of car for £10,600. The car had CO2 emissions of 46g/
25/06/2022
km.
Purchase of car for £18,000. The car had CO2 emissions of
16/02/2023
142g/km.
14/03/2023 Purchase of car for £22,000. The car had zero CO2 emissions.
419
Solution:
Special
Main Capital
Particulars F.Y.A. rate
Pool allowances
pool
Additions:
Solution:
420
Capital
Main Special
Particulars F.Y.A. allowan
Pool rate pool
ces
Additions:
(£1,080) *
70%
business £5,688
WDA (18%/6%) (£4,932)
use = (W1)
Capital
allowance
W1:
W2:
The tax written down value carried forward is calculated using the entire W.D.A.
421
Assets with private use
A company
This is because all of the people who work in the company are considered to be
employees of the company.
Therefore, the capital allowances given are not reduced by the % of private usage
by an employee of a company.
A Sole trader
If an asset is used privately by the owner of the business, the capital allowance
given must be reduced by the % of private usage.
She bought computer for £3,000 which she uses 70% in her business and 30%
privately.
Solution:
WDA = £3,000 x 18% = £540
Capital Allowances (business use only) £540 x 70% = £378
Illustration (a company)
The company bought computer for £3,000 which is used by the sales manager
30% privately.
422
Calculate the capital allowances.
Solution:
WDA = £3,000 x 18% = £540
Note: The private use of the computer by the employee is not relevant for capital
allowance purposes.
No adjustment is ever made to a company's capital allowances to reflect the private
use of an asset.
423
Disposal of the assets
Use LOWER OF
1. Proceeds
2. Original cost
When an item of plant or machinery is sold - the lower of the sale proceeds received or
the original cost of the asset is deducted from the written down value of the relevant
pool.
For example, if the written down value is 100 and sale proceeds received are 120 but
the original cost of the asset is 110, then 110 will be deducted from the pool to give a
balancing charge of 10. The difference between proceeds and original cost will be
treated as a capital gain.
Instead, balancing allowances and balancing charges are computed on each pool.
A balancing allowance will be deducted from trading profit to find tax adjusted
trading profit and a balancing charge will be added to trading profit to find tax
adjusted trading profit.
Illustration:
The company ceased to trade on 05/04/2023 on which all of its plant and
machinery was sold for £8,000.
The written down value on its main pool at 06/04/2022 was £11,000.
424
Solution:
The rate of the allowance is 3% per annum and is given for a period of 33 years and
4 months.
- Expenditure which qualifies as plant and machinery (and therefore will get the AIA)
cannot also qualify for the SBA and vice versa.
- The SBA can only be claimed from when the building / structure is brought into
use in the trade. This means that the SBA will be time apportioned for the period
when it is first brought into use, this is unlike capital allowances for plant and
machinery which are given the full allowance in the period of purchase.
- When the building / structure is sold, this will not result in a balancing allowance or
balancing charge, the 3% p.a. will continue to be given for the period remaining
out of the 33 years and 4 months. However, the allowances already given at the
425
date of sale will be added to the sale proceeds when calculating the chargeable
gain / capital loss for capital gains tax.
Illustration
Solution
The allowance will be given from September 2022 (date it was brought into use).
Illustration
Solution
The SBA will be given normally for the year ended 31/3/2024:
£370,000 x 3% = £11,100
= £606,475
426
Recognise the treatment of short life assets
Short life assets are main pool assets that have an expected life of 8 years or less.
A de-pooling election can be made so that the asset gets its own W.D.A.’s and on
sale of the asset, a balancing allowance or balancing charge can arise.
The benefit of this election is that a balancing adjustment will arise within 8 years,
which would not have arisen, if this de-pooling did not take place.
If the asset is not sold within the 8 years of acquiring the asset, then the written
down value is added back to the main pool.
This happens on the 8th anniversary of the end of the accounting period in which
the asset was acquired.
Any asset (including a car) bought on hire purchase (HP) is treated as if purchased
outright for the cash price. Therefore:
• The buyer normally obtains capital allowances on the cash price when the agreement
begins
• He may write off the finance charge as a trade expense over the term of the HP
contract
Long-term leases (those with a term of five or more years) are treated in the same way
as HP.
427
Property business profits/losses - for Companies
The calculation of property business profits is exactly the same as that for individuals
with 4 exceptions:
The 100% restriction to interest expenses that we saw in the income tax topic does
not apply to companies.
2. There is no rent a room relief for companies as a company will not have a main
residence.
3. Property losses for a company are entirely relieved against Total Income of the:
1) current year or
4. Property business profits are calculated using the accruals basis for companies - NOT
the cash basis.
Note:
Property losses CANNOT be carried back 12 months. ONLY Trading losses CAN
LOSS must be deducted first and if any income remains - then the QCD can be
deducted
428
Illustration:
Solution:
Note that the property loss is relieved before the qualifying charitable donation against total
income.
Additionally, this has resulted in £5,000 of the qualifying charitable donation being wasted.
429
Relief for Trading losses - for Companies
You HAVE TO deduct the LOSS from Total Income FIRST and then deduct Qualifying
charitable donations (QCD)
The LOSS can be given to 75% group companies for relief against total income (Without
relieving loss against their own income first)
2) Carried back against 12 months of Total income - AFTER the current year total
income has been fully used for the trading loss
You HAVE TO deduct the LOSS from Total Income FIRST and then deduct Qualifying
charitable donations (QCD)
Qualifying charitable donations can be saved (ie) the QCD is deducted before the LOSS
The LOSS can be given to 75% group companies for relief against total income (The loss
must be relieved against their own income first)
Note: The current year total income relief and carry back total income relief are normally
used before the carry forward relief.
430
1) Current year relief of trading losses
Illustration 1
Cow plc can relieve the trading loss by deducting it from it's total income:
Less:
Current year trading loss (£100,000)
Total profits £10,000 - this is the amount that corporation tax will be paid on.
431
Remember:
Qualifying charitable donations (QCD) CANNOT be saved, loss must be deducted first and
if any income remains - then the QCD can be deducted
Illustration 2
In 2023:
Solution:
Property income £75,000
Chargeable gains £35,000
Total Income £110,000
Less:
Current year trading loss (£100,000)
Total Income £10,000
Note £25,000 (£35,000-£10,000) of the qualifying charitable donation was wasted because
the claim for loss relief must be made in full.
432
3) Carry back relief of trading losses
A trading loss can be deducted from the previous 12 month's Total income
Illustration 1
Solution:
Less:
Total Taxable Profit £10,000 - this is the amount that corporation tax will be paid on.
433
The current year total income claim must be made FIRST
Unlike for individuals, the current year total income claim must be made before the claim
against total income for the previous 12 months.
Illustration 2
The trading loss must first be deducted from 2023 total income, and can then be carried
back to the total income (2022)
434
Illustration 3:
Pulkit Ltd. made the following income for the year ended 31/03/2023:
Pulkit Ltd. made the following income for the year ended 31/03/2022:
How can the trading loss of the year ended 31/03/2023 be relieved?
Solution:
435
Here we will illustrate only the current year total income claim and the carry back claim
against total income for 12 months.
Trading loss of (£30,000) incurred in the year ended 31/03/2023 will be relieved against the
total income generated in 31/03/2023 as shown below.
£Nil - no corporation
Total taxable profit
tax will be paid.
The qualifying charitable donations for the year ended 31/03/2023 have been wasted.
Notice here that the qualifying charitable donation has not been wasted, as there was
enough income remaining for it to be deducted.
436
Loss memo:
437
The carry back of a loss - periods of less than 12
months
If the period before your loss making period is less than 12 months
Therefore you will have to go one further period back for the remaining months.
For example:
2023 - Loss
Then you will take the full 8 months from 2022 and 4 from 2021 total income - to make sure
that you have gone back a full 12 months.
For example
Above, I must compare 4 month's of profit with 4 months of loss, and take the lower of
them as the amount of loss I can deduct.
438
Illustration
Trading profits/
£60,000 £2,000 £(66,000)
loss
What amount of loss relief will the company get if they use the current year and carry
back total income claims for loss relief?
Solution
Therefore the carry back 12 month claim will use these 8 months and go further back 4
months to make up an entire 12 month claim.
Trading profits/
£60,000 £2,000 Nil
loss
Total income
(£10,000)
current year claim
Total income
carry back 12
months claim (set £(12,000)
off in full in this 8
month period)
439
Total income
Carry back 12 Lower of: 4/12*£66,000 =
months claim £22,000 (Loss for the 4 months)
(restrict set off to or
(20,667)
Total taxable
£41,333 £Nil £Nil
profts
Loss memo:
Notice how the loss is restricted in the second carry back period. Look out for this in the
exam, don’t just allocate the remaining loss in this second period.
440
Carry forward relief of trading losses
If a company makes a trading loss, then it can relieve the loss by carrying it forward and
deducting it from it's Future total Income.
This rule came into force for losses from 1 April 2017.
In your ATX - UK exam you will not be tested on losses that arose before 1 April 2017.
Claims for carried forward loss relief must be made within 2 years of the end of the
accounting period in which the loss is relieved.
BUT once you start claiming it, then Trading losses can be carried forward for any amount
of time, until the full amount of the loss has been relieved.
Less:
Total taxable profit £40,000 - this is the amount that will be taxed, after the carried forward
loss has been deducted.
441
REMEMBER:
Unlike current year and carry back loss relief, under carry forward loss relief a company
can choose the amount of trading loss to use in order to save its charitable donations.
For example
Cow plc made a trading loss of (£30,000) in the tax year ending 31/03/2022.
Cow plc made a trading profit of £50,000 in the tax year ending 31/03/2023.
Cow plc also made a qualifying charitable donation of £35,000 in the tax year
ending 31/03/2023.
Trading profit £Nil - no trading profit will be taxed in the tax year ending
31/03/2023.
The remaining trading loss of £15,000 (£30,000 - £15,000) will be carried forward to future
years
Trading losses can be carried forward for any amount of time, until the full amount of the
loss has been relieved.
442
Illustration:
Pulkit Ltd. made the following income for the year ended 31/03/2022:
Pulkit Ltd. made the following income for the year ended 31/03/2023:
How can the trading loss of the year ended 31/03/2022 be relieved against future Total
Income?
Solution:
Trading loss of (£50,000) incurred in the year ended 31/03/2022 will be relieved against the
total profits generated in 31/03/2023.
BUT only £40,000 of the loss needs to be used, the remaining £5,000 of total profits is
covered by the qualifying charitable donations.
The remaining £10,000 of the loss will be carried forward to offset against future total
profits.
443
Loss memo:
Note: an alternative would be to use the loss in the current year and offset £25,000 against
other income. The downside of this is that £5,000 of donations would be wasted.
A4cvi) Identify the restriction on carried forward trading and capital losses for companies
with profits over £5 million.
Companies are entitled to a deductions allowance of £5m for a 12 month period for brought
forward trading and capital losses.
Companies can choose how the allowance will be allocated between the brought forward
trading and capital losses.
The maximum relief for the carried forward trading loss will be the amount of deduction
allowance available plus 50% of the company’s profits after deduction of current period
loss reliefs (including group reliefs) and the deductions allowance.
For example, if total income was £12,000,000 and brought forward trading losses were
£15,000,000 - the allowable deduction would be:
Notice here that the entire deductions allowance was given to the carried forward trading
loss, so none will be available for the carried forward capital loss.
The maximum relief for carried forward capital losses will be the amount of deduction
allowance available plus 50% of the excess of capital gains above this amount.
Companies in a group will only be entitled to one £5m deduction allowance, it can be
allocated to any company/companies in the group.
You only need to have an awareness of this restriction for the ATX - UK paper.
444
Terminal loss relief
If a trading loss occurs in the final 12 months of trading, then this trading loss can be
carried back for 36 months against the total income of the company, on a LIFO (last in first
out) basis.
Once again, the loss cannot be restricted to save qualifying charitable donations.
For example Creamy plc. made a trading loss of (£100,000) in its final year of trading.
The trading loss of (£100,000) will first be relieved against the total income of 31/03/2023:
445
Then,
The trading loss of (£60,000) (£100,000-£40,000) will second be relieved against the total
income of 31/03/2022:
Then,
Note for the years in which tax has already been paid, this will result in a repayment of tax.
446
Factors that influence choice of loss relief claim
There are 3 factors that will be relevant in the ATX - UK exam that will influence the
choice of the loss relief claim:
Therefore, the current year total income and and carry back 12 months’ total income
claim are much more likely to be used before the carry forward claim against trading
profits
The rate of corporation tax fell from 20% in FY16 to 19% in FY17 and has remained
at 19% for FY18, FY19, FY20, FY21 and FY22. However, the rate is expected to fall
in the future and so it is best to try and utilise losses as soon as possible to obtain
relief at the highest rate
If a loss relief claim can reduce the size of the company, then this will avoid the
company having to make quarterly instalments of corporation tax.
447
Loan relationship rules
All interest is received gross for companies and the basis of assessment for interest income
is the accruals basis.
• For example, if a loan was taken out to purchase an investment property, the
interest payable would be deducted from this area, not property income.
• However, there is one exception to this rule, that is that any loan taken or received
for trading purposes will have its interest payable or receivable adjusted within
“Trading profits”.
• Otherwise, any non trading loans will be adjusted within “Interest income”.
Simple proforma:
448
Less:
Illustration:
Seeta Ltd. took out a £190,000 loan on 01/07/22 in the year ended 31 March 2023.
The interest on this loan is £7.25% per annum. The loan is used for various activities:
How much of the interest payable will be taken under the Interest income?
Solution:
Interest Income:
Trading income:
449
Qualifying charitable donations
You can deduct charitable donations from the taxable total profits.
Also note the difference between how qualifying charitable donations are treated
between individuals and companies:
2. A company makes the payment gross, whereas an individual makes the payment
net.
Illustration:
Satya Ltd. has the following income and expenses for the year ending
31/03/2023:
450
Solution:
451
Computation of taxable total profits
Trading income x
Property income x
Interest income x
Capital gains x
Less:
Remember that dividends received are not subject to corporation tax and are therefore not
included in taxable total profits.
Illustration:
452
What are Lachmi Ltd. taxable total profits for the year?
Solution:
Less:
Notice that dividends received are not included. They are exempt and only used for the
calculation of Augmented profits for payment of corporation tax.
453
Little trick!
This means that the interest which is taxed is the interest which is receivable during the
year, not the interest which is actually received during the year.
For example, bank interest receivable of £2,000 was accrued at 31 March 2022 and £1,000
was accrued at 31 March 2023 respectively.
This means that £2,000 should have been paid in the year ended 31 March 2022 but was
not, and £1,000 should have been paid at 31 March 2023, but has not been paid yet.
The interest actually received during the year ended 31 March 2023 was £6,000.
Therefore, how do we figure out what the amount is that should have actually been received
for the year ended 31 March 2023?
Amount paid - Amount due for previous year + Amount still due at this year end = Amount
that should have been paid for this year.
Therefore, £4,000 paid was actually due for the year ended 31 March 2023
+
£1,000 is still to be paid for the year ended 31 March 2023
Therefore, £6,000-£2,000+£1,000 = £5,000 is actually due for the year ended 31 March
2023 - this amount will be used in the proforma.
Illustration:
Kamal Ltd. has the following results for the year ended 31/03/2023
£
Trading profits/loss before capital allowance 30,000
Chargeable gains 2,000
Kamal Ltd. had £2,000 interest accrued at 31/03/2022 and £3,000 of interest accrued at
31/03/2023.
454
What will Kamal Ltd.'s taxable total profits be for the year ended 31/03/2023?
Particular £
455
Syllabus A4a. TX - UK Recap: Chargeable gains for
companies
The contents of the Paper TX - UK study guide for corporation tax under headings:
Capital gains and losses are netted off for each tax year
Disposal proceeds X
Net proceeds X
Taxable gain X
After all individual indexed gains and losses have been computed, then they must be
aggregated and the following computation can be used.
456
Less: Capital losses in tax year (X)
Taxable Gains X
This final figure is then taken to the TTP computation if it is a gain and carried forward if it is
a loss.
The indexation allowance is an allowance given to companies to remove the part of the gain
that has been produced by increases in inflation rather than genuine increases in the value
of the asset. Indexation therefore reduces the chargeable gain.
Note: indexation was frozen in December 2017 so even if the disposal is in 2022,
indexation will only be calculated up to December 2017.
Prices increase due to inflation, therefore to avoid a company paying tax due to the
increases in inflation, an indexation allowance is calculated based on retail price indexes to
remove the effects of inflationary increases in the capital gain.
Note: you will not be expected to calculate indexation allowances in your exam. You will be
given the correct figure to use.
1. The indexation allowance can only reduce a capital gain to Nil, it cannot create a
capital loss or increase a capital loss.
2. If an asset has been enhanced, therefore capital expenditure has been incurred to
improve the earning capacity of the asset, then another indexation allowance must
be calculated for this enhancement expenditure.
The same calculation is used, replacing “cost” with the “enhancement expenditure”
and the “R.P.I acquisition” with R.P.I at enhancement date.
457
Total enhancement expenditure of asset * (R.P.I disposal date or Dec 17 – R.P.I.
enhancement date)/R.P.I. enhancement date = Indexation allowance for
enhancement expenditure
3. If there are incidental costs to acquisition or enhancement, for example, legal costs
incurred on the date of purchase, this cost also needs to be included in the “total
cost” and indexed along with it.
4. If the R.P.I factor has fallen from the month of acquisition to the month of disposal,
the indexation allowance is Nil.
5. Indexation was frozen in December 2017 so any inflation element of a gain from
January 2018 will be taxable.
Illustration:
They received disposal proceeds of £115,000 for the property and incurred legal fees on
disposal of £5,000.
They had initially purchased the property for £15,000 and incurred incidental costs on
acquisition of £1,500 on 31/12/2011.
On cost 0.306
On enhancement 0.218
Solution:
458
Indexation allowance for extension (£5,450) (W2)
The unindexed gain is a capital gain from which indexation allowance has not yet been
deducted.
W1:
Note that the incidental costs to acquire are included (15,000 + 1,500) = 16,500.
W2:
Note: even though the asset was not sold until December 2022, indexation is only
calculated to December 2017.
459
Capital losses
1. It is first set off against any Capital gains arising in the same accounting period.
2. Any remaining capital loss is then carried forward and set off against future Capital
gains.
Illustration:
Kruti Ltd. sold an office building on 06/06/2021 for £400,000, the unindexed cost of the
asset was £420,000.
In FY22, Kruti Ltd. realised a capital gain of £25,000 on the sale of a small piece of land that
the company owned.
Solution:
The loss of (£20,000) will be carried forward and set off against future capital gains.
460
Disposals of shares by companies, with share
identification rules
Matching rules
Disposals of shares for individuals and for companies are extremely similar.
There are 2 differences, these are that we index the cost of the shares and when looking at
shares to be sold, and we do not look 30 days after the sale, we look 9 days previous to the
sale.
• For this reason, the same illustrations and quizzes have been used to explain this
are so that you can compare for yourself both applications.
• When shares are disposed of, a problem arises in finding their allowable cost, if the
shares were acquired over a long period of time.
• To make this simpler, HMRC uses a set of rules to determine the acquisition date
and cost of the shares being disposed of.
Illustration:
They acquired 1,500 shares in the company on 31/03/2016 for £20,000, and 500 shares on
30/06/2017 for £10,000.
On 21/02/2023 Benazir Ltd bought a further 200 shares in L plc. For £4,000.
• Calculate Benazir’s capital gain on the disposal of the shares in February 2023.
461
Solution:
Let us apply our matching rules to see which shares we are disposing of.
Indexation factors:
462
Share pool:
Total £ 30,356
1,200
Remaining in share pool £18,000 £ 19,252
shares
Specifically note how each purchase will be indexed to the next EVENT date (an event
being either a purchase, sale or rights issue).
463
Calculating capital gain:
Acquisition cost:
21/02/23 (£4,000)
Note: The share pool figure in the above calculation is the indexed cost figure. This could
be shown separately as cost £12,000 and indexation (12,835 - 12,000) £835. This is useful
to be aware of because indexation cannot create or increase a loss so if the proceeds had
been £11,000 and the cost £12,000 there would have been an allowable loss of £1,000.
But if you had not separated out the cost and indexation you would have calculated a loss
of (11,000 - 12,835) £1,835 which would have been incorrect.
• You also might want to try to draw a timeline to ensure that you do not miss any
acquisition dates!
• Shares issued through a bonus issue will not be indexed as no money has been
paid for them.
• It will be assumed as though they have been acquired on the last purchase date.
• Shares that have been issued via a rights issue will be indexed as normal, as money
has been paid for them.
464
Bonus issues, rights issues, takeovers and
reorganisations
Share issues
Once again, the treatment of bonus issues, rights issues, takeovers and reorganisations are
exactly the same for companies and individuals.
The only difference is that a company will index its cost, whereas an individual will get an
annual exemption.
For this reason, very similar illustrations and quizzes have been used so that the difference
can be highlighted to you.
Bonus Issues
• For example, if you owned 500 shares in a company and a 1:5 bonus issue was
declared, you would receive (500/5) *1 = 100 bonus shares.
• These shares are deemed to be acquired at the same date and at the same cost as
the original shares to which they relate.
• Therefore, in your share pool, a bonus issue will only result in an increase in the
number of shares, and no increase in the indexed cost of shares.
465
Illustration:
• How many shares will Mina Ltd receive under the bonus issue?
Solution:
• When they are included in the share pool, the shares purchased previously will not
be indexed to the bonus issue date.
• The indexation of all of the shares will only happen once the next monetary
purchase happens.
Rights Issues
A rights issue occurs where a company offers its existing shareholders the right to buy
extra shares.
Rights issues are similar to bonus issues in that the number of shares offered to each
shareholder is generally in proportion to his or her existing shareholding.
• The price for the shares is normally lower than current market value, in order for the
the existing shareholders to be attracted to taking up the issue.
466
Illustration:
• Dec 2022 Took up 1:5 rights issue for £2.00 per share
• What will the rights issue cost Jack Ltd if they decide to subscribe to the issue fully?
Solution:
• Note carefully that these bonus issues and rights issue will follow the same
matching rules for shares when they are disposed.
• The bonus issues will be included in the share pool at no cost and the rights issue
shares will be included in the share pool at their respective cost.
• The rights issue share purchase will cause indexation of the previous purchases until
this date as this is a monetary purchase.
467
Takeovers
Takeovers can either be for a share for share exchange, or a takeover can be for a cash
exchange.
We will deal with both of these situations separately via the use of illustrations.
• If a takeover is for a share for share exchange, then no capital gains tax arises
immediately.
• The market value of the new holding provided will be used to apportion our initial
holding cost.
• Then when we ultimately dispose of this new holding, we will use the original
holding cost, and this will result in a capital gain assessable.
Illustration:
Jayna Ltd owned 2000 shares in A plc which cost them £2,000 in 2010, and A plc was
being taken over by B plc in 2023
• Jayna Ltd was offered by B. plc 1,500 ordinary shares with a market value of £3,000
and 500 preference shares with a market value of £1,000.
• If not, when Jayna Ltd sells these new ordinary shares and new preference shares,
what cost would be attributed to each?
468
Solution:
Market value of ordinary shares/Total market value of new holding * original cost
Market value of preference shares/Total market value of new holding * original cost
• Jayna Ltd needs to use these costs as the acquisition cost when they decides to
sell the shares in B. plc.
• (They cannot use the market value of the shares when they were given to them).
• If a takeover is for a share for cash exchange, capital gains tax will arise immediately
for the proportion of cash given compared to the total market value of the new
holding.
• The market value of the new holding provided will be used to apportion our initial
holding cost to be used.
469
Illustration:
Jayna Ltd owned 2000 shares in A plc. which cost them £2,000 in 2010, and A plc was
being taken over by B plc in 2023.
• Jayna Ltd was offered by B. plc 1,500 ordinary shares with a market value of £3,000
and cash of £1,000.
Solution:
Market value of ordinary shares/Total market value of new holding * original cost
Jayna Ltd needs to use this £500 as the acquisition cost of the shares that they are deemed
to have disposed of for the cash received.
Capital gains:
470
Rollover relief
Rollover relief for companies is the same as rollover relief for individuals.
The only difference between the two is that the indexed gain is rolled over for companies,
whereas individuals do not index the gain.
Explanation
Subject to certain conditions a company may claim that the gain arising on the disposal of
a business asset may be rolled over against the cost of acquiring a replacement business
asset.
Main effects:
1. Disposal of the old asset will arise in neither a gain nor a loss.
2. Cost of the new asset is reduced by the indexed gain that would have been
chargeable on the disposal of the old asset if the claim for roll over relief had not
been made.
Conditions:
1. The disposal must have been of a qualifying business asset and the reinvestment
must be in a qualifying business asset.
2. The reinvestment must be made 12 months prior to the sale or 36 months post the
sale.
3. All of the sale proceeds received on the sale must be reinvested for qualification of
full roll over relief. If only some of the sale proceeds are reinvested, then:
Total indexed capital gain-indexed capital gain realised now = indexed capital gain
to be rolled over.
471
Qualifying assets:
Illustration:
This office cost the company £100,000 on 29/09/2003. Jeremy Ltd. bought another
business office for £250,000 on 31/12/2022. Indexation factor 0.915
Solution:
• This base cost will be used as the cost against the disposal of the new office.
W1:
W2:
472
Disposal proceeds reinvested (£250,000)
473
Syllabus A4a. TX - UK Recap: The comprehensive
computation of corporation tax liability
The contents of the Paper TX - UK study guide for corporation tax under headings:
A company will pay corporation tax at the rate of 19% for FY20, FY21 and FY22.
If a company’s CAP falls into a financial year prior to FY17 a hybrid rate will need to be
calculated (it is unlikely that this will be required in the ATX exam as the tax rates and
allowances section of the exam only includes rates for FY 18, FY19, FY20, FY21 and FY22).
As you know, dividends received by a company from non-associated companies are not
charged to corporation tax. However, they do determine whether a company is small or
large.
How?
You will need to add the dividends figure it to the taxable total profits.
If the total of this exceeds the upper limit, then the company will be deemed to be large.
Do not forget that dividends are just used to determine whether a company is small or
large, they are never subject to corporation tax!
474
Illustration:
Illustration:
T.T.P £1,450,000
Dividend : £250,000 £250,000
Augmented profits £1,700,000
Yes, the total has crossed £1,500,000 and therefore the company will be considered to be a
large company.
They will pay corporation tax at 19% like small companies but the difference is that they will
have to pay their corporation tax in quarterly instalments.
Note: the quarterly instalment dates for very large companies (profits above £20m) have
been brought forward by 4 months but they are not examinable in ATX - UK.
2. Both companies are owned more than 51% by the same company
What is control?
The parent company needs to own more than 50% of the share capital of the subsidiary at
the end of the previous chargeable accounting period. The 50% needs to be both direct
and effective interest. For example if A Ltd owns 51% of B Ltd and B Ltd owns 51% of C
Ltd, the situation would be as follows:
475
A Ltd is related to B Ltd so A would divide the limit by 2
1. One annual investment allowance is given to the entire group. The group can decide
which companies get the allowance. Therefore, it is tax efficient to allocate the
allowance to large companies and companies which have purchased special rate
pool assets.
2. The upper limit of £1,500,000 is divided by the number of related 51% group
companies to determine an upper limit for each company in the group. If the
individual company’s profits exceed the upper limit, then they are deemed to be a
large company and must pay quarterly instalments of their corporation tax.
Illustration 1:
Solution:
Illustration 2:
476
Which companies are related 51% group companies of Q Ltd?
Solution:
Q Ltd is only related to Z Ltd and A Ltd so the limit would be divided by 3
B Ltd is excluded because the effective interest is less than 51% (65% x 60% = 39%)
Z Inc is excluded because the effective interest is less than 51% (51% x 50% = 25.5%)
Note:
A Ltd would include Q Ltd and B Ltd as related 51% companies (limit/3)
Hopefully you can see from these illustrations that there is not just one answer for a group.
It depends from which company you are looking from. The limit could be different for each
company.
A large company will pay corporation tax in installments in the second year that they are
large on:
1. First installment = 3/CAP x Estimated C.T. liability on 14th of 7th month in CAP
2. Second installment = 3/CAP x Estimated C.T. liability on 14th of 10th month in CAP
3. Third installment = 3/CAP x Estimated C.T. liability on 14th of 13th month in CAP
4. Fourth balancing payment = (Final C.T. liability - payments already made) on 14th of 16th
month in CAP
Illustration
A Ltd. is a large company and has a final C.T. liability of £600,000 for the year ended
30/04/2022.
477
Solution
478
Syllabus A4a. TX - UK Recap: Group corporate structure
for C.T.
The contents of the Paper TX - UK study guide for corporation tax under headings:
A group of companies is like a family, they can share their losses and
gains
B – VAT groups
We have already dealt with related 51% group companies and VAT groups.
There are 2 conditions that need to be satisfied for a company to be a part of a 75% loss
group.
These are:
1. The parent company must own (directly or indirectly) an effective interest of 75% of
the ordinary share capital all member companies.
479
Illustration:
Solution:
This is because A Ltd. owns a direct interest of 90% in B Ltd. and an indirect interest of
81% (90% * 90%) in C Ltd.
Illustration:
Solution:
This is because A Ltd. owns a direct interest of 100% in B Ltd., an indirect interest of 75%
(100% * 75%) in C Ltd, and an indirect interest of 75%(100% * 75% * 100%) in D Ltd.
480
What losses can they surrender?
This means that the property losses of the company who has generated the loss
must relieve the loss against its own total income before surrendering it to a group
member.
Thus, the loss making company’s total income should be NIL before it surrenders its
property loss.
This means that the qualifying donations of the company who has generated the
loss must relieve the loss against its own total income before surrendering it to a
group member.
Thus, the loss making company’s total income should be NIL before it surrenders its
qualifying donation.
3. Trading losses.
This means that the trading losses of the company who generated them do NOT
need to relieve the loss against its total income or previous year’s income before
surrendering it to a group member.
Thus, the loss making company’s total income does not need to be NIL before it
surrenders its trading loss.
This trading loss cannot be carried back against group members income, it can only
be relieved in the corresponding period or carried forward to future periods. The
surrendering company can choose the amount to surrender as group relief.
A company may only surrender carried forward trade losses if the loss cannot be
used against its own profits.
The claimant company must calculate the profits available for offset via group relief
by first deducting all possible single company loss reliefs even if they do not intend
to claim them.
481
Conditions for loss relief
1. The loss of the surrendering company for the exact same period against which it is
being surrendered.
2. The profit of the claimant company for the exact same period against which it is
being claimed.
Illustration:
• Ilea Ltd. made a loss for the year ending 31/03/23 of (£180,000).
• William Ltd. joined the group on 01/01/2023 and made a profit of £100,000 for the
period ending 31/03/2023.
• Jane Ltd. had been a part of the group for many years and made a profit of £55,000
for the year ending 30/06/2023.
Solution:
• Only 3 months are co-terminus since William Ltd. joined the group
(01/01/23-31/03/23)
• Only 9 months are co-terminus as both companies have a different year end
(01/07/22-31/03/23)
482
Loss memo:
Illustration:
A Ltd. and B Ltd. are part of a 75% loss group. They both have 31/03 year endings.
Solution:
The lower of £190,000 and £180,000, therefore only £180,000 loss can be relieved and the
remaining loss will be carried forward against A Ltd.’s future trading profits or used for
future group relief.
483
Carried forward group relief
A company which has a post 1 April 2017 loss carried forward may transfer all or part of
that loss to a member of the 75% group.
Unlike current period group relief, the surrendering company can only surrender a
carried forward loss if it cannot use it itself.
When calculating available taxable profits against which to use the carried forward
loss relief, the claimant company must deduct its own losses first.
Note: if a company joins the group and already has carried forward losses, it cannot
surrender these losses to other group companies.
Illustration
Apple Plc has one 75% subsidiary, Banana Ltd. Their results for the year ended 31
March 2023 are as follows:
Apple Plc
Banana Ltd
£ £
Trading profit 70,000 40,000
Trading loss carried (5,000) (1,10,000)
forward from 31 March
2022
Non-trade loan 10,000 10,000
relationship income
Chargeable gain 12,000 6,000
Calculate the maximum carry forward group relief that Apple Plc can claim from
Banana Ltd.
Solution
Banana Ltd can only surrender the amount of carried forward loss that it cannot use
itself, even if it would not choose to use the loss itself:
484
Carried forward trade loss £110,000
Apple Plc can only claim a loss against profits after deducting it’s own losses first:
Maximum carry forward group relief that Apple Plc can claim from Banana Ltd is
therefore £54,000 (the lower of £54,000 and £87,000)
Note: you will not be tested on group relief involving carried forward losses made
prior to 1 April 2017.
485
75% gains group
The asset will be transferred between group members at its indexed cost (cost +
indexation until date of transfer).
Therefore one member of a group can sell a qualifying asset, and if another member
purchases a qualifying asset within the time limit, the chargeable gain on the first
asset can be rolled over against the purchase of the second asset of the other group
member.
3. Chargeable gains or capital losses can be given to group members freely, to reduce
their taxable total profits as necessary.
An asset does not have to be physically moved and sold by another group member
for a chargeable gain or capital loss to arise on them, the gain or loss can simply be
transferred.
• The parent company must hold a direct or indirect effective interest of more than
50% in each subsidiary.
Illustration:
486
Solution:
This is because A Ltd. owns a direct interest of 90% in B Ltd. and an indirect interest of
67.5% (90% * 75%) in C Ltd.
Therefore, the parent effective interest is satisfied and the sub-subsidiary condition is
satisfied.
Illustration:
Solution:
• This is because A Ltd. owns a direct interest of 100% in B Ltd., an indirect interest
of 75% (100% * 75%) in C Ltd, and an indirect interest of 56.25%(100% * 75% *
75%) in D Ltd.
Illustration:
Zooby Ltd. and Scrappy Ltd. are members of a 75% group. Zooby Ltd. sold a qualifying
asset for £500,000 and this resulted in a capital gain of £100,000.
• Scrappy Ltd. spent £650,000 on a qualifying asset 6 months after the sale of
Zoooby Ltd.’s asset.
Solution:
As group rollover relief is available due to both assets being qualifying and purchased within
the necessary time limit, the base cost of Zooby Ltd.’s asset will be:
487
Purchase cost £650,000
Illustration:
If two companies are members of a capital gains group and one company transfers an
asset to another.
Solution:
Indexed cost
488
Syllabus A4b. The scope of CT
Syllabus: A4bi) Identify and calculate corporation tax for companies with investment business.
CT Implications
If a company makes investments and holds those investments, they are allowed to deduct
certain management expenses in relation to those investments.
The company can also carry on a trade, however, to deduct these additional management
expenses, the company must also make and hold investments.
2 Salaries of management
3 Audit fees
5 Bank interest
If management expenses are in excess of total profits, then the reliefs available are:
489
Illustration
C Ltd. has the following results for the year ended 31/03/2023:
Management expenses
Other £60,000
Capital allowances
Other £1,600
Solution
Property income £70,000
Less:
Management expenses (£35,000)
Capital allowances (£2,300)
£32,700
Interest income
Interest receivable £20,000
Less interest payable (£2,000)
£18,000
Chargeable gains £3,000
£53,700
490
Syllabus: A4bii)
Close companies: Apply the definition of a close company to given situations
Conclude on the tax implications of a company being a close company or a close investment
holding company
Close companies
If a person runs their business as a company then they are a shareholder and employee of
the company.
The company is a separate legal entity and has the legal rights to own assets.
If the company is UK resident or resident in the European Economic Area (EEA) and is
controlled by five or fewer shareholders and their associates or is controlled by any number
of directors and their associates, then the company is known as a close company.
Special rules apply to these companies to prevent participators taking undue advantage of
corporation tax legislation by virtue of their positions of influence over the company’s
affairs.
The shareholder is treated as receiving a dividend from the company which is subject to
income tax if the deemed dividend value exceeds the dividend nil rate band of £2,000, only
the excess value is subject to income tax at 8.75%, 33.75% or 39.35%.
The value of the deemed dividend is equivalent to the benefit which would have been
assessable if that person had been an employee of the company.
The company cannot reduce its trading profits by the expenses incurred in
connection with the benefit.
The company does not pay class 1A national insurance on the deemed
dividend.
491
Illustration
Option 2 give a computer that the company has already used and buy a replacement one
for the company for £1,800. The used computer has a market value of £150, and has a
balance of £Nil on the main pool.
Solution
Option 1 after tax cost
Payment (£1,800)
After tax cost £1,800
A Loan benefit is assessable if the shareholder is also an employee of the close company.
The shareholder who is not an employee is treated as receiving a dividend equivalent to the
loan benefit which would have been assessable.
When the loan is written off by the company then the shareholder/employee is treated as
receiving a distribution/ dividend equivalent to the loan written off.
492
Close company tax implications
The close company must pay a penalty to HMRC of 33.75% x loan provided to a
shareholder within 9 months and one day from end of the CAP.
The company can reclaim the penalty when the loan is repaid or when the
company writes off the loan.
1) The shareholder repays the loan within the 9 month payment period.
- Employee of company
- Loan ≤ £15,000
Illustration
Jake owns 100% of the share capital in Jake Ltd. and is a director of the company.
Solution
Jake is a shareholder and an employee of the company, therefore this will be taxed as the
beneficial loan benefit on Jake.
The company will have to pay Class 1 A NIC on the benefit as well as a penalty.
Class 1 A NIC £280*15.05% = £42
Penalty
33.75%*£14,000 = £4,725 This penalty is payable on the usual corporation tax payment
date
eg 9 months and 1 day after the CAP end and will be refunded to the company when the
loan is either repaid by the shareholder or written off. If the loan is written off then the
amount of the loan is treated as a distribution to the shareholder and the shareholder will be
taxed on it as if it were a dividend.
493
Syllabus: A4biii)
Identify and evaluate the significance of accounting periods on administration or winding up
Winding up of a company
Liquidation
If a company decided to wind up, this does not mean that the company has gone bankrupt,
the company just wants to cease trading.
There must be a separate corporation tax computation from the date of commencement of
winding up until the winding up has finished.
The date of commencement of winding up is the day that a liquidator is appointed to carry
out the liquidation.
On this date, one CAP will end and the CAP of winding up will begin, and continue until the
winding up has finished.
Illustration
Solution
The penultimate CAP will be from 01/07/2022-31/12/22.
The final CAP will be from 01/01/23-31/03/23.
494
Syllabus: A4biv)
Conclude on the tax treatment of returns to shareholders after winding up has commenced
On the liquidation of a company, the liquidator will be appointed and will distribute cash or
other assets to the shareholders once the company’s creditors have been paid.
495
Illustration
He has been the managing director of Jake Ltd. since 2010 and is an additional rate tax
payer.
Should Jake Ltd. distribute profits to John Ltd. and Mr J on 31/12/22 or 31/03/23?
Solution
For John Ltd. it will not make a difference because dividends are exempt from corporation
tax.
For Mr J, the distribution should be made on 31/03/2023 because it will be treated as a
capital disposal for him and because he owns more than 5% of the shares and is an
employee of the company, this disposal will qualify for E.R./Business Asset Disposal relief
at 10%.
If the distribution is made before the winding up has commenced, it will be treated as
though a dividend has been given to Mr J and he will be taxed at 39.35% as he is already
an additional rate tax payer.
496
Syllabus: A4bv)
Advise on the tax implications of a purchase by a company of its own shares
The Companies Act gives an unquoted company and companies quoted on the AIM the
right to purchase their own shares.
In some circumstances the shareholder is treated as making a capital gains tax disposal
rather than receiving a distribution attracting an income tax liability.
Conditions which must be met in order to be treated as a CGT disposal rather than as a
distribution are:
3 The shares must normally have been owned by the shareholder for at least
five years.
4 The shareholder must either dispose of his entire interest or reduce their
interest in the share capital to 75% or less of the amount held before the
repurchase of shares, and
5 The shareholder must not immediately after the purchase be connected with
the company (must not control more than 30% of the issued share capital or
voting rights in the company.
497
If conditions are not met
If any one of the above provisions does not apply, then a payment for the purchase by a
company of its own shares will be treated in the normal way as a distribution.
The amount of its distribution is the excess of the payment over the amount originally
subscribed for the shares.
Note: Any legal costs and other expenditure incurred by the company in purchasing its own
shares will not be allowable against the company’s profits.
Illustration
Gary will sell either 2,700 shares or 3,200 shares back to A Ltd.
Why will the capital treatment apply if he sells 3,200 shares but not apply if he sells 2,700
shares?
Solution
It will apply if he sells 3,200 shares because only a sale of this amount will reduce his
holding to less than 75% of the original holding.
498
Syllabus A4c. Taxable total profits
Syllabus: A4ci) Identify qualifying research and development expenditure, both capital and
revenue, and determine the reliefs available by reference to the size of the individual company/
group
additional tax reliefs are given for qualifying research and development expenditure incurred
by companies.
There are separate schemes for Small&Medium companies and Large companies.
• The exam question will tell you what size the company is.
• Materials
• Computer software
1 If the company spends money on qualifying R&D, they get enhanced relief
which means that they can deduct an additional 130% of qualifying
expenditure for tax purposes.
2 If the deduction creates a trading loss, it may claim a cash repayment from
HMRC this is called a R&D tax credit which is 14.5% of the surrendered loss.
499
Illustration
The company has recently decided to investigate the market for a new type of equipment
and has spent the following amounts in the year ended 31/12/2022:
Solution
Staff £20,000
Software £4,000
Total £43,000
Note:
Large companies cannot claim an additional deduction, instead they increase their taxable
income by 13% of the qualifying expenditure and then claim a 13% tax credit against their
C.T. liability. This is called ‘above the line’.
500
Calculation of the 13% tax credit:
Increase TTP by £110,000 * 13% and then tax at 19% = £2,717 and,
• In general the 13% tax credit is not received by the company but is
deducted from their corporation tax liability for the period concerned.
• If the amount of the 13% tax credit exceeds the company’s tax liability for
the period, the excess is paid directly to the company by HMRC.
The repayment is restricted to the company’s PAYE and NIC liability in
respect of wages bills included in qualifying R&D expenditure.
• The amount of the 13% tax credit must be added to the company’s taxable
total profits and included as part of their income.
Illustration
In the year ended 31 March 2023 they have spent £60,000 on qualifying R&D expenditure.
Solution
501
Syllabus: A4ciii)
Determine the tax treatment of non trading deficits on loan relationships
If interest payable on a non trading loan is more than the interest receivable on non trading
loans, then a non trading deficit will be created.
Illustration
Cobble Ltd. has interest income of £10,000 and interest payable of £20,000 in the year
ended 31 December 2022, they also have trading profits of £3,000 and gift aid donations of
£1,500 in the year ended 31 December 2022 and the year ended 31 December 2023.
502
Solution
Taxable trading profits Nil
Notice that the company can choose the amount to use in the current year and in this case
restricts the loss relief to £1,500 in order to save the gift aid deduction.
Again, only £1,500 was used to preserve the deduction of the gift aid donation.
503
Syllabus: A4eii)
Recognise the alternative tax treatments of intangible assets and conclude on the best
treatment for a given company and
Advise on the tax consequences of a transfer of intangible assets
An intangible fixed asset are assets that cannot be touched, for example goodwill, patents,
copyrights and intellectual property.
Companies may purchase these IFAs and incur further expenditure on them.
As these are capital assets, they can be transferred within a 75% gains group at no gain/no
loss.
They get tax relief on these purchases by deducting amortisation of the assets from trading
profit, as amortisation is an allowable expense when calculating tax adjusted trading profit.
As intangible fixed assets normally have very long lives, they are amortised over very long
periods. In this case, companies may elect for the IFA to be subject to a fixed rate
allowance of 4% per annum straight line.
The election must be made within two years from the end of the accounting period in which
the IFA is acquired.
On disposal of an intangible fixed asset, a company will calculate a profit of loss on the
sale.
This will be the sale proceeds less the net book value (purchase price – amortisation until
date). A profit will increase taxable total profits and a loss will decrease taxable total profits.
Illustration
Bobble Ltd acquires goodwill during its nine month accounting period to 31
December 2020 for a cost of £100,000 and does not propose to amortise it, it wants to use
the alternative tax treatment. The company has trading profits of £250,000 in this period.
Bobble Ltd. wants to sell the goodwill for £95,000 on 1 January 2023
504
• What is the allowable deduction for tax purposes for the cost of the goodwill
in the nine months to 31 December 2020?
• What will the tax adjusted trading profits be after this deduction?
Solution
• The election must be made within 2 years from the end of the accounting
period in which the goodwill was acquired. Therefore, it must be made by 31
December 2022.
Profit on disposal:
S.P. £95,000
NBV (£89,000)
Profit £6,000
This £6,000 will be added to the taxable total profits and increase the C.T. Payable.
505
Syllabus: A4cv)
Advise on the impact of the transfer pricing and thin capitalisation rules on companies
Transfer Pricing
HMRC wants to ensure that companies cannot reduce the total UK corporation tax by
substituting a transfer price which is below an arm’s length price for transactions between
companies where one company controls the other or both are controlled by the same
person.
The transfer pricing legislation covers not only sales but also lettings/hiring of property and
covers loan interest.
Where transfer pricing policies are under review the basic aim is to produce an arms length
price, i.e. the price which might have been expected if the parties had been independent
persons dealing with each other in a normal commercial manner unaffected by any special
relationship between them.
The OECD model will direct that the UK taxable total profits are adjusted to reflect the arms
length market value rather than the transfer price if using the transfer price results in an
overall reduction in the UK tax liability.
UK companies must apply the transfer pricing legislation in respect of transactions between
a resident and a non-resident company.
The main exemption to the transfer pricing rules applies if the advantaged company is small
or medium.
In the exam question, it will state whether the company is small or medium - if this
company is benefitting from the transfer pricing arrangement, then the prices do not need
to be adjusted to reflect market value.
Illustration
What effect will the transfer pricing legislation have on this transaction?
506
Solution
The transfer pricing legislation applies.
A Ltd. must increase its taxable total profits by £10,000 (£2*5,000)
507
Syllabus: A4cvi)
Advise on the restriction on the use of losses on a change in ownership of a company
Anti-avoidance legislation
The overall objective for companies forming a group is to minimise the tax liability of the
group as a whole.
There is anti-avoidance legislation that exists to prevent companies from trading in loss-
making companies.
It states that a company with a trading loss brought forward will be denied the right to
carry that loss forward in the following circumstances:
This rule applies to changes on or after 1 April 2017. Changes before 1 April
2017 are not examinable.
508
Illustration
Greg Ltd. purchased all of the share capital of Bob Ltd. on 01/04/2021.
In the two years to 31/03/2023, Bob Ltd. made trading profits of £150,000 leaving (£20,000)
to be carried forward.
On 01/04/2023 Bob Ltd. changed the entire nature of it's trade from selling low cost bread
to selling premium bread and expensive cakes.
Solution
Bob Ltd. has had a change of ownership and a change of nature of it's trade within a 5 year
period of the change of ownership, therefore the (£20,000) will not be allowed to be carried
forward.
509
Syllabus A4d. The corporation tax liability
Syllabus: A4di/ii) Assess the impact of the OECD model double tax treaty on corporation tax
and
Evaluate the meaning and implications of a permanent establishment
Permanent establishment
The rules that apply to the taxing of overseas income earned by UK Resident
companies are set out in the Organisation for Economic Co-operation and Development
Model (OECD).
Trading overseas:
The normal provision in tax treaties is that an overseas country will usually tax income
arising in its country from the commercial operation of a UK resident company if:
2) The profits are derived from a permanent establishment set up for that purpose
Permanent establishment
510
Syllabus: A4diii)
Identify and advise on the tax implications of controlled foreign companies
who wishes to set up an overseas company will be attracted to overseas countries which
have low rates of tax; these countries are called tax havens, because the company’s profits
will be taxed at a lower rate.
However
if the overseas company qualifies as a controlled foreign company, then special rules will
apply to the taxing of the overseas company’s Taxable total profits.
The controlled foreign company rules apply to owners of non-UK resident companies where
UK profits have been artificially diverted out of the UK corporation tax net, as explained
above.
Condition 1
– A foreign resident company controlled from the UK
Condition 2
– It is a foreign company resident overseas (ie resident outside of the UK)
511
1. A UK person or persons controls the company (>50%)
2. It is at least 40% held by a UK resident and at least 40% but no more than 55% by a
non-UK resident (the term ‘person/persons’ includes companies)
CFC Charge
If it is established that a foreign company is a CFC it may be necessary for any UK resident
company who owns at least 25% of the shares in the foreign company to pay a CFC charge
(additional corporation tax) to HMRC.
[% x Chargeable profits of the CFC x C.T. Rate] – Foreign tax suffered on the chargeable
profits
Illustration:
A Ltd., a UK company with taxable profits of £20,000 for the year to 31 March 2023, holds
90% of an overseas subsidiary resident in Nemo Land.
The overseas subsidiary has £600,000 of profits for the period. 75% of which are caught by
the CFC legislation and stand to be charged.
Solution
UK C.T. Computation:
Less:
512
When can the CFC Charge be avoided?
1. the foreign company did not have any chargeable profits (income profits
but not chargeable gains, calculated using UK tax rules which have been
artificially diverted out of the UK corporation tax net), or
Exemptions
For example, if the foreign company profits are £499,000 and it only has other income of
£45,000 – then the CFC Charge will not apply.
- This exemption applies if the foreign company’s accounting profits are less than 10% of
its allowable expenditure.
- For example, if the foreign company’s allowable expenditure is £100,000 and the
accounting profits are £9,000, then the CFC Charge will not apply.
For example, if the foreign company pays tax at 14.25% or more, the CFC Charge will not
apply.
513
For example, the first 12 months of the foreign company coming under control of a UK
resident will be exempt from a CFC Charge.
Note
Make sure that you spot this in the exam, if there is a UK resident company with a
subsidiary overseas in a country with a low tax rate, it’s likely that it will be a CFC.
Illustration
1 B Inc. resident in Fishy Land where the C.T. Rate is 7%. This is an
investment company and has taxable profits of £30,000 per annum
2 C Inc. is resident in Hogwarts Land where the C.T. Rate is 18%. It has
trading profits of £2,000,000 per annum.
Solution:
1 Taxable profits are below £50,000 – therefore this is exempt and there will be
no CFC Charge
2 C.T. Rate is above 75% of the U.K. C.T. rate – therefore this is exempt and
there will be no CFC Charge
514
Syllabus: A4div)
Advise on the tax position of overseas companies trading in the UK
Tax position
A non-UK resident company can be liable to UK C.T. on trading profits if it trades within the
UK, but not for trading with the UK.
C.T. is usually charged at the UK rate of 19% unless there is a double taxation treaty
specifying a lower rate.
Illustration
It manufactures mobile phones in India and sells them through a UK based agent.
On 01/12/22 M. Inc rented a showroom and an office in London, with 2 sales managers.
Solution
They will be liable to pay UK C.T. on their trading profits from 01/12/22 because this is
when they started to trade within the UK.
Before this, they were trading with the UK.
515
Syllabus: A4dv) Calculate double taxation relief
Under UK tax law a company that is resident in the UK must pay UK C.T. on it's worldwide
income.
In the case of income arising in another country, that income may also be taxed in the
foreign country, and will be taxed in the UK, if the company is UK resident.
The rules that apply to the taxing of overseas income are set out in the Organisation for
Economic Co-operation and Development Model (OECD).
This model states that if there is no double taxation treaty between 2 countries, then double
taxation relief is available. (There will never be a treaty in your exam, you will always have to
calculate DTR)
Therefore, in order to avoid being taxed on the same income two times, double taxation
relief (DTR) is available, usually as a tax credit against the UK C.T. liability.
Illustration
A Ltd. is UK resident.
B. Inc. has not made an election to exempt its profits from UK C.T.
It's trading profits for FY22 are £300,000 and the C.T. rate in Barbados is 18%.
Solution
DTR is the lower of:
1) UK tax suffered (£300,000 *19%) = £57,000
2) Foreign tax suffered (£300,000 *18%) = £54,000
Therefore, DTR will be £54,000
516
Syllabus A4e. Group Structure for C.T.
Syllabus: A4eiv/v) Understand the meaning of consortium owned company and consortium
member and
Advise on the operation of consortium relief
The tax reliefs available between qualifying companies where a consortium is involved are
more limited than for a 75% loss group.
Definition of a consortium
them own at least 75% of another company, and each company’s holding is
at least 5%.
For example, A Ltd owns 60% of C Ltd and B Ltd owns 20% of C Ltd, then
these companies will qualify to be in a consortium.
2 Ownership includes ordinary shares and assets and profits as for a 75%
group.
517
Consortium relief
is similar to group relief in many ways but with one main exception that losses can only be
surrendered from a cc to cm or from a cm to cc.
• For example, A Ltd can surrender losses to C Ltd and vice versa, and B Ltd
can surrender losses to C Ltd and vice versa BUT A Ltd cannot surrender
losses to B Ltd.
Current period and carried forward losses can be surrendered under consortium relief.
If the loss is made by the consortium company, the amount surrendered must first be
reduced by any potential loss relief claims against its own profits.
Between consortium company (CC) and the UK consortium members (CM), ie not between
the members.
Lower of:
Illustration
What is the maximum consortium relief available for P Ltd and Q Ltd?
Solution
P Ltd:
518
TTP £50,000
Q Ltd:
TTP £15,000
Illustration
Solution
X Ltd. can use part of its loss to relieve up to 40% of C Ltd. TTP = £20,000
519
Syllabus: A4evi) Determine pre-entry losses and understand their tax treatment
Pre-entry losses
Pre-entry losses
A group which anticipates making disposals which will give rise to substantial capital gains
might try to shelter those gains by acquiring a “capital loss company”.
The intention of the purchase of the company would be to set these capital losses against
the group’s capital gains and so reduce the group’s overall corporation tax liability.
They only allow group companies with realised pre-entry capital losses to set them
against gains arising on the following types of disposals:
1 Disposals of assets which the company owned before it joined the group.
For example, if a company has brought forward capital losses of £20,000
and sells an asset that it owned before it joined the group realising a gain of
£30,000 – it can set off it’s £20,000 brought forward loss.
2 Disposals of assets acquired by the company from outside the group since
becoming a group member.
For example, if a company has brought forward capital losses of £20,000
and purchases an asset from a third party, after becoming a group member –
and then sells the asset realising a gain of £30,000 – it can set of it’s £20,000
520
Syllabus: A4evii/A4eviii)
Determine the degrouping charge where a company leaves a group within six years of
receiving an asset by way of a no gain/no loss transfer and
Determine the effects of the anti-avoidance provisions, where arrangements exist for a
company to leave a group
Degrouping charge
Degrouping charge
= Degrouping charge
This is basically the chargeable gain that would have arisen at the date of the original
transfer if at that time the companies had not been members of the same 75% gains group.
The charge will now be added to the consideration received by the selling company in
respect of the company that has left the group. If there is a degrouping loss, this will be
deducted from the consideration.
521
Note
It should be recognised that the increase to the consideration received by the selling
company will often be irrelevant due to the availability of the substantial shareholding
exemption (SSE).
• Therefore, if the SSE is available, the whole of the chargeable gain on the
sale of the shares, including the element relating to the degrouping charge
will be exempt from tax.
Illustration
Blue Ltd. sold its wholly owned subsidiary Rainbow Ltd. on 15 April 2022.
On 1 December 2012, the building was transferred to Rainbow Ltd. for £230,000.
Solution
When Rainbow Ltd. leaves the group, the company still owns an asset which it had
acquired from Blue Ltd. in the years preceding Rainbow Ltd.’s leaving.
Degrouping charge:
Proceeds £375,000
Less:
This charge is added to the consideration received by Blue Ltd. on the sale of the shares in
Rainbow Ltd.
However, any gain is likely to be exempt under the SSE rules as Blue Ltd. has owned 10%
of the shares for 12 months out of the previous 6 years.
522
Note: where an intangible asset has been transferred between the group companies at no
gain no loss within 6 years of the transferee leaving the group, no degrouping charge will
arise on the deemed disposal if the disposal qualifies for the substantial shareholding
exemption.
Group relief ceases to be available once arrangements are in place to sell the shares
of a company.
This will usually occur sometime before the actual legal sale of the shares.
523
Syllabus: A4eix)
Advise on the tax treatment of an overseas branch
Overseas Branch
The profits of the branch are subject of UK corporation tax under trading profits.
The presence of the branch does not affect the profits threshold of the UK company.
If the branch makes a loss it can be relieved using the normal loss relief.
If the branch buys plant and machinery capital allowances can be claimed.
An overseas branch is simply an extension of the UK trade, and 100% of the branch profits
are assessed to UK corporation tax double tax relief (DTR) is then given where the overseas
branch’s profits are also taxed overseas.
Once made, the election is irrevocable and it applies to all of the company’s overseas
branches (existing and future).
The election must be made before the beginning of an accounting period to which it is to
apply.
An election will not be beneficial if a company has a loss making overseas branch as any
trading loss made by that branch would not be relievable when calculating taxable total
profits.
Even if a branch is currently profitable, a company might choose not to make an election if
double taxation relief means that there is little or no UK corporation tax liability in respect of
the overseas income.
524
If no election is made it will also mean that should the branch become loss making in the
future, the loss will be relievable in the taxable total profits of the company.
Advantages
If the overseas branch makes profits, then no additional UK corporation tax is payable.
Even if the UK corporation tax rate is greater than the foreign rate
Disadvantages
- If the branch is making losses with the election in place, it is not possible to
get relief for the losses made by the overseas branch.
525
Syllabus: A4fi)
Determine the application of the substantial shareholdings exemption
• 10% of the assets available for distribution to equity holders upon a winding
up.
• The conditions must be met for a continuous 12 month period in the six
years prior to disposal.
Illustration
Peepy Ltd has owned 100% of the shares in one trading company Kreepy Ltd since 1
January 2017.
Peepy Ltd has been offered £600,000 for the whole of the company’s share capital in
Kreepy Ltd.
The indexed cost for the shares in Kreepy Ltd was £400,000.
What chargeable gain will arise on the sale of these shares in Kreepy Ltd?
Solution
This is because, Kreepy Ltd. is a trading company and Peepy Ltd. owns >10% of the
shares for >12 months in the last 6 years. Therefore, this disposal will take place at no gain,
no loss.
526
Syllabus A5: Stamp Taxes
Syllabus A5ai) Identify the property in respect of which stamp taxes are payable.
Stamp tax is a tax which is payable by companies and individuals when they buy shares
(stamp duty) and when they buy land and buildings situated in the UK (stamp duty land
tax).
2 Stamp duty land tax payable on the purchase of property and lease
premiums.
3 Stamp duty reserve tax is payable where shares are transferred without
written documents.
527
Syllabus A5b. Liabilities arising on transfers
Syllabus A5bi) Advise on the stamp taxes payable on transfers of shares and securities
Stamp Duty
This is payable by the purchaser on the purchase/transfer of shares and securities when
transferred by a stock transfer form.
1 Stamp duty is payable at 0.5% of the purchase price unless the transfer is
covered by one of the exemptions.
Where shares and securities are transferred without a written document Stamp Duty
Reserve (SDRT) applies instead.
This is normally:
• Charged at the rate of 0.5% of the consideration payable for the shares/
securities.
528
Note
Securities admitted to trading on a recognised growth market (eg AIM) but not listed on
that or any other market are exempt from SDRT.
Illustration
Solution
a) 0.5% * £10,000 = £50
b) Nil – there is no SD payable on the gift of shares as there is no monetary
consideration
529
Syllabus A5bii)
Advise on the stamp taxes payable on transfers of land
Land
2 The rate of SDLT varies depending on the purchase price and whether the
land and buildings is residential or commercial.
3 Once the purchase price exceeds the particular threshold the whole amount
is charged at the corresponding rate.
Note - the charge to stamp duty land tax on residential property in not on the ATX - UK
syllabus.
Up to £150,000 – 0%
£150,001 - £250,000 - 2%
530
Illustration
Ray inherited £400,000 on the death of his aunt Daisie, and he wants to buy a factory
for his new business at a cost of £400,000.
Solution
Factory
£150,000 x 0% =0
£100,000 x 2% = £2,000
Total £250,000
£150,000 x 5% = £7,500
Total £400,000 - SDLT £9,500
531
Syllabus A5c/d. Exemptions and Reliefs
Syllabus A5ci/ii
Identify transfers involving no consideration.
Advise on group transactions.
The main exemptions relate to transfers where no consideration has been given.
1 Gifts at no consideration
3 Divorce arrangements
4 Variation of wills
5 Changes in trustees
Sales of assets between companies in the same group are exempt from SDLT and
stamp duty if:
- One company is the beneficial owner of at least 75% of the issued share capital in
one or more other companies.
Either of the companies can be non- UK resident i.e foreign parent or party to the
transaction. When the purchasing company leaves the group within 3 years of the
property transfer, the SDLT exemption is withdrawn and SDLT becomes payable.
532
Illustration
Greg received 100,000 of £1 ordinary shares in an unquoted company Able Ltd as a gift
from his father when they were worth £60,000.
Solution
This is a gift of unquoted shares, there is no stamp duty payable on gifts.
Illustration
Black Ltd transfers an office building to White Ltd on 1 December 2022 when the
market value is £310,000
Solution
Transfer of building between companies in the same 75% group are exempt for stamp
duty, therefore there is £Nil payable.
533
Syllabus A6: Value Added Tax
The contents of the Paper TX - UK study guide for value added tax (VAT), under headings:
When your sales (excluding VAT) go over the registration limit (£85,000).
1. Historic Turnover
2. Future Prospects
When you satisfy both tests HMRC (HM Revenue and Customs) will use the test that gives
the earlier registration date.
At the end of every month check to see if the last 12 month sales were over £85,000.
If so, you have 30 days to tell HMRC (30 days of the end of the month in which the limit is
exceeded)
534
You are then registered for VAT from the end of the next month (or earlier if agreed)
• You must notify HMRC by 30th May (within 30 days of the end of the month - April)
Illustration 1:
• Answer
• So tell HMRC by 30th November and will be registered for VAT from 1st December
If you think the limit (£85,000) will be reached in the next 30 days alone
• registration starts at the beginning of the 30 days you expect to reach the limit
• For example:
On 1 July, the company signed a contract valued at £100,000 for completion during
July.
The company will register for VAT from 1 July and have to notify HMRC by 30 July.
535
Illustration 2:
Guy starts to trade and in the year ended 31st December sales are expected to be
£240,000 (accrued evenly).
• Answer - using the historic test because the threshold is not £85,000 in one 30
day period alone.
Note: although the historic test tells us to look back 12 months, when someone starts to
trade you look back after every month as they may need to be registered before 12 months
have gone by.
Illustration 3:
The budgeted turnover of Shobha Ltd. in the first 9 months is £810 000.
Solution: using the future test as the threshold is exceeded in one 30 day period alone
Therefore, the limit would be crossed in the first month of operation (July).
Registration will be effective from 01/07 (the beginning of the 30 day period).
536
De-registration
• A trader stops being liable to VAT registration when it ceases to make taxable
supplies.
The trader must notify HMRC within 30 days and will be deregistered from the date
of cessation or from an earlier agreed date.
• A trader may also deregister for VAT when its expected taxable turnover in the next
12 months is expected to fall below £83,000.
The trader may deregister for VAT if they consider this beneficial.
Illustration:
A company has been VAT registered for many years, however it has recently faced financial
difficulties and sales for the year ended 31/12/2022 are forecast to be £60,000.
Solution:
The company can request HMRC to cancel its registration because its taxable supplies for
the next 12 months are below £83,000.
The de-registration will be effective from the date on which the request is made or from an
earlier agreed date.
537
VAT implications on selling a business (deregistering permanently)
General Rule
The sale of the business is assumed to be a taxable supply for VAT purposes.
Therefore, all of the assets, such as plant, equipment and trading inventory owned
by the business, will need to have output tax payable on them when the business is
sold.
An exception is made if the VAT due is less than or equal to £1,000. In this situation,
VAT will not be payable.
• Illustration:
It owned plant and equipment costing £1,200,000 (VAT inclusive) and had inventory
remaining that cost £120,000 (VAT inclusive).
All of the input VAT on the inventory had been claimed in previous VAT returns.
How much output VAT will be payable on the sale of this business assuming the
plant and inventory are sold for cost?
• Solution:
VAT payable
Plant and machinery £1,200,000 * 1/6 = £200,000
Inventory £120,000 * 1/6 = £20,000
Exception to general rule (where the sale is not treated as a taxable supply)
If the business disposes of its assets and trade as a going concern, no output VAT
will be charged as it will be outside the scope of VAT if the following conditions are
met.
538
The conditions for this treatment are:
Even if someone is not required to register for VAT, once they are making taxable supplies,
they are allowed to.
For example, if a company makes zero rated supplies, they are not required to register for
VAT, but they are allowed to do so.
4. If a company makes zero rated supplies and standard rated purchases, then the
company will be eligible for repayments from HMRC.
1. VAT added to the selling price will make an item more expensive for a final
consumer who is not VAT registered, and therefore reduce competitive advantage of
the business.
2. If the trader wants to remain competitive and still be VAT registered, then the profits
of the trader will suffer as they will have to suffer the output VAT payments on their
own, they cannot pass them on to the final consumer.
539
Illustration:
Villa sells furniture, a taxable supply. Her taxable turnover for the previous 12 months is
£68,000 and standard rated purchases are £45,000 (vat inclusive).
• Competition is high and most traders in this field are not VAT registered, therefore,
Villa cannot increase her prices. If she does, customers will go elsewhere.
Solution:
• W1:
540
Recovery of pre-registration input VAT
Input VAT incurred prior to VAT registration can be recovered on goods and services
purchased in certain circumstances. These include:
Purchased
Goods Services
item
541
How do we claim the pre-registration input VAT?
We treat these goods/services as being purchased on the first day of VAT registration,
therefore we will claim the input VAT when we file our first VAT return.
Illustration:
He has to file his VAT returns quarterly, and his first return will be filed on 01/04/2023.
Solution:
Sunil Ltd. will claim the £20 (input vat paid) on his first VAT return in 01/04/2023.
This is because these goods qualify to have pre-registration VAT claimed on them.
They are used for business purposes, still in stock and purchased within 4 years of VAT
registration.
542
Conditions for companies to be treated as VAT group
Conditions:
That is one company must own 51% or more of the share capital in another
company, or 2 companies must be under common control.
1. The VAT Group is treated for VAT purposes as a single company registered for VAT
on its own.
3. One VAT return will need to be filed on behalf of the whole group.
4. The group must have a representative who fills in the VAT return.
This member will have to gather all of the output and input VAT of the individual
members and fill it in on one return.
This representative is also responsible for paying VAT on behalf of the group.
543
Advantages of a VAT Group:
2. Only one return must be filed, therefore administration costs will be saved.
2. A single return may cause administration difficulties in collecting and collating the
information
3. There are special VAT schemes for businesses such as the cash, annual and flat rate
schemes.
To enter into these schemes, a business must have a turnover under a certain limit.
Since a VAT group is treated as a single company, the whole VAT group’s turnover will be
considered in comparison to the limit, when one company in the group is trying to enter into
the scheme.
Thus, it is unlikely that a company in VAT group will be eligible to enter into such schemes,
whereas if they were not in the VAT group, they would be more likely to qualify.
For example, there is a VAT group with 4 companies (A Ltd., B Ltd., C Ltd., and D Ltd.).
The annual turnover of the entire group is £5,400,000, and each individual company’s
annual turnover is £1,350,000.
B. Ltd. wants to enter into the cash accounting scheme, the company’s individual turnover
is within the limit of £1,350,000, however it cannot enter the scheme because the VAT
group’s annual turnover of £5,400,000 will be considered instead of individual company
turnover and B Ltd. will not qualify.
Illustration
B Ltd owns 80% in C Ltd and 51% in G Inc. (An overseas company)
544
Solution:
This is because Jay effectively owns more that 50% of the shares in each of them and they
are trading from a permanent establishment in the UK.
However, G Inc. is not trading from a permanent establishment in the UK and can therefore
not be included in the group.
545
Syllabus A6a. TX - UK Recap: Computation of VAT
liabilities
The contents of the Paper TX - UK study guide for value added tax (VAT), under headings:
- The computation of VAT liabilities
VAT payable/recoverable
Therefore, if an item is standard rated and VAT inclusive, then its total amount will be 100%
+ 20% = 120%.
Or
• VAT paid on standard rated purchases is called “input VAT” and can be claimed from
the government.
VAT charged on standard rated sales is called “output VAT” and must be paid to the
government.
The net of these 2 amounts will actually be payable/receivable from the government.
Illustration:
Mr. Mohan is self employed and has made standard rated sales of £120 (VAT inclusive) in
February 2023 and has standard rated purchases of £60 (Vat inclusive) from a VAT
registered supplier.
Solution:
546
Understand how VAT is accounted for and administered
1. On registration, the trader must charge VAT on all taxable supplies (output VAT).
2. The trader can also reclaim VAT on all taxable supplies purchased (input VAT).
3. At the end of a 3-month period, the trader accounts to HMRC for all the output tax
less the input tax on their VAT return.
5. VAT registered businesses must file their returns and make payments online.
6. The deadline for submitting the VAT return and making payments electronically is 1
month and 7 days after the period has ended.
Therefore, for the period ending 31/03/2023, the return with payment can be
submitted electronically on 07/05/2023.
Illustration 1
Cow Ltd's sales (standard rated) for the first 3 months were:
How, and when, will Cow Ltd have to submit its quarterly VAT return and pay any related
VAT liability?
Solution
Cow Ltd will have to file its VAT returns online and pay the VAT which is due electronically.
The deadline for filling the VAT return and paying any VAT is one months and seven days
after the end of each quarter.
So, in our case, Cow Ltd will pay (30,000 + 30,000 + 40,000) x 20% = £20,000 VAT on 7
May 2023 for the quarter ended 31 March 2023.
547
Illustration 2
For the quarter ended 30/06/2022, Pooja Ltd. had output vat of £10,000 and input VAT of
£7,000.
When will the company be required to file and pay the VAT liability and how much is it?
Solution:
• Pooja Ltd. must file the return and make the payment online on 07/08/2022.
Other points
1. Because VAT is a self-assessed tax, HMRC make control visits to VAT registered
traders.
The purpose of a control visit is to provide an opportunity for HMRC to check the
accuracy of VAT returns.
2. A business may choose to submit monthly returns but would only do so if it received
regular VAT repayments.
This would arise where the business had standard rated purchases and expenses
but made zero rated sales and hence always had more input tax than output tax and
would claim a repayment.
3. If a trader’s VAT liability exceeds £2,000,000 over a 12-month period, they must
make monthly payments on account of the VAT liability.
548
Recognise the tax point when goods or services are
supplied
The tax point is the date used to identify the VAT period which should be used to include
the output or input VAT.
This is:
or
The actual tax point is used more frequently than the basic tax point.
and
The basic tax point date is replaced by the invoice date if an invoice is issued within 14
days of the basic tax point.
549
Here is a simple way to work your tax point out:
1. Step 1:
The basic tax point is the date that the goods are delivered or services are
performed.
Use the basic tax point if the answers to the below two steps are NO.
2. Step 2:
Is cash paid or received before the basic tax point date? (Actual tax point)
3. Step 3:
Is an invoice issued within 14 days after the goods are delivered or services are
performed (basic tax point date)? (Actual tax point)
Illustration:
Joe is a sole trader in business selling furniture (a standard rated supply). His year end is 31
December.
Solution:
1. Step 1:
The basic tax point is 30/09/2022. Let us move on to the other 2 steps.
2. Step 2:
Is cash paid or received before the basic tax point date? (Actual tax point)
Yes – £2,000 deposit but the remaining has not been paid.
Therefore, for this £2,000 sale the output VAT related to it of:
£2,000 * 1/6 = £333 must be included in the VAT return filed on 30/06/2022.
550
Now, for the remaining £48,000 – we must go through the steps again.
1. Step 1:
The basic tax point is 30/09/2022. Let us move on to the other 2 steps.
2. Step 2:
Is cash paid or received before the basic tax point date? (Actual tax point)
No – Go to step 3
3. Step 3:
Is an invoice issued within 14 days after the goods are delivered or services are
performed (basic tax point date)? (Actual tax point)
Yes – Invoice was issued on 12/10/2022 and the goods were delivered on 30/09/2022.
Therefore, for this £48,000 sale the output VAT related to it of:
£48,000 * 1/6 = £8,000 must be included in the VAT return filed on 31/12/2022.
551
Information that must be given on a VAT invoice
A VAT registered trader making a supply to another taxable person must issue a VAT invoice
within 30 days of the relevant tax point.
If a sales invoice is meant to be valid for VAT purposes i.e. a separate VAT invoice does not
need to be issued, then all of the above needs to be included in the sales invoice.
VAT records (including VAT invoices) must normally be retained for six years.
552
Simplified VAT invoice
A less detailed VAT invoice may be issued by a taxable person where the invoice is for a
total including VAT of up to £250.
Zero-rated and exempt supplies must not be included in less detailed invoices.
553
Principles regarding the valuation of supplies
Value of supply
Discounts offered
VAT is chargeable on the actual amount received where a discount is offered for prompt
payment.
1. If the discount is not taken the VAT is charged on the full sale price
2. if the discount is taken, then the VAT is based on the discounted price.
However, it is not as straightforward as that because we often don’t know when a customer
will pay.
Therefore, the supplier can charge the full amount of the VAT and then issue a credit note
for the discount if it is taken or the supplier can issue an invoice stating the terms of the
discount and that the customer can only reclaim the VAT on the amount actually paid.
554
Illustration:
1) What is the output VAT charged if the customer pays within 14 days?
2) What is the output VAT charged if the customer doesn't pay within 14 days?
Sale £100
Discount (5%) (£5)
Net Sale £95
Output VAT charged (20% * £95) = £19
Selling price (95 + 19) = £114
Sale £100
555
Zero rated and exempt supplies
Types of supplies
If a trader is VAT registered and makes standard rated purchases, they can reclaim input
VAT at 20%, and they must pay output VAT of 20% on their standard rated sales.
For example, an accountancy firm sold their services for £240 and made purchases of
stationery of £12.
Both of these are standard rated items and VAT inclusive.
Examples:
• Stationery
• Furniture
• Computers
• Cars
• Accountancy fees
• Legal fees
• Advertising costs
• Confectionery
556
Zero rated supplies
If a trader is VAT registered and makes zero rated purchases, no input VAT can be claimed,
and if they make zero rated sales, no output VAT is payable.
For example, a VAT registered trader sells baby clothes for £240.
This item is zero rated, and therefore no output VAT will be payable on the sale.
On the other hand, if a trader makes zero rated supplies and has standard rated purchases,
the trader will qualify for VAT repayments.
For example, a VAT registered trader sells baby clothes for £240. He pays for his
advertising expenses, which cost him £120.
The trader makes zero rated supplies but standard rated purchases, and can therefore
claim the input VAT paid on his advertising expense of £20. (£120 * 1/6)
1. Basic food (not pet food or luxury items like alcohol and confectionary)
3. New construction work or the sale of buildings by builders where the building is
going to be used for residential/charitable purposes
6. Transport (but pleasure transport and transport in vehicles sitting less than 12
people is standard rated)
557
Exempt supplies
A person making exempt supplies cannot recover VAT on inputs, this is because someone
making solely exempt supplies will not have any taxable turnover and cannot become VAT
registered.
1. Land
2. Insurance
3. Postal services
5. Education
6. Health services
9. Sale of freehold commercial buildings owned for more than or equal to 3 years
558
Circumstances in which input VAT is non-deductible
2. Input VAT cannot be recovered in relation to any items that are privately used by an
owner of a business.
For example, if an owner purchases stationery for private use, input VAT cannot be
recovered on this purchase.
3. Input VAT cannot be recovered on motor cars (unless they are used 100% for
business purposes).
A car must be used 100% for business purposes in order for input VAT to be
recovered on its purchase.
The employee uses this car for both business and private purposes.
1. Input VAT can be recovered where fuel is used for private mileage (either by a sole
trader or an employee), but output VAT must be accounted for.
Output VAT is calculated according to a scale charge based on the car’s CO2
emissions.
The scale charge is VAT inclusive and will be provided to you in the exam.
2. Input VAT can fully be recovered in respect of repairs to a motor car, provided that
there is some business use.
The employee uses this car for both business and private purposes.
Input VAT can be recovered on the repairs incurred in respect of this car.
559
Illustration:
In the quarter to 31 March 2023, Shiva claimed all of the input VAT on his fuel cost (20%),
which he uses for private purposes.
How much VAT will be paid/reclaimed for the quarter ended 31 March 2023?
Solution
Illustration:
Lina Ltd. is registered for VAT. All of the sales are standard rated and all figures are inclusive
of VAT.
The following information relates to the company’s VAT return for the quarter ended
31/03/2023:
• On 01/01/2023 Lina Ltd. purchased a motor car for an employee costing £12,000
VAT inclusive.
• Lina Ltd. paid for the petrol and repairs of the car.
The relevant quarterly scale charge is £310 for the quarter to 31/03/2023.
• The petrol and running cost of the car was £2,000 VAT inclusive.
560
Solution:
561
Relief available for impairment losses on trade debts
If the sale becomes an impairment loss, the seller has paid VAT to HMRC and has not been
able to recover this from the customer.
It is possible for the supplier to reclaim this VAT on the impairment loss from HMRC
provided the following conditions are met:
1. The loss has been written off in the accounting records (the income statement)
If these conditions are met, then the seller can include the amount of VAT as input VAT on
the next VAT return filed and therefore get relief for it.
Illustration:
On 31/03/23, the debt was not paid and written off in Sahil Ltd.’s accounting records.
Solution:
• Sale £100
Output VAT £20
Selling price £120
• This £20 output was paid and included in the VAT returned filed on 30/09/2022 (VAT
returns are filed quarterly).
• The £120 was due on 30/09/2022, however it has not been paid by 31/03/23.
Therefore 6 months have passed since the debt was due to be paid and it has been
written off in Sahil Ltd.’s accounting records.
• Therefore, Sahil Ltd. will get relief for this output VAT of £20 by including it in the VAT
return filed on 31/03/23 as input VAT.
562
Default surcharge and penalty for incorrect VAT return
If a taxable person:
- submits a VAT return late, or
- submits a return on time but makes late payment of the VAT due then:
• HMRC will issue a surcharge liability notice which will specify the surcharge period
(normally 12 months).
1) You will have to pay a surcharge which is calculated as a % of the tax paid late and
1st default 2%
2nd default 5%
For the first and second default, if the surcharge due is less than £400, then nothing is
payable.
For the third and fourth default, there is a minimum of £30 payable, even if the surcharge
amount is below £30 for the quarter.
563
Illustration:
What are the consequences of Tommy submitting his VAT returns late?
Solution:
• 31/03/2022
Submitted late.
• 30/06/2022
Submitted and paid on time.
• 30/09/2022
Submitted late.
This is the first default within the surcharge period, therefore a default surcharge of
£3,100 * 2% = £62 is levied.
• 31/12/2022
Submitted late.
The surcharge of £1,300 * 5% = £65 is again less than £400, therefore this will not
be payable by Tommy.
564
Errors on a VAT return
If a VAT return is submitted incorrectly, the following penalties and surcharges will apply.
If an error occurs, then default interest and a standard penalty may be payable.
Default interest is interest based on the delayed payment of the VAT liability.
A standard penalty may be payable depending upon the reason for the late submission.
£10,000 and
1% of turnover (subject to an upper limit of £50,000)
565
Illustration:
Bebe Ltd. has made an error relating to understated output VAT of £7,000 for the quarter to
31/12/2022.
• Solution:
De-minimus limit:
No interest will be payable and depending on the reason for the understatement, a
standard penalty will be decided.
Disclosed by HMRC
566
Treatment of imports to the UK, exports from the UK
Illustration
The supply will be treated as zero rated and therefore no output VAT will be charged.
Whether the company outside of the UK is VAT registered or not does not matter, the
supply will be treated as though it is zero rated.
567
Coming into the UK:
• The VAT charge is declared on the return as output VAT but can be reclaimed as
input VAT on the same VAT return.
The UK trader accounts for output VAT as the goods would be standard rated if
supplied in the UK.
The UK trader can claim back input VAT of the same amount on the same return as
the goods are used by a trader that only makes taxable supplied.
• The entries contra each other, therefore there is no actual VAT cost.
• The only time that there is a VAT cost is if a business makes exempt supplies, since
an exempt business cannot reclaim any input VAT.
Illustration
On receipt, the UK company will account for the £2,000 on its VAT return and can claim the
£2,000 input VAT on the same VAT return.
568
Syllabus A6a. TX - UK Recap: The effect of special
schemes
The contents of the Paper TX - UK study guide for value added tax (VAT), under headings:
Special schemes
These schemes are available to small businesses to reduce the work and amount of VAT
payable.
569
1) Cash accounting scheme
Operation:
1. The tax point is the date on which the output tax is received and the input tax is
paid.
2. For sales, it is the date that cash is received from customers and for purchases, it is
the date that cash is paid to suppliers.
Conditions:
3. A business must leave the scheme if annual taxable supplies exceeds £1,600,000.
Advantages:
1. A business will not pay output tax until received from customers. This is a cash flow
advantage for the business.
2. The scheme provides automatic bad debt relief as output VAT will not have been
paid on a sale until the cash is received from the customer.
Illustration
All sales are standard rated and are made on credit for 60 days.
All purchases are standard rated are made on credit for 30 days.
If Shivani opts into the cash accounting scheme, when will she need to account for VAT for
her sales and purchases?
• Solution
Shivani will need to account for her standard rated sales 60 days after the sale is
made, as this is when the cash is received.
This will ensure that Shivani does not pay any output VAT for bad debts.
She will need to account for her standard rated purchases 30 days after the
purchase is made, as this is when the cash is paid.
570
2) Annual accounting scheme
Operation:
2. The VAT return is due 2 months after the annual accounting VAT period, along with
the balancing payment of VAT.
3. 9 payments of VAT are made from months 4-12 during the annual accounting
period. These are (10% * VAT paid last period).
4. The final payment (2 months after the annual accounting period) is calculated as
follows:
(VAT payable for the year – 9 payments made during months 4-12 during the period)
= balancing payment.
Conditions:
3. A business must leave the scheme if annual taxable supplies exceeds £1,600,000.
Advantages:
1. Administration costs are saved, only one VAT return is prepared per year.
2. Regular monthly payments help the cash flow of the business, small regular
payments are made as opposed to less frequent large outflows.
Illustration:
• She was eligible to enter the annual accounting scheme and for the year ended
31/12/2022 she had VAT payable of £12,000.
571
Solution:
Payments on account:
• Payments on account were made from months 4-12 during the year ended
31/12/2022. Therefore, they were made from April to December. This total 9
payments on account.
• Balancing payment:
• This payment is made 2 months after the year has ended. Therefore, it is made on
28/02/2023.
Operation:
1. VAT payable is computed by using a flat rate %. The flat rate % differs from industry
to industry (you will be told the % in the exam)
3. The sales revenue used includes VAT, exempt supplies and zero rated supplies.
Note: from 6/4/17 there is a standard % of 16.5% for limited cost traders. This means that,
regardless of their industry, if they are deemed to be limited cost traders, then they must
use the rate of 16.5% (you will be told if this rate applies in the exam).
Conditions:
Advantages:
1. Simplicity of scheme
572
Illustration:
The company also has standard rated expenses of £4,800 (VAT inclusive).
• Is it beneficial for the company to use the flat rate scheme or account for VAT
normally?
Solution:
• Normal accounting:
• It is not beneficial for Addi Ltd. to opt into the flat rate scheme.
573
Syllabus A6ai)
Advise on the VAT implications of the supply of land and buildings in the UK
• Commercial buildings owned for less than 3 years are standard rated.
This means that on sale proceeds and rental income, output VAT will be charged at
20%.
• Commercial buildings owned for more than 3 years are exempt but have an
option to tax.
This means that they are normally out of the scope of VAT, therefore no output VAT is
charged and no input VAT is reclaimed.
However, if the option to tax is used, then on sale proceeds and rental income, output
VAT will be charged at 20%, and input VAT on expenses can be reclaimed.
Purchasers may choose to opt to tax so that they can recover the input VAT paid on the
purchase of a property that has an opt to tax already on it. By doing this though, they
are promising to charge output VAT on all transactions relating to that property including
any future sale.
574
Illustration
A commercial building owned for 4 years will be sold for £1,000,000 (excl.)
Expenses relating to the sale amount to £100,000 (excl.) and its purchase cost is
£500,000 (excl.)
Solution
Normal treatment
Therefore, the election should not be made as it will result in a VAT payment.
575
Syllabus A6aii) Advise on the VAT implications of partial exemption
are businesses that sell taxable and exempt supplies and may be registered for VAT
compulsorily (if taxable turnover exceeds £85,000) or voluntarily.
Input tax is generally not recoverable on exempt supplies, however, if the input tax
relating to exempt supplies is less than the de-minimus limits then it becomes
recoverable.
In order to see if this is the case, there are two simplified tests to work through. If you pass test one
then you do not need to work through test two. If you fail both tests then you will need to use a
formula to calculate how much input tax is recoverable.
Test 1:
If the answer to this test is YES then 100% of input tax can be recovered.
Test 2:
Is total input tax less input tax directly attributable to taxable supplies less than £625
per month? And
If the answer to this test is YES then 100% of input tax can be recovered.
If neither of these tests are passed then you can apply a formula to non-attributable
input tax to discover how much, if any, is recoverable.
VAT registered traders can reclaim input tax that relates to its taxable supplies
proportion, but not input VAT that relates to it’s exempt supplies, however the issue
arises when there is non-attributable input VAT, this is the input VAT that relates to
overheads.
576
The input VAT that can be reclaimed for non-attributable input VAT must be in
proportion to the taxable supplies proportion.
For example, if a business has £70,000 taxable supplies and £30,000 exempt supplies
for the year, and it has non attributable input VAT of £9,000 – then it can reclaim
70%*£9,000 = £6,300.
If the remaining amount of £2,700 (£9,000 - £6,300) is less than £625 per month and
less than 50% of the input VAT relates to exempt supplies then this amount is also
recoverable.
When calculating the amount of recoverable input tax for a quarter, the trader can now
choose to use the percentage for the previous year rather than the partial exemption
percentage for the current particular quarter.
The trader must use the same method for the whole year.
For example, if the taxable supplies percentage for 21/22 was 60%, the trader can use
this percentage to calculate the input VAT recoverable for 22/23 and then make a final
adjustment in the final quarter of 22/23 with the current year percentage.
The method used will not make any difference to the total amount of VAT recovered as
the annual adjustment will ensure that the final amount recovered is in accordance with
the figures for the whole year.
The business can now choose to enter the annual adjustment on the return for the final
period of the year rather than the first period following the end of the year.
Small is:
577
• The irrecoverable input tax must be no more than £625 per month and
• The irrecoverable input VAT must be less than 50% of the total input tax
Illustration
Input VAT
Can the Input VAT attributed to exempt sales and the unattributed Input VAT be
recovered?
Solution
Total £1,420
This will be deemed to be small as it is less than £625/month and it is less than 50% of
total Input VAT.
578
Syllabus A6aiii)
Advise on the application of the capital goods scheme
This is a scheme that applies to partially exempt businesses (businesses with taxable
and exempt turnover) that spend large amounts of money on land and buildings or
computers and computer equipment.
Where the scheme applies, the first deduction of input tax is made in the normal way for
a partially exempt business (% of taxable supplies * input vat) and then the input VAT
that was deducted initially is reviewed over a set adjustment period.
The review is based on the proportion of taxable to exempt turnover over a set number
of years.
For example, if a business purchased a piece of land that had input VAT of £100,000
and in the year of purchase they had 80% taxable supplies and 20% exempt supplies,
then they can recover 80% * £100,000 = £80,000 input VAT.
However, in the following years if their taxable supplies were 50% and exempt supplies
were 50% - then it looks like they have recovered an additional amount of input VAT by
increasing their taxable supplies in the year of purchase.
£100,000/10 years * (50%-80%) = £3,000 will need to be repaid each year for 10 years
579
Adjustments are made over the next 10/5 years if the proportion of exempt supplies
changes.
Illustration 1
A partially exempt company purchases a computer for £100,000 plus VAT on 1 January
2021.
In the first year to 31 March 2021, the company has 60% taxable supplies which fall to
50% in the second year and increase to 80% in the third, which will then remain the
same for future years.
The company sold the computer for £6,000 plus VAT on 10 August 2023.
Required:
Calculate the amount of input VAT recoverable in the year of purchase and the annual
adjustment required under the capital goods scheme for years 2 and 3.
Calculate the adjustment needed as a result of the sale of the computer on 10 August
2023.
Solution
580
Transfer of a going concern
Illustration
Martin is registered for VAT but intends to cease trading on 31 March 2023.
On the cessation of trading Martin can sell his entire business as a going concern to a
single purchaser.
Solution
This is a sale of business as a going concern, therefore output VAT will not be charged if
the following conditions are met:
581
Syllabus A6b. TX - UK Recap: The overall function and
purpose of taxation.
The contents of the TX - UK study guide for the UK tax system and its administration under
headings:
1. Inflation
2. Employment
Higher tax levels should increase employment (if spent by governments in the right
way!)
• It encourages saving by offering ISAs (individual savings accounts) and tax relief for
contributions to pensions
582
Social Justice Purpose
This simply means the higher earners pay a higher % of their income as taxes - thus
redistributing the wealth in society from the rich to the poor
The opposite of this is Regressive taxation where higher earners pay a lower % of their
earnings as tax
Ad Valorem Principle
This is where the tax levels (% of earnings) remain the same regardless of income levels
583
Direct Taxes - tax paid directly to HMRC
Basically the more income or profit, the more tax you pay..
Basically the more the asset is sold for (or the higher the gift), the more tax you pay..
Basically think of this as a shop for example - you buy an item with tax on it, but you pay
the shop. The shop then pays this tax to the HMRC.
Example: VAT
584
Syllabus A6b. TX - UK Recap: Principal sources of revenue
law and practice
The contents of the TX - UK study guide for the UK tax system and its administration under
headings:
HMRC
Purpose of HMRC
Most taxpayers never deal with HMRC direct - instead they file their tax returns online and
pay electronically (compulsory for companies)
The responsibility for assessing how much tax is payable is down to the taxpayer under a
system called "self - assessment"
Individuals can still ask HMRC to calculate the tax though for them - companies can't
585
Structure of the UK tax system
The management of the treasury is the responsibility of the Chancellor of the Exchequer.
Commissioners
The main body of HMRC is divided into District offices and Accounting and payment offices
District Offices
The Commissioner appoints Officers of HMRC to implement the day to day work of HMRC
586
Principal sources
Tax Legislation (Statute law)
1. Updated annually by the Finance Act (made by the chancellor of the exchequer) -
referred to as "The Budget"
2. Statutory instruments - these give detailed guidance where necessary on points of law
Case Law
These are decisions made previously by judges in court about taxation matters
HMRC Guidance
These allow laws to be relaxed where their implementation would cause undue hardship
3. Internal HMRC Manuals Give guidance for their staff but are also available to the public
4. Briefs
587
Tax EVASION is ILLEGAL
It's arranging your income to minimise tax - although HMRC are introducing anti-avoidance
legislation to lower the advantages to the taxpayer
This fights artificial and abusive schemes (unreasonable courses of action) which are used
to avoid paying tax
588
This is where income could get taxed under 2 different
systems
These are agreements between countries over how certain items are taxed - and take
precedence over UK law
They either:
EU Influences
The EU would like to remove differences between countries policies as these can cause
distortions and be barriers to trade for some countries
EU countries do NOT have to align their tax policies - but can jointly enact laws called
Directives
589
Advising on tax? You have duties to the HMRC too!
Examples:
If the client commits an offence - you need to decide if it was an error or fraud
You then explain to the client that they should disclose the error to the HMRC
If the client won't disclose still - then you must stop representing the client and disclose
matters to HMRC if it's in the public interest or you think there might be money laundering
Their duties and responsibilities should be towards both clients and HMRC
4. Provide professional high standards of service, conduct and performance at all times.
The ACCA “Code of Ethics and Conduct” sets out five fundamental principles which
members should adhere to meet these expectations, namely:
1. Integrity
2. Objectivity
4. Confidentiality
5. Professional behaviour
590
Syllabus A6b. TX - UK Recap: The systems for self-
assessment and the making of returns
The contents of the TX - UK study guide for the UK tax system and its administration under
headings:
Remember it is the responsibility of the taxpayer to calculate their own tax liability
2. There are deadlines for filing the SA (31/10 for paper and 31/1 online) or 3 months after
being given notice if its later
4. Payment is due 31st January the following year (interim payments on account may also
be required)
5. 31st January the following year is known as the filing date (for both paper and online) -
different to the "actual file date"
6. Online filing - Tax returns submitted electronically automatically calculate the tax due
7. Paper filing - HMRC will (optionally) calculate it if filed by 31st October. If a taxpayer
submits a paper return on time, they can ask HRMC to calculate the tax due.
8. When the HRMC calculate the tax they make no judgement on the accuracy of the
information given to them
591
Companies must submit a corporation tax return within
12m of their period end
They must pay the tax within 9m + 1day of their chargeable period end (CAP) but they do
not have to file their return until 12 months after the CAP end.
Therefore many submit their corporation tax return before the 9m + 1day payment deadline
too
iXBRL allows for the exchanging of business information electronically and tags the
accounts so they can be read by a computer
Other Options
These automatically insert the iXBRL tags and produces accounts/computations in the
iXBRL format
3. Conversion Software
592
Syllabus A6b. TX - UK Recap: The Time Limits
The contents of the TX - UK study guide for the UK tax system and its administration under
headings:
- The time limits for the submission of information, claims and payment of tax, including
payments on account
HMRC
May amend any obvious errors (e.g. adding up errors) within 9 months of the date of filing
Taxpayer
Notification of chargeability
The onus is on the taxpayer to inform HMRC that they are liable to tax - must be done
within 6 months of the first tax year - unless there's no actual tax liability
593
Generally the next 31st January
This is the date for income tax, NIC class 2 & 4 and CGT
These are made if less than 80% of last years tax liability was deducted at source (unless
less than £1,000)
Therefore employees don't need to make POAs as more than 80% of their tax liability is
deducted at source
They only apply to income tax and class 4 NIC - NOT FOR CGT
CALCULATION of POAs
Example
Jack’s tax bill was £10,200 - of which 2,500 was collected using PAYE
Answer
POA 2 £3,850
594
Claims to reduce POAs - anytime before next 31
January
The taxpayer would do this if he expects the taxable income to be lower this year than last
(as last years was used to calculate the POA)
If the actual taxable income ends up being higher then interest will be charged on the
underpaid POA tax, and a penalty if the reduction in POA was fraudulent (and not an
innocent error)
Payment of Tax
2. Estimated tax is payable 9 months and one day after the end of each accounting period
(due date), with provisions for quarterly instalment payments for ‘large’ companies.
Payment must be made electronically
3. Interest due to the HMRC on tax paid late will run from the due date to the date of
payment at a rate of 2.6% per annum.
4. Interest on overpayments of tax will run from the later of the due date or the date tax
was actually paid at a rate of 0.5% per annum.
Under self assessment interest on tax paid late will be deductible against interest
receivable.
Quarterly Instalments
2. A large company is one with a profit exceeding £1.5M based on a single company with
no related 51% group companies and which prepares accounts for a 12 month period.
The profit limit must be divided by the number of 51% related group companies and
time apportioned for a chargeable accounting period of less than 12 months.
4. The four quarterly instalments will be made in months 7, 10, 13 and 16 following the
start of the accounting period.
595
Thus for the accounting year ended 31 March 2023 the first quarterly instalment
payment would be due October 14 2022 followed by further payments due January 14
2023, April 14 2023 and July 14, 2023
5. Quarterly payments are not required if the company was not large in previous CAP.
596
How long should business records be kept?
Business records and personal records need to be retained for a number of years after the
tax returns have been submitted for that year.
Retention of records
Self employed -
business and non 5 years from 31January following end of the tax year
business records
A failure to retain records could result in a penalty of up to £3,000 per accounting period.
597
Syllabus A6b. TX - UK Recap: Compliance checks, appeals
and disputes
The contents of the TX - UK study guide for the UK tax system and its administration under
headings:
Appeals
Tax appeals are heard by the Tax Tribunal which is made of:
• Upper Tribunal
Deals with complex cases.
Opening up a tax assessment means that either the taxpayer or HMRC thinks the taxpayer
has paid too much or too little tax and wants this to be corrected.
The following table shows when a taxpayer or HMRC can open up a tax assessment.
HMRC can open a normal enquiry for a tax return, 12 months from the date of submission.
However, if HMRC suspects something more serious, they can raise a discovery
assessment.
The time limit for raising this discovery assessment depends on the reason of suspicion of
HMRC (mentioned below).
598
After HMRC raises a discovery assessment, taxpayers can raise an appeal within 30 days.
Taxpayers claim for overpayment relief 4 years from the end of the tax year
— No careless or deliberate behaviour 4 years from the end of the tax year
— Tax lost due to careless behaviour 6 years from the end of the tax year
— Tax lost due to deliberate behaviour 20 years from the end of the tax year
599
Syllabus A6b. TX - UK Recap: Penalties for non-
compliance
The contents of the TX - UK study guide for the UK tax system and its administration under
headings:
If the liability is outstanding for less than a full year, then this will be apportioned
accordingly.
For example
How much late payment interest will be payable assuming a rate of 2.6%?
600
2) Late payment Penalty for balancing payments
• UP TO 30% of the understated tax where a tax payer fails to take reasonable care.
• UP TO 100% of the understated tax where the error is deliberate and concealed.
A penalty will be substantially reduced where the taxpayer makes disclosure, especially
unprompted disclosure to HMRC.
601
Syllabus A6bi. Offshore Matters
Syllabus A6bi)
Advise on the increased penalties which apply in relation to offshore matters.
It applies where the GAAR has been used to counteract tax advantages arising from
abusive tax arrangements entered into by the taxpayer.
The penalty is 60% of the amount of the tax advantage counteracted by the GAAR.
Examples of abusive arrangements are ones that result in less income, profits or gains,
greater deductions or losses, or a claim for a repayment of tax that is unlikely to be
paid.
Examples of a tax advantage are: relief or increased relief from tax, repayment or
increased repayment of tax, avoidance of possible assessment to tax, avoidance or
reduction of charge to tax, deferral of a payment or advancement of a repayment and
avoidance of an obligation to deduct or account for tax.
HMRC may counteract these tax advantages by increasing the amount of tax due from
the taxpayer but these adjustments must be made on a ‘just and reasonable’ basis.
Offshore Matters
Finance Act 2015 increased the penalties for failure to notify chargeability to tax, late
filing and errors in respect of offshore matters.
The level of the penalty depends on the categorisation of the overseas country
concerned (as determined by the Treasury) and the behaviour involved.
Finance Act 2016 has increased the minimum penalty for these offences, and
introduced further penalties for both the taxpayer and for those who have enabled the
offence to be carried out.
You are expected to know that these regimes exist but do not need to know the precise
amounts of the penalties that may be charged or the categorisation of particular
countries.
602
Syllabus B: Financial Decisions made by a
business
a) Identify and understand that the alternative ways of achieving personal or business
outcomes may lead to different tax consequences
b) Calculate the receipts from a transaction, net of tax and compare the results of alternative
scenarios and advise on the most tax efficient course of action.
In the exam
The best advice here is to go and practise some past paper questions so that you are
familiar with the exam style
603
Syllabus B3. Different types of finance and investment
Advise how taxation can affect the financial decisions made by businesses (corporate and
unincorporated) and by individuals
Debt or equity?
Raising Capital
If a company needs to raise capital to buy plant and machinery, increase working capital
or buy an investment property it has two choices: it can either finance using debt or
equity.
Debt
604
Tax implications
1. The cost of issuing the loan notes such as legal costs and advertising costs are an
allowable expense.
3. These costs will reduce taxable trading profits if the loan is for trading purposes.
4. These costs will reduce interest receivable if the loan is for non- trading.
Equity
Tax implications
The dividend paid to shareholders is also a disallowable expense (no effect on the tax
paid by the company).
Lease
If an asset is leased, then a premium will be paid and rentals each year will be paid.
The income element of the lease/no. of years of the lease, and the rentals are allowable
expenses.
Hire purchase
If an asset is hire purchased, the amount paid is an allowable expense, except if a car
that has emissions of >=50g is hire purchased, then 15% will be disallowable.
Purchase outright
If an asset is purchased outright, then it will receive capital allowances.
605
Syllabus C. Ethics
Syllabus C5/6. Ethics
Be aware of the ethical and professional issues arising from the giving of tax planning advice
and
Be aware of and give advice on current issues in taxation.
Ethical behaviour
1. Objectivity – Avoid conflicts of interest; do not act for two companies one buying
shares and the other selling shares if objectivity will be compromised.
2. Professional – Professional behaviour at all times, comply with relevant laws and
avoid any action that discredits the profession.
3. Technical competence – Keep up to date with new tax rules and legislation.
4. Integrity – Must be honest and should not assist clients in committing an offence.
606
New Clients
- Whether the practice has adequate skills and competence to carry out the work.
- On accepting new clients – a member of the ACCA must ask permission from the
client to contact the old advisers to request information.
- If the client refuses then the ACCA member should consider not acting for them.
Once the new appointment has been agreed the tax adviser should issue a letter of
engagement setting out terms and conditions.
Information needed:
• The identities of those persons instructing the firm on behalf of the company and
those persons that are authorised to do so.
Actions to take:
• Consider whether becoming tax advisers would create any threats to compliance with
the fundamental principles of the professional code of ethics, for example integrity
and professional competence.
• Where such threats exist, then the appointment should not be accepted unless the
threats can be reduced to an acceptable level via implementation of safeguards.
• Contact the existing tax advisers in order to ensure that there has been no action by
the company that would, on ethical grounds, preclude us from accepting the
appointment.
607
Dealing with HMRC
If the client refuses to follow the advice given then the professional adviser should stop
acting for the client and must inform the client and HMRC in writing.
608
Syllabus D. Communication in an appropriate
manner
Syllabus D. Communication
Communicate with clients, hm revenue and customs and other professionals in an appropriate
manner
Communication formats
Professional Marks
Between four and six professional marks are included in each of the Professional level
papers.
These allow students to demonstrate – and examiners to assess – particular skills and
capabilities which employers expect ACCA members to possess on qualification.
Professional marks are awarded for the overall quality of answers, and for effective
professional communication skills.
1. Writing a letter
A letter should start with the sender’s address details (put the company name and
follow with ‘Address line 1, Address line 2’, etc below it) and the date.
The letter should commence with ‘Dear XXXXX’ as specified in the requirements.
Throughout the text of the letter, write in the first person, using phrases such as ‘I’, ‘we’,
‘your board’, and ‘our company’ to personalise.
Keep the audience and their interests in mind throughout, and refer to them on
occasions to make it clear how your answer is still clearly focused.
609
Conclude with a suitable sentence, thanking the reader for their interest or time. Use
‘Yours faithfully’ where the addressee is anonymous, such as ‘shareholders’.
Use ‘Yours sincerely’ if the addressee is named.
2. Writing a memo
A memo is generally written to a particular person or persons (such as a board
committee or the CEO).
A memo format will need to be headed ‘Memorandum’ and have the To/From/Date/
Subject information at the top.
The style of writing will be precise and factual, leaving little room for interpretation.
It will be written in the first person, directly addressing the person at whom it is aimed
(‘you’) and identifying the author as ‘I’.
3. Writing a report
The purpose of a report is usually to inform, occasionally providing recommendations or
suggestions for future action.
It will have a wider circulation than a memo and is hence more formal in style and
wording.
Like a memo, it will be written in the first person.
The initial structure of a report is similar to that of a memo, although the heading would
be ‘Report’.
It is good practice to provide an introduction or ‘Terms of Reference’ section at the
start, stating exactly what the report aims to cover, and to finish with a summary or
conclusion.
Use of headings and sub-headings will not only improve presentation but also add to
the ease of reading by the audience of the report (and the marker of your exam).
610
4. Writing briefing notes
They will need to be well structured, focusing on the key points at the start, with
background information provided later.
Briefing notes, along with management reporting narratives and press statements,
should be written in the third person, referring to ‘the company’, ‘XYZ Ltd’ and ‘the
board’, rather than ‘I’ or ‘we’.
611